As filed with the Securities and Exchange Commission on April 20, 1999
Registration No. 333-
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------------------
LEHMAN ABS CORPORATION
(Depositor)
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3447441
(State of incorporation) (I.R.S. Employer Identification No.)
----------------------
Three World Financial Center
200 Vesey Street
New York, New York 10285-1600
(Address of principal executive offices)
----------------------
MARK L. ZUSY
Lehman ABS Corporation
Three World Financial Center
200 Vesey Street
New York, New York 10285-1600
(Name and address of agent for service)
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Copy to:
GAIL G. WATSON, ESQ.
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
----------------------
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. /x/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.
----------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
----------------------
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of Registration
Securities to Be Registered Registered Unit* Price* Fee
<S> <C> <C> <C> <C>
Asset Backed Securities..... $2,546,208,717 100% $2,546,208,717 $734,032.94**
</TABLE>
* Estimated for the purpose of calculating the registration fee.
** $1,046,208,717 in securities are being carried forward and
$317,032.94 of the filing fee is associated with the securities being
carried forward and was previously paid with the earlier registration
statement.
Pursuant to Rule 429 of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933, as amended, the
Prospectuses and Prospectus Supplements contained in this Registration
Statement also relate to the Registrant's registration statement No.
333-39649, as previously filed by the Registrant on Form S-3.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
Version #1
Prospectus Supplement dated ________ __, ____
To Prospectus dated _________ __, ____
$----------
Lehman Home Equity Loan Trust ____-_
Home Equity Loan Asset-Backed Certificates, Series ____-_
<TABLE>
<CAPTION>
[ ] Lehman ABS Corporation,
as Servicer as Depositor
Principal Balance Certificate Price to Public Underwriting Proceeds to the
Rate (1) Discount (2) Depositor (3)
<S> <C> <C> <C> <C> <C>
Class $ % % % %
Total $ N/A $ $ $
(1) Plus accrued interest, if any, at the Certificate Rate from _____________, _____.
(2) The Depositor has agreed to indemnify Lehman Brothers against certain liabilities, including liabilities
under the Securities Act of 1933.
(3) Before deducting expenses, payable by the Depositor, estimated to be $____________.
</TABLE>
The Certificates
o represent the entire beneficial interest in a trust, whose assets are a
pool of home equity revolving credit line loans secured primarily by first
and more junior [deeds of trust] [mortgages] on residential properties
that are primarily one- to four-family properties and pass-through
certificates representing fractional, undivided interests in mortgage
loans.
o currently have no trading market
o are obligations of the trust only and are not obligations of the seller,
the master servicer or their affiliates
Credit Enhancement
o [Letter of Credit] [Surety Bond]
Review the information in Risk Factors on page S-__ of this prospectus
supplement and on page 2 in the prospectus.
For complete information about the Home Equity Loan Asset-Backed Certificates,
Series ____-_, read both this prospectus supplement and the prospectus. This
prospectus supplement must be accompanied by a prospectus if it is being used
to offer and sell the certificates.
Neither the Securities Exchange Commission nor any state securities commission
has approved or disapproved of these certificates or passed upon the adequacy
or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
LEHMAN BROTHERS
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 Home Equity Loan Asset-Backed Certificates, Series
____-_ 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.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Home Equity Loan Asset-Backed Certificates, Series ____-_
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling Home Equity Loan Asset-Backed Certificates, Series ____-_ will
be required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
Page
Prospectus Supplement
SUMMARY.....................................................................3
RISK FACTORS................................................................9
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER................................10
[DESCRIPTION OF LC/SURETY ISSUER] THE HOME EQUITY LENDING PROGRAM.........10
SERVICING OF THE MORTGAGE LOANS............................................12
THE HELOCS.................................................................16
MATURITY AND PREPAYMENT CONSIDERATIONS.....................................22
DESCRIPTION OF THE CERTIFICATES............................................23
USE OF PROCEEDS............................................................35
LEGAL INVESTMENT CONSIDERATIONS............................................35
UNDERWRITING...............................................................36
LEGAL MATTERS..............................................................37
RATING.....................................................................37
Prospectus
RISK FACTORS............................................................... 2
DESCRIPTION OF THE SECURITIES.............................................. 5
THE TRUST FUNDS............................................................ 10
ENHANCEMENTS............................................................... 17
SERVICING OF LOANS......................................................... 20
THE AGREEMENTS............................................................. 27
CUSTODY RECEIPTS; CUSTODY AGREEMENTS....................................... 38
CERTAIN LEGAL ASPECTS OF LOANS............................................. 41
THE DEPOSITOR.............................................................. 52
USE OF PROCEEDS............................................................ 53
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................. 53
STATE TAX CONSIDERATIONS................................................... 78
ERISA CONSIDERATIONS....................................................... 79
LEGAL INVESTMENT........................................................... 83
RATINGS.................................................................... 83
PLAN OF DISTRIBUTION....................................................... 83
LEGAL MATTERS.............................................................. 84
AVAILABLE INFORMATION...................................................... 84
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. To understand all of the terms of the offering of the
certificates, read carefully this entire document and the accompanying
prospectus.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
Class Certificate Rate Principal Balance Last Scheduled
Distribution Date1
LIBOR+ _____% $
1 We expect that the actual last distribution date for each certificate
will be significantly earlier than its last scheduled distribution date.
The Trust
Lehman Home Equity Loan Trust ____-_ will be formed on _________ __, ____
by Lehman ABS Corporation, [servicer] and [trustee]. [Seller] will sell
the mortgage loans to Lehman ABS Corporation. Lehman ABS Corporation will
deposit the mortgage loans with the Trust. [Trustee] will act as trustee
for the benefit of the securityholders.
Certificates Offered
On the closing date, __________ __, ____, the trust will issue the
certificates. Each certificate represents an undivided interest in the
trust.
The certificates will be offered for purchase in denominations of [$1,000]
and integral multiples of $1 thereof.
Registration of Certificates
We will issue the certificates in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they
will be registered in the name of the depository. The limited
circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
Trust Property
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o o a pool of home equity loans, the "mortgage loans," which are
secured primarily by first and more junior [deeds of
trust][mortgages] on primarily one- to four-family residential
properties
o payments on the mortgage loans received on and after [the cut-off
date]
o any additions to the loan balances on the mortgage loans during the
life of the trust. The mortgage loans arise under home equity lines
of credit, or "HELOCs". Principal amounts may be drawn down by the
borrower under the HELOC from time to time, subject to the borrower's
credit limit. A borrower may repay principal at any time.
o the [deed of trust] [mortgage] related to each mortgage loan
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure
o the benefits of the [Letter of Credit][Surety Bond]
o rights of the depositor under the purchase agreement pursuant to
which the depositor purchased the mortgage loans from the seller,
including the right to require the seller to repurchase mortgage
loans for breaches of representations and warranties.
o rights of the seller under any hazard insurance policies covering the
mortgaged properties
The Mortgage Loans
On [the closing date], the trust will acquire the pool of mortgage loans.
The information below is based on the pool as it existed on [the cut-off
date] of $__________. The mortgage loans have the following characteristics
as of [the cut-off date]:
o number of mortgage loans:
o aggregate principal balance: $
o mortgaged property location: __states; other than __% of mortgaged
properties located in [state], no state represents more than ___% of
the mortgage loans, by loan balance
o maximum combined loan to value ratio at origination: ____% (based on
credit limit)
o weighted average combined loan-to-value ratio: ____% (approximate)
o combined loan-to-value ratio range: ____% to ____% (approximate)
o loan balance range: $0.00 to $____________
o credit limit range $___________ to $__________ (approximate)
o mortgage loan origination range from __________ to __________, ____
o weighted average loan utilization rate: ___% (approximate)
o average loan balance: $____________
o maximum principal balance: $_________
o interest rates range: ____% to ____%
o weighted average interest rate: ____% (approximate)
o weighted average remaining term to stated maturity, based on
principal balance: ____ months (approximate)
o term to stated maturity range: __ months to __ months
o last maturity date:
o average credit limit: $_________
o [use and type of each mortgaged property: ____% owner occupied; ____%
second vacation home;
o [____% first priority and ____% second priority lien]
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS"; "THE HOME EQUITY
LENDING PROGRAM"; and "THE HELOCS"; in this prospectus supplement.
Interest on the Mortgage Loans
Interest on each mortgage loan is payable monthly and computed on the
average daily outstanding loan balance for each billing cycle at a
variable rate per annum (subject to minimum and maximum rates, including
applicable usury limitations) equal to the sum of
(1) the [prime rate], and
(2) a margin.
Principal amounts may be drawn down by the borrower under the HELOC from
time to time, subject to the borrower's credit limit. A borrower may repay
principal at any time.
We refer you to ""THE HOME EQUITY LENDING PROGRAM--HELOC Terms" in this
prospectus supplement and "CERTAIN LEGAL ASPECTS OF THE
LOANS-Applicability of Usury Laws" in the prospectus.
Servicer
The servicer of the mortgage loans will be [the Bank][ ].
We refer you to "SERVICING OF MORTGAGE LOANS--The Servicer" in this
prospectus supplement.
Servicing
The servicer will be responsible for servicing, managing and making
collections on the mortgage loans. The servicer will receive a monthly
servicing fee equal to, on an annualized basis, __% of the pool balance.
The servicer will also be entitled to certain other amounts as servicing
compensation from the trust.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Distributions on the
Certificates"; and "SERVICING OF MORTGAGE LOANS--Servicing Compensation
and Payment of Expenses" in this prospectus supplement.
In certain limited circumstances, the servicer may resign or be removed,
in which event either the trustee or a third-party servicer will be
appointed as successor servicer.
We refer you to "SERVICING OF THE LOANS--Certain Matters Regarding the
Servicer" and "THE AGREEMENTS--Events of Default" and "--Rights Upon
Events of Default" in the Prospectus.
Collections
The servicer will allocate collections received on the trust property as
either interest collections or principal collections. All such amounts
will then be allocated in accordance with the interests of the
certificateholders, based on the investor interest, and the interests of
the seller based on the seller interest.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Payments on Mortgage
Loans; Deposits to Collection Account" and "SERVICING OF LOANS--Deposits
to and Withdrawals from the Collection Account" in this prospectus
supplement.
Distribution of Certificateholders
You are entitled to receive monthly payments of interest at the
certificate rate, and monthly payments of principal during the
amortization period. These payments will be funded from a percentage of
the payments received with respect to the mortgage loans or, in certain
circumstances, from draws on the [letter of credit] [surety bond.]
The distribution date will be the ____ day of each month, or if the ____
day is not a business day the next business day, starting with __________
__, ____.
We refer you to "DESCRIPTION OF THE CERTIFICATES" in this prospectus
supplement.
Payments to you of principal will be based on the investor interest in the
trust. The investor interest is the aggregate undivided interest in the
trust represented by the certificates and will initially represent
$___________ of principal. The investor interest will decline as principal
is paid to the certificateholders during the amortization period, except
as described in this prospectus supplement. The seller will hold the
seller interest which represents the remaining undivided interest in the
trust not represented by the certificates.
On the ______ business day, but no later than the ______ calendar day, of
each month, the servicer will calculate, and instruct the trustee
regarding, the amounts to be paid to you.
The pool balance is the aggregate amount of the loan balances for the
mortgage loans, including the additional balances. The pool balance will
fluctuate from day to day because the amount of draws by borrowers and the
amount of principal payments by borrowers will usually differ on each day.
Because the seller interest represents the interest in the trust not
represented by the certificates, the amount of the seller interest will
fluctuate from day to day as draws are made and principal is paid under
the mortgage loans.
[The interest in the loan balances which is represented by the
certificates will never exceed the aggregate certificate principal
balance. If, for example, draws by borrowers under the HELOCs cause the
aggregate loan balance held by the trust to exceed the aggregate
certificate principal balance, the excess will be part of the seller
interest.]
Interest
Interest will be distributed monthly on the distribution date, starting on
__________ __, ____. Interest will accrue during the period starting on
the preceding distribution date (or in the case of the first distribution
date, from the closing date) through the day preceding the current
distribution date on the basis of the [actual number of days in the
interest period and a 360-day year].
Interest payments will be funded from the portion of the interest
collections collected during the immediately preceding calendar month (or,
in the case of the initial distribution date, the period from
_____________, ___ through the last day of the calendar month immediately
preceding such distribution date) allocable to the investor interest. To
the extent there are insufficient funds, the shortfall will be funded from
draws on the [Letter of Credit] [Surety Bond].
We refer you to "DESCRIPTION OF THE CERTIFICATES" and "RISK
FACTORS--Credit Enhancement" in this prospectus supplement.
Payments of Principal; Revolving Period
You will not be entitled to receive payments of principal during the
revolving period. The revolving period is expected to last from the
closing date through __________ __, ____. The revolving period will
terminate earlier if an early amortization event occurs. In order to
maintain the certificate principal balance at $__________ (except in
certain limited circumstances) during the revolving period, principal
collections allocable to the investor interest will be paid to the seller
rather than the certificateholders. During the revolving period the
certificateholders will maintain the same investor interest in the trust.
Unless earlier terminated by the occurrence of an early amortization
event, the revolving period will end on ____________.
We refer you to "DESCRIPTION OF THE CERTIFICATES."
Principal Payments; Amortization Period
During the amortization period the principal collections allocated to the
investor interest will be paid to you and will no longer be paid to the
seller. The amortization will begin __________ __, ____ or, if an early
amortization event occurs, the date of such occurrence. The amortization
period will end when the certificate principal balance has been reduced to
zero or when the trust terminates. The distributions of principal
collections will be made monthly on each distribution date starting on the
distribution date in the month following the month in which the
amortization period commences.
Payments to you of principal will be based on the investor interest in the
trust. The investor interest is the aggregate undivided interest in the
trust represented by the certificates and will initially represent
$___________ of principal. The investor interest will decline as principal
is paid to the certificateholders during the amortization period, except
as described in the prospectus supplement.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Early Amortization
Events" for a discussion of the events which might lead to the early
commencement of the amortization period.
On each distribution date you will be entitled to receive an amount equal
to the investor percentage multiplied by the principal collections
received during the preceding calendar month. On the last day of the
revolving period, the trustee will determine the "investor percentage".
The investor percentage will equal the principal balance of the
certificates divided by the balance of the pool of mortgage loans.
Allocations based upon the investor percentage during the amortization
period may result in distributions of principal in amounts that are
greater relative to the declining balance of the certificate principal
balance than would be the case if a fixed investor percentage were not
used to determine the percentage of principal collections distributed in
respect of the investor interest.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Payments on Mortgage
Loans; "Deposits to Collection Account."
[Letter of Credit] [Surety Bond]
On [the closing date], [issuer] will issue a [letter of credit] [surety
bond]. If available amounts on deposit in the collection account on any
distribution date are insufficient to provide for the payment of the
amount required to be distributed to you and the servicer, the trustee
will draw on the [letter of credit] [surety bond], to the extent of the
[letter of credit] [surety bond] amount for such distribution date. Any
amounts remaining in the collection account with respect to the preceding
collection period, after all other distributions have been made, will be
distributed to the [letter of credit] [surety bond] issuer to the extent
amount.
We refer you to "THE [LETTER OF CREDIT] [SURETY BOND] ISSUER";
"DESCRIPTION OF THE CERTIFICATES--The [Letter of Credit] [Surety Bond]";
"--Distributions on the Certificates"; "RISK FACTORS--[Credit
Enhancement]" in this prospectus supplement and "ENHANCEMENT" in the
prospectus.
[Letter of Credit] [Surety Bond] Amount
The amount available under the [letter of credit] [surety bond] for the
first distribution date will be $__________.
For each distribution date after the first distribution date, the amount
will equal the lesser of a percentage of the pool balance and an amount
based on amounts drawn under the [Letter of Credit] [Surety Bond] and
amounts paid to the [Letter of Credit] [Surety Bond] Issuer.
Final Payment of Principal; Termination
The trust will terminate on the distribution date after the earlier of:
(1) the reduction of the certificate principal balance to zero and after
which there is no unreimbursed loss amounts; and
(2) the final payment or other liquidation of the last mortgage loan in
the trust.
On any distribution date when the certificate principal balance is less
than or equal to $________ ([5]% of the initial certificate principal
balance) the investor interest will be subject to optional retransfer to
the seller. The retransfer price will be equal to the sum of the
outstanding certificate principal balance and accrued and unpaid interest
thereon at the certificate rate through the day preceding the final
distribution date.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Optional Termination" in
this prospectus supplement, and "THE AGREEMENTS--Termination" in the
prospectus.
Federal Tax Considerations
[Brown & Wood LLP is of the opinion that, the certificates will be treated
as indebtedness of the seller for Federal income tax purposes. The seller
will treat the certificates as indebtedness for Federal, state and local
income and franchise tax purposes.
We refer you to "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the
prospectus for additional information concerning the application of
Federal income tax laws.]
ERISA Considerations
[A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended, or ERISA should
carefully review with its legal advisors whether the purchase or holding
of certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA.]
[The certificates generally may not be transferred to a fiduciary of any
employee benefit plan subject to ERISA or Section 4975 of the Internal
Revenue Code.]
We refer you to "ERISA CONSIDERATIONS" in the prospectus and in this
prospectus supplement.
Certificate Rating
Before the certificates can be issued, the trust must obtain a rating on
the certificates of:
[Rating][Rating Agency]
The ratings address credit risk. When evaluating credit risk, the rating
agencies look at the likelihood of whether or not you will receive your
interest and principal payments. Credit risk does not relate to the
likelihood of prepayments on the mortgage loans. Prepayments affect the
timing of your payments, such that your actual return could differ
substantially from your anticipated return on your investment.
We refer you to "RATINGS" and "RISK FACTORS--Rating of the Securities" in the
prospectus.
RISK FACTORS
Servicer's Ability to Change the Terms of the HELOCS May Affect Payments on
the HELOCs.
The servicer may permit an increase in the credit limit under a
HELOC. An increase is only permitted if the new credit limit under the HELOC,
plus the outstanding principal balance of any related senior loans, does not
exceed (1) ___% (___% for a condominium, townhouse, duplex, or vacation
condo/house), if the market value of the mortgaged property is $__________ or
less, or (2) ___% (___% for a condominium, townhouse, duplex, or vacation
condo/house), if the market value of the mortgaged property exceeds $_________,
market value will be based upon an appraisal or the tax assessed value of the
mortgaged property at the time the increase was requested. The trustee does not
have to consent to an increase in the credit limit under a HELOC as described
in the previous sentence. Additional balances arising under a mortgage loan as
a result of an increase in the credit limit will be treated the same as
additional balances arising under a mortgage loan for which there has been no
increase in the credit limit.
In addition to such changes, the servicer may agree to other changes
in the terms of a loan agreement, provided that such changes:
(i) do not materially adversely affect the interest of the
certificateholders,
(ii) are consistent with prudent business practice,
(iii) are also being applied to the comparable segment of home
equity credit lines being held for the servicer's own
account, and
(iv) do not change the terms of the HELOC so as to change the
terms for the amortization of principal. The servicer may
also extend the period during which draws under the HELOCS
may be made.
There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not result
in changes in the terms of the loan agreements.
Changes in the terms of the mortgage loans may impact your receipt of
interest and principal.
Delinquent Mortgage Loans included in Trust Property may be More Likely to
Default than Non-Delinquent Mortgage Loans.
The trust will include mortgage loans which are ___ days or fewer
delinquent. As of the cut-off date, the aggregate loan balance of such
delinquent mortgage loan was $__________. If there are not sufficient funds
from interest collections allocated to the investor interest to cover losses on
the mortgage loans for any collection period and the [letter of credit] [surety
bond] amount has been reduced to zero, the certificate principal balance will
be reduced which (unless otherwise later reimbursed) would result in a
reduction in the aggregate amount of principal returned to the
certificateholders and in the amount of interest collections allocable to the
investor interest and available to provide protection against defaults in
subsequent collection periods. Loans which are delinquent may be more likely to
experience losses.
Recharacterization of Certificates by IRS could result in Tax Liability.
In the opinion of special tax counsel to the depositor, the
certificates are properly characterized as debt for federal income tax
purposes. If the IRS were to contend successfully that the certificates were
not debt obligations of the seller for federal income tax purposes, the
arrangement among the depositor and the certificateholders might be classified
for federal income tax purposes as either a partnership or an association
taxable as a corporation that owns the mortgage loans. This recharacterization
of the tax treatment may result in taxes which would impact the amount of
interest and principal you receive. We refer you to "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" in the prospectus.
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to _________ ______________
("___________") has been furnished by _____________.
[DESCRIPTION OF LC/SURETY ISSUER]
THE HOME EQUITY LENDING PROGRAM
General
The home equity lines of credit in the trust (the "HELOCs" or the
"Mortgage Loans") were originated by ___________________ (the "Bank") under its
home equity lending program. The Bank has offered variable-rate home equity
revolving credit lines since ____________. As of _____________, _____, the Bank
owned approximately $__________ million aggregate principal amount of
outstanding loans originated in the State of ____________ under home equity
credit lines (the "Bank's Portfolio").
Underwriting Procedures Relating to HELOCs
[Each revolving home equity line of credit is originated after a
review by the Bank in accordance with its established underwriting procedures,
which are intended to assess the applicant's ability to assume and repay such
home equity lines of credit and the adequacy of the real property which serves
as collateral for such home equity lines of credit. The maximum home equity
line of credit provided by the Bank is $________.
Each applicant for a home equity line of credit is required to
complete an application which lists the applicant's assets, liabilities,
income, credit and employment history and other demographic and personal
information. If information in the loan application demonstrates that there is
sufficient income and equity to justify making a home equity line of credit,
the Bank will conduct a further credit investigation of the applicant. This
investigation includes (i) obtaining and reviewing an independent credit bureau
report on the credit history of the borrower in order to evaluate the
borrower's ability to repay; (ii) obtaining a verification of employment from
the applicant's employer; (iii) obtaining and reviewing pay stubs, income tax
returns and/or W-2 forms in order to verify the applicant's income; and (iv) in
the case of all home equity lines of credit originated with a Credit Limit in
excess of $__________ or with any Credit Limit, if originated after
_______________, obtaining a drive-by appraised value (a "Drive-By Appraised
Value") of the property to be mortgaged through an independent frontal exterior
inspection and neighborhood observation (a "Drive-By Appraisal") of the
property or, in the case of home equity lines of credit originated prior to
______________ in an amount of $_________ or less, making an estimate of the
value (the "Estimated Value") of the property to be mortgaged through, (a) in
the case of home equity lines of credit originated for such properties located
in the State of _____________, the use of a formula that assumed that the then
current value of the property was equal to the amount the applicant paid for
the property together with appreciation of __% of the purchase price for each
year since the applicant purchased the property and (b) in the case of home
equity lines of credit originated for such properties located in
______________, a property tax bill which reflected a 100% assessment on the
property.
Although no complete title search of the property to be mortgaged is
required, a bring-down to the date of origination of the home equity lines of
credit of the complete title search obtained by the borrower at the time of his
original purchase of the mortgaged property must be delivered.
The Bank calculates the maximum amount of the loan that the customer
may obtain by taking ___% (or, in the case of home equity lines of credit
originated prior to _________, __%) of the Drive-By Appraised Value or
Estimated Value, as the case may be, of the property and subtracting any
outstanding senior mortgage balance. Financial insurance premiums and fees are
not considered in the loan amount when making such computation.
Applications for loans exceeding the maximum amount calculated in the
preceding paragraph require regional manager approval. Overrides of other
criteria may be authorized by branch managers up to their lending limits. Among
the reasons that the Bank grants overrides are the existence of compensating
balances of the borrower in accounts held by the Bank (which balances will not
necessarily be available in the event of a default or delinquency of any HELOC
in the Pool) and relationships between the borrower and the trust department of
the Bank.
No information is available with respect to the portion of the home
equity lines of credit in the bank's Portfolio as to which overrides of
underwriting criteria were granted.]
HELOC Terms
[A borrower may access a home equity line of credit by writing a
check supplied by the Bank or through a check overdraft facility. On home
equity lines of credit originated prior to ____________, _____ in ____________
_______, there is no automatic termination of the draw-down period so long as
the borrower is not in default under the loan agreement. On all home equity
lines of credit originated in ___________ and on home equity lines of credit
originated after ___________, ______ in ______________ _______, there is a ___
year draw down period on the lines as long as the borrower is not in default
under the loan agreement. Home equity lines of credit bear interest at a
variable rate which may change monthly. Home equity lines of credit are subject
to a maximum per annum interest rate of ___ percentage points and to applicable
usury limitations. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Applicability of Usury Laws" in the Prospectus. The monthly periodic
rate on the home equity revolving lines of credit is 1/12th of the annual
percentage rate (the "Loan Rate"), which is the sum of the Index Rate plus a
spread (the "Margin") of predominantly ____%.
Interest on a home equity line of credit is calculated at the Loan
Rate applied to the daily balance of the account for each day of the billing
cycle. A borrower is required to pay each month the amount of interest accrued
on the line during the previous month. There are no minimum principal payment
requirements for home equity lines of credit originated prior to _______, ____
in ____________. For all lines of credit originated in _________________ and
lines of credit originated after _____________, ____ in ______________,
principal repayments vary depending on the option selected by the borrower. A
borrower who selects an "interest only" option has no minimum principal payment
during the first ten year draw period of and thereafter has a minimum monthly
principal payment during the ten years following the draw period of 1/120th of
the principal amount outstanding on the last day of the ten year draw period. A
borrower who selects a "principal and interest" option has a minimum monthly
principal payment during the first ten year draw period of 1/200th of the
principal amount outstanding on the last day of the applicable billing cycle
and thereafter has a minimum monthly payment of 1/120th of the principal amount
outstanding on the last day of the draw period. Billing statements are mailed
monthly. The statement details all debits and credits and specifies the minimum
payment due and the available credit line. all payments are due ___ days after
the billing statement is issued.
The "Index Rate" is based on the "prime rate" published in the "Money
Rates" section of The Wall Street Journal on the applicable billing date for
each HELOC (or if such day is not a banking day in ___________ or ___________
______, on the banking day immediately preceding such day), with charges
becoming effective on the first day of the next billing cycle.
If more than one prime rate is published, then the highest rate
published will be used. The Loan Agreements further provide that if publication
of the Index Rate is discontinued, the Bank will change the Index Rate upon
notification in accordance with such Loan Agreements. Except for any
amortization of principal which may occur as a result of the required monthly
minimum payments, there are no required payments of principal.
The Bank also offers a "fixed rate" loan option whereby a borrower
may repay all or a portion of the outstanding loan balance, in excess of
$________, at a fixed rate. If a borrower selects a "fixed rate" option the
amount converted will be treated as a principal payment on the line of credit
and the available line of credit will be reduced by the "fixed rate" option
amount. The Bank has the right under each HELOC originated prior to
____________, with 30 days' prior written notice of the amendment or longer
notice period if applicable in accordance with Federal and applicable ________
_______ law, to change any of its terms, including increasing the monthly
periodic rate or changing the Index Rate at any time. Unless otherwise
indicated in the notice, all such changes will apply to both new and
outstanding balances. For home equity lines of credit originated after
_____________, _____, the Bank may make changes pre-approved by each individual
obligor and changes that are considered immaterial. Notwithstanding the
foregoing, no change shall be made to the terms of the HELOCs after
___________, ____ unless, in connection with such change, the Depositor
delivers to the Trustee an opinion of counsel stating that such change will not
cause the Trust, or the arrangement by which the Certificates are issued, to be
classified as a taxable mortgage pool within the meaning of Section 701(i) of
the Internal Revenue Code of 1986, as amended.
The Bank has the right to suspend or terminate the right to obtain
additional credit, or to require the borrower to pay the entire balance due
plus all other accrued but unpaid charges immediately, if the borrower fails to
make any required payment by the due date, if the borrower's original loan
application was fraudulent or contained a material misrepresentation or if the
borrower sells or transfers the mortgaged property or acts in any way which
adversely affects the lien of the mortgage or the maintenance of the property.
The Bank has the right to suspend the right to obtain additional credit or to
reduce a borrower's credit limit, if the value of the mortgaged property
declines significantly below its appraised value, if the Bank reasonably
believes the borrower will be unable to repay the line due to a material
financial change, if the borrower is in default under the loan agreement, if
government action either impairs the Bank's security interest or prevents it
from imposing the annual percentage rate, if a regulatory agency has notified
the Bank that continued advances would institute an unsafe and unsound practice
or if the maximum annual percentage is reached.]
SERVICING OF THE MORTGAGE LOANS
The Servicer
[The Servicer is a ___________ which is wholly owned by
_____________.
The Servicer conducts a general banking business throughout the
_________, and, with its subsidiaries, offers a broad array of commercial and
retail loan and deposit products and services, mortgage banking and brokerage
and investment services. At _________, the Servicer had total assets of
approximately $________ billion and total deposits of approximately $_________
billion.
The principal executive offices of the Servicer are located at
_________________________________ (telephone (___-___-_____)).]
Servicing of HELOCS
[Centralized controls and standards have been established by the
Servicer for the servicing and collection of home equity lines of credit.
Servicing includes, but is not limited to, post-origination loan processing,
customer service, remittance processing, collections and liquidations. The
collection process is initiated ten days after the payment due date with the
computer generation of a late notice. To make payment arrangements, a collector
attempts to contact the borrower when the home equity line of credit is 15 to
30 days past due.
During the period when an account is 45 to 60 days past due, a credit
bureau report is obtained, homeowner's insurance is verified, the status of
senior mortgages and property taxes is checked and a title search and
"drive-by" appraisal are ordered.
If arrangements have not been made to cure the delinquency within 61
days of the line becoming past due, drawing privileges are cancelled. The line
is referred to outside counsel and is placed on a "non-accrual" status after 90
days of delinquency. All legal expenses are assessed to the account and become
the responsibility of the borrower. When it is determined by the Servicer that
there is no possibility of recovery from the mortgaged property or from other
leviable assets or wage attachments, the line is charged-off.
Reinstatement arrangements can be made up until the point of sale.
Any foreclosures initiated on a junior mortgage are subject to the senior
mortgage or mortgages and any outstanding property taxes. If the Servicer
purchases the property through the foreclosure action, the account is
transferred to the Servicer's REO Department which is maintained at
__________________. The REO Department is responsible for maintaining and
marketing the property.
The Servicer may not foreclose on the property securing a junior
mortgage loan unless the Servicer forecloses subject to any senior mortgages,
in which case the Servicer may pay the entire amount due on the senior mortgage
to the senior mortgagees at or prior to the foreclosure sale. If a senior
mortgage is in default after the Servicer has initiated its foreclosure action,
the Servicer may advance funds to keep senior mortgages current until such time
as the Servicer satisfies such senior mortgages. In the event that foreclosure
proceedings have been instituted on a senior mortgage prior to the initiation
of the Servicer's foreclosure action, the Servicer may either satisfy the
senior mortgage at the time of the foreclosure sale or take other action to
protect the Trust's interest in the related property.]
See "SERVICING OF LOANS" in the Prospectus for additional information
regarding the Servicer's servicing of the Mortgage Loans pursuant to the
Agreement.
Delinquency and Loss Experience of the Servicer's Portfolio
The following tables set forth the delinquency and loss experience
for each of the periods shown for the Servicer's portfolio of home equity lines
of credit. The Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented in
the following tables. The information in the tables below has not been adjusted
to eliminate the effect of the growth in the size of the Servicer's portfolio
during the periods shown. Accordingly, loss and delinquency as percentages of
aggregate principal balance of such loans for each period may be higher than
those shown if a group of such loans were artificially isolated at a point in
time and the information showed the activity only in that isolated group. The
data presented in the following tables are for illustrative purposes only, and
there is no assurance that the delinquency and loss experience of the HELOCs
will be similar to that set forth below.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE (Dollars in Thousands)
As of As of December 31,
-----------------------------------------------------------------
, 1999(1) 1998 1997 1996
----------------------- -----------------------------------------------------------------
Number of Amount Number of Amount Number of Amount Number of Amount
Loans Loans Loans Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End............
Delinquency (1) $ $ $ $
30-59 Days............
60-89 Days............
90 or More Days (2)...
------------ ---------- -----------------------------------------------------------------
Total Delinquencies..... $ $ $ $
Total Delinquencies % % % % % % % %
as a Percentage of
the Portfolio at
Period End............
- ---------
(1) The period of delinquency is based on the number of days payments are contractually past due for all loans other than
mortgage loans previously charged off.
(2) Includes mortgage loans in foreclosure and not charged off.
</TABLE>
<TABLE>
<CAPTION>
LOSS EXPERIENCE (Dollars in Thousands)
As of December 31,
As of -------------------------------------------------------------------
, 1999(1) 1998 1997 1996
-----------------------------------------------------------------------------------------
Number of Amount Number of Amount Number of Amount Number of Amount
Loans Loans Loans Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End............
Gross Losses............ $ $ $ $
Recoveries.............. $ $ $ $
Net Losses.............. $ $ $ $
Net Losses as a %(2) %(2) % % % % % %
Percentage of
Portfolio at
Period End............
- -----------
(1) Net Losses equal total principal charged off less recoveries. The customary policy of the Bank is to charge off mortgage
loans in full that are 120 days past due unless foreclosure proceedings are planned or there are indications that the
account will be brought current. An account that is not charged off because there are indications that payment is
imminent generally will be charged off after an additional 60 to 90 days if such payments is not forthcoming.
(2) This percentage represents the three-month period ended ______________, 1999 annualized and is not necessarily indicative
of the results which may occur for the full year.
</TABLE>
Servicing Compensation and Payment of Expenses
The servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Mortgage Loans will be paid to it from
Interest Collections at the time such collections are received or from amounts
drawn on the [Letter of Credit] [Surety Bond] and will be equal to ____% per
annum, (the "Servicing Fee Rate") of the Pool Balance. The Investor Percentage
of such servicing fee (the "Investor Servicing Fee") will be paid as described
under "DESCRIPTION OF THE CERTIFICATES--Distribution on the
Certificates--Distribution of Interest Collections and Draw Amounts" herein.
All assumption fees, late payment charges and other fees and charges, to the
extent collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
[The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Certificate
Registrar and any paying agent.] In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Certificateholders to
receive any related Liquidation Proceeds.
THE HELOCS
The Trust will be formed pursuant to the Agreement. The Depositor
will transfer the Mortgage Loans to the Trust, without recourse, in exchange
for the Certificates and a certificate to be held by it representing the
Depositor's interest in the Trust (the "Depositor Certificate"). The property
of the Trust will consist of the Mortgage Loans, all proceeds of the Mortgage
Loans, all monies on deposit in the Collection Account and the Certificate
Account, the Mortgages on the properties securing the Mortgage Loans, including
any properties acquired by foreclosure or deed in lieu of foreclosure, the
benefits of the [Letter of Credit] [Surety Bond], and the proceeds on any
insurance policies covering the Mortgage Loans or Mortgaged Properties or any
obligors on the Mortgages. [Pursuant to the Agreement, the Seller will be
required to transfer Eligible Additional Mortgage Loans (to the extent
available) to the Trust, in order to avoid the occurrence of any Early
Amortization Event resulting from a decline in the Seller's Interest, and
otherwise will be allowed to transfer Eligible Additional Mortgage Loans to the
Trust (subject to certain limitations and conditions) from time to time. See
"DESCRIPTION OF THE CERTIFICATES--Transfers of Eligible Additional Mortgage
Loans to the Trust" herein.] In addition, the Seller may, subject to certain
limitations and conditions specified in the Agreement, cause the retransfer
from the Trust to it of certain Mortgage Loans. See "DESCRIPTION OF THE
CERTIFICATES--Optional Retransfers of Mortgage Loans to the Depositor" herein.
The Mortgage Loans to be transferred to the Trust (collectively, the
"Pool") are evidenced by loan agreements (each, a "Loan Agreement") secured by
credit line [deeds of trust] [mortgages] (which are primarily second [deeds of
trust] [mortgages] on Mortgaged Properties, approximately ____% of which are
located in _____________ and approximately ____% of which are located in other
states, with no single state accounting for more than ____% of the Cut-Off Date
Pool Balance[, and represent substantially all of the home equity credit lines
originated by the Bank which meet the criteria specified in the Agreement and
described below] (the "Mortgage Loans"). Because the Mortgage Loans include the
loans generated under substantially all of the HELOCs and because the Loan
Balances will include all amounts payable by borrowers under such HELOCs, some
of the Mortgage Loans will be generated under recently solicited, unseasoned
HELOCs [and the Pool will include delinquent Mortgage Loans and may include
obligations of borrowers who are or are about to become bankrupt or insolvent].
Many of the Mortgage Loans are less than the Credit Limit under the
corresponding HELOC. Additional Balances on such Mortgage Loans will be
property of the Trust and will increase the Pool Balance. The amount of the
[Letter of Credit] [Surety Bond] was determined taking into account, among
other considerations, the nature of the HELOCs and the Mortgage Loans.
Each Mortgage Loan included in the Pool was generated under a HELOC
that, as of the Cut-Off Date, was an Eligible HELOC. An "Eligible HELOC" is
defined in the Agreement as any home equity credit line that: [selection
criteria of HELOCs to be added]. Each HELOC was originated between __________
and the Cut-Off Date [in the ordinary course of the Bank's home equity
revolving credit program]. Subject to exceptions deemed appropriate by the
[Bank] as to individual HELOCs, the [Bank's] general policy was to require that
the Combined Loan-to-Value Ratio under the HELOC at the origination not exceed
80% of the market value of the Mortgaged property, based upon an appraisal or
the tax assessed value of the Mortgaged Property at the time the HELOC was
originated, as described under "THE HOME EQUITY LENDING PROGRAM" herein.
Substantially all of the Mortgage Properties were one- to four-family
residential properties. As of the Cut-Off Date, the weighted average loan
utilization rate was approximately _____%.
Set forth below is a description of certain additional
characteristics of the HELOC's as of the Cut-Off Date:
<TABLE>
<CAPTION>
LOAN POOL STATISTICS
CUT-OFF DATE LOAN BALANCES
Range of Number of Aggregate % of Pool
Cut-Off Date Home Equity Loan by Aggregate
Loan Balances Credit Lines Balances Loan Balances
- ------------------------------------------- ----------------- ---------------- --------------------
<S> <C> <C> <C>
$ .........to $ ................. $ %
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
$ .........to $ .................
Total............................. $ %
================= ================ ====================
</TABLE>
<TABLE>
<CAPTION>
CUT-OFF DATE LOAN RATES
Range of Number of Aggregate % of Pool
Loan Rates Home Equity Loan by Aggregate
Credit Lines Balances Loan Balances
- ------------------------------------------ ------------------------ --------------------- ------------------------
<S> <C> <C> <C> <C>
% to.....%..................
% to.....%..................
% to.....%..................
% to.....%..................
% to.....%..................
% to.....%..................
Total..................................... $ %
======================== ===================== ========================
</TABLE>
<TABLE>
<CAPTION>
CUT-OFF DATE MARGIN RANGES - PRIME INDEXED MORTGAGE LOANS
Margin Number of Aggregate % of Pool
Home Equity Loan by Aggregate
Credit Lines Balances Loan Balances
------------------------ --------------------- ------------------------
<S> <C> <C> <C>
%........................................ $ %
%........................................
Total..................................... $ %
======================== ===================== ========================
</TABLE>
<TABLE>
<CAPTION>
CREDIT LIMIT UTILIZATION RATES
Range of Number of Aggregate %of Pool
Credit Limit Home Equity Loan by Aggregate
Utilization Rates Credit Lines Balances Loan Balances
------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
0.00% to 5.00%................................. $ %
5.01% to 10.00%.................................
10.01% to 15.00%.................................
15.01% to 20.00%.................................
20.01% to 25.00%.................................
25.01% to 30.00%.................................
30.01% to 35.00%.................................
35.01% to 40.00%.................................
40.01% to 45.00%.................................
45.01% to 50.00%.................................
50.01% to 55.00%.................................
55.01% to 60.00%.................................
60.00% to 65.00%.................................
65.01% to 70.00%.................................
70.01% to 75.00%.................................
75.00% to 80.00%.................................
80.00% to 85.00%.................................
85.01% to 90.00%.................................
90.01% to 95.00%.................................
95.01% to 100.00%................................
=================== ================== ====================
$ %
Total....................................................
=================== ================== ====================
</TABLE>
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIOS(1)
Range of Number of Aggregate %of Pool
Combined Home Equity Loan by Aggregate
Loan -to-Value Credit Lines Balances Loan Balances
Ratios
------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
0.00% to 5.00%................................. $ %
5.01% to 10.00%.................................
10.01% to 15.00%.................................
15.01% to 20.00%.................................
20.01% to 25.00%.................................
25.01% to 30.00%.................................
30.01% to 35.00%.................................
35.01% to 40.00%.................................
40.01% to 45.00%.................................
45.01% to 50.00%.................................
50.01% to 55.00%.................................
55.01% to 60.00%.................................
60.00% to 65.00%.................................
65.01% to 70.00%.................................
70.01% to 75.00%.................................
75.00% to 80.00%.................................
80.00% to 85.00%.................................
85.01% and above...................................
=================== ================== ====================
$ %
Total....................................................
=================== ================== ====================
(1) For a description of the method of calculating the Combined Loan-to-Value Ratio, see "THE HOME EQUITY CREDIT LINES"
herein. The information in this table is as of the Cut-Off Date.
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE LOAN INTEREST RATE FLOORS
Interest Number of Aggregate % of Pool
Rate Floors Home Equity Loan by Aggregate
Credit Lines Balances Loan Balances
------------------------ -------------------- ---------------------
<S> <C> <C> <C>
None.........................................
%..................................
%..................................
======================== ==================== =====================
$ %
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE LOAN INTEREST RATE CEILINGS
Interest Number of Aggregate % of Pool by
Rate Ceilings Home Equity Loan Balances Aggregate
Credit Lines Loan Balances
------------------------ -------------------- ---------------------
<S> <C> <C> <C>
%..................................
%..................................
None.........................................
------------------------ -------------------- ---------------------
$ %
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
PROPERTY USE OF MORTGAGE LOANS
Property Use Number of Aggregate Percent of
Mortgage Loans Balance Mortgage Loans
by Principal
Balance
<S> <C> <C> <C>
Owner Occupied........................
Non-Owner Occupied....................
Unknown...............................
------------------------ -------------------- ---------------------
......... $ 100.00%
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
LIEN PRIORITY OF MORTGAGE LOANS
Lien Priority Number of Aggregate Percent of
Mortgage Loans Balance Mortgage Loans
by Principal
Balance
<S> <C> <C> <C>
First Mortgage........................
Second Mortgage.......................
Third Mortgage........................
------------------------ -------------------- ---------------------
Unknown...............................
$ 100.00%
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGE LOANS
State Number of Aggregate Percent of
Mortgage Loans Balance Mortgage Loans
by Principal
Balance
<S> <C> <C> <C>
- ------------------------------------------
- ------------------------------------------
- ------------------------------------------
......... $ 100.00%
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE OF MORTGAGE LOANS
Number of Units Number of Aggregate Percent of
Mortgage Loans Balance Mortgage Loans
by Principal
Balance
<S> <C> <C> <C>
Single Family Detached................
Single Family Attached................
2-4 Family............................
Condominium...........................
Cooperative...........................
Unknown...............................
------------------------ -------------------- ---------------------
$ 100.00%
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
ORIGINATION YEAR OF MORTGAGE LOANS
Origination Year Number of Aggregate Percent of
Mortgage Loans Loan Balance Loan Pool
by Aggregate
Loan Balance
<S> <C> <C> <C>
19....................................
19....................................
19....................................
19....................................
19....................................
19....................................
19....................................
19....................................
......................................
$ 100.00%
Total..........................
======================== ==================== =====================
</TABLE>
<TABLE>
<CAPTION>
DAYS DELINQUENT AS OF CUT-OFF DATE
Days Delinquent Number of Aggregate Percent of
Mortgage Loans Loan Balance Loan Pool
by Aggregate
Loan Balance
<S> <C> <C> <C>
30-59.................................
60-89.................................
------------------------ -------------------- ---------------------
$ 100.00%
Total..........................
======================== ==================== =====================
</TABLE>
No assurance can be given that the values of the Mortgaged Properties
as of the dates of origination of the related HELOCs have remained or will
remain constant or have not declined. If the residential real estate market
generally or the residential real estate market in ________________ should
experience an overall decline in property values such that the outstanding Loan
Balances under the HELOCs, together with any senior financing on the Mortgaged
Properties, equal or exceed the value of the Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those
currently experienced in the mortgage lending industry in general. For
information concerning possible declines in value of the Mortgaged Properties,
see "RISK FACTORS--Certain Mortgage Loans and Mortgaged Property; Obligor
Default" in the Prospectus. In addition, adverse economic conditions (which may
or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments under the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to the
Pool. To the extent that such losses are not covered by draws on the [Letter of
Credit] [Surety Bond], they will be borne by holders of the Certificates.
The descriptions in this Prospectus Supplement of the Pool and the
Mortgaged Properties are based upon the Pool as it is expected to be
constituted as of the close of business on the Cut-Off Date, as adjusted for
the scheduled principal and interest payments due on or before such date. Prior
to the issuance of the Certificates, Mortgage Loans may be removed from the
Pool as a result of prepayments, delinquencies, incomplete documentation, or
otherwise if the Depositor deems such removal necessary or desirable. A limited
number of other mortgage loans may be included in the Pool prior to the
issuance of the Certificates, unless including such mortgage loans would
materially after the characteristics of the Pool as described herein. The
Depositor believes that the information set forth herein will be representative
of the characteristics of the Pool as it will be constituted at the time the
Certificates are issued, although the range of Loan Rates and maturities and
certain other characteristics of the Mortgage Loans in the Pool may vary.
A Current report on Form 8-K (the "Form 8-K") containing a detailed
description of the Mortgage Loans will be available to purchasers of the
Certificates on or shortly after the Closing Date and will be filed with the
Securities and Exchange Commission within fifteen days after the Closing Date,
if there is a material difference between the description of the Pool contained
herein and the Pool as constituted on the Closing Date. The Form 8-K will
specify the precise aggregate outstanding principal balance of the Mortgage
Loans as of the Cut-Off Date and will set forth on a precise basis the other
information presented herein on an approximate basis.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement provides that the Certificateholders will not receive
payments of principal until the Distribution Date on ___________ (i.e., the
first Distribution Date after the first Collection Period following the end of
the Revolving Period) or, if earlier, the Distribution Date in the month after
the first Collection Period of an Early Amortization Event. During the
Amortization Period, Certificateholders will be entitled to receive on each
distribution Date the Investor Percentage described herein of the Principal
Collections received in the preceding Collection Period until the Certificate
Principal Balance is reduced to zero. Allocations of Principal Collections
based on the Investor Percentage (which is fixed for the Amortization Period to
equal the percentage derived from dividing the Certificate Principal Balance by
the Pool Balance, in each case at the end of the Revolving Period) may result
in distributions of principal to the Certificateholders greater than those that
would result from distributions of principal based upon the proportion that the
declining Certificate Principal Balance bears to the Pool Balance. [The
Agreement permits the Depositor, at its option, but subject to the satisfaction
of certain conditions specified in the Agreement, including the conditions
described herein, to remove Mortgage loans from the Trust at any time during
the life of the Trust (including the Amortization Period), so long as the Pool
Balance after such removal is not less than the Pool Balance at the Closing
Date. The Depositor may also, under certain circumstances, add Eligible
Additional Mortgage Loans to the Trust. Such removals and additions may affect
the rate at which principal is distributed to Certificateholders. See
"DESCRIPTION OF THE CERTIFICATES--Transfers of Eligible Additional Mortgage
Loans to the Trust" and "--Optional Retransfers of Mortgage Loans to the
Depositor."]
All of the Mortgage Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience with respect to the Mortgage
Loans will affect the life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Home equity credit lines such as the Mortgage Loans have been originated in
significant volume only during the past few years and the Depositor is not
aware of any publicly available studies or statistics on the rate of prepayment
of such loans. Generally, home equity credit lines are not viewed by borrowers
as permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans will amortize as described herein, the absence of
voluntary borrower prepayments could cause rates of principal payment to be
slower than, or similar to, those of traditional full-amortizing first
mortgages. The prepayment experience of the Trust with respect to the Mortgage
loans may be affected by a wide variety of factors, including general economic
conditions, economic conditions in _____________, prevailing interest rate
levels, the availability of alternative financing and homeowner mobility, the
frequency and amount of any future draws on the HELOCs and changes affecting
the deductibility for Federal income tax purposes of interest payments on home
equity credit lines. Substantially all of the Mortgage Loans contain
"due-on-sale" provisions, and the Servicer intends to enforce such provisions,
unless such enforcement is not permitted by applicable law. The enforcement of
a "due-on-sale" provision will have the same effect as a prepayment of the
related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS--'Due-on-sale' Clauses" in the Prospectus. The yield to an investor who
purchases the Certificates in the secondary market at a price other than par
will vary from the anticipated yield if the rate of prepayment on the Mortgage
Loans is actually different than the rate anticipated by such investor at the
time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for such month or as high as the entire principal outstanding
balance plus accrued interest and the fees and charges thereon. It is possible
that borrowers may fail to make scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
Because the Mortgage Loans have a variable interest rate and a fixed payment,
changes in underlying interest rates will vary the allocation of payments
between interest and principal.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See
"DESCRIPTION OF THE SECURITIES--Weighted Average Life of the Certificates" in
the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form
of the Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus Supplement and the Prospectus is a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
General
The Certificates will be issued in denominations of [$1,000] and
integral multiples thereof and will evidence specified undivided interests in
the Trust. [Definitive] Certificates[, if issued,] will be transferable and
exchangeable at the corporate trust office of the Trustee, which will initially
act as Certificate Registrar. See "--Registration of Certificates" below. No
service charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The outstanding principal amount of the Certificates ("Certificate
Principal Balance") will be equal to the initial principal amount of the
Certificates, minus the amount of principal payments paid to the
Certificateholders, and minus the amount of Certificate Principal Balance Loss
deduction Amounts, if any, which have not been reimbursed as provided herein.
See "--Distributions on the Certificates" below. Each Certificate represents
the right to receive payments of interest at the Certificate Rate and payments
of principal during the Amortization Period funded from Interest Collections
and Principal Collections, respectively, allocated to the investor interest and
draws on the [Letter of Credit] [Surety Bonds].
The Seller will own the interest (the "Seller Interest") not
represented by the Certificates. The Seller Interest will represent an
undivided interest in the Trust, including the right to receive certain
percentages (the "Seller Percentage") of Interest Collections and Principal
Collections. The initial amount of the Seller Interest was determined, among
other factors, to be able to absorb reductions in the aggregate amount of Loan
Balances in the Trust without causing an Early Amortization Event, which would
result in the early commencement of the Amortization Period. There can be no
assurance that the Seller Interest will be sufficient for such purpose. While
the Seller is obligated (subject to certain conditions and limitations) to
transfer Eligible Additional Mortgage Loans (to the extent available) to the
Trust, there can be no assurance that sufficient Eligible Additional Mortgage
Loans will be available.
During the Revolving Period, the Certificate Principal Balance will
remain constant except in certain limited circumstances. See "--Distributions
on the Certificates" below. The Pool Balance, however, will vary each day as
principal is paid on the Mortgage Loans, liquidation losses are incurred,
Additional Balances are drawn down by borrowers under the HELOCs, Mortgage
Loans are retransferred to the Seller or Eligible Additional Mortgage Loans are
transferred to the Trust. Consequently, the amount of the Deposit Interest will
fluctuate each day to reflect the changes in the Pool Balance. During the
Amortization Period, the Certificate Principal Balance will decline and the
Investor Percentage of Principal Collections is distributed to the
Certificateholders. As a result, during the Amortization Period, the Seller
Interest may increase each month to reflect the reductions in the certificate
Principal Balance but may change each day to reflect the variations in the Pool
Balance.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, the Depositor will
transfer to the Trust all of its right, title and interest in and to each
Mortgage Loan (including any Additional Balances arising in the future)
conveyed by it to the Trust, including all principal (including Net Liquidation
Proceeds) and interest received on or with respect to each such Mortgage Loan
subsequent to the Closing Date (other than any amounts received in respect of
taxes insurance premiums, assessments and similar items, as provided in the
Agreement) plus the Investor Percentage of Interest Collections on the mortgage
Loans during the period from the Cut-Off Date to the second business day
preceding the Closing Date, but not in excess of the amount needed to
distribute the required interest to Certificateholders on the first
Distribution Date and to pay the related Investor Servicing Fee. The Trustee,
concurrently with such transfer, will deliver the Certificates and the Seller
Interest to the Seller. Each HELOC under which a Mortgage Loan assigned to the
Trust was generated will be identified in a schedule appearing as an exhibit to
the Agreement.
The Depositor will deliver the files containing, among other things,
the Loan Agreement, the Mortgage Note and the Mortgage relating to each
Mortgage Loan (the "Mortgage Files") to the Trustee (or a custodian on its
behalf) will review each Mortgage File within ___ days of receipt thereof. If
any such document is found not to have been executed or received or to be
unrelated to the Mortgage Loan or to have not been recorded as required by the
Agreement, the Trustee (or custodian on its behalf) will notify the Depositor,
which shall have a period of ____ days after such notice to correct or cure
such defect. If the defect cannot be cured within the ____-day period, the
Seller will be obligated to accept the retransfer of such Mortgage Loan from
the Trust. Upon such retransfer, the Loan Balance of such Mortgage Loan will be
deducted from the Pool Balance, thus reducing the amount of the Seller Interest
by the same amount. If the deduction would cause the Seller Interest to become
less than zero, the Seller will be obligated to make a deposit in the
Collection Account in the amount ("Retransfer Deposit Amount") by which the
Seller Interest is less than zero. Notwithstanding the foregoing, however, no
such retransfer shall be considered to have occurred unless such deposit is
actually made. The obligation of the Seller to accept a retransfer of a
defective Mortgage Loan and, if applicable, pay the Retransfer Deposit Amount,
is the sole remedy regarding any defects in the Mortgage Files available to the
Trustee or the Certificateholders.
The Depositor will make certain representations and warranties as to
the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan on the schedule of Mortgage Loans
appearing as an exhibit to the Agreement. In addition, the Bank will represent
and warrant that, among other things:
[(i) each Mortgage Loan has been generated under an eligible HELOC;
(ii) at the time of transfer to the Trust, the Depositor has
transferred all of the Depositor's right, title and interest in
each Mortgage Loan, free of any lien (subject to certain
exceptions);
(iii) each Mortgage Loan was generated under a HELOC that complied,
at the time of origination, in all material respects with
applicable state and Federal laws; and
(iv) as of the date of origination of the related HELOC, the related
Mortgaged Property was covered by hazard insurance in the amount
at least equal to the lesser of (a) the maximum insurable value
of the improvements thereon and (b) the combined Credit Limit
under the HELOC and the unpaid principal balance of any mortgage
loan senior thereto].
Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Trust, the
Certificateholders or the [Letter of Credit] [Surety Bond] Issuer in the
related Mortgage Loan, the Depositor will have a period of ____ days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the ____-day period, the Depositor will obligated to accept a
retransfer of the Mortgage Loan from the Trust. The same procedure and
limitations that are set forth in the preceding paragraph for the retransfer of
a Mortgage Loan respecting which there is a defect in the Mortgage File will
apply to the retransfer of a Mortgage Loan that is required to be retransferred
because of a breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
Any Mortgage Loan required to be retransferred to the Depositor as
described in the preceding two paragraphs is referred to as a "Defective
Mortgage Loan".
The Depositor may, but is not obligated to, retransfer a Defective
Mortgage Loan to the Trust within ____ days of the transfer of such Defective
Mortgage Loan to the Depositor if all defects in respect of such Defective
Mortgage Loan have been cured and such Defective Mortgage Loan satisfies the
applicable representations and warranties in the Agreement at the time of such
retransfer to the Trust.
[Transfers of Eligible Additional Mortgage Loans to the Trust
If, for each of five consecutive business days during the Revolving
Period, the Seller Interest for each such date is less than 10% of the Pool
Balance, then not later than the first business day of the calendar month
beginning at least ten business days after such fifth business day thereafter
the Depositor will be obligated to transfer to the Trust Eligible Additional
Mortgage Loans (but only to the extent available in the [Depositor's]
[Seller's] [Bank's] portfolio), which may be generated under home equity credit
lines in any billing cycle, so that, after giving effect to such transfer, the
Seller Interest will equal at least 10% of the Pool Balance on such date. An
Eligible Additional Mortgage Loan is a home equity loan that was originated
under a HELOC that, as of the date of notice by the Depositor to the Trustee,
the Servicer and the [Letter of Credit] [Surety Bond] Issuer of its transfer to
the Trust (the "Notice Date"), was an Eligible HELOC and that, as of the Notice
Date, complies with the representations and warranties described under
"Assignment of Mortgage Loans" above. The Depositor must satisfy the following
conditions, among others, in order to transfer Eligible Additional Mortgage
Loans to the Trust: (i) the Pool Balance, after giving effect to such transfer,
will not exceed $___________; (ii) the Mortgage Files for such Eligible
Additional Mortgage Loans shall have been delivered to the Trustee (or a
custodian on its behalf); and (iii) the Depositor shall have given notice of
the proposed transfer to the Rating Agency and the Rating Agency has not
notified the Depositor in writing prior to the transfer date that such transfer
will result in a reduction or withdrawal of its then-current rating for the
Certificates.
[In addition, the Depositor may, at its election, transfer Eligible
Additional Mortgage Loans subject to satisfaction of the conditions described
above.]
[Optional Retransfers of Mortgage Loans to the Depositor
Subject to the conditions specified in the Agreement, the Depositor
may, at its option, require the retransfer of one or more Mortgage Loans (which
may have been generated under a HELOC in any billing cycle) from the Trust to
it on the last day of any Collection Period. The Pool Balance after giving
effect to such retransfer must not be less than the Pool Balance on the Closing
Date. The Depositor will be required to satisfy the following conditions, among
others:
(i) the Depositor shall reasonably believe that such retransfer will
not cause an Early Amortization Event to occur;
(ii) as of the fifth business day prior to the proposed transfer, not
more than 10% (based on Loan Balances) of the Mortgage Loans
(after giving effect to the proposed transfer) are delinquent
more than 30 days and the weighted average delinquency of all of
the Mortgage Loans (before and after giving effect to the
proposed transfer) is not more than 60 days;
(iii) the Depositor shall have represented that no selection
procedures reasonably believed by the Depositor to be adverse to
the interests of the Certificateholders or the [Letter of
Credit] [Surety Bond] Issuer were used to select the Mortgage
Loans to be removed;
(iv) the Depositor shall have received evidence satisfactory to it
that the reassignment will not, as of the date thereof, prevent
the transfer of the Mortgage Loans (including any Additional
Balances) to the Trust from being recognized as a sale under
generally accepted accounting principles and shall have received
no evidence that such reassignment will, as of the date thereof,
prevent such transfer from being recognized as a sale for
regulatory purposes; and
(v) each Rating Agency shall have been notified of the proposed
retransfer and prior to the date of retransfer has not notified
the Depositor in writing that such retransfer would result in a
reduction or withdrawal of its then-current rating of the
Certificates.]
Payments on Mortgage Loans; Deposits to Collection Account
The Servicer will follow such collection procedures with respect to
the Mortgage Loans as it follows from time to time with respect to mortgage
loans in its servicing portfolio comparable to the Mortgage Loans. See
"SERVICING OF THE LOANS--Collection Procedures; Escrow Accounts" in the
Prospectus.
The Servicer will establish and maintain a separate account in the
name of the Trustee for the benefit of the Certificateholders and the [Letter
of Credit] [Surety Bond] Issuer (the "Collection Account"). See "SERVICING OF
LOANS--Deposits to and Withdrawals from the Collection Account" in the
Prospectus. [The Collection Account will be established initially with the
trust department of the Trustee.] Funds in the Collection Account may be
invested in Eligible Investments maturing in general not later than the
business day preceding the next Distribution Date. Eligible Investments consist
of certain investments acceptable to each Rating Agency for a structured
transaction having the rating initially assigned to the Certificates. All net
income and gain realized from any such investment will be paid to the Servicer.
Investor Percentage and Seller Percentage. Pursuant to the Agreement,
the Servicer will allocate between the Investor Interest and the Seller
Interest all amounts (including any Net Liquidation Proceeds) collected under
the Mortgage Loans on account of principal ("Principal Collections") and the
amount of the amount of the unrecovered Loan Balance of any Defaulted Mortgage
Loan at the end of the Collection Period in which such Defaulted Mortgage Loan
became a Defaulted Mortgage Loan (the "Liquidation Loss Amount"). A "Defaulted
Mortgage Loan" is a Mortgage Loan that has been written off as uncollectible by
the Servicer. The Collection Period for a Distribution Date is the calendar
month preceding such Distribution Date or, in the case of the first
Distribution Date, the period from the Cut-Off Date through the last day of the
calendar month preceding the month in which such Distribution Date occurs. The
Servicer will make each allocation by reference to the Investor Percentage and
the Depositor Percentage applicable in each case during a Collection Period.
For convenience, this Prospectus Supplement refers to the Investor
Percentage with respect to Interest Collections, Principal Collections and
Liquidation Loss Amounts as if the Investor Percentage were the same percentage
at all times in each case. The Investor Percentage may be a different
percentage for each Collection Period, and will vary primarily as a result of
changes in the Pool Balance.
The Investor Percentage will be calculated as follows:
Interest Collections and Liquidation Loss Amounts. When used
with respect to Interest Collections and Liquidation Loss Amounts at
any time, "Investor Percentage" means the percentage equivalent of a
fraction the numerator of which is the Certificate Principal Balance
and the denominator of which is the Pool Balance, in each case as of
the end of the immediately preceding Collection Period (or, in the
case of the first Collection Period, as of the Closing Date).
Principal Collections during the Revolving Period. When used with
respect to Principal Collections during the Revolving Period,
"Investor Percentage" means the percentage equivalent of a fraction
the numerator of which is the amount of the Certificate Principal
Balance and the denominator of which is the Pool Balance, in each
case as of the end of the immediately preceding Collection Period (or
in the case of the first Collection Period, as of the Closing Date).
Principal Collections during the Amortization Period. When used
with respect to Principal Collections during the Amortization Period,
"Investor Percentage" means the percentage equivalent of a fraction
the numerator of which is the amount of the Certificate Principal
Balance and the denominator of which is the Pool Balance, in each
case as of the end of the Revolving Period.
The Seller Percentage will, in all cases, be equal to 100% minus
the applicable Investor Percentage.
As a result of the calculation described above, Interest Collections
in each Collection Period will be allocated to the Certificateholders based on
the relationship of the Certificate Principal Balance to the Pool Balance
(which may fluctuate from month to month). As described above, the Investor
Percentage applied when allocating Principal Collections is expected to vary
from month to month during the Revolving Period, because the Certificate
Principal Balance as a percentage of the Pool Balance will fluctuate from month
to month. During the Amortization Period, however, the amount of Principal
Collections allocated to the Investor Interest will be determined by reference
to a fixed percentage which will be equal to the Investor Percentage with
respect to Principal Collections on the last day of the Revolving Period.
Deposits in the Collection Account and Payments to the Seller. On the
Closing Date, the Servicer will deposit in the Collection Account funds in the
amount of the Investor Percentage of Interest Collections on the Mortgage Loans
received during the period from the Cut-Off Date to the second business day
preceding the Closing Date, but not in excess of the amount needed to
distribute the required interest on the Certificates and the Investor Servicing
Fee to be distributed on the initial Distribution Date. On and after the
Closing Date, the Servicer will, subject to the following paragraph, deposit on
a daily basis within two business days following receipt thereof (i) during
each Collection Period in the Revolving Period, the Investor Percentage of
Interest Collections and (ii) during each Collection Period in the Amortization
Period, the Investor Percentage of all Interest Collections and Principal
Collections. The Servicer will pay to the Seller within two business days of
its receipt thereof (i) during each Collection Period in the Revolving Period,
the Seller Percentage of all Interest Collections and, if the Seller Interest
(after giving effect to any transfers of Additional Balances or Eligible
Additional Mortgage Loans to the Trust on such day) is equal to or greater than
zero, the Seller Percentage of all Principal Collections and the Investor
Percentage of all Principal Collections and (ii) during each Collection Period
in the Amortization Period, the Seller Percentage of Interest Collections and,
if the Seller Interest (after giving effect to any transfers of Additional
Balances or Eligible Additional Mortgage Loans to the Trust on such day) is
greater than zero, the Seller Percentage of all Principal Collections.
The Trustee will establish and maintain a separate account (the
"Distribution Account"). On the business day preceding each Distribution Date
the Servicer will transfer amounts in the Collection Account for distribution
to Certificateholders to the Distribution Account.
The Trustee will deposit in the Distribution Account any amounts
drawn on the [Letter of Credit] [Surety Bond] as described below.
Any Principal Collections not paid to the Seller because of the
limitations described above ("Unallocated Principal Collections"), will be
deposited and retained in the Collection Account for payment to theSeller,
during the Revolving Period, if and when the Seller Interest is greater than
zero and, during the Amortization Period, to the Certificateholder.
Distributions on the Certificates
Beginning with the Distribution Date occurring on ____________,
distributions on the Certificates will be made by the Trustee out of amounts on
deposit in the Distribution Account on each Distribution Date to the persons in
whose names such Certificates are registered at the close of business on the
[day prior to each Distribution Date] (the "Record Date"), except as provided
in "Registration of Certificates" below. The term "Distribution Date" means the
___ day of each month (or if such _____ day is not a business day the next
succeeding business day). Distributions will be made by check mailed (or upon
the request of a Certificateholder owning Certificates having denominations
aggregating at lease $___________, by wire transfer or otherwise) to the
address of the person entitled thereto [(which, in the case of Book-Entry
Certificates, will be DTC or its nominee)] as it appears on the Certificate
Register in amounts calculated as described herein on the ______ business day
(but no later than the ______ calendar day) of the month in which the related
Distribution Date occurs (the "Determination Date"). However, the final
distribution in respect of the Certificates will be made only upon presentation
and surrender thereof at the office or the agency of the Trustee specified in
the notice to Certificateholders of such final distribution.
Distributions of Interest Collections and Required Amounts. On each
Distribution Date, the Trustee, on behalf of the Trust, shall pay the following
amounts in the following order of priority to the following persons from the
Investor Interest of all Interest Collections collected during the related
Collection Period, together with the Required Amount, if any, drawn on the
[Letter of Credit] [Surety Bond] for such Distribution Date.
(1) [to the Certificateholders, interest at the Certificate Rate for
the Interest Period preceding such Distribution Date on the
Certificate Principal Balance outstanding immediately prior to
such Distribution Date;
(2) to the Certificateholders, any interest on the Certificates
accrued in accordance with clause (1) that has not been
previously distributed to Certificateholders plus, to the extent
legally permissible, interest thereon at the Certificate Rate
applicable from time to time (an "Unpaid Interest Shortfall");
(3) to the Servicer, the Investor Servicing Fee for the related
Interest Period and all accrued and unpaid Investor Servicing
Fees for previous Interest Periods;
(4) if such Distribution Date is in the Revolving Period, to
theSeller, the Investor Percentage of the aggregate of all
Liquidation Loss Amounts incurred in the preceding Collection
Period; provided that the Seller Interest (after giving effect
to any transfers of Additional Balances and Eligible Additional
Mortgage Loans on such date and to the distribution of such
Liquidation Loss Amount) is equal to or greater than zero;
(5) if such Distribution Date is in the Amortization Period, to the
Certificateholders, the Investor Percentage of the aggregate of
all Liquidation Loss Amounts incurred in the preceding
Collection Period;
(6) to the Certificateholders, the aggregate of the amounts
allocable pursuant to clause (5) that were not previously
distributed pursuant to such clause (each such undistributed
amount being referred to herein as a "Certificate Principal
Balance Loss Deduction Amount"); and
(7) to the Certificateholders, accrued and unpaid interest on each
unreimbursed Certificate Principal Balance Loss Deduction Amount
(such interest being calculated at the Certificate Rate for each
Interest Period during which such unreimbursed amount was
outstanding.]
Any amounts remaining in the Collection Account collected during or
with respect to the preceding Collection Period, after all other distributions
have been made, will be distributed to the [Letter of Credit] [Surety Bond]
Issuer.
A Certificate Principal Balance Loss Deduction Amount represents a
loss of principal in respect of Defaulted Mortgage Loans allocable to the
Investor Interest and will arise when the Investor Percentage of Interest
Collections and the Required Amount are not sufficient to cover such loss, in
accordance with the priority of distributions described above. As described
under "General" above, any Certificate Principal Balance Loss Deduction Amounts
which have not been reimbursed, as provided herein, will reduce the Certificate
Principal Balance.
The Required Amount for each Distribution Date will be the lesser of
(i) the [Letter of Credit] [Surety Bond] Amount and (ii) the amount, if any, by
which (a) the full amount distributable on such Distribution Date pursuant to
clauses (1) through (7) above exceeds (b) the Investor Percentage of the
Interest Collections for the related Collection Period. The Required Amount
will be drawn on the [Letter of Credit] [Surety Bond].
Distributions of Principal. On each Distribution Date after the first
Collection Period in the Amortization Period, the Trustee will distribute to
the Certificateholders the Investor Percentage of Principal Collections
received in the preceding Collection Period. In addition, the Trustee will
distribute to the Certificateholders on any Distribution Date during the
Amortization Period any Retransfer Deposit Amount (or drawn on the [Letter of
Credit] [Surety Bond] in respect thereof) received in the preceding Collection
Period and any Unallocated Principal Collections then on deposit in the
Distribution Amount. The aggregate distributions of principal to the
Certificateholders will not exceed the Initial Certificate Principal Balance.
[Calculation of Certificate Rate. With respect to the initial
Distribution Date, the Certificate Rate will be equal to ____%. Thereafter, on
each Distribution Date, the Certificate Rate will be equal to LIBOR as of the
second London Business Day (as defined below) prior to the immediately
preceding Distribution Date plus 0.___% of 1%. However, if the Certificate Rate
calculated as described in the preceding sentence for any such Distribution
Date is greater than the weighted average of the Net Loan Rates for the
Mortgage Loans for the preceding Collection Period, the Certificate Rate for
any such Distribution Date will be equal to the weighted average of the Net
Loan Rates. The Net Loan Rate for a Mortgage Loan is its Loan Rate less the
Servicing Fee Rate. Interest payable on any Distribution Date will accrue on
the Certificates from the preceding Distribution Date (or, in the case of the
first Distribution Date, from the Closing Date) through the day preceding such
Distribution Date (an ("Interest Period"). All calculations of interest accrued
on the Certificates will be made on the basis of the actual number of days in
an Interest Period and a year assumed to consist of 360 days.
The term "Certificate Principal Balance" means (i) the original
principal amount of the Certificates less (ii) all amounts previously
distributed to Certificateholders under "--Distributions of Principal" above,
less (iii) the aggregate of all unreimbursed Certificate Principal Balance Loss
Deduction Amounts.
Calculation of LIBOR. "LIBOR" with respect to any Distribution Date
will be determined by the Trustee and will be equal to the offered rates for
deposits in United States dollars having a maturity of one month (the "Index
Maturity") commencing on the second London Business Day (as defined below)
prior to the previous Distribution Date, which appear on the Reuters Screen
LIBO Page as of approximately 11:00 A.M., London Time, on such date of
calculation. If at least two such offered rates appear on the Reuters Screen
LIBO Page, LIBOR will be the arithmetic mean (rounded upwards, if necessary, to
the nearest one-sixteenth of a percent) of such offered rates. If fewer than
two such quotations appear, LIBOR with respect to such Distribution Date will
be determined at approximately 11:00 A.M., London time, on such determination
date on the basis of the rate at which deposits in United States dollars having
the Index Maturity are offered to prime banks in the London interbank market by
four major banks in the London interbank market selected by the Trustee and in
a principal amount equal to an amount of not less than U.S. $1,000,000 and that
is representative for a single transaction in such market at such time. The
Trustee will request the principal London office of each of such banks to
provide a quotation of its rate. If at least two such quotations are provided,
LIBOR will be the arithmetic mean (rounded upwards as aforesaid) of such
quotations. If fewer than two quotations are provided, LIBOR with respect to
such Distribution Date will be the arithmetic mean (rounded upwards as
aforesaid) of the rates quoted at approximately 11:00 A.M., New York City time,
on such determination date by three major banks in New York, New York selected
by the Trustee for loans in United States dollars to leading European banks
having the Index Maturity and in a principal amount equal to an amount of not
less than U.S. $1,000,000 and is representative for a single transaction in
such market at such time; provided, however, that if the banks selected as
aforesaid by the Bank are not quoting as mentioned in this sentence, LIBOR in
effect for the applicable period will be LIBOR in effect for the previous
period.]
[For purposes of calculating LIBOR, a "London Business Day" will be
any Business Day on which dealings in deposits in United States dollars are
transacted in the London interbank market and "Reuters Screen LIBO Page" will
be the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for
the purpose of displaying London interbank offered rates of major banks.)]
The [Letter of Credit] [Surety Bond]
On the Closing Date, the [Letter of Credit] [Surety Bond] Issuer will
issue the [Letter of Credit] [Surety Bond] in favor of the Trustee on behalf of
the Trust to support payments on the Certificates. On each Determination Date,
the Servicer will determine the amounts required to be drawn on the [Letter of
Credit] [Surety Bond], up to the [Letter of Credit] [Surety Bond] Amount, on
the related Distribution Date. On each Distribution Date, any amounts remaining
in the Collection Account with respect to the preceding Collection Period,
after all other distributions have been made as described above, will be
distributed to the [Letter of Credit] [Surety Bond] Issuer. See
"--Distributions on Certificates" above.
The amount available under the [Letter of Credit] [Surety Bond] (the
"[Letter of Credit] [Surety Bond] Amount") for the initial Distribution Date
will be $ . For each Distribution Date thereafter, the [Letter of Credit]
[Surety Bond] Amount will equal the lesser of (i) __% of the Pool Balance as of
the first day of the preceding Collection Period (after giving effect to any
amounts distributed with respect to principal of the Mortgage Loans on the
Distribution Date occurring in such preceding Collection Period) and (ii) the
[Letter of Credit] [Surety Bond] Amount as of the first day of the preceding
Collection Period, minus any amounts drawn under the [Letter of Credit] [Surety
Bond] during such preceding Collection Period, plus any amounts paid to the
[Letter of Credit] [Surety Bond] Issuer on the Distribution Date occurring in
such preceding Collection Period up to the amount of any previous draws on the
[Letter of Credit] [Surety Bond].
Early Amortization Events
As described above, the Revolving Period will continue until the
close of business on the last day of __________ unless an Early Amortization
Event occurs prior thereto. The term "Early Amortization Event" refers to any
of the following events:
[(a) failure on the part of the Servicer or the Depositor
(i) to make any payment or deposit on the date required under
the Agreement within five business days after such payment
or deposit is required to be made,
(ii) to observe or perform in any material respect certain
covenants of the Servicer or the Depositor or
(iii) to observe or perform in any material respect any other
covenants or agreements of the Servicer or the Depositor
set forth in the Agreement, which failure, in each case,
materially and adversely affects the interests of the
Certificateholders and which, in the case of clause (iii),
continues unremedied for a period of 60 days after written
notice and continues to materially and adversely affect the
interests of the Certificateholders for such period;
(b) any representation or warranty made by the Servicer or the
Depositor in the Agreement proves to have been incorrect in any material
respect when made, as a result of which the interests of the Certificateholders
are materially and adversely affected, which continues to be incorrect in any
material respect for a period of 60 days after written notice and which
continues to materially and adversely affect the interests of the
Certificateholders for such period; provided, however, that an Early
Amortization Event shall not be deemed to occur thereunder if the Depositor has
accepted retransfer of the related Mortgage Loan or all such Mortgage Loans, if
applicable, during such period (or such longer period (not to exceed an
additional 60 days) as the Trustee may specify) in accordance with the
provisions of the Agreement;
(c) the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
(d) if the Depositor fails to transfer to the Trust Eligible
Additional Mortgage Loans by the time it is required to do so;
(e) an Event of Default under the Trust Agreement (as described in
the Prospectus under "THE TRUST AGREEMENTS--Events of Default") occurs;
(f) the [Letter of Credit] [Surety Bond] Amount is less than % of the
Certificate Principal Balance; or
(g) if the average of the Investor Percentage of Interest Collections
for any three consecutive Collection Periods is less than the amounts to be
distributed to Certificateholders as set forth in subsections (i) through (vii)
under "Distributions on the Certificates--Distributions of Interest Collections
and Required Amounts" above for the three Distribution Dates relating to such
Collection Periods.]
[In the case of any event described in clauses (a), (b) or (e), an
Early Amortization Event will be deemed to have occurred only if, after the
expiration of the applicable grace period, if any, described in such clauses,
either the Trustee or holders of Certificates evidencing Percentage Interests
aggregating more than 51% or the [Letter of Credit] [Surety Bond] Issuer (but
only if the [Letter of Credit] [Surety Bond] is outstanding or the [Letter of
Credit] [Surety Bond] Issuer has not been fully reimbursed for all amounts paid
to the Trust by the [Letter of Credit] [Surety Bond] Issuer), by written notice
to the Depositor and the Servicer (and to the Trustee if given by the
Certificateholders or the [Letter of Credit] [Surety Bond] Issuer) declare that
an Early Amortization Event has occurred as of the date of such notice. In the
case of any event described in clauses (c), (d), (e) or (f), an Early
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the Trustee or the Certificateholders or the [Letter of
Credit] [Surety Bond] Issuer immediately upon the occurrence of such event. On
the date on which an Early Amortization Event is deemed to have occurred, the
Amortization Period will commence. In such event, distributions of principal to
the Certificateholders will begin on the first Distribution Date following the
month in which the Early Amortization Date occurs. If, because of the
occurrence of an Early Amortization Event, the Amortization Period begins
earlier than ____________, the date on which the Amortization Period is
scheduled to commence, Certificateholders will begin receiving distributions of
principal earlier than they would otherwise have under the Agreement, which may
shorten the final maturity of the Certificates.]
Optional Termination
The Depositor may effect a retransfer of the Certificateholders'
interest in each Mortgage Loan, and all property acquired in respect of any
Mortgage Loan, remaining in the Trust for an amount equal to the sum of the
Certificate Principal Balance plus accrued and unpaid interest thereon at the
applicable Certificate Rate through the day preceding the final Distribution
Date if the Certificate Principal Balance immediately prior to the final
Distribution Date is less than or equal to 5% of the original Certificate
Principal Balance. The purchase price will be distributed to the
Certificateholders in lieu of the amount that would otherwise be distributed if
such options were not exercised, which will be applied as provided in the
Agreement.
[Registration of Certificates
The Certificates will initially be registered in the name of Cede,
the nominee of DTC. DTC is a limited- purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilities the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners who are not Participants but desire to purchase,
sell or otherwise transfer ownership of the Certificates may do so only through
Participants (unless and until Definitive Certificates are issued). In
addition, Certificate Owners will receive all distributions of principal of and
interest on the Certificates from the Trustee through Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates are issued, it is
anticipated that the only Certificateholder of the Certificates will be Cede,
as nominee of DTC, Certificate Owners will not be Certificateholders as that
term is used in the Agreement. Certificate Owners are only permitted to
exercise the rights of Certificateholders indirectly through Participants.
While the Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Certificates and is required to receive and transmit
distributions of principal of and interest on the Certificates. Participants
with whom Certificate Owners have accounts with respect to Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, Certificate
Owners who are not Participants may transfer ownership of Certificates only
through Participants by instructing such Participants to transfer Certificates,
by book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificate Owners.
Because DTC can only act on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
Certificates will be issued in registered form to Certificate Owners,
or their nominees, rather than to DTC (such Certificates being referred to
herein as "Definitive Certificates"), only if (i) DTC or the Servicer advises
the Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the Certificates
and the Servicer or the Trustee is unable to locate a qualified successor, (ii)
the Servicer, at its sole option, advises the Trustee in writing that it elects
to terminate the book-entry system through DTC or (iii) after the occurrence of
an Event of Servicing Termination, DTC, at the direction of Certificate Owners
owning Certificates evidencing Percentage Interests aggregating at lease 51%,
advises the Trustee in writing that the continuation of a book-entry system
through DTC (or a successor thereto) to the exclusion of any physical
certificates being issued to Certificate Owners is no longer in the best
interests of Certificate Owners. Upon the issuance of Definitive Certificates
to Certificate Owners, such Certificates will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions. If
Definitive Certificates are issued, the Record Date may be changed to the last
day of the month immediately preceding the related Distribution Date.
DTC has advised the Servicer and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one
or more Participants to whose accounts with DTC the Certificates are credited.
DTC has advised the Servicer that DTC will take such action with respect to any
Percentage Interests of the Certificates only at the direction of and on behalf
of such Participants with respect to such Percentage Interests of the
Certificates. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.]
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates
will be applied by the Depositor towards the purchase of the Mortgage Loans.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be
rated in the [highest] rating category of the Rating Agency, the Certificates
will not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"), because most of the
Mortgages securing the Mortgage Loans are not first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Certificates, which because they evidence interests in a pool that includes
junior mortgage loans are not "mortgage related securities" under SMMEA. See
"LEGAL INVESTMENT" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit or other plan (such as an individual
retirement account or a Keogh plan) that is subject to Title I of ERISA or to
Section 4975 of the Code from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Plan. Certain
governmental plans, although not subject to ERISA or the Code, are subject to
federal, state or locals laws ("Similar Law") that impose similar requirements
(such plans subject to ERISA, Section 4975, or Similar Law referred to herein
as "Plans"). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code or under Similar Law
for such persons.
ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA, including the requirements of investment prudence and
diversification, and the requirement that such a Plan's investments be made in
accordance with the documents governing the Plan. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Plan is considered to be a fiduciary of such Plan.
It is expected that the Certificates will be considered equity
interests in the Trust for purposes of the Plan Assets Regulation, and that the
assets of the Trust may therefore constitute plan assets if Certificates are
acquired by Plans. It is not expected that the Certificates will constitute
"publicly-offered securities" and the Trustee will not monitor ownership of the
Certificates to ensure that ownership by benefit plan investors is not
significant. [Furthermore, the Trust does not contain only assets to which the
Exemption, described in the Prospectus, applies.
As a result, Certificates shall not be transferred and the Trustee
shall not register any proposed transfer of Certificates unless it receives (i)
a representation substantially to the effect that the proposed transferee is
not a Plan, is not acquiring the Certificates on behalf of or with the assets
of a Plan (including assets that may be held in an insurance company's separate
or general accounts where assets in such accounts may be deemed "plan assets"
for purposes of ERISA), or (ii) an opinion of counsel in form and substance
satisfactory to the Trustee and the Depositor that the purchase or holding of
the Certificates by or on behalf of a Plan will not constitute a prohibited
transaction and will not result in the assets of the Trust being deemed to be
"plan assets" and subject to the fiduciary responsibility provisions of ERISA
or the prohibited transaction provisions of ERISA and the Code or any Similar
Law or subject the Trustee, the Certificate Administrator or the Depositor to
any obligation in addition to those undertaken in the Trust Agreement.]
[It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Certificates, and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single mortgagor that is the obligor on five
percent of the obligations included in the Trust by aggregate unamortized
principal balance of the assets of the Trust.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Certificates.]
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ______________, and the Terms Agreement relating to the
Certificates, dated ____________ (collectively the "Underwriting Agreement"),
between the Depositor and Lehman Brothers Inc. ("Lehman Brothers"), an
affiliate of the Depositor, the Depositor has agreed to sell to Lehman
Brothers, and Lehman Brothers has agreed to purchase from the Depositor, all of
the Certificates.
The Underwriting Agreement provides that Lehman Brothers' obligations
hereunder are subject to certain conditions precedent, and that Lehman Brothers
will be obligated to purchase all of the Certificates if any are purchased.
The distribution of the Certificates by Lehman Brothers will be
effected from time to time in one or more negotiated transactions or otherwise
at varying prices to be determined, in each case, at the time of sale. Lehman
Brothers may effect such transactions by selling the Certificates to or through
dealers, and such dealers may receive from Lehman Brothers compensation in the
form of underwriting discounts, concessions or commissions. Lehman brothers and
any dealers that participate with Lehman Brothers in the distribution of the
Certificates may be deemed to be underwriters, and any discounts, commissions
or concessions received by them, and any profit on the resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act").
The Underwriting Agreement provides that the Depositor will indemnify
Lehman Brothers against certain civil liabilities, including liabilities under
the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor by [ ] and for Lehman Brothers by [ ].
RATING
It is a condition to issuance that each Class of the Certificates be
rated not lower than "____"by [Rating Agency] and "____" by [Rating Agency].
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes
into consideration the characteristics of the Mortgage Loans and the
structural, legal and tax aspects associated with the Certificates. The ratings
on the Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans or the possibility
that Certificateholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
Index of Defined Terms
[Letter of Credit] [Surety Bond] Amount............31
Bank.............................................. 10
Bank's Portfolio.................................. 10
Certificate Principal Balance................. 24, 31
Certificate Principal Balance Loss.. Deduction
Amount.......................................... 30
Defaulted Mortgage Loan........................... 27
Defective Mortgage Loan........................... 26
Definitive Certificates........................... 34
Depositor Certificate............................. 16
Determination Date................................ 29
Distribution Account.............................. 29
Distribution Date................................. 29
Drive-By Appraisal................................ 10
Drive-By Appraised Value.......................... 10
Early Amortization Event.......................... 32
Eligible HELOC.................................... 16
ERISA............................................. 35
Estimated Value................................... 10
Form 8-K.......................................... 22
Index Maturity.................................... 31
Index Rate........................................ 12
Indirect Participants............................. 33
Investor Percentage............................... 28
Investor Servicing Fee............................ 15
LIBOR............................................. 31
Liquidation Loss Amount........................... 27
Loan Rate......................................... 11
London Business Day............................... 31
Margin............................................ 11
Mortgage Files.................................... 25
Mortgage Loans.................................... 16
Notice Date....................................... 26
Participants...................................... 33
Plans............................................. 35
Principal Collections............................. 27
Record Date....................................... 29
Registration of Certificates...................... 29
Retransfer Deposit Amount......................... 25
Rules............................................. 34
Servicing Fee Rate................................ 15
Similar Law....................................... 35
SMMEA............................................. 35
Unallocated Principal Collections................. 29
Underwriting Agreement............................ 36
Unpaid Interest Shortfall......................... 29
$___,___,___,___
LEHMAN HOME EQUITY
LOAN TRUST ____-_
$___________
Asset-Backed Certificates
Series ____-_
Lehman ABS Corporation
(Depositor)
_________________
PROSPECTUS SUPPLEMENT
[ , --- ]
---------------------
LEHMAN BROTHERS
==============================================================================
The information in this prospectus supplement is not complete and may
be changed. We may not sell these securities until the registration filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
Version #2
Prospectus Supplement dated __________ __, ____
To Prospectus dated _____________ __, ____
<TABLE>
<CAPTION>
$-------------
Lehman Home Equity Loan Trust ____-_
$________ Home Equity Loan Asset-Backed Certificates, Series ____-_
$_______ Home Equity Loan Asset-Backed Notes, Series ____-_
[Seller], Lehman ABS Corporation,
as Seller as Depositor
[Certificates] Principal [Certificate][Note] Price to Underwriting Proceeds to the
[Notes] Balance Rate Public(1) Discount(2) Depositor(3)
<S> <C> <C> <C> <C> <C>
$ % % % %
Total $ $ $ $
</TABLE>
----------
(1) Plus accrued interest, if any, at the [certificate] [note] rate
from ____________ ____, ______
(2) The depositor has agreed to indemnify Lehman Brothers against
certain liabilities, including liabilities under the Securities,
including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, payable by the depositor, estimated to
be $___________.
The [Certificates][Notes]
o the certificates represent a beneficial interest in a trust, whose assets
are a pool of non-conforming closed-end [adjustable][fixed]rate home
equity revolving credit line loans and certain property relating to such
loans
o the notes are secured by assets of the trust
o currently have no trading market
o are obligations of the trust only and are not obligations of the seller
and master servicer or [its/their] affiliates
Credit Enhancement
o will be provided in the form of [overcollateralization] [an irrevocable
and unconditional certificate guaranty insurance policy issued by
[insurer]]
Review the information in Risk Factors on page S-_ of this prospectus
supplement and on page 2 of the prospectus.
o For complete information about the [certificates][notes] read both this
prospectus supplement and the prospectus. This prospectus supplement must
be accompanied by the prospectus if it is being used to offer and sell the
[certificates][notes].
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
LEHMAN BROTHERS
<PAGE>
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 [certificates][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.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the [certificates][notes] and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the
[certificates][notes] will be required to deliver a prospectus supplement and
prospectus for ninety days following the date of this prospectus supplement.
Page
Prospectus Supplement
Summary.................................................................3
Risk Factors............................................................7
The Trust...............................................................9
The [Letter Of Credit][Surety Bond] Issuer.............................10
The Home Equity Lending Program........................................10
Servicing Of The Mortgage Loans........................................13
Description Of The Mortgage Loans......................................14
[Tabular Information]..................................................15
Description Of The Servicing Agreement.................................17
Description Of The Securities..........................................20
The Depositor..........................................................25
The Indenture..........................................................25
The Trust Agreement....................................................29
Administration Agreement...............................................32
The Indenture Trustee..................................................32
The Owner Trustee......................................................32
Use Of Proceeds........................................................32
Certain Federal Income Tax Consequences................................32
State Tax Consequences.................................................33
ERISA Considerations...................................................33
Legal Investment Considerations........................................33
Underwriting...........................................................34
Legal Matters..........................................................35
Rating.................................................................35
Prospectus
Risk Factors........................................................... 2
Description of the Securities.......................................... 5
The Trust Funds........................................................ 10
Enhancements........................................................... 17
Servicing of Loans..................................................... 20
The Agreements......................................................... 27
Custody Receipts; Custody Agreements................................... 38
Certain Legal Aspects of Loans......................................... 41
The Depositor.......................................................... 52
Use of Proceeds........................................................ 53
Certain Federal Income Tax Considerations.............................. 53
State Tax Considerations............................................... 78
Erisa Considerations................................................... 79
Legal Investment....................................................... 83
Ratings................................................................ 83
Plan of Distribution................................................... 83
Legal Matters.......................................................... 84
Available Information.................................................. 84
<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. To understand all of the terms of the offering of the
[certificates][notes], read carefully this entire document and the accompanying
prospectus.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
[Certificate] Interest Rate
[Note] (First Distribution Interest Principal Last Scheduled
Class Date Only) Rate2 Balance Distribution Date1
<S> <C> <C> <C> <C>
_________% [LIBOR+ __%][%]
_________% [LIBOR+ __%][%]
</TABLE>
1 We expect the actual last distribution date for each certificate will
be significantly earlier its last scheduled distribution date.
2 For each distribution date after the first distribution date.
The Trust
Lehman Home Equity Loan Trust ____-_, will be formed on ____________ ___,
____ by Lehman ABS Corporation, [Seller] and [trustee]. [Seller] will sell
the mortgage loans to Lehman ABS Corporation and Lehman ABS Corporation
will deposit the mortgage loans and the private securities with the trust.
[[Indenture Trustee] will act as trustee for the benefit of the
noteholders.] [Owner trustee] will act as trustee for the benefit of the
certificateholders.]
Certificates Offered
On the closing date, _________ ___, _____, [the notes will be issued
pursuant to the indenture] [the trust will issue the certificates].
The securities will be issued in minimum denominations of [$100,000] and
integral multiples of [$1,000] in excess thereof.
Registration of Certificates
We will issue the securities in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they
will be registered in the name of the depository.
The limited circumstances under which definitive certificates will replace
the book-entry certificates are described in this prospectus supplement.
We refer you to "RISK FACTORS--Book-Entry Securities".
Trust Property
The property of the trust will include:
o a pool of [adjustable] [fixed] rate home equity loan revolving
credit line loans made or to be made in the future under home
equity revolving credit line loan agreements, the "credit line
agreements" and secured primarily by second [deeds of trust]
[mortgages] on residential properties that are primarily one- to
four-family properties (the "mortgage loans")
o payments on the mortgage loans received after [the cut-off date]
o any additions to the loan balances on the mortgage loans during
the life of the trust. The mortgage loans arise under home equity
lines of credit, or "HELOCs". Principal amounts may be drawn down
by the borrower under the HELOC, from time to time, subject to
the borrower's credit limit. The draws are funded by the [Bank]
[Servicer] [Seller] [depositor].
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure
o the benefit of the [surety bond] [letter of credit]
o [rights of the depositor under the purchase agreement pursuant to
which the depositor purchased the mortgage loans from the seller.
Under certain circumstances, if the representations and
warranties made by the seller about the mortgage loans are
breached, then the seller will be obligated to repurchase those
mortgage loans
o rights of the seller under any hazard insurance policies covering
the mortgaged properties
The Mortgage Loans
On [the cut-off date], the trust will acquire a pool of mortgage loans. The
information below is based on the pool of mortgage loans as it existed on
[the cut-off date].
o aggregate principal balance: $__________
o maximum combined loan-to-value ratio (using the maximum credit
limit): _______
o weighted average combined loan-to-value ratio: ____%
o principal balance range: $0.00 to $____________
o credit limit range: $___________ to $______ (approximate)
o average credit limit: $___________
o originated in the period from __________ to ____________
o weighted average credit limit utilization rate: ___%
(approximate)
We refer you to "THE HOME EQUITY LENDING PROGRAM" and "DESCRIPTION OF THE
MORTGAGE LOANS."
[Interest on the Mortgage Loans
Interest on each mortgage loan is payable monthly and is computed
based on the average daily outstanding principal balance of the
mortgage loan for the calendar month prior to the due date. The
loan rate is equal at any time (subject to minimum and maximum
rates, and applicable usury limitations) to the sum of:
(i) [the prime rate] and
(ii) a margin generally within the range of ____% to ____%.
The loan rate is subject to adjustment [ ].]
Servicer
[The servicer] will service the mortgage loans.
Servicing
The Servicer will be responsible for servicing, managing and
making collections on the mortgage loans.
The Servicer will receive a monthly servicing fee equal to, on an
annualized basis, ____% of the principal balance of the mortgage
loans. The servicer will also be entitled to certain other
amounts as servicing compensation.
We refer you to "SERVICING OF MORTGAGE LOANS--Servicing
Compensation and Payment of Expenses."
In certain limited circumstances, the servicer may resign or be
removed, in which event either the trustee or a third-party
servicer will be appointed as successor servicer.
We refer you to "SERVICING OF THE LOANS--Certain Matters
Regarding the Servicer" and "THE AGREEMENTS--Events of Default"
and "--Rights Upon Events of Default" in the prospectus.
Collections
All collections on the mortgage loans will be allocated by the
servicer between amounts collected in respect of interest and
amounts collected in respect of principal. The servicer will
generally deposit collections distributable to the
securityholders in a collection account.
We refer you to "DESCRIPTION OF THE SERVICING AGREEMENT" in this prospectus
supplement and "SERVICING OF LOANS--Deposits to and withdrawals from the
Collection Account" in the prospectus.
Distribution to Securityholders
You will be entitled to receive payments of interest each month.
The amount of principal you will be entitled to receive will vary
depending on a number of factors, including the payments on the
mortgage loans. Each month the [servicer] [trustee] will
calculate the amounts to be paid to the securityholders. If you
hold a [note][certificate] on the last day preceding a
distribution date, or if the securities are no longer book-entry
securities, the last day of the month preceding a distribution
date, you will be entitled to receive payments on the
distribution date in the next month. The distribution date will
be the ____ day of each month or, if the __ day is not a business
day, the next succeeding business day, starting on __________ --,
----.
On each distribution date, collections on the mortgage loans will
be applied in the following order of priority:
(1) to the servicer, the servicing fee;
(2) as payment for the accrued interest due and any overdue
accrued interest (with interest thereon);
(3) as principal on the securities, the excess of principal
collections over additional balances created during the preceding
collection period. This amount will be allocated between the
notes and certificates, pro rata, based on their respective
principal balances;
(4) as principal of the securities, payment for any amounts
unrecoverable as losses on the mortgage loans;
(5) the premium on the [surety bond];
(6) reimbursement of prior draws made on the [surety bond]; and
(7) any remaining amounts to the depositor.
Interest
Interest will accrue on the unpaid principal balance of the
securities at the applicable rate from the closing date to the
first distribution date. After the first distribution date,
interest will accrue from and including the preceding
distribution date to but excluding the current distribution date.
[Interest will be calculated on the basis of the actual number of
days in each interest accrual period divided by 360.]
We refer you to "THE [LETTER OF CREDIT] [SURETY BOND] ISSUER."
[Letter of Credit] [Surety Bond]
On the closing date, [issuer] will issue a [letter of credit]
[surety bond] in favor of the trustee on behalf of the trust. In
the event that, on any distribution date, available amounts on
deposit in the collection account with respect to the preceding
collection period are insufficient to provide for the payment of
the amount required to be distributed to the holders and the
servicer on such distribution date, the trustee will draw on the
[letter of credit] [surety bond], to the extent of the [letter of
credit] [surety bond] amount for such distribution date, in an
amount equal to such deficiency.
We refer you to "DESCRIPTION OF THE SECURITIES--The [Letter of
Credit] [Surety Bond]" and "--Distributions on the Securities"
and "ENHANCEMENT" in the prospectus.
[[Letter of Credit] [Surety Bond] Amount
The amount available under the [letter of credit] [surety bond]
for the initial distribution date will be $ _____________. For
each distribution date thereafter, the amount available will
equal the lesser of (1) a percentage of the pool balance and (2)
an amount based on the original amount available, minus amounts
drawn and plus amounts paid to the [letter of credit] [surety
bond] issuer as reimbursement.]
[Final Payment of Principal; Termination
The Trust will terminate on the distribution date following the
earlier of (i) _________________________ and (ii) the final
payment or other liquidation of the last mortgage loan or private
security in the trust.
On any distribution date after the principal balance is reduced
to an amount less than or equal to $ ________ ([5]% of the
initial principal balance) the servicer will have the option of
repurchasing the mortgage loans [and private securities.] The
repurchase price, for the mortgage loans, will be equal to the
sum of the outstanding principal balance and accrued and unpaid
interest thereon at the weighted average of the loan rates
through the day preceding the final distribution date.
We refer you to "DESCRIPTION OF THE SECURITIES--Optional
Termination" and "DESCRIPTION OF THE SECURITIES--Optional
Termination" and "THE AGREEMENTS--Termination" in the
prospectus.]
[Certain Federal Income Tax Consequences
[Brown & Wood LLP has acted as counsel to the trust and the underwriters and
is of the opinion that:
o The trust will be treated as a real estate mortgage investment
conduit, or REMIC, for federal income tax purposes
o The [certificates] [notes] will be "regular interests" in the
REMIC and will be treated as debt instruments of the REMIC for
federal income tax purposes with payment terms equivalent to the
terms of such [certificates] [notes]]
In the opinion of Brown & Wood LLP, for federal income tax
purposes, the securities will be characterized as indebtedness,
and the trust should be characterized as an owner trust and will
not be characterized as an association (or publicly traded
partnership) taxable as a corporation. Each holder of a security,
by the acceptance of a security, will agree to treat the security
as indebtedness and the trust as an owner trust for federal,
state and local income and franchise tax purposes.
We refer you to "Certain Federal Income Tax Consequences" and
"State Tax Consequences" in this prospectus supplement and
"Certain Federal Income Tax Considerations" and "State Tax
Considerations" in the prospectus concerning the application of
federal, state and local tax laws.]
ERISA
[Subject to the considerations described under "ERISA
CONSIDERATIONS" in this prospectus supplement and the prospectus,
the notes may be transferred to an employee benefit or other plan
subject to the Employee Retirement Income Security Act of 1974,
as amended, or ERISA or Section 4975 of the [Code].][Subject to
the considerations described under "ERISA CONSIDERATIONS" in this
prospectus supplement and the prospectus, the certificates
generally [may][may not] be transferred to an employee benefit or
other plan subject to the Employee Retirement Income Security Act
of 1974, as amended, or ERISA or Section 4975 of the [Code].]
We refer you to "ERISA CONSIDERATIONS" in this prospectus
supplement and in the prospectus.
Rating
Before the securities can be issued, [the trust] must obtain a
rating on the securities of:
[Rating] [Rating Agency]
Ratings such as the rating obtained for the securities address
credit risk. When evaluating credit risk, the rating agencies
evaluate the likelihood of whether or not you will receive your
interest and principal payments. Credit risk does not relate to
the likelihood of prepayments on the mortgage loans or on the
loans underlying the private securities. Prepayments affect the
timing of payments to you, such that your actual return could
differ substantially from your anticipated return on your
investment.
We refer you to "RATINGS" and "RISK FACTORS--_____" for more
detail.
<PAGE>
RISK FACTORS
Book-Entry Securities may be Illiquid.
Issuance of the securities in book-entry form may reduce the
liquidity of such securities in the secondary trading market since investors
may be unwilling to purchase securities for which they cannot obtain physical
securities. [You may be unable to sell your securities or a sale may result in
a lower return than expected.]
We refer you to "DESCRIPTION OF THE SECURITIES--Book-Entry
Securities."
Book-Entry Securities may not be able to be Pledged.
Since transactions in the Securities can be effected only through
DTC, Cedelbank, Euroclear, participating organizations, indirect participants
and certain banks, your ability to pledge your security to persons or entities
that do not participate in the DTC, Cedelbank or Euroclear system or otherwise
to take actions in respect of such securities, may be limited due to lack of a
physical security representing the securities.
We refer you to "DESCRIPTION OF THE SECURITIES--Book-Entry
Securities."
Book-Entry Securities may result in Delayed Receipt of Distributions.
As a beneficial owner, you may experience some delay in your receipt
of distributions of interest on and principal of your securities since such
distributions will be forwarded by the trustee to DTC and DTC will credit such
distributions to the accounts of its participants which will thereafter credit
them to the accounts of the beneficial owners either directly or indirectly
through indirect participants.
We refer you to "DESCRIPTION OF THE SECURITIES--Book-Entry
Securities."
Cash Flow Limited in Early Years of Mortgage Loans.
During the first [ ]-year draw down period under the related credit
line agreements borrowers are not required to make monthly payments of
principal. As a result, collections on such mortgage loans may vary. With
respect to some of the mortgage loans, during the second [ ]-year draw down
period, no monthly payments of principal are required. Collections on the
mortgage loans may also vary due to seasonal purchasing and payment habits of
borrowers. As a result there may be limited collections available to make
payments to you.
General credit risk may also be greater to you than to holders of
instruments representing interests in level payment first mortgage loans since
no payment of principal generally is required until after either a five- or
ten-year interest-only period under the related credit line agreements. Minimum
monthly payments will at least equal and may exceed accrued interest.
[Liquidations could result in Delays and Losses.]
Even assuming that the mortgaged properties provide adequate security
for the mortgage loans, substantial delay could be encountered in connection
with the liquidation of mortgage loans that are delinquent. Corresponding
delays in the receipt of related proceeds by holders could occur if the [letter
of credit] [surety bond] provider were unable to perform on its obligations
under the [letter of credit] [surety bond]. Also, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses) will
be paid first, thereby reducing the proceeds payable to holders and reducing
the security for the mortgage loans. In the event any of the mortgaged
properties fail to provide adequate security for the related mortgage loans,
holders could experience a loss if the [letter of credit] [surety bond]
provider were unable to perform its obligations under the [letter of credit]
[surety bond].]
Limited Information Regarding Prepayment History
All of the mortgage loans may be prepaid in whole or in part at any
time without penalty. Home equity loans, such as the mortgage loans, have been
originated in significant volume only during the past few years and neither the
depositor nor the servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loan
are not viewed by borrowers as permanent financing. Accordingly, the mortgage
loans may experience a higher rate of prepayment than traditional loans. The
trust's prepayment experience may be affected by a wide variety of factors,
including general economic condition, interest rates, the availability of
alternative financing and homeowner mobility. In addition, substantially all of
the mortgage loans contain due-on-sale provisions and the servicer intends to
enforce such provisions unless (1) such enforcement is not permitted by
applicable law or (2) the servicer, in a manner consistent with reasonable
commercial practice, permits the purchaser of the related mortgaged property to
assume the mortgage loan. To the extent permitted by applicable law, such
assumption will not release the original borrower from its obligation under any
such mortgage loan. Enforcement of a due-on-sale provision would result in
repayment in full of the mortgage loan which will be treated as a prepayment.
[If the rate of prepayments is faster (or slower) than the rate you
anticipated, depending upon the price paid for the security and your prepayment
assumptions, you may experience a loss.]
Consider carefully the discussion under "PREPAYMENT AND
YIELD CONSIDERATIONS."
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds may be less than
Mortgage Loan Balance
The mortgage loans are secured by deeds of trust or mortgages (which
generally are second mortgages). With respect to mortgage loans that are
secured by first mortgages, the servicer has the power under certain
circumstances to consent to a new mortgage lien on the mortgaged property
having priority over such mortgage loan. Mortgage Loans secured by second
mortgages are entitled to proceeds that remain from the sale of the related
mortgage property after any related senior mortgage loan and prior statutory
liens have been satisfied. In the event that such proceeds are insufficient to
satisfy such loans and prior liens in the aggregate [and the [letter of credit]
[surety bond] provider is unable to perform its obligations under the [letter
of credit] [surety bond] or if the coverage under the [letter of credit]
[surety bond] is exhausted] the trust and, accordingly, you, bear (1) the risk
of delay in distributions while a deficiency judgment against the borrower is
obtained and (2) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon.
We refer you to "CERTAIN LEGAL ASPECTS OF THE LOANS" in the prospectus.
Insolvency of Seller; Reclassification of Sale of Mortgage Loans as a Loan
The transfer of the mortgage loans from the seller to the depositor
will be treated by the seller, the depositor and the trust as a sale of the
mortgage loans. In the purchase agreement, the seller will warrant that such
transfer is either a sale of its interest in the mortgage loans or a grant of a
first priority perfected security interest therein. In the event of an
insolvency of the seller, the receiver of the seller may attempt to
recharacterize the sale of the mortgage loans as a borrowing by the seller
secured by a pledge of the mortgage loans. If the receiver decided to challenge
such transfer, delays in payments of the securities and possible reductions in
the amount payable under the mortgage loans could occur. The depositor will
warrant in the trust agreement that the transfer of its interest in the
mortgage loans to the trust is a valid transfer and assignment of such
interest. Such an attempt, even if unsuccessful, could result in delays in
distributions to you.
If a conservator, receiver or trustee were appointed for the seller,
or if certain other events relating to the bankruptcy or insolvency of the
seller were to occur, additional balances would not be transferred by the
seller to the trust pursuant to the purchase agreement (as assigned by the
depositor to the trust). In such an event, an event of default under the
pooling and servicing agreement and indenture would commence and the owner
trustee would attempt to sell the mortgage loans (unless holders holding
securities evidencing undivided interests aggregating at least 51% of each of
the security balance of the notes and the certificates instruct otherwise),
thereby causing early payment of the security balance of the notes and the
certificates.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Holders from appointing a successor Servicer.
Servicer's Ability to Change the Terms of the Mortgage Loans.
The servicer may agree to changes in the terms of a credit line
agreement, provided that such changes (i) do not adversely affect the interest
of the holders, and (ii) are consistent with prudent business practice. There
can be no assurance that changes in applicable law or the marketplace for home
equity loans or prudent business practice will not result in changes in the
terms of the mortgage loans.
[Describe risk to certificateholders in the event such changes
occur.]
[Delinquent Mortgage Loans.
The trust will include mortgage loans which are 89 or fewer days
delinquent. The cut-off date principal balance of such delinquent mortgage
loans was $______________. If there are not sufficient funds from the certain
interest collections to cover the liquidation loss amounts for any distribution
date have been reduced to zero, the aggregate amount of principal returned to
the holders may be less than the principal balance on the day the securities
are issued.]
[Risks Associated with Year 2000 Readiness]
THE TRUST
General
The Issuer, Lehman Home Equity Loan Trust ___________ is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. The
Trust Agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to business trusts. After its formation, the Issuer
will not engage in any activity other than (1) acquiring, holding and managing
the Mortgage Loans and the other assets of the Trust and proceeds therefrom,
(2) issuing the Notes and the Certificates, (3) making payments on the Notes
and the Certificates and (4 engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The property of the Trust will consist of:
(i) each of the Mortgage Loans that are __________________;
(ii) collections on the Mortgage Loans received after the Cut-Off
Date;
(iii) Mortgaged Properties relating to the Mortgage Loans that are
acquired by foreclosure or deed in lieu of foreclosure;
(iv) the Collection Account and the Distribution Account (excluding
net earnings thereon);
(v) the [Letter of Credit] [Surety Bond]; and
(vi) an assignment of the Depositor's rights under the Purchase
Agreement, including all rights of the Depositor to purchase
Additional Balances.
The Trust's principal offices are in _____________, Delaware, in care
of ________________________, as Owner Trustee, at
[ ].
THE [LETTER OF CREDIT][SURETY BOND] ISSUER
The following information with respect to _______________
("_______________") has been furnished by __________________.
[Description of Letter of Credit/Surety Issuer]
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning [________________] and its
underwriting policies has been provided by [_________________]. The Depositor
does not make any representation as to the accuracy or completeness of such
information.
General
All of the Mortgage Loans were originated by
[_____________________________], (the "Seller" or the "Servicer") under its
home equity lending program. The Seller first offered adjustable rate home
equity revolving credit line loans ("home equity loans") in _____. As of
[_____________], [___________________] owned and serviced approximately
$__________ aggregate principal amount of outstanding home equity loans secured
by properties located in _______________ under home equity credit lines (the
"Seller Portfolio").
Underwriting Procedures Relating to the Mortgage Loans
Each home equity loan was originated after a review by the Seller in
accordance with its established underwriting procedures, which were intended to
assess the applicant's ability to assume and repay such home equity loans and
the adequacy of the real property which serves as collateral for such home
equity loans. The maximum Credit Limit for a home equity loan provided by the
Seller was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income, credit
and employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (a)
received a satisfactory independent credit bureau report on the credit history
of the borrower and (b) obtained, in the case of all home equity loans
originated prior to __________ a drive-by appraisal of the related Mortgaged
Property or for all home equity loans originated as of __________, a
satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Seller's underwriting standards, the Seller issued a
commitment subject to satisfaction of certain other conditions. These
conditions included: (i) obtaining and reviewing pay stubs, income tax returns
or a verification of employment from the applicant's employer; (ii) obtaining
and reviewing a verification of deposit; and (iii) obtaining and reviewing a
verification of the loan in the first lien position when the home equity loan
was to be in a second lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title insurance policy in
accordance with the intended lien position. Regardless of Combined
Loan-to-Value Ratios, it is the Seller's policy not to accept a position junior
to any mortgage lien other than a first mortgage.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio
of ___% for loans which the Seller obtained full documentary support and was
___% for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity in
the property existed and whether the prospective borrower had sufficient
monthly income available to support the payments of interest at the current
prime rate plus the applicable margin based on the credit limit in addition to
any senior mortgage loan payments (including any escrows for property taxes and
hazard insurance premiums) and other monthly credit obligations based on the
prospective borrower's debt-to-gross income ratio. The "debt-to-gross income
ratio" is the ratio of (a) certain of the borrower's debt obligations which
include: (i) the monthly first mortgage payment plus taxes; (ii) monthly
installment debt payments with a term of more than ten months; (iii) five
percent of the total revolving obligations; (iv) monthly alimony and child
support obligations; and (v) the payment on the home equity loan calculated at
the Credit Limit and current prime rate plus margin for such home equity loan
to (b) the borrower's gross verifiable monthly income. The debt-to-gross income
ratio generally did not exceed [_____%].
When the commitment conditions had been satisfied, the home equity
loan was completed by signing a Credit Line Agreement, rescission statement,
and mortgage which secured the repayment of principal of and interest on the
related home equity loan. The original mortgage was then recorded in the
appropriate county government office.
Mortgage Loan Terms
A borrower may access a home equity loan by writing a check. On all
home equity loans, there is [a ten-year] draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate which may change bi-weekly. Home equity loans may
be subject to a maximum per annum interest rate (the "Maximum Rate") of % per
annum and in all cases, are subject to applicable usury limitations. We refer
you to "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Applicability of Usury
Laws" in the Prospectus. The daily periodic rate on the home equity loans (the
"Loan Rate") is the sum of the Index Rate plus a spread (the "Margin") which
generally ranges between ____% and ____%, divided by 365 days or 366 days, as
applicable.
The "Index Rate" is based on [the "prime rate" published in The Wall
Street Journal every second Monday rounded to the nearest one-eighth of one
percent or if not published on any such date, as next published in The Wall
Street Journal.] The annual percentage rate for any bi-weekly period will be
based on the Prime Rate in effect the Monday on which the rate may change. [If
a prime rate range is published in The Wall Street Journal, then the midpoint
(average) of that range will be used.] There are no limitations on increases or
decreases (except for those home equity loans which have Maximum Rates). Only
the home equity loans that have Maximum Rates of ____% also have annual
adjustment caps of ___% as to both increases and decreases in their Loan Rates.
Billing statements are mailed monthly. The statement details all
debits and credits and specifies the minimum payment due and the available
credit line. Notice of changes in the applicable Loan Rate are provided by the
Seller to the Borrower with such statements. All payments are due by the tenth
day after the date the billing statement is issued.
The Credit Line Agreements and Disclosure Statement further provide
that if publication of the Index Rate is discontinued, the Index Rate will be
changed upon notification in accordance with such Credit Line Agreements and
Disclosure Statements.
The right to obtain additional credit may be suspended or terminated
or the borrower may be required to pay the entire balance due plus all other
accrued but unpaid charges immediately, if the borrower fails to make any
required payment by the due date, if the total outstanding principal balance
including all charges payable exceeds the Credit Limit, if the borrower made
any statement or signature on any document which is fraudulent or contained a
material misrepresentation, if the borrower dies or becomes incompetent, if the
borrower becomes bankrupt or insolvent, if the borrower becomes subject to any
judgment, lien, attachment or execution is issued against the Mortgaged
Property, the borrower fails to obtain and maintain required property insurance
or if the borrower sells or transfers the Mortgaged Property or does not
maintain the property. In addition, the right to obtain additional credit may
be suspended or a borrower's Credit Limit may be reduced, if the value of the
Mortgaged Property decreases for any reason to less than 80% of the original
appraised value, if the borrower is in default under the home equity loan, if
government action impairs the Seller's lien priority or if a regulatory agency
has notified the Seller that continued advances would constitute an unsafe and
unsound practice.
Delinquency And Loss Experience Of The Servicer's Portfolio
The following tables set forth the delinquency and loss experience
for each of the periods shown for the home equity loans indicated on the table.
The Servicer believes that there have been no material trends or anomalies in
the historical delinquency and loss experience as represented in the following
tables. The data presented in the following tables are for illustrative
purposes only, and there is no assurance that the delinquency and loss
experience of the Mortgage Loans will be similar to that set forth below.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE
(Dollars in Thousands)
As of ____________
Number of
Loans Amount
------------------------ --------------------
<S> <C> <C>
Amount Outstanding at
Period End...............................................
Delinquency
30-59 Days...............................................
60-89 Days...............................................
90 or More Days..........................................
Foreclosures and Bankruptcies............................ __________
Total Delinquencies........................................ $
=
30-59 Days Percentage...................................... %
60-89 Days Percentage...................................... %
90 or More Days Percentage................................. %
Foreclosures and Bankruptcies.............................. %
</TABLE>
<TABLE>
<CAPTION>
LOSS EXPERIENCE
(Dollars in Thousands)
For the Year
Ending ________
<S> <C>
Average Amount
Outstanding.............................................. $
Gross Charge-Offs.......................................... $
Recoveries................................................. $
Net Losses as a Percentage
of Average Amount Outstanding............................
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such information.
Servicing of Mortgage Loans
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and procedures
for servicing home equity loans and in accordance with the terms of the
Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior
lien is received by the Servicer; or (iii) if circumstances are discovered by
the Servicer which would indicate that a potential for loss exists. Foreclosure
proceedings may be terminated if the delinquency is cured. However, under
certain circumstances, the Servicer may elect not to commence foreclosure or
stay the foreclosure proceeding if the borrower's default is due to special
circumstances which are temporary and are not expected to last beyond a
specified period. The loans to borrowers in bankruptcy proceedings will be
restructured in accordance with law and with a view to maximizing recovery of
such home equity loans, including any deficiencies. Additionally, any time
during foreclosure, a forbearance, short sale, deed-in-lieu or a payment plan
can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate the
Mortgaged Property and charge-off the balance of the home equity loan balance
which was not recovered by the liquidation proceeds. If the Mortgaged Property
was subject to a senior lien position, the Servicer will either satisfy such
lien at the time of foreclosure sale or take other action as deemed necessary
to protect the Servicer's interest in the Mortgaged Property. If in the
judgment of the Servicer, the cost of maintaining or purchasing the senior lien
position exceeds the economic benefit of such action, the Servicer will
generally charge-off the entire home equity loan.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable laws
and regulations, and other considerations.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, other than the first
Collection Period, the servicing compensation to be paid to the Servicer in
respect of its servicing activities relating to the Mortgage Loans will be paid
to it from interest collections in respect of the Mortgage Loans and will be
equal to ____% per annum (the "Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of each such Collection
Period (the "Servicing Fee"). With respect to the first Collection Period, the
Servicer will receive from such collections ______ of the amount calculated in
the preceding sentence. All assumption fees, late payment charges and other
fees and charges, to the extent collected from borrowers, will be retained by
the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties
related thereto, such right of reimbursement being prior to the rights of
Holders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
Mortgage Loans
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second deeds
of trust, on Mortgage Properties. The Mortgaged Properties securing the
Mortgage Loans consist primarily of residential properties that are one- to
four-family properties. All of the Mortgaged Properties are owner occupied. We
refer you to "--Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, ____ (the
"Cut-Off Date"). As of the ____________, the Mortgage Loans were not more than
89 days delinquent and had a Loan Rate of at least ____% per annum. The average
Cut-Off Date Principal Balance was $_______, the minimum Mortgage Cut-Off Date
Principal Balance was zero, the maximum Cut-Off Date Principal Balance was
$_________, the minimum Loan Rate and the maximum Loan Rate on the Cut-Off Date
were ____% and ____% per annum, respectively, and the weighted average Loan
Rate on the Cut-Off Date was ____% per annum. As of the Cut-Off Date, the
weighted average Credit Limit Utilization Rate was ____%, the minimum Credit
Limit Utilization Rate was zero and the maximum Credit Limit Utilization Rate
was ____%. The "Credit Limit Utilization Rate" is determined by dividing the
Cut-Off Date Principal Balance of a Mortgage Loan by the Credit Limit of the
related Credit Line Agreement. The weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was ____% as of the Cut-Off Date.
Mortgage Loan Pool Statistics
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
[TABULAR INFORMATION]
Assignment of Mortgage Loans
At the time of issuance of the Securities, the Depositor will
transfer to the Trust all of its right, title and interest in and to each
Mortgage Loan (including its right to purchase any Additional Balances arising
in the future), related Credit Line Agreements, mortgages and other related
documents (collectively, the "Related Documents"), including all collections
received on or with respect to each such Mortgage Loan on or after the Cut-Off
Date pursuant to an assignment of the Depositor's rights and obligations under
the Purchase Agreement. The Owner Trustee, concurrently with such transfer,
will deliver the Securities. Each Mortgage Loan transferred to the Owner Trust
will be identified on a schedule (the "Mortgage Loan Schedule") delivered to
the Owner Trustee pursuant to the Purchase Agreement. Such schedule will
include information as to the Cut-Off Date Principal Balance of each Mortgage
Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will require that, within the time period
specified therein, the Seller deliver to the Owner Trustee (or a custodian, as
the Owner Trustee's agent for such purpose) the Mortgage Loans endorsed in
blank and the Related Documents. In lieu of delivery of original mortgages, the
Seller may deliver trust and correct copies thereof which have been certified
as to authenticity by the appropriate county recording office where such
mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have [___ days after the Closing Date] to prepare and
record assignments of the mortgages related to each Mortgage Loan in favor of
the Owner Trustee (unless opinions of counsel satisfactory to the Rating
Agencies and the Certificate Insurer are delivered to the Owner Trustee and the
Certificate Insurer to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the Owner
Trustee in the Mortgage Loans).
Within 90 days of the Closing Date, the Owner Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or Related
Document is found to be defective in any material respect and such defect is
not cured within 90 days following notification thereof to the Seller and the
Depositor by the Trustee, the Seller will be obligated to repurchase the
Mortgage Loan and to deposit the Repurchase Price into the Collection Account.
Upon such retransfer, the Principal Balance of such Mortgage Loan will be
deducted from the Pool Balance. In lieu of any such repurchase, the Seller may
substitute an Eligible Substitute Mortgage Loan. Any such repurchase or
substitution will be considered a payment in full of such Mortgage Loan. The
obligation of the Seller to accept a transfer of a Defective Mortgage Loan is
the sole remedy regarding any defects in the Mortgage Loans and Related
Documents available to the Owner Trustee or the Holders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to
the Principal Balance of such Mortgage Loan at the time of any transfer
described above plus accrued and unpaid interest thereon to the date of
repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgaged loan
substituted by the Seller for a Defective Mortgage Loan which must, on the date
of such substitution:
(i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective
Mortgage Loan, an aggregate Principal Balance), not 5% more or
less than the Principal Balance relating to such Defective
Mortgage Loan;
(ii) have a Loan Rate not less than the Loan Rate of the Defective
Mortgage Loan and not more than 1% in excess of the Loan Rate of
such Defective Mortgage Loan;
(iii) have a Loan Rate based on the same Index with adjustments to
such Loan Rate made on the same Interest Rate Adjustment Date as
that of the Defective Mortgage Loan;
(iv) have a Margin that is not less than the Margin of the Defective
Mortgage Loan and not more than 100 basis points higher than the
Margin for the Defective Mortgage Loan;
(v) have a mortgage of the same or higher level of priority as the
mortgage relating to the Defective Mortgage Loan;
(vi) have a remaining term to maturity not more than six months
earlier and not later than the remaining term to maturity of the
Defective Mortgage Loan;
(vii) comply with each representation and warranty as to the Mortgage
Loans set forth in the Purchase Agreement (deemed to be made as
of the date of substitution); and
(viii) satisfy certain other conditions specified in the Purchase
Agreement.
To the extent the Principal Balance of an Eligible Substitute Mortgage Loan
is less than the Principal Balance of the related Defective Mortgage Loan,
the Seller will be required to make a deposit to the Collection Account equal
to such difference ("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and warrant,
on the Closing Date, that, among other things: (1) at the time of transfer to
the Depositor, the Seller has transferred or assigned all of its right, title
and interest in each Mortgage Loan and the Related Documents, free of any lien
(subject to certain exceptions); and (2) each Mortgage Loan was generated under
a Credit Line Agreement that complied, at the time of origination, in all
material respects with applicable state and federal laws. Upon discovery of a
breach of any such representation and warranty which materially and adversely
affects the interests of the Holders in the Related Mortgage Loan and Related
Documents, the Seller will have a period of 60 days after discovery or notice
of the breach to effect a cure. If the breach cannot be cured within the 60-day
period, the Seller will be obligated to repurchase or substitute the Defective
Mortgage Loan from the Trust. The same procedure and limitations that are set
forth above for the repurchase or substitution of Defective Mortgage Loans will
apply to the transfer of a Mortgage Loan that is required to be repurchased or
substituted because of a breach of a representation or warranty in the Purchase
Agreement that materially and adversely affects the interests of the Holders.
Mortgage loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer shall establish and maintain on behalf of the Owner Trustee
an account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account (as defined herein). Subject to
the investment provision described in the following paragraphs, upon receipt by
the Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Servicer will deposit
such amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Servicing Agreement) maturing no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies. Not later than the fifth
Business Day prior to each Distribution Date (the "Determination Date"), the
Servicer will notify the Owner Trustee and the Indenture Trustee of the amount
of such deposit to be included in funds available for the related Distribution
Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Distribution Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to Holders on a
Distribution Date. The Distribution Account will be an Eligible Account.
Amounts on deposit therein will be invested in Eligible Investments maturing on
or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is
(i) maintained with a depository institution whose debt obligations at
the time of any deposit therein have the highest short-term debt
rating by the Rating Agencies,
(ii) one or more accounts with a depository institution which accounts are
fully insured by either the Savings Association Insurance Fund or the
Bank Insurance Fund of the Federal Deposit Insurance Corporation
established by such fund with a minimum long-term unsecured debt
rating of Baa3,
(iii) a segregated trust account maintained with the Owner Trustee or an
Affiliate of the Owner Trustee in its fiduciary capacity or
(iv) otherwise acceptable to each Rating Agency as evidenced by a letter
from each Rating Agency to the Owner Trustee, without reduction or
withdrawal of their then current ratings of the Securities.
Eligible Investments are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Securities.
Allocations and Collections
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the aggregate of the
amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to the
terms of the Credit Line Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Net Liquidation Proceeds, and allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any Substitution Adjustment
Amounts. "Net Liquidation Proceeds" with respect to a Mortgage Loan are equal
to the aggregate of all amounts received upon liquidation of such Mortgage
Loan, including, without limitation, insurance proceeds, reduced by related
expenses, but not including the portion, if any, of such amount that exceeds
the Principal Balance of the Mortgage Loan at the end of the Collection Period
immediately preceding the Collection Period in which such Mortgage Loan became
a Liquidated Mortgage Loan plus accrued and unpaid interest thereon through the
date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-Off Date Principal Balance thereof, plus (i) any
Additional Balances in respect of such Mortgage Loan minus (ii) all collections
credited against the Principal Balance of such Mortgage Loan in accordance with
the related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
Hazard Insurance
The Servicing Agreement provides that the Servicer will maintain
certain hazard insurance on the Mortgaged Properties relating to the Mortgage
Loans. While the terms of the related Credit Line Agreements generally require
borrowers to maintain certain hazard insurance, the Servicer will not monitor
the maintenance of such insurance.
The Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to a Mortgage Loan acquired upon foreclosure of a
Mortgage Loan, or by deed in lieu of such foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of (1) the maximum insurable
value of such Mortgaged Property or (2) the outstanding balance of such
Mortgage Loan plus the outstanding balance on any mortgage loan senior to such
Mortgage Loan at the time of foreclosure or deed in lieu of foreclosure, plus
accrued interest and the Servicer's good faith estimate of the related
liquidation expenses to be incurred in connection therewith. The Servicing
Agreement provides that the Servicer may satisfy its obligation to cause hazard
policies to be maintained by maintaining a blanket policy insuring against
losses on such Mortgaged Properties. If such blanket policy contains a
deductible clause, the Servicer will be obligated to deposit in the Collection
Account the sums which would have been deposited therein but for such clause.
The Servicer will initially satisfy these requirements by maintaining a blanket
policy. As set forth above, all amounts collected by the Servicer (net of any
reimbursements to the Servicer) under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property) will
ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state laws and
most of such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when in accordance with applicable servicing procedures under the
Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Servicer will not be required to expend its own funds
in connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase net
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders or the Transferor. "Net
Liquidation Proceeds" with respect to a Mortgage Loan is the amount received
upon liquidation of such Mortgage Loan reduced by related expenses, which may
include the amount advanced in respect of a senior mortgage, up to the unpaid
Principal Balance of the Mortgage Loan plus accrued and unpaid interest
thereon.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, other than the first
Collection Period, the Servicer will receive from interest collections in
respect of the Mortgage Loan a portion of such interest collections as a
monthly Servicing Fee in the amount equal to ___% per annum ("Servicing Fee
Rate") on the aggregate Principal Balances of the Mortgage Loans as of the
first day of each such Collection Period. All assumption fees, late payment
charges and other fees and charges, to the extent collected from borrowers,
will be retained by the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Holders to receive any
related Net Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
General
The Notes will be issued pursuant to the Indenture dated as of
___________, ____, between the Trust and _______________, as Indenture Trustee.
The Certificates will be issued pursuant to the Trust Agreement dated as of
______________, ____, among the Depositor, __________, and ______________, as
Owner Trustee. The following summaries describe certain provisions of the
Securities, Indenture and Trust Agreement. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreement. As used herein, "Agreement" shall
mean either the Trust Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form
only. The Securities will be freely transferrable and exchangeable at the
corporate trust office of the Owner Trustee, with respect to the Certificates
or the Indenture Trustee with respect to the Notes.
Book-Entry Securities
The Securities will be book-entry Securities (the "Book-Entry
Securities").
Persons acquiring beneficial ownership interests in the Securities
("Security Owners") may elect to hold their Securities through the Depository
Trust Company ("DTC") in the United States, or Cedelbank or Euroclear (in
Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry Securities
will be issued in one or more certificates which equal the aggregate principal
balance of the Securities and will initially be registered in the name of Cede
& Co., the nominee of DTC. 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 will act as depositary for
Cedelbank and Morgan will act as depositary or Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Securities in minimum denominations representing Security Principal Balances of
$1,000 and in integral multiples in excess thereof. Except as described below,
no person acquiring a Book-Entry Securities (each, a "beneficial owner") will
be entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued, it
is anticipated that the only "Holder" of the Securities will be Cede & Co., as
nominee of DTC. Security Owners will not be Holders as that term is used in the
Agreement. Security Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the 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 Securities and
is required to receive and transmit distributions of principal of, and interest
on, the Securities. Participants and indirect participants with whom Security
Owners have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess certificates, the Rules provide a mechanism by which Security
Owners will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive Securities
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in
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 Securities.
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
Securities, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Securities will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
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 certificates. 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,
checkering 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
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian co-operative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission. Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms
and Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Securities that
it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Securities held through Cedelbank or Euroclear will bc 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 distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book Entry Securities, may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Servicer to
CEDE & Co., as nominee of DTC, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book Entry Securities of such beneficial owners are credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Securities are issued, SDTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. Cedelbank or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by Holder under the Agreement on behalf
of a 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
Securities which conflict with actions taken with respect to other Securities.
Definitive Securities will be issued to beneficial owners of the
Book-Entry Securities, or their nominees, rather than to DTC, only if (a) DTC
or the Transferor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Securities and the Transferor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as deemed herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Securities advise the
Trustee and DTC through the Financial Intermediaries and the DTC participants
in writing that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as Holders
under the Trust Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities 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.
Distributions
On each Distribution Date, collections on the Mortgage Loans will be
applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon) on the respective Security Balance of the
Notes and the Certificates;
(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and
Certificates pro rata, based on their respective Security Balances;
(iv) as principal on the Securities, as payment for any Liquidation
Loss Amounts on the Mortgage Loans;
(v) as payment for the premium for the Policy;
(vi) to reimburse prior draws made on the Policy; and
(vii) any remaining amounts to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof at the end of the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage Loan
after giving effect to the Net Liquidation Proceeds in connection therewith.
Interest
Note Rate. Interest will accrue on the unpaid Principal Balance of
the Notes at the per annum rate (the "Note Rate") equal to ___% per annum from
the Closing Date to the first Distribution Date and thereafter interest will
accrue on the Notes from and including the preceding Distribution Date to but
excluding such current Distribution Date (each, an "Interest Accrual Period")
at [a floating rate equal to LIBOR (as defined herein) plus ___%] [___%].
[Interest will be calculated on the basis of the actual number of days in each
Interest Accrual Period by 360.] A failure to pay interest on any Notes on any
Distribution Date that continues for five days constitutes an Event of Default
under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Principal
Balance of the Certificates at the per annum rate (the "Pass-Through Rate")
equal to ___% per annum from the Closing Date to the first Distribution Date
and thereafter interest will accrue on the Certificates for each Interest
Accrual Period at [a floating rate equal to LIBOR (as defined herein) plus
___%] [___%]. [Interest will be calculated on the basis of the actual number of
days in each Interest Accrual Period divided by 360.] A failure to pay interest
on any Certificates on any Distribution Date that continues for five days
constitutes an Event of Default under the Trust Agreement.
Optional Termination
The Trust will terminate on the Distribution Date following the
earlier of (i) _________________________ and (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust. The Mortgage Loans will be
subject to optional repurchase by the Servicer on any Distribution Date after
the Principal Balance is reduced to an amount less than or equal to $ ([5]% of
the initial Principal Balance). The repurchase price will be equal to the sum
of the outstanding Principal Balance and accrued and unpaid interest thereon at
the weighted average of the Loan Rates through the day preceding the final
Distribution Date.
THE DEPOSITOR
Lehman ABS Corporation (the "Depositor") was incorporated in the
State of Delaware on January 29, 1988. As of January 4, 1993, the Depositor is
a wholly owned, special purpose subsidiary of Lehman Commercial Paper Inc.
("LCPI"), which is itself a wholly owned subsidiary of Lehman Brothers Inc.
("Lehman Brothers"), which is a wholly owned subsidiary of Lehman Brothers
Holdings Inc. ("Holdings"). None of Lehman Brothers, LCPI, Holdings or the
Depositor, nor any affiliate of the foregoing, has guaranteed or is otherwise
obligated with respect to the Securities. The principal executive offices of
the Depositor are located at 200 Vesey Street, Three World Financial Center,
New York, New York 10285 (Telephone: (212) 526-7000). We refer you to "THE
DEPOSITOR" in the Prospectus.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference.
Reports to Noteholders
The Indenture Trustee will mail to each Noteholder, at such
Noteholder's request, at its address listed on the Note Register maintained
with the Indenture Trustee a report setting forth certain amounts relating to
the Notes.
Events of Default; Rights Upon Event of Default
With respect to the Notes, "Events of Default" under the Indenture
will consist of:
(i) a default for five days or more in the payment of any interest
on any Note;
(ii) a default in the payment of the principal of or any installment
of the principal of any Note when the same becomes due and
payable;
(iii) a default in the observance or performance of any covenant or
agreement of the Trust made in the Indenture and the
continuation of any such default for a period of 30 days after
notice thereof is given to the Trust by the Indenture Trustee or
to the Trust and the Indenture Trustee by the holders of at
least 25% in principal amount of the Notes then outstanding;
(iv) any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in
connection therewith having been incorrect in a material respect
as of the time made, and such breach not having been cured
within 30 days after notice thereof is given to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by
the holders of at least 25% in principal amount of Notes then
outstanding; or
(v) certain events of bankruptcy, insolvency, receivership or
liquidation of the Trust.
[The amount of principal required to be paid to Noteholders under the
Indenture will generally be limited to amounts available to be deposited in the
Collection Account. Therefore, the failure to pay principal on the Notes
generally will not result in the occurrence of an Event of Default until the
final scheduled Distribution Date for such Notes.] If there is an Event of
Default with respect to a Note due to late payment or nonpayment of interest
due on a Note, additional interest will accrue on such unpaid interest at the
interest rate on the Note (to the extent lawful) until such interest is paid.
Such additional interest on unpaid interest shall be due at the time such
interest is paid. If there is an Event of Default due to late payment or
nonpayment of principal on a Note, interest will continue to accrue on such
principal at the interest rate on the Note until such principal is paid. If an
Event of Default should occur and be continuing with respect to the Notes, the
Indenture Trustee or holders of a majority in principal amount of Notes then
outstanding may declare the principal of such Notes to be immediately due and
payable. Such declaration may, under certain circumstances, be rescinded by the
holders of a majority in principal amount of the Notes then outstanding. If the
Notes are due and payable following an Event of Default with respect thereto,
the Indenture Trustee may institute proceedings to collect amounts due or
foreclose on Trust property or exercise remedies as a secured party. If an
Event of Default occurs and is continuing with respect to the Notes, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders of
the Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the holders of a majority in principal
amount of the Notes then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the holders of the outstanding
Notes.
No holder of a Note will have the right to institute any proceeding
with respect to the Indenture, unless
(i) such holder previously has given the Indenture Trustee written
notice of a continuing Event of Default,
(ii) the holders of not less than 25% in principal amount of the
outstanding Notes have made written request to the Indenture
Trustee to institute such proceeding in its own name as
Indenture Trustee,
(iii) such holder or holders have offered the Indenture Trustee
reasonable indemnity,
(iv) the Indenture Trustee has for 60 days failed to institute such
proceeding and
(v) no direction inconsistent with such written request has been
given to the Indenture Trustee during the 60-day period by the
holders of a majority in principal amount of the Notes. In
addition, the Indenture Trustee and the Noteholders, by
accepting the Notes, will covenant that they will not at any
time institute against the Trust any bankruptcy, reorganization
or other proceeding under any federal or state bankruptcy or
similar law.
With respect to the Trust, neither the Indenture Trustee nor the
Owner Trustee in its individual capacity, nor any holder of a Certificate
representing an ownership interest in the Trust nor any of their respective
owners, beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the Trust contained in the Indenture.
Certain Covenants
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity, unless
(i) the entity formed by or surviving such consolidation or merger
is organized under the laws of the United States, any state or
the District of Columbia,
(ii) such entity expressly assumes the Trust's obligation to make due
and punctual payments upon the Notes and the performance or
observance of any agreement and covenant of the Trust under the
Indenture,
(iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation,
(iv) the Trust has been advised that the ratings of the Securities
then in effect would not be reduced or withdrawn by any Rating
Agency as a result of such merger or consolidation and
(v) the Trust has received an opinion of counsel to the effect that
such consolidation or merger would have no material adverse tax
consequence to the Trust or to any Noteholder or
Certificateholder.
The Trust will not, among other things,
(i) except as expressly permitted by the Indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust,
(ii) claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any
claim against any present or former holder of Notes because of
the payment of taxes levied or assessed upon the Trust,
(iii) dissolve or liquidate in whole or in part,
(iv) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants
or obligations with respect to the Notes under the Indenture
except as may be expressly permitted thereby or
(v) permit any lien, charge excise, claim, security interest,
mortgage or other encumbrance to be created on or extent to or
otherwise arise upon or burden the assets of the Trust or any
part thereof, or any interest therein or the proceeds thereof.
The Trust may not engage in any activity other than as specified
under "THE TRUST" herein. The Trust will not incur, assume or
guarantee any indebtedness other than indebtedness incurred
pursuant to the Notes and the Indenture.
Annual Compliance Statement
The Trust will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and
qualification to continue as Indenture Trustee under the Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity date
of any indebtedness owing by the Trust to the Indenture Trustee in its
individual capacity, any change in the property and funds physically held by
the Indenture Trustee as such and any action taken by it that materially
affects the Notes and that has not been previously reported, but if no such
changes have occurred, then no report shall be required.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
Modification of Indenture
With the consent of the holders of a majority of the outstanding
Notes, the Trust and the Indenture Trustee may execute a supplemental indenture
to add provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. Without the consent of the holder of each outstanding Note
affected thereby, however, no supplemental indenture will:
(i) change the due date of any installment of principal of or
interest on any Note or reduce the principal amount thereof, the
interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin
or currency in which any Note or any interest thereon is
payable;
(ii) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment;
(iii) reduce the percentage of the aggregate amount of the
outstanding Notes, the consent of the holders of which is
required for any supplemental indenture or the consent of the
holders of which is required for any waiver of compliance with
certain provisions of the Indenture or of certain defaults
thereunder and their consequences as provided for in the
Indenture;
(iv) modify or alter the provisions of the Indenture regarding the
voting of Notes held by the Trust, the Depositor or an affiliate
of any of them;
(v) decrease the percentage of the aggregate principal amount of
Notes required to amend the sections of the Indenture which
specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other
related agreements; or
(vi) permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the
collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the holder of any
Note of the security afforded by the lien of the Indenture. The
Trust and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the Noteholders,
for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions
of the Indenture or of modifying in any manner the rights of the
Noteholders; provided that such action will not materially and
adversely affect the interest of any Noteholder.
Voting Rights
At all times, the voting rights of Noteholders under the Indenture
will be allocated among the Notes pro rata in accordance with their outstanding
principal balances.
Certain Matters Regarding the Indenture Trustee and the Depositor
Neither the Depositor, the Indenture Trustee nor any director,
officer or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Indenture or for errors in judgment; provided, however, that none of the
Indenture Trustee, the Depositor and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the Indenture
Trustee shall be indemnified by the Trust and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to the
Indenture other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Indenture or by reason of reckless disregard of its
obligations and duties under the Indenture. Any such indemnification by the
Trust will reduce the amount distributable to the Noteholders. All persons into
which the Indenture Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the
successor of the Indenture Trustee under each Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference. We
refer you to "Description of the Securities" for a summary of certain
additional terms of the Trust Agreement.
Reports to Holders
Concurrently with each distribution to the Holders of the
Certificates, the Servicer will forward to the Owner Trustee for mailing to
such Holders a statement setting forth, among other items:
(i) the amount of interest included in such distribution and the
related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(iv) the amount, if any, of principal included in such distribution;
(v) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding Collection
Period;
(ix) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for
30-59 days, 60-89 days and 90 or more days, respectively, as of
the end of the preceding Collection Period; and
(x) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv)
and (v) above, the amounts shall be expressed as a dollar amount per Security
with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will
be required to forward to the Trustee a statement containing the information
set forth in clauses (iii) and (viii) above aggregated for such calendar year.
Amendment
The Trust Agreement may be amended by the Depositor and the Owner
Trustee, without consent of the Holders, to cure any ambiguity, to correct or
supplement any provision or for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of such Holders; provided, however, that
such action will not, as evidenced by an opinion of counsel satisfactory to the
Owner Trustee, adversely affect in any material respect the interests of any
Holders. The Trust Agreement may also be amended by the Depositor and the Owner
Trustee with the consent of the holders of Notes evidencing at least a majority
in principal amount of then outstanding Notes and Holders owning Voting
Interests (as herein defined) aggregating not less than a majority of the
aggregate Voting Interests for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Agreement or modifying in any manner the rights of the Holders.
Insolvency Event
"Insolvency Event" means, with respect to any Person, any of the
following events or actions; certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings with respect
to such Person and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation
of the Mortgage Loans will be treated as collections on the Mortgage Loans and
deposited in the Collection Account. The Trust Agreement will provide that the
Owner Trustee does not have the power to commence a voluntary proceeding in
bankruptcy with respect to the Trust without the unanimous prior approval of
all Holders (including the Depositor) of the Trust and the delivery to the
Owner Trustee by each Holder (including the Depositor) of a certificate
certifying that the Holder reasonably believes that the Trust is insolvent.
Liability of the Depositor
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Noteholder or a Holder
in the capacity of an investor with respect to the Trust) arising out of or
based on the arrangement created by the Trust Agreement.
Voting Interests
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so
disregarded. Certificates so owned that have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Owner Trustee the pledgor's right so to act with respect to such Certificates
and that the pledgee is not the Issuer or its affiliates.
Certain Matters Regarding the Owner Trustee and the Depositor
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Trust Agreement or for
errors in judgment; provided, however, that none of the Owner Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by reason
of reckless disregard of obligations and duties under the Trust Agreement.
Subject to certain limitations set forth in the Trust Agreement, the Owner
Trustee and any director, officer, employee or agent of the Owner Trustee shall
be indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Trust
Agreement other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Trust Agreement or by reason of reckless disregard of its
obligations and duties under the Trust Agreement. Any such indemnification by
the Trust will reduce the amount distributable to the Holders. All persons into
which the Owner Trustee may be merged or with which it may be consolidated or
any person resulting from such merger or consolidation shall be the successor
of the Owner Trustee under each Trust Agreement.
ADMINISTRATION AGREEMENT
The ________________________, in its capacity as Administrator, will
enter into the Administration Agreement with the Trust and the Owner Trustee
pursuant to which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[ ] is the Indenture Trustee under the Indenture. The mailing address
of the Indenture Trustee is [ ], Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. The mailing
address of the Owner Trustee is [ ], Attention: Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities, which are expected
to be $______________, will be applied by the Depositor on the Closing Date
towards the purchase price of the Mortgage Loans, the payment of expenses
related to such sale and the purchase of the Mortgage Loans and other corporate
purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On January 27, 1994, the Internal Revenue Service issued final
regulations ("final OID regulations") relating to original issue discount
("OID"). The discussion under "Certain Federal Income Tax Consequences-Taxation
of Debt Securities" in the Prospectus applies with respect to the final OID
regulations.
Prospective purchasers should see "Certain Federal Income Tax
Considerations" in the Prospectus for a discussion of the application of
certain federal income tax laws to the Trust and the Securities.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Securities offered hereunder. State income tax law may
differ substantially from the corresponding federal tax law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state. Therefore, potential investors should consult their own tax advisors
with respect to the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit or other plan (such as an individual
retirement account or a Keogh plan) that is subject to Title I of ERISA or to
Section 4975 of the Code from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Plan. Certain
governmental plans, although not subject to ERISA or the Code, are subject to
federal, state or locals laws ("Similar Law") that impose similar requirements
(such plans subject to ERISA, Section 4975, or Similar Law referred to herein
as "Plans"). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code or under Similar Law
for such persons.
ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA, including the requirements of investment prudence and
diversification, and the requirement that such a Plan's investments be made in
accordance with the documents governing the Plan. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Plan is considered to be a fiduciary of such Plan.
[[Subject to the considerations discussed in "ERISA Considerations"
in the Prospectus, the Notes may be purchased by a Plan. A fiduciary of a Plan
must determine that the purchase of a Note is consistent with its fiduciary
duties under ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code. See "ERISA
Considerations" in the Prospectus.]
In addition, the fiduciary of any Plan for which the Underwriter, the
Depositor, any Trustee, any provider of services to the Trust or any of their
affiliates (a) has investment or administrative discretion with respect to Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to Plan assets for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be
based on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan should consult with its counsel
concerning whether an investment in the Notes may constitute or give rise to a
prohibited transaction before investing in a Note.]
[It is expected that the Certificates will be considered equity
interests in the Trust for purposes of the Plan Assets Regulation, and that the
assets of the Trust may therefore constitute plan assets if Certificates are
acquired by Plans. It is not expected that the Certificates will constitute
"publicly-offered securities" and the Trustee will not monitor ownership of the
Certificates to ensure that ownership by benefit plan investors is not
significant.] [Furthermore, the Trust does not contain only assets to which the
Exemption, described in the Prospectus, applies.
As a result, Certificates shall not be transferred and the Trustee
shall not register any proposed transfer of Certificates unless it receives (i)
a representation substantially to the effect that the proposed transferee is
not a Plan, is not acquiring the Certificates on behalf of or with the assets
of a Plan (including assets that may be held in an insurance company's separate
or general accounts where assets in such accounts may be deemed "plan assets"
for purposes of ERISA), or (ii) an opinion of counsel in form and substance
satisfactory to the Trustee and the Depositor that the purchase or holding of
the Certificates by or on behalf of a Plan will not constitute a prohibited
transaction and will not result in the assets of the Trust being deemed to be
"plan assets" and subject to the fiduciary responsibility provisions of ERISA
or the prohibited transaction provisions of ERISA and the Code or any Similar
Law or subject the Trustee, the Certificate Administrator or the Depositor to
any obligation in addition to those undertaken in the Trust Agreement.]
[It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Certificates, and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single mortgagor that is the obligor on five
percent of the obligations included in the Trust by aggregate unamortized
principal balance of the assets of the Trust.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Certificates.]
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase Securities, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Securities will constitute legal investments
for them. The Depositor makes no representation as to the proper
characterization of the Securities for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase Securities under applicable legal investment restrictions. The
uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Securities) may adversely affect the liquidity of the Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Lehman Brothers Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase from the Depositor,
the Securities. The Underwriter is obligated to purchase all the Securities
offered hereby if any are purchased. The Depositor has been advised by the
Underwriter that it presently intends to make a market in the Securities
offered hereby; however, it is not obligated to do so, any market-making may be
discontinued at any time, and there can be no assurance that an active public
market for the Securities will develop. Distribution of the Securities will be
made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor are expected to be $____________ from the sale of the Notes and
$___________ from the sale of the Certificates, before deducting expenses
payable by the Depositor of $___________. In connection with the purchase and
sale of the Securities, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts,
concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof. [The Depositor, which is a wholly owned subsidiary
of the Underwriter, will own at least ___% of the outstanding principal amount
of the Notes at all times prior to their payment in full.] The Underwriter is
an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York and for the
Underwriter by Brown & Wood LLP, New York, New York.
RATING
It is a condition to issuance that each Class of the Notes be rated
be rated not lower than _________ by [ ] and _______ by [ ]. It is a condition
to issuance that the Certificates be rated at least "____" by [ ] and "____" by
[ ]. A securities rating addresses the likelihood of the receipt by
Certificateholders and Noteholders of distributions on the Mortgage Loans. The
rating takes into consideration the structural, legal and tax aspects
associated with the Certificates and Notes. The ratings on the Securities do
not, however, constitute statements regarding the possibility that
Certificateholders or Noteholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
<PAGE>
Index of Defined Terms
<PAGE>
BIF.............................................. 17
Book-Entry Securities............................ 20
Cedelbank Participants........................... 21
Collection Account............................... 17
Cooperative...................................... 22
Credit Limit Utilization Rate.................... 14
credit line agreements........................... 3
Cut-Off Date..................................... 14
Defective Mortgage Loans......................... 16
Definitive Security.............................. 20
Determination Date............................... 17
Distribution Account............................. 17
DTC.............................................. 20
Eligible Account................................. 17
Eligible Substitute Mortgage Loan................ 15
ERISA........................................ 6, 32
ERISA Counsel.................................... 34
Euroclear Operator............................... 22
Euroclear Participants........................... 22
Events of Default................................ 25
Exemption........................................ 34
Financial Intermediary........................... 20
Holder........................................... 20
Holdings......................................... 25
home equity loans................................ 10
Index Rate....................................... 11
Insolvency Event................................. 30
Interest Accrual Period.......................... 24
Interest Collections............................. 17
Labor............................................ 33
LCPI............................................. 25
Lehman Brothers.................................. 25
Loan Rate........................................ 11
Margin........................................... 11
Maximum Rate..................................... 11
Mortgage Loan Schedule........................... 15
mortgage loans................................... 3
Net Liquidation Proceeds..................... 17, 19
Note Rate........................................ 24
OID.............................................. 32
Pass-Through Rate................................ 24
Plan............................................. 6
Plan Asset Regulation............................ 33
Plans............................................ 32
Pool Balance..................................... 18
Principal Collections............................ 17
Related Documents................................ 15
Repurchase Price................................. 15
Rules............................................ 20
SAIF............................................. 17
Security Owners.................................. 20
Seller........................................... 10
Seller Portfolio................................. 10
Servicer......................................... 10
Servicing Fee.................................... 14
Servicing Fee Rate........................... 14, 19
Substitution Adjustment Amounts.................. 16
Terms and Conditions............................. 22
Underwriter.................................. 34, 35
Voting Interests................................. 31
<PAGE>
$___,___,___,___
LEHMAN HOME EQUITY
LOAN TRUST ____-_
$_________ [Fixed] [Floating] Rate
Asset-Backed Notes
Series ____-_
$_________ [Fixed] [Floating] Rate
Asset-Backed Certificates
Series ____-_
Lehman ABS Corporation
(Depositor)
-----------------
PROSPECTUS SUPPLEMENT
[ , --- ]
---------------------
LEHMAN BROTHERS
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Subject to completion, dated April 20, 1999.
Prospectus
LEHMAN ABS CORPORATION
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
Lehman ABS Corporation, as depositor, may offer from time to time under this
prospectus and related prospectus supplements securities that are either
asset-backed notes, asset-backed certificates and asset-backed note custody
receipts which may be sold from time to time in one or more series. Each series
of securities will be issued in one or more classes.
The related prospectus supplement will set forth the specific assets of the
trust fund and the seller or sellers from whom the assets are acquired. The
assets may include:
(a) 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, secured by
mortgages primarily on one- to four-family residential
properties,
(ii) home improvement installment sales contracts and installment loan
agreements which may be unsecured, secured by mortgages primarily
on one- to four-family residential properties, or secured by
purchase money security interests in the related home
improvements;
(iii) private securities,
(b) all monies due under the above assets (which may be net of certain
amounts payable to the servicer), and
(c) certain funds, enhancement and other assets.
The 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 prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE RISK FACTORS ON PAGE 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the offered securities or determined if
this prospectus is accurate or complete. Making any contrary representation is a
criminal offense.
LEHMAN BROTHERS
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATIONS OR LOWER RETURNS
There will be no market for the securities of any series prior to its
issuance, 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
that any such market 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. Absent a secondary market for the securities you may experience a delay
if you choose to sell your securities or the price you receive may be less than
that which is offered for a comparable liquid security.
LIMITED ASSETS
THE DEPOSITOR. 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 the related
series and other payments specified in the related prospectus supplement, may be
promptly released or remitted to the depositor, the servicer, the provider of
any enhancement 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 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 and you may experience a loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to certain representations and
warranties. The depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
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.
WE REFER YOU TO "THE AGREEMENTS - ASSIGNMENT OF PRIMARY ASSETS."
LIMITS ON ENHANCEMENT
Although enhancement for the securities is intended to reduce the risk of
delinquent payments or losses to holders of securities entitled to the benefit
thereof, the amount of the enhancement will be limited, as set forth in the
related prospectus supplement. In addition the amount available will decline and
could be depleted under certain circumstances prior to the payment in full of
the related series of securities, and as a result you may suffer losses.
WE REFER YOU TO "ENHANCEMENT."
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD
The yield to maturity experienced by a holder of securities may be affected
by the rate of payment of principal of the loans or underlying loans relating to
the private securities. 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, 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. 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.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--WEIGHTED AVERAGE LIFE OF
SECURITIES."
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.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--PAYMENTS OF INTEREST."
JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS
The mortgages may be 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 in connection with such
mortgage 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.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT
JUNIOR LIENHOLDERS
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 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, 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 securing a mortgage.
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS
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 related trust fund as the owner of the loan, to
damages and administrative enforcement.
The loans are also subject to Federal laws, including laws that require
certain disclosures to borrowers, that prohibit discrimination and that regulate
the use and reporting of information relating to the borrower's credit
experience. Violations of certain provisions of these Federal laws may limit the
ability of the servicer to collect all or part of the principal of or interest
on the loans and in addition could subject the related trust fund to damages and
administrative enforcement.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS."
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, such as the related trust fund with respect to the
loans, 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 RELATE TO CREDIT RISK ONLY
The ratings of the securities 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, since 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. Any reduction or withdrawal of a rating will have an adverse
effect on the value of the related securities.
LIQUIDATION VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT TO SATISFY ALL
CLAIMS AGAINST TRUST FUND
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. In addition, 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. The payment
of such expenses will reduce the portion of the amount realized that will be
available to make payments on the securities and may result in the related
securityholders suffering a loss.
DESCRIPTION OF THE SECURITIES
GENERAL
The notes (the "Notes") will be issued in series (each, a "Series")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
(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. The custody
receipts (the "Custody Receipts") will be issued in series pursuant to a custody
agreement (a "Custody Agreement") among the Depositor and the entity named in
the related prospectus supplement as Custodian (the "Custodian"). A form of
Custody Agreement has been filed as an exhibit to the registration statement of
which this prospectus forms a part. A Series may consist of any combination of
Notes, Certificates and Custody Receipts (the "Securities").
The Depositor will acquire the primary assets (the "Primary Assets") from
one or more sellers (the "Seller"). 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. As
described herein under "Custody Receipts; Custody Agreements", Custody Receipts
entitle the related holder (the "Holder") of Securities to certain payments that
are made on Classes of Notes held by the related Custodian. Accordingly, to the
extent the following descriptions apply to Notes, including the effect payments
on the Loans may have on Notes that are secured by Loans, such descriptions also
apply to Custody Receipts.
Each Series of Securities will consist of one or more classes of Securities
(each a "Class"), one or more of which may be Compound Interest Securities,
Fixed Interest Securities, Variable Interest Securities, Planned Amortization
Class Securities, Zero Coupon Securities, Principal Only Securities, Interest
Only Securities, Participating Securities and Custody Receipts. 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 date 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 or by a Custodian, 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 credit enhancement
specified in the prospectus supplement (the "Enhancement") will be deposited
directly into a separate account established by the Trustee or the Servicer (the
"Collection Account") and, net, if and as provided in the related prospectus
supplement, of certain amounts payable to the related Servicer and any other
person specified in the prospectus supplement, will thereafter be deposited into
the Distribution Account and will be available to make payments on Securities of
such Series on the next distribution date, as the case may be. See "The trust
funds--Collection and Distribution Accounts."
VALUATION OF THE PRIMARY ASSETS
If specified in the related prospectus supplement for a Series of Notes,
each Primary Asset included in the related trust fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
prospectus supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of 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 and in the priority specified
in the related prospectus supplement. The rate of interest on Securities of a
Series may be fixed or variable or may change with changes in the annual
percentage rates of the Loans or underlying loans relating to the Private
Securities (the "Underlying Loans"), 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.
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.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled distribution date with respect to each Class of Notes
and Custody Receipts is the date no later than which principal thereof will be
fully paid and with respect to each Class 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. 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 Loans or Underlying Loans, as applicable, in the related trust
fund. Since payments on the Primary Assets including prepayments 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 Class
will occur earlier, and may occur substantially earlier, than its Final
Scheduled distribution date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related prospectus supplement,
as a result of delinquencies, defaults and liquidations of the Primary Assets in
the trust fund, the actual final distribution date of any Certificate may occur
later than its Final Scheduled distribution date. No assurance can be given as
to the actual prepayment experience with respect to the Primary Assets related
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 through the designated interest accrual date specified in the related
prospectus supplement (the "Available Interest Amount") 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, 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, 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, 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, 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, as
applicable. If any Loans or Underlying Loans, 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, or in an Asset Group specified in the
related prospectus supplement. As described under "Custody Receipts; Custody
Agreements", Custody Receipts entitle the related Holders of Securities to
certain payments that are made on Classes of Notes held by the related
Custodian. Accordingly, to the extent the following descriptions apply to Notes,
including the descriptions of Loans that may be Primary Assets that secure
Notes, such descriptions also apply to Custody Receipts. 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, any of its affiliates
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, in the case of
Private Securities, 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 of the Depositor.
The Primary Assets will be transferred by the Depositor to the trust fund. Loans
relating to a Series will be serviced by the Servicer, which may be the Seller,
specified in the related prospectus supplement, pursuant to a Pooling and
Servicing Agreement, with respect to a Series of Certificates or a servicing
agreement (each, a "Servicing Agreement") between the trust fund and Servicer,
with respect to a Series of Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such trust fund specified in the related prospectus supplement.
With respect to each trust fund, prior to the initial offering of the
related Series of Securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related prospectus supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No trust fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the trust fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related prospectus supplement.
THE LOANS
MORTGAGE LOANS. The property which secures repayment of the loans is
referred to as the "Mortgaged Property". 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 and/or loans the proceeds of which have been applied
to the purchase of the related Mortgaged Property (the "Closed-End Loans" and
"Revolving Credit Line Loans" and collectively, the "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 variable 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 the amounts of such draws and payments 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 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 described in the related prospectus supplement. Unless otherwise
described in the related prospectus supplement, the original terms to stated
maturity of Loans generally 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)("Single Family Property"). 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.
The Mortgaged Properties may include properties containing one to four
residential units and no more than three income producing non-residential units
("Small Mixed-Use Properties"). Small Mixed-Use Properties may be owner occupied
or investor properties and the loan purpose may be a refinancing or a purchase.
Unless otherwise specified in the related prospectus supplement, mortgages
on cooperative dwellings consist of a lien on the shares issued by such
cooperative dwelling and the proprietary lease or occupancy agreement relating
to such cooperative dwelling.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related prospectus supplement.
Unless otherwise specified in the prospectus supplement, the sole basis for a
representation that a given percentage of the Loans are secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Loan either that the
underlying Mortgaged Property will be used by the Mortgagor for a period of at
least six months every year or that the mortgagor intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of the
underlying Mortgaged Property is the mortgagor's mailing address as reflected in
the Servicer's records. To the extent specified in the related prospectus
supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes.
The initial combined loan-to-value ratio of a Loan is computed in the
manner described in the related prospectus supplement and may take 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 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.
If applicable, 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.
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 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
specified in such prospectus supplement (the "Cut-off Date"), including, among
other things, and to the extent relevant
(a) the aggregate unpaid principal balance of the Loans (or the
aggregate unpaid principal balance included in the trust fund
for the related Series);
(b) the range and weighted average loan rate on the Loans, and, in
the case of adjustable rate Loans, the range and weighted
average of the current loan rates and the lifetime rate caps, if
any;
(c) the range and average outstanding principal balance of the Loans;
(d) the weighted average original and remaining term-to-stated
maturity of the Loans and the range of original and remaining
terms-to-stated maturity, if applicable;
(e) the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the Loans, as applicable;
(f) the percentage (by outstanding principal balance as of the
Cut-off Date) of Loans that accrue interest at adjustable or
fixed interest rates;
(g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans;
(h) the percentage (by principal balance as of the Cut-off Date) of
Loans that are secured by Mortgaged Properties, home
improvements or are unsecured;
(i) the geographic distribution of any Mortgaged Properties securing
the Loans;
(j) the percentage of Loans (by principal balance as of the Cut-off
Date) that are secured by Single Family Properties, shares
relating to cooperative dwellings, condominium units, investment
property and vacation or second homes;
(k) the lien priority of the Loans;
(l) the credit limit utilization rate of any Revolving Credit Line
Loans; and
(m) the delinquency status and year of origination of the Loans.
The related prospectus supplement will also specify any other limitations on
the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
GENERAL. 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 or (b) collateralized obligations secured by Underlying Loans. Such
pass-through certificates or collateralized obligations will have previously
been (i) offered and distributed to the public pursuant to an effective
registration statement or (ii) 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.
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. 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 the registered owner of such Private Securities. 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. An Underlying Loan will be of a type that would qualify as a
Loan as described herein.
ENHANCEMENT RELATING TO PRIVATE SECURITIES. Enhancement 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 enhancement may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of enhancement 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, (D) the minimum
and maximum stated maturities of such Underlying Loans at origination,
(E) the lien priority and 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 PS Sponsor, the PS Servicer (if other than the PS Sponsor) and the
PS Trustee for such Private Securities;
(vii) certain characteristics of enhancement, if any, such as reserve funds,
insurance policies, letters of credit or guarantees relating to
Underlying Loan or to the 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. Unless otherwise provided in the
related prospectus supplement, the Trustee shall be required to apply a portion
of the amount in the Collection Amount, together with reinvestment earnings from
Eligible Investments 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 by the
Trustee for such Series, each in the manner and at the times established in the
related prospectus supplement. Certain amounts available pursuant to any
Enhancement, as provided in the related prospectus supplement, will also be
deposited in a related Distribution Account. 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. 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.
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 Enhancement in favor of the Trustee on behalf
of holders of the related Series or designated classes of such series.
Enhancement may take the form of an irrevocable letter of credit, surety bond or
insurance policy, Reserve Funds issue subordinate Securities or obtain any other
form of enhancement or combination thereof or as otherwise specified in the
prospectus supplement. 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. As described under "Custody Receipts; Custody
Agreements" Custody Receipts entitle the related Holders of Securities to
certain payments that are made on Classes of Notes held by the related
Custodian. Accordingly, to the extent the following descriptions apply to Notes
such descriptions apply to Custody Receipts.
SUBORDINATE SECURITIES
If specified in the related prospectus supplement, Enhancement for a Series
may consist of one or more Classes of subordinate Securities. The rights of
holders of such subordinate securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the Series, but only to the extent described in
the related prospectus supplement.
INSURANCE
If stated in the related prospectus supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related prospectus supplement.
POOL INSURANCE POLICY. If so specified in the prospectus supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related trust fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related prospectus
supplement) by reason of default, but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related prospectus supplement.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such property or (ii)
upon transfer of such property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to holders of the Securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
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 (the
"Scheduled Payments") 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 guaranteed investment contract or an
investment agreement (the "Deposit Agreement") with the entity specified in such
prospectus supplement on or before the sale of such Series of Securities.
Pursuant to the Deposit Agreement, all or a portion of the amounts held in the
Collection Account, the Distribution Account or in any Reserve Fund would be
invested with the entity specified in the prospectus supplement. 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 Trustee would be entitled to withdraw
amounts invested pursuant to a Deposit Agreement, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the manner specified in the prospectus
supplement. 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.
DERIVATIVE PRODUCTS
"Derivative Products" may consist of a swap to convert floating or fixed
rate payments, as applicable on the Loans or Private Securities into fixed or
floating rate payments, as applicable, on the Securities or in a cap or floor
agreement intended to provide protection against changes in floating rates of
interest payable on the Loans, Private Securities or the Securities. Any such
Derivative Product will constitute or will be structured so as to be an
insurance policy or an exempt security.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A trust fund may also include insurance, guaranties, surety bonds, letters
of credit or similar arrangements for the purpose of (i) maintaining timely
payments to Holders of Securities or providing additional protection against
losses on the assets included in such trust fund, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Holders of Securities are
entitled to receive amounts deposited in various accounts held by the Trustee
upon the terms specified in the related prospectus supplement.
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. As described herein under
"Custody Receipts; Custody Agreements" Custody Receipts entitle the related
Holders of Securities to certain payments that are made on Classes of Notes held
by the related Custodian. Such Classes of Notes may be secured by Loans.
Accordingly, the following descriptions of servicing are relevant to Holders of
Securities of Custody Receipts. In performing its 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. 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.
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 curing delinquencies by modifying the due dates
(the "Due Dates") of 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 Collection Account in the name of the
Trustee. Unless otherwise indicated in the related prospectus supplement, the
Collection Account will be an account maintained (i) at a depository
institution, the long-term unsecured debt obligations of which at the time of
any deposit therein are rated by each Rating Agency rating the Securities of
such Series at levels satisfactory to each Rating Agency or (ii) in an account
or accounts the deposits in which are insured to the maximum extent available by
the FDIC or which are secured in a manner meeting requirements established by
each Rating Agency.
Unless otherwise specified in the related prospectus supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related prospectus
supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related prospectus supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two Business Days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related prospectus supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only
to the extent of the amount permitted to be withdrawn or withheld
from the Collection Account in accordance with the related
Agreement, the Servicing Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect
thereof, whether through foreclosure sale, repossession or
otherwise, including 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 of delinquent payments of principal of and interest
on a Loan or other payments specified in the Agreement (the
"Advances") made by the Servicer required pursuant to the related
Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related prospectus supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to
reimburse itself is limited to amounts received on or in respect
of particular Loans (including, for this purpose, Liquidation
Proceeds and amounts representing proceeds of insurance policies
covering the related Property) which represent late recoveries of
Scheduled Payments respecting which any such Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from
amounts representing late recoveries of Scheduled Payments
respecting which such Advance was made or from Liquidation
Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in
connection with the restoration of damaged Property and, in the
event deposited in the Collection Account and not previously
withheld, and to the extent that Liquidation Proceeds after such
reimbursement exceed the outstanding principal balance of the
related Loan, together with accrued and unpaid interest thereon
to the Due Date for such Loan next succeeding the date of its
receipt of such Liquidation Proceeds, to pay to itself out of
such excess the amount of any unpaid Servicing Fee and any
assumption fees, late payment charges, or other charges on the
related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late
payment or other recovery with respect to a particular Loan prior
to the deposit of such Scheduled Payment, late payment or
recovery into the Collection Account, to pay to itself the
Servicing Fee, as adjusted pursuant to the related Agreement,
from any such Scheduled Payment, late payment or such other
recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by
or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been
repurchased or removed from the trust fund by the Depositor, the
Servicer or the Seller pursuant to the related Agreement, all
amounts received thereon and not distributed as of the date on
which the related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the
Holders of such Series in the amounts and in the manner provided
for in the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
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 (1) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (2) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
Unless otherwise specified in the related prospectus supplement, coverage
will be in an amount at least equal to the greater of (1) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(2) 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 three 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
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.
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.
To the extent permitted by the related Agreement, 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 (1) such exceptions as such firm believes to be
immaterial and (2) 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.
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."
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.
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. As described
herein under "Custody Receipts; Custody Agreements" Custody Receipts entitle the
related Holders of Securities to certain payments that are made on Classes of
Notes held by the related Custodian. Accordingly, the following descriptions of
Agreements, insofar as they relate to Notes, are relevant to Holders of
Securities of Custody Receipts.
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 the
amount or percentage thereof which is not included in the trust fund for the
related Series (the "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 secured by a Mortgage, 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 "Asset
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 Asset Custodian, will
hold such documents in trust for the benefit of the Holders of Securities.
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 Asset 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 Holders of
Securities 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 Holders of Securities 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 loan schedule appearing as an exhibit to
the related Agreement. 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, if applicable.
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." Each Private Security will be identified in a
certificate schedule appearing as an exhibit to the related Agreement, 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 Depositor 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 Asset 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 (a) 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.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related prospectus supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related prospectus supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
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."
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.
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.
PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, on the related Closing
Date the Depositor will deposit cash in an amount (the "Pre-Funded Amount")
specified in such prospectus supplement into an account (the "Pre-Funding
Account"). In no event shall the Pre-Funded Amount exceed 50% of the initial
aggregate principal amount of the Certificates and/or Notes of the related
Series of Securities. The Pre-Funded Amount will be used to purchase Loans
("Subsequent Loans") in a period from the related Closing Date to a date not
more than one year after such Closing Date (such period, the "Funding Period")
from the Seller. The Pre-Funding Account will be maintained with the Trustee for
the related Series of Securities and is designed solely to hold funds to be
applied by such Trustee during the Funding Period to pay to the Seller the
purchase price for Subsequent Loans. Monies on deposit in the Pre-Funding
Account will not be available to cover losses on or in respect of the related
Loans. To the extent that the entire Pre-Funded amount has not been applied to
the purchase of Subsequent Loans by the end of the related Funding Period, any
amounts remaining in the Pre-Funding Account will be distributed as a prepayment
of principal to the holders of the related Securities on the distribution date
immediately following the end of the Funding Period, in the amounts and pursuant
to the priorities set forth in the related prospectus supplement. Any
reinvestment risk resulting from such prepayment will be borne entirely by the
holders of one or more classes of the related Series of Securities. Monies on
deposit in the Pre-Funding Account may be invested in Eligible Investments under
the circumstances and in the manner described in the related Agreement. Earnings
on investment of funds in the Pre-Funding Account will be deposited into the
trust account specified in the related prospectus supplement and losses will be
charged against the funds on deposit in the Pre-Funding Account.
In addition, if so provided in the related prospectus supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series of
Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account has not been
applied to cover shortfalls in interest on the related Series of Securities by
the end of the Funding Period, any amounts remaining in the Capitalized Interest
Account will be paid to the Depositor.
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."
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 five (5) days or more in the payment of any
interest on any Note of such Series or the default in the payment
of the principal of any Note at such Note's maturity;
(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 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, 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 one or more Classes of a Series have the benefit of a Security
Insurance Policy, the issuer of such policy will have the right to consent to
any sale described above.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, 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 Holders of the Notes 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.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related prospectus supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the trust fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee.
The Trustee may also be removed at any time:
(i) if the Trustee ceases to be eligible to continue as such under
the Agreement,
(ii) if the Trustee becomes insolvent, or
(iii) by the Holders of Securities evidencing over 50% of the aggregate
voting rights of the Securities in the trust fund upon written
notice to the Trustee and to the Depositor.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders:
(i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement
any provision therein,
(iii) to add to the duties of the Depositor, the trust fund or
Servicer,
(iv) to add any other provisions with respect to matters or questions
arising under such Agreement or related Enhancement,
(v) to add or amend any provisions of such Agreement as required by a
Rating Agency in order to maintain or improve the rating of the
Securities, or
(vi) to comply with any requirements imposed by the Code; provided
that any such amendment except pursuant to clause (vi) above will
not adversely affect in any material respect the interests of any
Holders of such Series, as evidenced by an 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 662/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 662/3% 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 payment to the provider of any related Enhancement of any
required amount and the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
trust fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related prospectus supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related prospectus supplement to
purchase from the trust fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related prospectus supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets 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."
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.
CUSTODY RECEIPTS; CUSTODY AGREEMENTS
A series of Securities may include one or more classes of Custody Receipts.
Custody Receipts entitle the related Holders of Securities to certain payments
made on notes that are held by a Custodian. Such Notes will be issued pursuant
to an Indenture and if the Primary Assets securing the notes are Loans, the
Loans will be serviced pursuant to a Servicing Agreement. The Custody Receipts
will be issued pursuant to a Custody Agreement between the Depositor and the
Custodian. The identity of the commercial bank, savings and loan association or
trust company named as custodian for each series of Securities that includes
Custody Receipts will be set forth in the related prospectus supplement. The
entity serving as Custodian may have normal banking relationships with the
Depositor or Servicer.
Payments on Notes held by a Custodian will be made by the related Indenture
Trustee to the Custodian. The Custodian will in turn remit to Holders of Custody
Receipts, from payments on the Notes, the amounts to which such Holders are
entitled in accordance with the terms of the Custody Receipts.
If a Series of Securities includes Custody Receipts, the related prospectus
supplement will describe:
o the Primary Assets the are security for the related Notes
o the terms of the related Notes, and
o the terms of the Custody Receipts.
At the time of issuance of a Series of Securities that includes one or more
Classes of Custody Receipts the Depositor will deposit the related Notes with
the Custodian. Such Notes will be registered in the name of and held by the
Custodian in a Custody Account. The Custody Account will be required at all
times to be maintained as a custodial account in the corporate trust department
of the Custodian for the benefit of the Holders of the Custody Receipts,
separated and segregated on the books of the Custodian from all other accounts,
funds and property in the possession of the Custodian.
The Custodian will not have any equitable or beneficial interest in the
related Notes. The Notes held by the Custodian will not be available to the
Custodian for its own use or profit, nor will any Note be deemed to be part of
the general assets of the Custodian. Neither the Notes held by the Custodian nor
the proceeds of such Notes will be subject to any right, charge, security
interest, lien or claim of any kind in favor of the Custodian.
No Holder of a Custody Receipt will have the right to withdraw the related
Notes from the Custody Account and the Custodian will not deliver the related
Notes to such Holder.
Neither the Depositor nor the Custodian shall have any obligation to
advance its own funds to make any payment to any Holder of a Custody Receipt.
NOTICES; VOTING
Upon receipt from a Trustee or Servicer under Agreements relating to the
Notes held by the Custodian of any notice with respect to a Note, the Custodian
shall promptly transmit a copy of such notice by mail to the Holders of the
related Custody Receipts. For such purpose, the Holders shall consider the date
of the receipt by the Custodian of any such notice as the record date for the
purpose of determining the Holders of record to whom such notices shall be
transmitted. In the event such notice requests or requires any vote, action or
consent by the Holders of such a Note, the Custodian shall within the time
period specified in the related prospectus supplement following receipt of such
notice, deliver to the Holders of the Custody Receipts of a letter of direction
with respect to such vote, action or consent, returnable to the Custodian, and
the Custodian shall vote such Notes in accordance with such letter of direction.
Any record date established by such notice for purposes specified in such notice
shall be the record date for the purpose of determining the Holders of record
for such purposes. If no record date is established by the related Trustee, the
date such notice is received by the Custodian shall be the record date.
Notwithstanding the above, without the consent of all of the Holders of
Custody Receipts of a Series, neither the Custodian shall vote nor shall the
Holders of Custody Receipts consent to any amendments to the related Indenture
or any other actions which would reduce the amount of or change the amount or
timing or currency of payment on the Custody Receipts.
DEFAULTS
The Custodian will not be authorized to proceed against the Servicer or the
Trustee under any Agreement relating to Notes held by the Custodian in the event
of a default under the related Servicing Agreement or Indenture and has no power
or obligation to assert any of the rights and privileges of the Holders of the
Custody Receipts. In the event of any default in payment on the Notes or any
Event of Default or similar event with respect to the Servicer, as the case may
be, each Holder of a Custody Receipt will have the right to proceed directly and
individually against the Issuer or the Servicer in whatever manner is deemed
appropriate by such Holder by directing the Custodian to take specific actions
on behalf of such Holder. A Holder of a Custody Receipt will not be required to
act in concert with any Holder. The Custodian will not be required to take any
actions on behalf of Holders except upon receipt of reasonable indemnity from
such Holders for resulting costs and liabilities.
THE CUSTODIAN
Under the Custodial Agreement, the Note Custodian will not be liable other
than by reason of bad faith or gross negligence in the performance of such
duties as are specifically set forth in the Custody Agreement except in regard
to payments under Notes received by it for the benefit of the Owners and
safekeeping of Notes, with respect to which it shall be a fiduciary. The
Custodian will not be liable for any damages resulting from any distribution
from the Custody Account to a Holder at the address of record of such Holder on
the books of the Custodian. The Custodian will not be liable for any action or
inaction by it done in reasonable reliance upon the written advice of its
accountants or legal counsel. The Custodian may request and rely and shall be
fully protected in acting in reliance upon any written notice, request,
direction or other document reasonably believed by it to be genuine and to have
been signed or presented by the proper party or parties.
DUTIES OF THE CUSTODIAN
The Custodian makes no representations as to the validity or sufficiency of
the Custody Agreement, the Securities or of any Primary Asset or related
documents. The Custodian is required to perform only those duties specifically
required of it under the Custody Agreement.
The Custodian will not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Custody 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 CUSTODIAN
The Custodian may, upon written notice to the Depositor, resign at any time
in which event the Depositor will appoint a successor Custodian. If no successor
Custodian has been appointed and has accepted the appointment within 90 days
after giving such notice of resignation, the resigning Custodian may petition
any court of competent jurisdiction for appointment of a successor Custodian.
The Custodian may also be removed at any time upon 30 days notice from the
Depositor or by Holders of Custody Receipts evidencing at least 66 2/3% of the
aggregate voting rights of all Custody Receipts of the related Series.
Any resignation or removal of the Custodian and appointment of a successor
Custodian will not become effective until acceptance of the appointment by the
successor Custodian.
AMENDMENT OF CUSTODY AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each Series of Custody Receipts may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the Custodian 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 or the Custodian, or
(iv) to add any other provisions with respect to matters or questions
arising under such Custody Agreement or provided that any such
amendment will not adversely affect in any material respect the
interests of any Holders of such Series, as evidenced by an
opinion of counsel. Any such amendment shall be deemed not to
adversely affect in any material respect the interest of any
Holder if the Custodian receives written confirmation from each
Rating Agency that such amendment will not cause such Rating
Agency to reduce the then current rating thereof.
Unless otherwise specified in the prospectus supplement, the Custody Agreement
for each Series may also be amended by the Custodian 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 Custody Receipts 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 Custody 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 Custody Receipt without the consent of the
Holder of such Custody Receipts or (b) reduce the required percentage of the
aggregate outstanding principal amount of Custody Receipts 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 Custody Receipts affected thereby.
VOTING RIGHTS
The related prospectus supplement will set forth the method of determining
allocation of voting rights with respect to Custody Receipts included in a
Series.
TERMINATION OF CUSTODY AGREEMENT
The obligations created by the Custody Agreement for a Series will
terminate upon the payment in full of the Notes held by the Custodian and the
receipt by Holders of Custody Receipts of all amounts to which they are
entitled.
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 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.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the Comprehensive
Environmental Response, Cooperation and Liability Act of 1980 ("CERCLA"), the
United States Environmental Protection Agency ("EPA") may impose a lien on
property where EPA has incurred clean-up costs. However, a CERCLA lien is
subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any and
all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest but without
"actually participating in the management" of the Property (the "Secured
Creditor Exclusion"). Thus, if a lender's activities begin to encroach on the
actual management of a contaminated facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
foreclosures and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to third party) or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute actual participation in
the management of a mortgaged property or the business of a borrower so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the Secured Creditor Exclusion to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the Secured Creditor
Exclusion only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property. If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
Holders.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
under ground storage tanks under Subtitle I of RCRA. Under such rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. In addition, under the Asset Conservation, Lender
Liability and Deposit Insurance Protection Act of 1996, the protections accorded
to lenders under CERCLA are also accorded to the holders of security interests
in underground storage tanks. Liability for cleanup of petroleum contamination
may, however, be governed by state law, which may not provide for any specific
protection for secured creditors.
Except as otherwise specified in the related prospectus supplement, at the
time the Loans were originated, no environmental or a very limited environmental
assessments of the Properties were conducted.
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.
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 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.
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. The Federal Home Loan Mortgage
Corporation has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980, as amended, ("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, 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 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.
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, 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.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with originating, servicing and
enforcing loans secured by certain residential properties. Theses laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z requires certain
disclosures to borrowers regarding terms of the Loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder prohibit discrimination
in the extension of credit on the basis of age, race, color, sex, religion,
martial status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act; and the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans and could subject the Servicer
and in some cases its assignees 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, such as the trust
fund with respect to the Loans, 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.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of Lehman Commercial Paper Inc., which is
a wholly-owned subsidiary of Lehman Brothers Inc., a wholly-owned subsidiary of
Lehman Brothers Holdings Inc. 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. None of the Depositor, Lehman Brothers Holdings Inc.,
Lehman Commercial Paper Inc., Lehman Brothers Inc., the Servicer, the Trustee or
the Seller has guaranteed or is otherwise obligated with respect to the
Securities of any Series.
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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated United States 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 Internal Revenue Code
of 1986, as amended (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 United States
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 United States 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 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, partnership or other entity created or organized
in or under the laws of the United States or any state thereof, including the
District of Columbia (other than a partnership that is not treated as a Unites
States person under any applicable Treasury regulations), an estate whose income
is subject to United States 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
prospectus supplement as to each Series of Securities Brown & Wood LLP will have
advised the Depositor that: (i) Securities held by a mutual savings bank or
domestic building and loan association will represent interests in "qualifying
real property loans" within the meaning of Code section 593(d); (ii) Securities
held by a domestic building and loan association will constitute "loans . . .
secured by an interest in real property" within the meaning of Code section
7701(a)(19)(C)(v); and (iii) Securities held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code section
856(c)(5)(A) and interest on Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder (the "OID Regulations"). A Holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first distribution date on a Debt
Security is either longer or shorter than the interval between subsequent
distribution dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such OID. 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 OID 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 OID 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 OID 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 ("IRS") were to require that OID be accrued without such adjustments,
the rate of accrual of OID for a Class of Regular Interest Securities could
increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable prospectus supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing 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 IRS 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 IRS 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 OID, stated interest
payable in the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of Securities (or, in the case of
a Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
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. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such holder, and will be irrevocable without the consent of the Internal Revenue
Service. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. 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 a REMIC election is made with respect to a Series of Securities,
then the arrangement by which the Securities of that Series are issued will be
treated as a REMIC as long as all of the provisions of the applicable Agreement
are complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as "Regular Interests" or "Residual Interests" in
a REMIC, as specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a mutual savings bank or domestic building and loan association will
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
"qualifying real property loans"); (ii) Securities held by a domestic building
and loan association will constitute "a regular or a residual interest in a
REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at
least 95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described in
Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of Certificates representing a Residual Interest (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 the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
prospectus supplement, the expenses of the REMIC will be allocated to holders of
the related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue OID (i.e., under the constant yield method taking into account the
Prepayment Assumption). The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the holders of the Regular Interest
Securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
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 Residual Interest Security will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a Residual Interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
LIMITATION ON LOSSES. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
SECURITY. If the amount of such payment exceeds a holder's adjusted basis
in the Residual Interest Security, however, the holder will recognize gain
(treated as gain from the sale of the Residual Interest Security) to the extent
of such excess.
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.
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
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 IRS 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 IRS in a unified
administrative proceeding.
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, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. The holder's purchase price
of a Pass-Through Security is to be allocated among the Loans in proportion to
their fair market values, determined as of the time of purchase of the
Securities. In the typical case, the Trustee (to the extent necessary to fulfill
its reporting obligations) will treat each Loan as having a fair market value
proportional to the share of the aggregate principal balances of all of the
Loans that it represents, since the Securities, unless otherwise specified in
the applicable prospectus supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
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 OID, 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 OID rules are to apply to Stripped Securities and
other Pass-Through Securities. Under the method described above for Pay-Through
Securities (the "Cash Flow Bond Method"), a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during such period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as the Stripped Securities which technically represent
ownership interests in the underlying Loans, rather than being debt instruments
`secured by" those loans. Nevertheless, it is believed that the Cash Flow Bond
Method is a reasonable method of reporting income for such Securities, and it is
expected that OID will be reported on that basis unless otherwise specified in
the related prospectus supplement. In applying the calculation to Pass-Through
Securities, the Trustee will treat all payments to be received by a holder with
respect to the underlying Mortgage Loans as payments on a single installment
obligation. The IRS could, however, assert that OID must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Mortgage Loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Mortgage
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
CHARACTER AS QUALIFYING LOANS. In the case of Stripped Securities there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans" character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent "qualifying real property loans" within the meaning of Section 593(d)
of the Code, "real estate assets" within the meaning of Section 856(c)(6)(B) of
the Code, and "loans secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to
the Securities should be considered to represent "interest on obligations
secured by mortgages on real property or on interests in real property" with the
meaning of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the
Securities may cause a proportionate reduction in the above-described qualifying
status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to trust funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. The maximum tax rate on ordinary income for individual taxpayers is
39.6% and the maximum tax rate on long-term capital gains for such taxpayers is
20%. The maximum tax rate on both ordinary income and long-term capital gains of
corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to trust
funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). On October 6,
1997, the Treasury Department issued new regulations (the "New Regulations")
which make certain modifications to the backup withholding and information
reporting rules described above. The New Regulations will generally be effective
for payments made after December 31, 1999, subject to 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 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."
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.
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. The New Regulations which make
certain modifications to the withholding and information reporting rules
described above. The New Regulations will generally be effective for payments
made after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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.
The New Regulations described above also make certain modifications to the
backup withholding and information reporting rules. The New Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the trust fund. If so treated, the
trust fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the trust fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the trust fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The trust fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the Certificates, the Notes, the trust
fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
trust fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
trust fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the trust
fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating trust fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the trust fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the trust fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the trust fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the trust fund acquires the Loans at a market discount or premium, the
trust fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. 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 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 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 or similar form 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. The New Regulations make certain modifications to the
withholding and information reporting rules described above. The New Regulations
will generally be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
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. The New Regulations described above also make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
3, 1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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 Holders of Securities.
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 effect, (ii) certain tests concerning (A) the composition
of the FASIT's assets and (B) the nature of the Holders of Securities" 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 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 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.
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, regulatory 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.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the
Securities--for example, Prohibited Transaction Class Exemption ("PTE") 96-23,
which exempts certain transactions effected on behalf of a Plan by an "in-house
asset manager"; PTE 95-60, which exempts certain transactions between insurance
company general accounts and parties in interest; PTE 91-38, which exempts
certain transactions between bank collective investment funds and parties in
interest; PTE 90-1, which exempts certain transactions between insurance company
pooled separate accounts and parties in interest; or PTE 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified professional
asset manager". There can be no assurance that any of these exemptions will
apply with respect to any Plan's investment in the Securities, or that such an
exemption, if it did apply, would apply to all prohibited transactions that may
occur in connection with such investment. Furthermore, these exemptions would
not apply to transactions involved in operation of the Trust if, as described
below, the assets of the Trust were considered to include Plan assets.
The United States Department of Labor ("DOL") has issued a final regulation
(29 C.F.R. Section 2510.3-101) (the "Plan Assets Regulation") containing rules
for determining what constitutes the assets of a Plan. The Plan Assets
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 Plan Assets 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, regulatory or administrative exemption.
The "look-through" rule of the Plan Assets Regulation does not apply if the
interest acquired by the Plan is treated as indebtedness under applicable local
law and 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. The prospectus supplement related to a
Series will indicate the expected treatment of the Securities in that Series
under the Plan Assets Regulation.
If the interest is an "equity interest," the Plan Assets Rule create an
exception if the class of equity interests in question is: (i) "widely held"
(held by 100 or more investors who are independent of the Depositor and each
other); (ii) freely transferable; and (iii) sold as part of an offering pursuant
to (A) an effective registration statement under the Securities Act of 1933, and
then subsequently registered under the Securities Exchange Act of 1934 or (B) an
effective registration statement under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 ("Publicly Offered Securities"). In addition, the
regulation provides that if at all times more than 75% of the value of all
classes of equity interests in the Depositor or the trust fund are held by
investors other than benefit plan investors (which is defined as including
Plans, employee benefit plans as defined under ERISA, whether or not they are
subject to ERISA, and any entity whose underlying assets include plan assets by
reason of a plan's investment in the entity, the investing Plan's assets will
not include any of the underlying assets of the Depositor or the trust fund.
If the Security is an "equity interest" under the Plan Assets Regulation
and no exception applies, an exemption may be available. On February 22, 1991,
the DOL granted to Lehman Brothers, Inc. 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 may include the
Certificates. 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 Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(ii) The rights and interests evidenced by the Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(iii) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps Inc. or Fitch IBCA Inc.;
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the seller pursuant to the sale of the
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 Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemptions, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Pre-Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account
to the total principal amount of the Certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust,
which terms and conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the Certificates to
be covered by the Exemption receiving a lower credit rating from a
Rating Agency upon termination of the Pre-Funding Period than the
rating that was obtained at the time of the initial issuance of the
Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Obligations in
the Trust at the end of the Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the
Obligations transferred to the Trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations
which were transferred to the Trust:
(i) the characteristics of the Additional Obligations must
be monitored by an insurer or other enhancement provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor
must provide the depositor with a letter (with copies provided to
each Rating Agency rating the Certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to
the trust as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding
may be invested only in certain permitted investments ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account
at the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
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 holding receivables as to which
the fiduciary (or its affiliates) is an obligor provided that, among other
requirements: (i) in the case of an acquisition in connection with the initial
issuance of Securities, at least fifty (50) percent of each Class of Securities
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least fifty (50) percent of the aggregate interest in
the trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five (5) percent or
less of the fair market value of the obligations contained in the trust; (iii) a
Plan's investment in Securities does not exceed twenty-five (25) percent of all
of the Securities outstanding after the acquisition; and (iv) immediately after
the acquisition, no more than twenty-five (25) percent of the assets of any Plan
for which such person is a fiduciary 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, any 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" under the Secondary
Mortgage Market Enhancement Act of 1984. 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.
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, as
applicable, for a Series may have on the yield to investors in the Securities of
such Series.
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.
AVAILABLE 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."
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. 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
electronically with the Commission.
<PAGE>
INDEX OF DEFINED TERMS
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Additional Obligations.............................81 Notional Amount.....................................8
Advances...........................................21 Obligations........................................80
Agreement..........................................10 OID................................................54
Asset Custodian....................................27 OID Regulations....................................54
Asset Value.........................................7 Pay-Through Security...............................55
Assumed Reinvestment Rate...........................7 Permitted Investments..............................81
Available Interest Amount...........................8 Plans..............................................78
Capitalized Interest Account.......................30 Pooling and Servicing Agreement.....................5
Cash Flow Bond Method..............................64 Pre-Funded Amount..................................30
CERCLA.............................................43 Pre-Funding Account................................30
Certificates........................................5 Pooling and Servicing Agreement.....................5
Class...............................................6 Pre-Funded Amount..................................30
Closed-End Loans...................................11 Pre-Funding Account................................30
Code...............................................52 Pre-Funding Limit..................................81
Collection Account..................................6 Pre-Funding Period.................................81
Custodian...........................................6 Prepayment Assumption..............................55
Custody Agreement...................................5 Primary Assets......................................6
Custody Receipts....................................5 Private Securities.................................14
Cut-off Date.......................................13 PS Agreement.......................................14
Deleted Primary Asset..............................29 PS Servicer........................................14
Deposit Agreement..................................19 PS Sponsor.........................................14
Depositor Securities...............................52 PS Trustee.........................................14
Derivative Products................................19 PTE................................................79
Distribution Account...............................16 Publicly Offered Securities........................79
DOL................................................79 Qualifying Substitute Primary Asset................29
Due Dates..........................................20 RCRA...............................................44
Eligible Corporations..............................75 Regular Interest Securities........................53
Enhancement.........................................6 REMIC..............................................53
Enhancer...........................................16 Reserve Funds......................................18
EPA................................................43 Restricted Group...................................82
ERISA..............................................78 Retained Interests.................................27
Escrow Accounts....................................20 Revolving Credit Line Loans........................11
Exemption..........................................80 Scheduled Payments.................................18
FASIT Qualification Test...........................75 Secured Creditor Exclusion.........................43
Funding Period.....................................30 Securities..........................................6
Garn-St. Germain Act...............................47 Seller..............................................6
Holder..............................................6 Series..............................................5
Home Improvement Contracts.........................12 Servicing Agreement................................10
Indenture...........................................5 Servicing Fee......................................25
Installment Contract...............................50 Short-Term Note....................................68
Interest Weighted Securities.......................56 Single Family Property.............................11
IO.................................................75 Small Mixed-Use Properties.........................12
IRS................................................56 Special Redemption Date.............................8
Lehman Brothers....................................83 Subsequent Loans...................................30
Liquidation Proceeds...............................21 Title V............................................48
Loans..............................................11 Trust Agreement.................................5, 10
Minimum Principal Payment Agreement................19 Trustee.............................................5
Modification.......................................24 U.S. Person........................................53
Mortgaged Property.................................11 UCC................................................48
Notes...............................................5 Underlying Loans....................................7
</TABLE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Subject to completion, dated April 20, 1999.
Prospectus
LEHMAN ABS CORPORATION
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
Lehman ABS Corporation, as depositor, may offer from time to time under this
prospectus and a related prospectus supplements securities that are either
asset-backed notes, asset-backed certificates or asset-backed note custody
receipts which may be sold from time to time in one or more series. Each series
of securities will be issued in one or more classes.
The related prospectus supplement will set forth the specific assets of the
trust fund and the seller or sellers from whom the depositor acquired the
assets. The assets may include:
(a) one or more pools of
(i) home improvement installment sales contracts and installment loan
agreements (the "contracts") which may be unsecured, secured by
mortgages primarily on one-to-four family residential properties,
or secured by purchase money security interests in the related
home improvements,
(ii) manufactured housing installment sales contracts and installment
loan agreements (the "contracts") secured by either security
interests in the manufactured homes or by mortgages on real
estate on which the related manufactured homes are located, and
(iii) private securities,
(b) all monies due under the above assets, which may be net of
certain amounts payable to the servicer of the manufactured
housing installment sales contracts and installment loan
agreements, and
(c) certain funds, enhancement and other assets.
The 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 prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE RISK FACTORS ON PAGE 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the offered securities or determined if
this prospectus is accurate or complete. Making any contrary representation is a
criminal offense.
LEHMAN BROTHERS
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATIONS OR LOWER RETURNS
There will be no market for the securities of any series prior to its
issuance, 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
that any such market 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. Absent a secondary market for the securities you may experience a delay
if you choose to sell your securities or the price you receive may be less than
that which is offered for a comparable liquid security.
LIMITED ASSETS
THE DEPOSITOR. 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 the related
series and other payments specified in the related prospectus supplement, may be
promptly released or remitted to the depositor, the servicer, the provider of
any enhancement 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 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 and you may experience a loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to certain representations and
warranties. The depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
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.
WE REFER YOU TO "THE AGREEMENTS - ASSIGNMENT OF PRIMARY ASSETS."
LIMITS ON ENHANCEMENT
Although enhancement for the securities is intended to reduce the risk of
delinquent payments or losses to holders of securities entitled to the benefit
thereof, the amount of enhancement will be limited, as set forth in the related
prospectus supplement. In addition the amount available 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 you may suffer losses.
WE REFER YOU TO "ENHANCEMENT."
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD
The yield to maturity experienced by a holder of securities may be affected
by the rate of payment of principal of the contracts or underlying contracts
relating to the private securities. The timing of principal payments of the
securities of a series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the contracts or underlying
contracts relating to the private securities, 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. Prepayments may also result from repurchases
of contracts or underlying contracts relating to the private securities, as
applicable, due to material breaches of the seller's or the depositor's
warranties.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--WEIGHTED AVERAGE LIFE OF
SECURITIES."
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.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--PAYMENTS OF INTEREST."
JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS
The mortgages may be 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 in connection with such
mortgage 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.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR
LIENHOLDERS
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 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, 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.
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the contracts. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the servicer to collect all or part of the principal of or interest
on the contracts, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the trust fund as the owner of the
contracts to damages and administrative enforcement.
The loans are also subject to Federal laws, including laws that require
certain disclosures to borrowers, that prohibit discrimination and that regulate
the use and reporting of information relating to the borrower's credit
experience. Violations of certain provisions of these Federal laws may limit the
ability of the servicer to collect all or part of the principal of or interest
on the contracts and in addition could subject the trust fund to damages and
administrative enforcement.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE CONTRACTS."
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, such as the trust fund with respect to the
contracts, to all claims and defenses which the obligor in the credit sale
transaction could assert against the seller of the goods.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE CONTRACTS."
RATING OF THE SECURITIES RELATE TO CREDIT RISK ONLY
The ratings of the securities 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, since 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. Any reduction or withdrawal of a rating will have an adverse
effect on the value of the securities.
LIQUIDATION VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT TO SATISFY ALL CLAIMS
AGAINST TRUST FUND
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. In addition, 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 contracts do not vary
directly with the outstanding principal balance of the contracts at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted contract having a small remaining principal balance as it would
in the case of a defaulted contract 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 contract than would be the
case with a larger contract. Because the average outstanding principal balances
of the contracts are small relative to the size of the contracts in a typical
pool of first mortgages, realizations net of liquidation expenses on defaulted
contracts may also be smaller as a percentage of the principal amount of the
contracts than would such net realizations in the case of a typical pool of
first mortgage loans. The payment of such expenses will reduce the portion of
the amount realized that will be available to make payments on the securities
and may result in you suffering a loss.
DESCRIPTION OF THE SECURITIES
GENERAL
The notes (the "Notes") will be issued in series pursuant to an indenture
(an "Indenture" between the related Trust Fund and the entity named in the
related prospectus supplement as 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 (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 contracts, 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. The custody receipts (the "Custody Receipts") will
be issued in series pursuant to a custody agreement (a "Custody Agreement")
among the Depositor and the entity named in the related prospectus supplement as
the custodian (the "Custodian"). A form of Custody Agreement has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
A series may consist of any combination of Notes, Certificates and Custody
Receipts (the "Securities").
The Depositor will acquire the primary assets (the "Primary Assets" from
one or more sellers (the "Seller").
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. As
described under "Custody Receipts; Custody Agreements," Custody Receipts entitle
the related holder (the "Holder") of Securities to certain payments that are
made on classes of notes held by the related Custodian. Accordingly, to the
extent the following descriptions apply to Notes, including the effect payments
on the contracts may have on Notes that are secured by such contracts, such
descriptions also apply to Custody Receipts.
Each Series of Securities will consist of one or more classes of Securities
(each, a "Class"), one or more of which may be compound interest securities,
fixed interest securities, variable interest securities, planned amortization
class securities, zero coupon securities, principal only securities, interest
only securities, participating securities and Custody Receipts. 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, by a paying agent on behalf of the Trustee or by a Custodian, as
specified in the related prospectus supplement. Unless otherwise provided in the
related prospectus supplement, all payments with respect to the Primary Assets
for a Series, together with reinvestment income thereon, amounts withdrawn from
any Reserve Fund, and amounts available pursuant to any other Enhancement will
be deposited directly into the Collection Account and, net, if and as provided
in the related prospectus supplement, of certain amounts payable to the related
Servicer and any other person specified in the prospectus supplement, will
thereafter be deposited into the Distribution Account and will be available to
make payments on Securities of such Series on the next Distribution Date, as the
case may be. See "The Trust Funds--Collection and Distribution Accounts."
VALUATION OF THE PRIMARY ASSETS
If specified in the related prospectus supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
prospectus supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of 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 and in the priority specified
in the related prospectus supplement. The rate of interest on Securities of a
Series may be fixed or variable or may change with changes in the annual
percentage rates of the Contracts or underlying contracts relating to the
Private Securities (the " Underlying Contracts"), as applicable included in the
related Trust Fund and/or as prepayments occur with respect to such Contracts or
Underlying Contracts, 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.
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.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
and Custody Receipts is the date no later than which principal thereof will be
fully paid and with respect to each Class 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. 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 Contracts or Underlying Contracts, as applicable, in the related
Trust Fund. Since payments on the Primary Assets including prepayments 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
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related prospectus supplement,
as a result of delinquencies, defaults and liquidations of the Primary Assets in
the Trust Fund, the actual final Distribution Date of any Certificate may occur
later than its Final Scheduled Distribution Date. No assurance can be given as
to the actual prepayment experience with respect to the Primary Assets related
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 Contracts or
Underlying Contracts, 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 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 amount available for the payment of interest to equal the amount of interest
that will have accrued through such designated interest accrual date for such
Series of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the prospectus supplement relating to such Series.
Alternatively, if so specified in the related prospectus supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related prospectus supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related prospectus supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related prospectus
supplement, is less than the amount or percentage specified in the related
prospectus supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
prospectus supplement. If specified in the related prospectus supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Code.
In addition, the prospectus supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Contracts or Underlying Contracts, 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
Contracts or Underlying Contracts, 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 Contracts or
Underlying Contracts, 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 Contracts or
Underlying Contracts, as applicable, for a Series, such contracts are likely to
prepay at rates higher than if prevailing interest rates remain at or above the
interest rates borne by such loans. In this regard, it should be noted that the
Contracts or Underlying Contracts, 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 Contracts or
Underlying Contracts, as applicable. If any Contracts or Underlying Contracts,
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, or in an Asset Group specified in the
related prospectus supplement. As described under "Custody Receipts; Custody
Agreements," Custody Receipts entitle the related Securityholders to certain
payments that are made on classes of notes held by the related Custodian.
Accordingly, to the extent the following descriptions apply to Notes, including
the effect payments on the contracts may have on Notes that are secured by such
contracts, such descriptions also apply to Custody Receipts. The Trust Fund of
each Series will include assets purchased from the Seller composed of:
(i) the Primary Assets;
(ii) amounts available from the reinvestment of payments on such
Primary Assets at the Assumed Reinvestment Rate, if any,
specified in the related prospectus supplement;
(iii) any Enhancement;
(iv) any Property that secured a Contract but which is acquired by
foreclosure or deed in lieu of foreclosure or repossession;
and
(v) the amount, if any, initially deposited in the Collection
Account or Distribution Account for a Series as specified in
the related prospectus supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related prospectus supplement for
a Series of Securities, unless otherwise specified in the related prospectus
supplement will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor, any of its affiliates
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, in
the case of Private Securities, not from the issuer of such Private Securities
or an affiliate thereof, or, in the case of the Contracts, in privately
negotiated transactions, which may include transactions with affiliates of the
Depositor. The Primary Assets will be transferred by the Depositor to the Trust
Fund. Contracts relating to a Series will be serviced by the Servicer, which may
be the Seller, specified in the related prospectus supplement, pursuant to a
Pooling and Servicing Agreement, with respect to a Series of Certificates or a
servicing agreement (each, a "Servicing Agreement") between the Trust Fund and
Servicer, with respect to a Series of Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, with
respect to a Series of Notes, the Indenture and the Servicing Agreement, and
with respect to a Series of Custody Receipts, the Custodial Agreement, as the
context requires.
If so specified in the related prospectus supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund specified in the related prospectus supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related prospectus supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Contracts and Private Securities, to the extent and as specified
in the related prospectus supplement.
THE CONTRACTS
CONTRACTS. The Primary Assets for a Series may consist, in whole or part,
of (i) conventional manufactured housing installment sales contracts and
installment loan agreements (the "Manufactured Housing Contracts"), originated
by a manufactured housing dealer in the ordinary course of business and (ii)
home improvement installment sales contracts and installment loan agreements
(the "Home Improvement Contracts" and together with Manufactured Housing
Contracts, the "Contracts") originated by a home improvement contractor in the
ordinary course of business. As specified in the related prospectus supplement,
the Manufactured Housing Contracts will be secured by either Manufactured Homes,
located in any of the fifty states or the District of Columbia or by Mortgages
on the real estate on which the Manufactured Homes are located. As specified in
the related prospectus supplement, the Home Improvement Contracts will either be
unsecured or secured by Mortgages primarily on Single Family Properties which
are generally subordinate to other mortgages on the same Mortgaged Property or
by purchase money security interest in the Home Improvements financed thereby.
The Contracts will be conventional contracts or contracts insured by the Federal
Housing Administration or partially guaranteed by the Veterans Administration.
Unless otherwise specified in the applicable prospectus supplement, the
Contracts will be fully amortizing and may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below and in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
manufactured homes (the "Manufactured Homes") securing the Manufactured Housing
Contracts will consist of manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of [this] paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
Manufactured Homes and home improvements, unlike Mortgaged Properties,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or home improvement
may be lower than the principal amount outstanding under the related Contract.
The Mortgaged Properties will include primarily one- to four-family
residential housing, including Condominium Units and Cooperative Dwellings
("Single Family Property"). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related prospectus supplement) greater than the term
of the related Contract. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
The Mortgaged Properties may include properties containing one- to
four-family residential units and no more than three income producing
non-residential units ("Small Mixed-Use Properties"). Small Mixed-Use Properties
may be owner occupied or investor properties and the Contract purpose may be a
refinancing or a purchase.
Unless otherwise specified in the related prospectus supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Contracts secured by Properties that are
owner-occupied will be disclosed in the related prospectus supplement. Unless
otherwise specified in the prospectus supplement, the sole basis for a
representation that a given percentage of the Contracts are secured by Single
Family Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Contract either that the
underlying Mortgaged Property will be used by the Mortgagor for a period of at
least six months every year or that the Mortgagor intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of the
underlying Mortgaged Property is the Mortgagor's mailing address as reflected in
the Servicer's records. To the extent specified in the related prospectus
supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes.
The initial Combined Loan-to-Value Ratio of a Contract is computed in the
manner described in the related prospectus supplement and may take into account
the amounts of any related senior mortgage loan.
HOME IMPROVEMENT CONTRACTS. The Primary Assets for a series may consist, in
whole or in 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 variable interest rates and may provide for other
payment characteristics as described below and in the prospectus supplement.
Unless otherwise specified in the prospectus supplement, 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.
If applicable, the initial Loan-to-Value Ratio of a Home Improvement
Contract is computed in the manner described in the related prospectus
supplement.
ADDITIONAL INFORMATION. The selection criteria which shall apply with
respect to the Contracts, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
prospectus supplement.
Some Contracts may be delinquent or non-performing as specified in the
related prospectus supplement. Contracts may be originated by or acquired from
an affiliate of the Depositor and an affiliate of the Depositor may be an
obligor with respect to any such Contract. To the extent provided in the related
prospectus supplement, additional Contracts may be periodically added to the
Trust Fund, or may be removed from time to time if certain asset value tests are
met, as described in the related prospectus supplement.
The Contracts for a Series may include Contracts that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity, as
specified in the related prospectus supplement. As further described in the
related prospectus supplement, the Contracts for a Series may include Contracts
that do not have a specified stated maturity.
The related prospectus supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the cut-off date
specified in the related Prospectus Supplement (the "Cut-off Date"), including,
among other things, and to the extent relevant:
(a) the aggregate unpaid principal balance of the Contracts (or
the aggregate unpaid principal balance included in the Trust
Fund for the related Series);
(b) the range and weighted average Loan Rate on the Contracts,
and, in the case of adjustable rate Contracts, the range and
weighted average of the current Loan Rates and the Lifetime
Rate Caps, if any;
(c) the range and average outstanding principal balance of the Contracts;
(d) the weighted average original and remaining term-to-stated
maturity of the Contracts and the range of original and
remaining terms-to-stated maturity, if applicable;
(e) the range and weighted average of Combined Loan-to-Value
Ratios or Loan-to-Value Ratios for the Contracts, as
applicable;
(f) the percentage (by outstanding principal balance as of the
Cut-off Date) of Contracts that accrue interest at adjustable
or fixed interest rates;
(g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Contracts;
(h) the percentage (by principal balance as of the Cut-off Date)
of Contracts that are secured by Mortgaged Properties, Home
Improvements or are unsecured;
(i) the geographic distribution of any Mortgaged Properties securing
the Loans;
(j) the percentage of Contracts (by principal balance as of the
Cut-off Date) that are secured by Single Family Properties or
Small Mixed-Use Properties, shares relating to Cooperative
Dwellings, Condominium Units, investment property and vacation
or second homes;
(k) the lien priority of the Contracts; and
(l) the delinquency status and year of origination of the Contracts.
The related prospectus supplement will also specify any other limitations
on the types or characteristics of Contracts for a series.
If information of the nature described above respecting the Contracts is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
GENERAL. 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 Underlying Contracts or (b) collateralized obligations
secured by Underlying Contracts. Such pass-through certificates or
collateralized obligations will have previously been (i) offered and distributed
to the public pursuant to an effective registration statement or (ii) 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
Contracts 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 Contracts 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 Contracts.
Underlying Contracts 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.
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. 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 the registered owner of such Private Securities. The
PS Sponsor or the PS Servicer may have the right to repurchase the Underlying
Contracts after a certain date or under other circumstances specified in the
related prospectus supplement.
The Underlying Contracts may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. An Underlying Contract will be a type that would qualify as a
Contract as discussed herein.
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 Contracts or with respect to the Private Securities themselves. The
type, characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Contracts 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 Contracts including (A) the
payment features of such Underlying Contracts (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 Contracts insured or
guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the Underlying Contracts, (D) the
minimum and maximum stated maturities of such Underlying Contracts at
origination, (E) the lien priority of any such Underlying Contracts,
and (F) the delinquency status and year of origination of such
Underlying Contracts;
(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
Underlying Contracts or to Private Securities;
(viii) the terms on which Underlying Contracts 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 Contracts 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. Unless otherwise provided in the
related prospectus supplement, the Trustee shall be required to apply a portion
of the amount in the Collection Amount, together with reinvestment earnings from
Eligible Investments 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 by the
Trustee for such Series, each in the manner and at the times established in the
related prospectus supplement. Certain amounts available pursuant to any
Enhancement, as provided in the related prospectus supplement, will also be
deposited in a related Distribution Account. 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. 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 (described below) as specified in the related prospectus supplement.
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 Enhancement in favor of the Trustee on behalf
of holders of the related Series or designated classes of such series.
"Enhancement" may take the form of an irrevocable letter of credit, surety bond
or insurance policy, Reserve Funds, issue Subordinate Securities or obtain any
other form of enhancement or combination thereof or as otherwise specified in
the prospectus supplement. 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. As described under "CUSTODY RECEIPTS; CUSTODY
AGREEMENTS," Custody Receipts entitle the related Securityholders to certain
payments that are made on Classes of Notes held by the related Custodian.
Accordingly, to the extent the following descriptions apply to Notes such
descriptions apply to Custody Receipts.
SUBORDINATE SECURITIES
If specified in the related prospectus supplement, Enhancement for a Series
may consist of one or more Classes of subordinate securities. The rights of
holders of such subordinate securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
holders of senior securities of the Series, but only to the extent described in
the related prospectus supplement.
INSURANCE
If stated in the related prospectus supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related prospectus supplement.
POOL INSURANCE POLICY. If so specified in the prospectus supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Contracts in the related Trust Fund. The pool insurance policy
will cover any loss (subject to the limitations described in a related
prospectus supplement) by reason of default, but will not cover the portion of
the principal balance of any Contract that is required to be covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the related prospectus supplement.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Contract
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to such Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
Property or (ii) upon transfer of such Property to the special hazard insurer,
the unpaid principal balance of such Contract at the time of acquisition of such
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Servicer with
respect to such Property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such Property. Any amount
paid as the cost of repair of such Property will reduce coverage by such amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Contract secured by such
Property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Contract under any pool insurance
policy. Therefore, so long as such pool insurance policy remains in effect, the
payment by the special hazard insurer of the cost of repair or of the unpaid
principal balance of the related Contract plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
BANKRUPTCY BOND. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the Property securing the related Contract at
an amount less than the then outstanding principal balance of such Contract. The
amount of the secured debt could be reduced to such value, and the holder of
such Contract thus would become an unsecured creditor to the extent the
outstanding principal balance of such Contract exceeds the value so assigned to
the Property by the bankruptcy court. In addition, certain other modifications
of the terms of a Contract can result from a bankruptcy proceeding. See "Certain
Legal Aspects of the Contracts." If so provided in the related prospectus
supplement, the Depositor or other entity specified in the related prospectus
supplement will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") covering losses resulting from proceedings with respect to
borrowers under the Bankruptcy Code. The bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on (the "Scheduled Payments") a Contract or a
reduction by such court of the principal amount of a Contract and will cover
certain unpaid interest on the amount of such a principal reduction from the
date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related prospectus supplement for all Contracts in the Trust Fund for
such Series. Such amount will be reduced by payments made under such bankruptcy
bond in respect of such Contracts, unless otherwise specified in the related
prospectus supplement, and will not be restored.
RESERVE FUNDS
If so specified in the prospectus supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the "Reserve Funds") cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such prospectus supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related prospectus supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related prospectus supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
prospectus supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the prospectus supplement relating to a Series of Securities,
the Depositor will enter into a "Minimum Principal Payment Agreement" with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the prospectus supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the Depositor and the Trustee for
such Series of Securities will enter into a guaranteed investment contract or an
investment agreement (the "Deposit Agreement") with the entity specified in such
prospectus supplement on or before the sale of such Series of Securities.
Pursuant to the Deposit Agreement, all or a portion of the amounts held in the
Collection Account, the Distribution Account or in any Reserve Fund would be
invested with the entity specified in the prospectus supplement. 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 Trustee would be entitled to withdraw
amounts invested pursuant to a Deposit Agreement, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the manner specified in the prospectus
supplement. 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.
DERIVATIVE PRODUCTS
Derivative Products may consist of a swap to convert floating or fixed rate
payments, as applicable on the Loans or Private Securities into fixed or
floating rate payments, as applicable, on the Securities or in a cap or floor
agreement intended to provide protection against changes in floating rates of
interest payable on the Loans, Private Securities or the Securities. Any such
Derivative Product will constitute or will be structured so as to be an
insurance policy or an exempt security.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds, letters
of credit or similar arrangements for the purpose of (i) maintaining timely
payments to Securityholders or providing additional protection against losses on
the assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in respect
of such assets or principal payment rate on such assets. Such arrangements may
include agreements under which Securityholders are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the related prospectus supplement.
SERVICING OF CONTRACTS
GENERAL
Customary servicing functions with respect to Contracts comprising the
Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities. As described under
"CUSTODY RECEIPTS; CUSTODY AGREEMENTS," Custody Receipts entitle the related
Securityholders to certain payments that are made on classes of notes held by
the related Custodian. Accordingly, to the extent the following descriptions
apply to Notes, including the effect payments on the contracts may have on Notes
that are secured by such contracts, such descriptions also apply to Custody
Receipts. In performing its 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. 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.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Contracts and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Contract and (ii) to the extent provided in the related Agreement,
arrange with an obligor a schedule for curing delinquencies by modifying the due
dates (the "Due Dates") for Scheduled Payments on such Contract.
If specified in the related prospectus supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") with respect to Contracts in which payments by obligors to
pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items will be deposited. Contracts may not require such payments
under the loan related documents, in which case the Servicer would not be
required to establish any Escrow Account with respect to such Contracts.
Withdrawals from the Escrow Accounts are to be made to effect timely payment of
taxes, assessments and mortgage and hazard insurance, to refund to obligors
amounts determined to be overages, to pay interest to obligors on balances in
the Escrow Account to the extent required by law, to repair or otherwise protect
the property securing the related Contract and to clear and terminate such
Escrow Account. The Servicer will be responsible for the administration of the
Escrow Accounts and generally will make advances to such account when a
deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related prospectus supplement, the
Trustee or the Servicer will establish a Collection Account in the name of the
Trustee. Unless otherwise indicated in the related prospectus supplement, the
Collection Account will be an account maintained (i) at a depository
institution, the long-term unsecured debt obligations of which at the time of
any deposit therein are rated by each Rating Agency rating the Securities of
such Series at levels satisfactory to each Rating Agency or (ii) in an account
or accounts the deposits in which are insured to the maximum extent available by
the FDIC or which are secured in a manner meeting requirements established by
each Rating Agency.
Unless otherwise specified in the related prospectus supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related prospectus
supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related prospectus supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related prospectus supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) all payments on account of principal, including prepayments, on
such Primary Assets;
(ii) all payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) all amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
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 of delinquent payments of principal of and interest
on a Contract or other payments specified in the Agreement (the "Advances")
made by the Servicer required pursuant to the related Agreement; and
(vii) all repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related prospectus supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Contracts
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Contract, together with accrued and unpaid
interest thereon to the Due Date for such Contract next succeeding the date
of its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Contract;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Contract prior to the deposit
of such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related prospectus supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Contracts. If specified in the related prospectus supplement, the Servicer
will be obligated to make Advances, and such obligations may be limited in
amount, or may not be activated until a certain portion of a specified Reserve
Fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related prospectus supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Contracts which represent late
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related
Contract, the Servicer may be entitled to reimbursement from other funds in the
Collection Account or Distribution Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
prospectus supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. Except as otherwise specified
in the related prospectus supplement, the Servicer will be required to maintain
or to cause the obligor on each Contract to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Contracts. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Contracts
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides,
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Mortgaged Property securing a Contract is located in a flood area
identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Servicer will be required to cause flood insurance to be maintained
with respect to such Property, to the extent available.
The standard hazard insurance policies covering Properties securing
Contracts typically will contain a "coinsurance" clause which, in effect, will
require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the Property,
including the improvements on any Property, in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, such clause will provide that the hazard insurer's liability in the
event of partial loss will not exceed the greater of (i) the actual cash value
(the replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Contracts declines as the principal balances owing
thereon decrease, and since the value of the Properties will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected Property.
Unless otherwise specified in the related prospectus supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Contract. Unless otherwise
specified in the related prospectus supplement, the Servicer will also maintain
on REO Property that secured a defaulted Contract and that has been acquired
upon foreclosure, deed in lieu of foreclosure, or repossession, a standard
hazard insurance policy in an amount that is at least equal to the maximum
insurable value of such REO Property. No earthquake or other additional
insurance will be required of any obligor or will be maintained on REO Property
acquired in respect of a defaulted Contract, other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Contracts, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Contract or related REO Property. This blanket policy may
contain a deductible clause, in which case the Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Contracts as come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure or other conversion, the Servicer
will follow such practices and procedures as it deems necessary or advisable and
as are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that: (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Contract available
to the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer
shall liquidate any Property acquired through foreclosure within three years
after the acquisition of the beneficial ownership of such Property. While the
holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Contract, a
modification of such Contract to the extent provided in the related prospectus
supplement. Such modifications may only be entered into if they meet the
underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meet the other conditions set forth in the
related prospectus supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related prospectus supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Contract under the applicable
"due-on-sale" clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Contract and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Contract. Any
fee collected in connection with an assumption will be retained by the Servicer
as additional servicing compensation. The terms of a Contract may not be changed
in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to a periodic fee as servicing compensation
(the "Servicing Fee") in an amount to be determined as specified in the related
prospectus supplement. The Servicing Fee may be fixed or variable, as specified
in the related prospectus supplement. In addition, unless otherwise specified in
the related prospectus supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted Contracts.
When an obligor makes a principal prepayment in full between Due Dates on
the related Contract, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related prospectus supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related
Contract (less the Servicing Fee). If the aggregate amount of such shortfalls in
a month exceeds the Servicing Fee for such month, a shortfall to Holders may
occur.
To the extent permitted by the related Agreement, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
the liquidation of defaulted Contracts. The related Holders will suffer no loss
by reason of such expenses to the extent expenses are covered under related
insurance policies or from excess Liquidation Proceeds. If claims are either not
made or paid under the applicable insurance policies or if coverage thereunder
has been exhausted, the related Holders will suffer a loss to the extent that
Liquidation Proceeds, after reimbursement of the Servicer's expenses, are less
than the outstanding principal balance of and unpaid interest on the related
Contract which would be distributable to Holders. In addition, the Servicer will
be entitled to reimbursement of expenditures incurred by it in connection with
the restoration of property securing a defaulted Contract, such right of
reimbursement being prior to the rights of the Holders to receive any related
proceeds of insurance policies, Liquidation Proceeds or amounts derived from
other Enhancement. The Servicer is generally also entitled to reimbursement from
the Collection Account for Advances.
Unless otherwise specified in the related prospectus supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related prospectus supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Contracts by the Servicer and that, on the basis of such examination,
such firm is of the opinion that the servicing has been conducted in compliance
with such Agreement, except for (1) such exceptions as such firm believes to be
immaterial and (2) 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.
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."
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.
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. As described
under "CUSTODY RECEIPTS; CUSTODY AGREEMENTS," Custody Receipts entitle the
related Securityholders to certain payments that are made on classes of notes
held by the related Custodian. Accordingly, to the extent the following
descriptions apply to Notes, including the effect payments on the contracts may
have on Notes that are secured by such contracts, such descriptions also apply
to Custody Receipts.
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 the
amount or percentage thereof which is not included in the Trust Fund for the
related Series (the "Retained Interests"). The Trustee will, concurrently with
such assignment, execute and deliver the Securities.
ASSIGNMENT OF CONTRACTS. Unless otherwise specified in the related
prospectus supplement, the Depositor will as to each Contract, deliver or cause
to be delivered to the Trustee (or, as specified in the related prospectus
supplement, a custodian on behalf of the Trustee, the "Asset Custodian") the
original Contract and copies of documents and instruments related to each
Contract and, other than in the case of unsecured Contracts, the security
interest in the property securing such Contract. In order to give notice of the
right, title and interest of Securityholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor or the
Seller identifying the Trustee as the secured party and identifying all
Contracts as collateral. Unless otherwise specified in the related prospectus
supplement, the Contracts will not be stamped or otherwise marked to reflect
their assignment to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of Securityholders in
the Contracts could be defeated. See "Certain Legal Aspects of the
Contracts--The Contracts."
With respect to Contracts secured by mortgages, if so specified in the
related prospectus supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the mortgages relating to
the Contracts for a Series to be recorded in the appropriate public office for
real property records, except in states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Contracts. If specified in the related
prospectus supplement, the Depositor will cause such assignments to be so
recorded within the time after issuance of the Securities as is specified in the
related prospectus supplement, in which event, the Agreement may, as specified
in the related prospectus supplement, require the Depositor to repurchase from
the Trustee any Contract the related mortgage of which is not recorded within
such time, at the price described below with respect to repurchases by reason of
defective documentation. Unless otherwise provided in the related prospectus
supplement, the enforcement of the repurchase obligation would constitute the
sole remedy available to the Holders or the Trustee for the failure of a
Mortgage to be recorded. Unless otherwise specified in the related prospectus
supplement, the Depositor will, as to each Contract secured by a Mortgage,
deliver or cause to be delivered to the Trustee or the Asset 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 mortgage in recordable from. The Trustee, or if so specified in
the related prospectus supplement, the Asset Custodian, will hold such documents
in trust for the benefit of the Securityholders.
Each Contract will be identified in a schedule appearing as an exhibit to
the related Agreement (the "Contract Schedule"). Such Contract Schedule will
specify with respect to each Contract: the original principal amount and unpaid
principal balance as of the Cut-off Date; the current interest rate; the current
Scheduled Payment of principal and interest; the maturity date, if any, of the
related Mortgage Note; if the Contract is an adjustable rate Contract, the
lifetime rate cap, if any, and the current index, if applicable.
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." Each Private Security will be identified in a
certificate schedule appearing as an exhibit to the related Agreement, 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 Depositor 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 Asset 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 (a) 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.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related prospectus supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related prospectus supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
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."
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.
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.
PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, on the related Closing
Date the Depositor will deposit cash in an amount (the "Pre-Funded Amount")
specified in such prospectus supplement into an account (the "Pre-Funding
Account"). In no event shall the Pre-Funded Amount exceed 50% of the initial
aggregate principal amount of the Certificates and/or Notes of the related
Series of Securities. The Pre-Funded Amount will be used to purchase Contracts
("Subsequent Contracts") in a period from the related Closing Date to a date not
more than one year after such Closing Date (such period, the "Funding Period")
from the Seller. The Pre-Funding Account will be maintained with the Trustee for
the related Series of Securities and is designed solely to hold funds to be
applied by such Trustee during the Funding Period to pay to the Seller the
purchase price for Subsequent Contracts. Monies on deposit in the Pre-Funding
Account will not be available to cover losses on or in respect of the related
Contract. To the extent that the entire Pre-Funded amount has not been applied
to the purchase of Subsequent Contracts by the end of the related Funding
Period, any amounts remaining in the Pre-Funding Account will be distributed as
a prepayment of principal to the holders of the related Securities on the
Distribution Date immediately following the end of the Funding Period, in the
amounts and pursuant to the priorities set forth in the related prospectus
supplement. Any reinvestment risk resulting from such prepayment will be borne
entirely by the holders of one or more classes of the related Series of
Securities. Monies on deposit in the Pre-Funding Account may be invested in
Eligible Investments under the circumstances and in the manner described in the
related Agreement. Earnings on investment of funds in the Pre-Funding Account
will be deposited into the trust account specified in the related prospectus
supplement and losses will be charged against the funds on deposit in the
Pre-Funding Account.
In addition, if so provided in the related prospectus supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series of
Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account has not been
applied to cover shortfalls in interest on the related Series of Securities by
the end of the Funding Period, any amounts remaining in the Capitalized Interest
Account will be paid to the Depositor.
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 property, which secured a defaulted
Contract, acquired by the related Trust Fund upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related prospectus
supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Contracts. See "Servicing of Contracts--Evidence as
to Compliance."
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
Contracts 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 Contracts,
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 five (5) days or more in the payment of any
principal of or interest on any Note of such Series or the default in the
payment of the principal of any Note at such Note's maturity;
(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 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, 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 one or more Classes of a Series have the benefit of a Security
Insurance Policy, the issuer of such policy will have the right to consent to
any sale described above.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, 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 Holders of the Notes 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.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related prospectus supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
EVENT OF DEFAULT. The Trustee is not required to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties under the Agreement, or in the exercise of any of its rights or
powers, if it has reasonable grounds for believing that repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured
to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time:
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement,
(ii) if the Trustee becomes insolvent or
(iii) by the Holders of Securities evidencing over 50% of the
aggregate voting rights of the Securities in the Trust Fund upon written
notice to the Trustee and to the Depositor.
Any resignation or removal of the Trustee and appointment of a successor
Trustee will not become effective until acceptance of the appointment by the
successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Contracts), and the Trustee with respect to such
Series, without notice to or consent of the Holders:
(i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement
any provision therein,
(iii) to add to the duties of the Depositor, the Trust Fund or
Servicer,
(iv) to add any other provisions with respect to matters or questions
arising under such Agreement or related Enhancement,
(v) to add or amend any provisions of such Agreement as required by a
Rating Agency in order to maintain or improve the rating of the Securities,
or
(vi) to comply with any requirements imposed by the Code; provided
that any such amendment except pursuant to clause (vi) above will not
adversely affect in any material respect the interests of any Holders of
such Series, as evidenced by an opinion of counsel. Any such amendment
except pursuant to clause (vi) of the preceding sentence shall be deemed
not to adversely affect in any material respect the interests of any Holder
if the Trustee receives written confirmation from each Rating Agency rating
such Securities that such amendment will not cause such Rating Agency to
reduce the then current rating thereof. Unless otherwise specified in the
prospectus supplement, the Agreement for each Series may also be amended by
the Trustee, the Servicer, if applicable, and the Depositor with respect to
such Series with the consent of the Holders possessing not less than
66 2/3% of the aggregate outstanding principal amount of the Securities of
such Series or, if only certain Classes of such Series are affected 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 payment to the provider of any related Enhancement of any
required amount and the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related prospectus supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related prospectus supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related prospectus supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Primary Assets plus the fair market value of
any property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, to be set forth in the related prospectus
supplement, of the aggregate Principal Balance of the Primary Assets as of the
Cut-off Date. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Servicer or the
Trustee, as applicable, will give written notice of termination of the Agreement
to each Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. If so provided in the related prospectus supplement for a Series,
the Depositor or another entity may effect an optional termination of the Trust
Fund under the circumstances described in such prospectus supplement. See
"Description of the Securities--Optional Redemption, Purchase or Termination."
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.
CUSTODY RECEIPTS; CUSTODY AGREEMENTS
A series of Securities may include one or more classes of Custody Receipts.
Custody Receipts entitle the related Holders to certain payments made on Notes
that are held by a Custodian. Such Notes will be issued pursuant to an Indenture
and if the Primary Assets securing the Notes are Contracts, the Contracts will
be serviced pursuant to a Servicing Agreement. The Custody Receipts will be
issued pursuant to a Custody Agreement between the Depositor and the Custodian.
The identity of the commercial bank, savings and loan association or trust
company named as custodian for each series of Securities that includes Custody
Receipts will be set forth in the related prospectus supplement. The entity
serving as Custodian may have normal banking relationships with the Depositor or
Servicer.
Payments on Notes held by a Custodian will be made by the related Trustee
to the Custodian. The Custodian will in turn remit to Holders of Custody
Receipts, from payments on the Notes, the amounts to which such Holders are
entitled in accordance with the terms of the Custody Receipts.
If a Series of Securities includes Custody Receipts, the related prospectus
supplement will describe:
o the Primary Assets the are security for the related Notes
o the terms of the related Notes, and
o the terms of the Custody Receipts.
At the time of issuance of a Series of Securities that includes one or more
Classes of Custody Receipts the Depositor will deposit the related Notes with
the Custodian. Such Notes will be registered in the name of and held by the
Custodian in a Custody Account. The "Custody Account" will be required at all
times to be maintained as a custodial account in the corporate trust department
of the Custodian for the benefit of the Holders of the Custody Receipts,
separated and segregated on the books of the Custodian from all other accounts,
funds and property in the possession of the Custodian.
The Custodian will not have any equitable or beneficial interest in the
related Notes. The Notes held by the Custodian will not be available to the
Custodian for its own use or profit, nor will any Note be deemed to be part of
the general assets of the Custodian. Neither the Notes held by the Custodian nor
the proceeds of such Notes will be subject to any right, charge, security
interest, lien or claim of any kind in favor of the Custodian.
No Holder of a Custody Receipt will have the right to withdraw the related
Notes from the Custody Account and the Custodian will not deliver the related
Notes to such Holder.
Neither the Depositor nor the Custodian shall have any obligation to
advance its own funds to make any payment to any Holder of a Custody Receipt.
NOTICES; VOTING
Upon receipt from a Trustee or Servicer under an Agreement relating to the
Notes held by the Custodian of any notice with respect to a Note, the Custodian
shall promptly transmit a copy of such notice by mail to the Holders of the
related Custody Receipts. For such purpose, the Holders shall consider the date
of the receipt by the Custodian of any such notice as the record date for the
purpose of determining the Holders of record to whom such notices shall be
transmitted. In the event such notice requests or requires any vote, action or
consent by the Holders of such a Note, the Custodian shall within the time
period specified in the related prospectus supplement following receipt of such
notice, deliver to the Holders of the Custody Receipts of a letter of direction
with respect to such vote, action or consent, returnable to the Custodian, and
the Custodian shall vote such Notes in accordance with such letter of direction.
Any record date established by such notice for purposes specified in such notice
shall be the record date for the purpose of determining the Holders of record
for such purposes. If no record date is established by the related Trustee, the
date such notice is received by the Custodian shall be the record date.
Notwithstanding the above, without the consent of all of the Holders of
Custody Receipts of a Series, neither the Custodian shall vote nor the Holders
of Custody Receipts shall consent to any amendments to the related Indenture or
any other actions which would reduce the amount of or change the amount or
timing or currency of payment on the Custody Receipts.
DEFAULTS
The Custodian is not authorized to proceed against the Servicer or the
Trustee under any Agreement relating to Notes held by the Custodian in the event
of a default under the related Servicing Agreement or Indenture and has no power
or obligation to assert any of the rights and privileges of the Holders of the
Custody Receipts. In the event of any default in payment on the Notes or any
Event of Default or similar event with respect to the Servicer, as the case may
be, each Holder of a Custody Receipt will have the right to proceed directly and
individually against the Issuer or the Servicer in whatever manner is deemed
appropriate by such Holder by directing the Custodian to take specific actions
on behalf of such Holder. A Holder of a Custody Receipt will not be required to
act in concert with any Holder. The Custodian will not be required to take any
actions on behalf of Holders except upon receipt of reasonable indemnity from
such Holders for resulting costs and liabilities.
THE CUSTODIAN
Under the Custodial Agreement, the Custodian will not be liable other than
by reason of bad faith or gross negligence in the performance of such duties as
are specifically set forth in the Custody Agreement except in regard to payments
under Notes received by it for the benefit of the Holders and safekeeping of
Notes, with respect to which it shall be a fiduciary. The Custodian will not be
liable for any damages resulting from any distribution from the Custody Account
to a Holder at the address of record of such Holder on the books of the
Custodian. The Custodian will not be liable for any action or inaction by it
done in reasonable reliance upon the written advice of its accountants or legal
counsel. The Custodian may request and rely and shall be fully protected in
acting in reliance upon any written notice, request, direction or other document
reasonably believed by it to be genuine and to have been signed or presented by
the proper party or parties.
DUTIES OF THE CUSTODIAN
The Custodian will make no representations as to the validity or
sufficiency of the Custody Agreement, the Securities or of any Primary Asset or
related documents. The Custodian will be required to perform only those duties
specifically required of it under the Custody Agreement. The Custodian will not
be required to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties under the Custody 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 CUSTODIAN
The Custodian may, upon written notice to the Depositor, resign at any time
in which event the Depositor will appoint a successor Custodian. If no successor
Custodian has been appointed and has accepted the appointment within 90 days
after giving such notice of resignation, the resigning Custodian may petition
any court of competent jurisdiction for appointment of a successor Custodian.
The Custodian may also be removed at any time upon 30 days notice from the
Depositor or by Holders of Custody Receipts evidencing at least 66 2/3% of
the aggregate voting rights of all Custody Receipts of the related Series. Any
resignation or removal of the Custodian and appointment of a successor Custodian
will not become effective until acceptance of the appointment by the successor
Custodian.
AMENDMENT OF CUSTODY AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each Series of Custody Receipts may be amended by the Depositor, the Servicer
(with respect to a Series relating to Contracts), and the Custodian 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 or the Custodian,
(iv) to add any other provisions with respect to matters or questions
arising under such Custody Agreement, or
(v) provided that any such amendment will not adversely affect in any
material respect the interests of any Holders of such Series, as evidenced
by an opinion of counsel. Any such amendment shall be deemed not to
adversely affect in any material respect the interest of any Holder if the
Custodian receives written confirmation from each Rating Agency that such
amendment will not cause such Rating Agency to reduce the then current
rating thereof.
Unless otherwise specified in the prospectus supplement, the Custody Agreement
for each Series may also be amended by the Custodian and the Depositor with the
consent of the Holders possessing not less than 66 2/3% of the aggregate
outstanding principal amount of the Custody Receipts 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 Custody 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 Custody Receipt without the consent of the Holder of such Custody
Receipts or (b) reduce the aforesaid percentage of the aggregate outstanding
principal amount of Custody Receipts 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 Custody
Receipts affected thereby.
VOTING RIGHTS
The related prospectus supplement will set forth the method of determining
allocation of voting rights with respect to Custody Receipts included in a
Series.
TERMINATION OF CUSTODY AGREEMENT
The obligations created by the Custody Agreement for a Series will
terminate upon the payment in full of the Notes held by the Custodian and the
receipt by Holders of Custody Receipts of all amounts to which they are
entitled.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of certain legal aspects of
manufactured housing and home improvement installment sales contracts and
installment loan agreements which are general in nature. Because certain of such
legal aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Contracts are situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Contracts.
CONTRACTS SECURED BY MORTGAGES
MORTGAGES
Certain Contracts for a Series may be secured by either mortgages or deeds
of trust or deeds to secure debt (such Contracts are hereinafter referred to in
this section as "mortgage loans"), depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. The filing of
a mortgage, deed of trust or deed to secure debt creates a lien or title
interest upon the real property covered by such instrument and represents the
security for the repayment of an obligation that is customarily evidenced by a
promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers and may
also be subject to other liens pursuant to the laws of the jurisdiction in which
the Mortgaged Property is located. Priority with respect to such instruments
depends on their terms, the knowledge of the parties to the mortgage and
generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred 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.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the Comprehensive
Environmental Response, Cooperation and Liability Act of 1980 ("CERCLA"), the
United States Environmental Protection Agency ("EPA") may impose a lien on
property where EPA has incurred clean-up costs. However, a CERCLA lien is
subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any and
all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest but without
"actually participating in the management" of the Property (the "Secured
Creditor Exclusion"). Thus, if a lender's activities begin to encroach on the
actual management of a contaminated facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
foreclosures and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to third party) or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute actual participation in
the management of a mortgaged property or the business of a borrower so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the Secured Creditor Exclusion to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the Secured Creditor
Exclusion only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property. If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to Holders
of Securities.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to the holders of security interests in
underground storage tanks. Liability for cleanup of petroleum contamination may,
however, be governed by state law, which may not provide for any specific
protection for secured creditors.
Except as otherwise specified in the related prospectus supplement, at the
time the Contracts were originated, no environmental or a very limited
environmental assessments of the Mortgaged Properties were conducted.
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.
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 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 mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the organization and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale 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. The Federal Home Loan Mortgage
Corporation has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by certifying that the voters of such
state have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
CONTRACTS NOT SECURED BY MORTGAGES
GENERAL
The Contracts, other than those Contracts that are unsecured or secured by
mortgages on real estate (such Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the related
Agreement, the Depositor will transfer physical possession of the contracts to
the Trustee or a designated custodian or may retain possession of the contracts
as custodian for the Trustee. In addition, the Depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related prospectus supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trustee's interest in the contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS
The contracts that are secured by the home improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such home improvements to secure all or part of the purchase price of such home
improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the manufactured housing contracts may be
located in all 50 states. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the secured party must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the manufactured home is located.
If so specified in the related prospectus supplement, the manufactured housing
contracts may contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, the related lender may be required to perfect a security interest
in the Manufactured Home under applicable real estate laws.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect a security interest in such state, the security interest in
the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the secured party must surrender possession if
it holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien on
the certificate of title, notice of surrender would be given to the secured
party noted on the certificate of title. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home.
ENFORCEMENT OF SECURITY INTEREST IN MANUFACTURED HOMES AND HOME
IMPROVEMENTS
So long as the Manufactured Home or Home Improvement has not become subject
to the real estate law, a creditor can repossess a Manufactured Home or Home
Improvement securing a contract by voluntary surrender, by "self-help"
repossession that is "peaceful" (i.e., without breach of the peace) or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a contract must give the debtor a
number of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any contract which is
secured by a first lien on certain kinds of consumer goods. The contracts would
be covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The Contracts may also consist of installment sales contracts. Under
certain types of installment sales contracts ("Installment Sales Contracts") the
seller (hereinafter referred to in this section as the "lender") retains legal
title to the property and enters into an agreement with the purchaser
(hereinafter referred to in this section as the "borrower") for the payment of
the purchase price, plus interest, over the term of such contract. Only after
full performance by the borrower of the contract is the lender obligated to
convey title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Contracts) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Contract included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Depositor nor the Trustee will be required to advance such
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the holders of the Certificates of such Series. Unless otherwise
specified in the related prospectus supplement, any shortfalls in interest
collections on Contracts or Underlying Contracts, 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 Contracts or
Underlying Contracts in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Contracts or Underlying Contracts had such interest shortfall not occurred.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with originating, servicing and
enforcing Contracts secured by certain residential properties. Theses laws
include the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, Real Estate Settlement Procedures Act and Regulation B promulgated
thereunder, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. In particular, Regulation Z
requires certain disclosures to borrowers regarding terms of the Contracts; the
Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit
discrimination in the extension of credit on the basis of age, race, color, sex,
religion, martial status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act; and the Fair
Credit Reporting Act regulates the use and reporting of information related to
the borrower's credit experience. Certain provisions of these laws impose
specific statutory liabilities upon lenders who fail to comply therewith. In
addition, violations of such laws may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Contracts and could
subject the Servicer and in some cases its assignees to damages and
administrative enforcement.
The Contracts 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, such as the Trust
Fund with respect to the Contracts, 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
Contract. If the Trust Fund includes Contracts 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 Contract in question.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of Lehman Commercial Paper Inc., which is
a wholly-owned subsidiary of Lehman Brothers Inc., a wholly-owned subsidiary of
Lehman Brothers Holdings Inc. 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. None of the Depositor, Lehman Brothers Holdings Inc.,
Lehman Commercial Paper Inc., Lehman Brothers Inc., the Servicer, the Trustee or
the Seller has guaranteed or is otherwise obligated with respect to the
Securities of any Series.
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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated United States 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 Internal Revenue Code
of 1986, as amended, (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 United States
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 United States 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 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, partnership or other entity created or organized
in or under the laws of the United States or any state thereof, including the
District of Columbia (other than a partnership that is not treated as a Unites
States person under any applicable Treasury regulations), an estate whose income
is subject to United States 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 CONTRACTS. Except to the extent provided otherwise
in a prospectus supplement as to each Series of Securities, Brown & Wood LLP
will have advised the Depositor that: (i) Securities held by a mutual savings
bank or domestic building and loan association will represent interests in
"qualifying real property loans" within the meaning of Code section 593(d); (ii)
Securities held by a domestic building and loan association will constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and (iii) Securities held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code section
856(c)(5)(A) and interest on Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder (the "OID Regulations"). A Holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general,
OID must be included in income in advance of the receipt of the cash
representing that income. The amount of OID on a Debt Security will be
considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such OID. 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 OID that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the Contracts, the amount of OID includible in income of a Holder
for an accrual period (generally the period over which interest accrues on the
debt instrument) will equal the product of the yield to maturity of the Debt
Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to such Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Contracts at a rate that
exceeds the Prepayment Assumption, and to decrease (but not below zero for any
period) the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the
Contracts at a rate that is slower than the Prepayment Assumption. Although OID
will be reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Contracts will be prepaid
at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Contracts, although
the OID Regulations do not provide for such adjustments. If the Internal Revenue
Service ("IRS") were to require that OID be accrued without such adjustments,
the rate of accrual of OID for a Class of Regular Interest Securities could
increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable prospectus supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Contracts, except possibly to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Contract default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own tax
advisors on this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "--Tax Status as a Grantor Trust; General" herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Contracts, 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 IRS 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 IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent payments. Such treatment may be more likely in the case of Interest
Weighted Securities that are Stripped Securities as described below. See "--Tax
Status as a Grantor Trust--Discount or Premium on Pass-Through Securities."
VARIABLE RATE DEBT SECURITIES. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
MARKET DISCOUNT. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Contracts underlying such Security) not originally issued with OID, stated
interest payable in the relevant period to total stated interest remaining to be
paid at the beginning of the period or (b) in the case of Securities (or, in the
case of a Pass-Through Security, as described below, the Contracts underlying
such Security) originally issued at a discount, OID in the relevant period to
total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the
Contracts), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
Underlying Contracts) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in which
such interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an Underlying Contract). A holder may
elect to include market discount in income currently as it accrues, on all
market discount obligations acquired by such holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
PREMIUM. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a holder makes an election
to amortize premium on a 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. 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 a REMIC election is made with respect to a Series of Securities,
then the arrangement by which the Securities of that Series are issued will be
treated as a REMIC as long as all of the provisions of the applicable Agreement
are complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as "Regular Interests" or "Residual Interests" in
a REMIC, as specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a mutual savings bank or domestic building and loan association will
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
"qualifying real property loans"); (ii) Securities held by a domestic building
and loan association will constitute "a regular or a residual interest in a
REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at
least 95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described in
Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
STATUS OF MANUFACTURED HOUSING CONTRACTS. The REMIC Regulations provide
that obligations secured by interests in manufactured housing that qualify as
"single family residences" within the meaning of Code Section 25(e)(10) may be
treated as "qualified mortgages" of the REMIC.
Under Section 25(e)(10), the term "single family residence" includes any
manufactured home which has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and which is of a kind customarily used at
a fixed location.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of Certificates representing a Residual Interest (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 the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
prospectus supplement, the expenses of the REMIC will be allocated to holders of
the related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
TIERED REMIC STRUCTURES. For certain series of REMIC Certificates, two or
more separate elections may be held to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, special counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Contracts, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue OID (i.e., under the constant yield method taking into account the
Prepayment Assumption). The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the holders of the Regular Interest
Securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
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 Residual Interest Security will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
LIMITATION ON LOSSES. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
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.
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 Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
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 IRS recently finalized regulations which
provide that a Residential 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 IRS in a unified
administrative proceeding.
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
Contracts. In such circumstances, a Holder will be considered to have purchased
a pro rata undivided interest in each of the Contracts. In other cases
("Stripped Securities"), sale of the Securities will produce a separation in the
ownership of all or a portion of the principal payments from all or a portion of
the interest payments on the Contracts.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Contracts (not reduced by the amount payable as
fees to the Trustee and the Servicer and similar fees (collectively, the
"Servicing Fee")), at the same time and in the same manner as such items would
have been reported under the Holder's tax accounting method had it held its
interest in the Contracts directly, received directly its share of the amounts
received with respect to the Contracts, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Securities other than Stripped
Securities, such income will consist of a pro rata share of all of the income
derived from all of the Contracts and, in the case of Stripped Securities, such
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the Holder owns an interest. The holder of a
Security will generally be entitled to deduct such Servicing Fees under
Section 162 or Section 212 of the Code to the extent that such Servicing Fees
represent "reasonable" compensation for the services rendered by the Trustee and
the Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. The holder's purchase price
of a Pass-Through Security is to be allocated among the Contracts in proportion
to their fair market values, determined as of the time of purchase of the
Securities. In the typical case, the Trustee (to the extent necessary to fulfill
its reporting obligations) will treat each Contract as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Contracts that it represents, since the Securities, unless otherwise
specified in the applicable prospectus supplement, will have a relatively
uniform interest rate and other common characteristics. To the extent that the
portion of the purchase price of a Pass-Through Security allocated to a Contract
(other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Contract allocable to the Security, the interest in
the Contract allocable to the Pass-Through Security will be deemed to have been
acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Contract with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Contract could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the charging
of points by the originator of the Contract in an amount greater than a
statutory de minimis exception, in circumstances under which the points are not
currently deductible pursuant to applicable Code provisions. Any market discount
or premium on a Contract will be includible in income, generally in the manner
described above, except that in the case of Pass-Through Securities, market
discount is calculated with respect to the Contracts underlying the Certificate,
rather than with respect to the Security. A Holder that acquires an interest in
a Contract originated after July 18, 1984 with more than a de minimis amount of
market discount (generally, the excess of the principal amount of the Contract
over the purchaser's allocable purchase price) will be required to include
accrued market discount in income in the manner set forth above. See "--Taxation
of Debt Securities; Market Discount" and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Contracts originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Contract and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described in the preceding paragraph.
STRIPPED SECURITIES. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Contracts, a right to receive
only principal payments on the Contracts, or a right to receive certain payments
of both interest and principal. Certain Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each Contract. Pursuant to Section 1286 of the Code,
the separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing OID, a stripped bond or a stripped coupon is
treated as a debt instrument issued on the date that such stripped interest is
purchased with an issue price equal to its purchase price or, if more than one
stripped interest is purchased, the ratable share of the purchase price
allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Contract principal balance)
or the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a
Contract by Contract basis, which could result in some Contracts being treated
as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to Stripped Securities and
other Pass-Through Securities. Under the method described above for Pay-Through
Securities (the "Cash Flow Bond Method"), a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during such period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as the Stripped Securities which technically represent
ownership interests in the Underlying Contracts, rather than being debt
instruments "secured by" those loans. Nevertheless, it is believed that the Cash
Flow Bond Method is a reasonable method of reporting income for such Securities,
and it is expected that OID will be reported on that basis unless otherwise
specified in the related prospectus supplement. In applying the calculation to
Pass-Through Securities, the Trustee will treat all payments to be received by a
holder with respect to the underlying Contracts as payments on a single
installment obligation. The IRS could, however, assert that OID must be
calculated separately for each Contract underlying a Security.
Under certain circumstances, if the Contracts prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Contracts prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Contracts
and an installment obligation consisting of stripped principal payments; (ii)
the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Contracts
and an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
CHARACTER AS QUALIFYING CONTRACTS. In the case of Stripped Securities there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Contracts.
The IRS could take the position that the Contracts' character is not carried
over to the Securities in such circumstances. Pass-Through Securities will be,
and, although the matter is not free from doubt, Stripped Securities should be
considered to represent "qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" with the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. The maximum tax rate on ordinary income for individual taxpayers is
39.6% and the maximum tax rate on long-term capital gains for such taxpayers is
20%. The maximum tax rate on both ordinary income and long-term capital gains of
corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). On October 6,
1997, the Treasury Department issued new regulations (the "New Regulations")
which make certain modifications to the backup withholding and information
reporting rules described above. The New Regulations will generally be effective
for payments made after December 31, 1999, subject to 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 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
Contracts were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all Federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions." TAX CHARACTERIZATION OF THE TRUST AS A
PARTNERSHIP
Brown & Wood 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., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable prospectus supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is 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. The New Regulations which make
certain modifications to the withholding and information reporting rules
described above. The New Regulations will generally be effective for payments
made after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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.
The New Regulations described above also make certain modifications to the
backup withholding and information reporting rules. The New Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding the New Regulations.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of special counsel to the Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A VARIETY OF ALTERNATIVE CHARACTERIZATIONS ARE POSSIBLE. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable prospectus
supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Contracts
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Contracts. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Contracts that corresponds to
any excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Contracts that corresponds to any excess of the issue price
of Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Contract, the Trust
Fund might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Contracts were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Contracts may be greater or less
than the remaining principal balance of the Contracts at the time of purchase.
If so, the Contract will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust Fund will make this calculation on
an aggregate basis, but might be required to recompute it on a Contract by
Contract basis.)
If the Trust Fund acquires the Contracts at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Contracts or to offset any such premium against
interest income on the Contracts. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. 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 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 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 or similar form 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. The New Regulations make certain modifications to the
withholding and information reporting rules described above. The New Regulations
will generally be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
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. The New Regulations described above also make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
3, 1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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 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 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 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.
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, regulatory 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.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the
Securities--for example, Prohibited Transaction Class Exemption ("PTE") 96-23,
which exempts certain transactions effected on behalf of a Plan by an "in-house
asset manager"; PTE 95-60, which exempts certain transactions between insurance
company general accounts and parties in interest; PTE 91-38, which exempts
certain transactions between bank collective investment funds and parties in
interest; PTE 90-1, which exempts certain transactions between insurance company
pooled separate accounts and parties in interest; or PTE 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified professional
asset manager". There can be no assurance that any of these exemptions will
apply with respect to any Plan's investment in the Securities, or that such an
exemption, if it did apply, would apply to all prohibited transactions that may
occur in connection with such investment. Furthermore, these exemptions would
not apply to transactions involved in operation of the Trust if, as described
below, the assets of the Trust were considered to include Plan assets.
The United States Department of Labor ("DOL") has issued a final regulation
(29 C.F.R. Section 2510.3-101) (the "Plan Assets Regulation") containing rules
for determining what constitutes the assets of a Plan. The Plan Assets
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 Plan Assets 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, regulatory or administrative exemption.
The "look-through" rule of the Plan Assets Regulation does not apply if the
interest acquired by the Plan is treated as indebtedness under applicable local
law and 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. The prospectus supplement related to a
Series will indicate. The expected treatment of the Securities in that Series
under the Plan Assets Regulation.
If the interest is an "equity interest," the Plan Assets Rule create an
exception if the class of equity interests in question is: (i) "widely held"
(held by 100 or more investors who are independent of the Depositor and each
other); (ii) freely transferable; and (iii) sold as part of an offering pursuant
to (A) an effective registration statement under the Securities Act of 1933, and
then subsequently registered under the Securities Exchange Act of 1934 or (B) an
effective registration statement under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 ("Publicly Offered Securities"). In addition, the
regulation provides that if at all times more than 75% of the value of all
classes of equity interests in the Depositor or the Trust Fund are held by
investors other than benefit plan investors (which is defined as including
Plans, employee benefit plan as defined under ERISA, whether or not they are
subject to ERISA, and any entity whose underlying assets include plan assets by
reason of a plan's investment in the entity, the investing Plan's assets will
not include any of the underlying assets of the Depositor or the Trust Fund.
If the Security is an "equity interest" under the Plan Assets Regulation
and no exception applies, an exemption may be available. On February 22, 1991,
the DOL granted to Lehman Brothers an administrative exemption, Prohibited
Transaction Exemption 91-14 (Application No. D-7958, 56 Fed. Reg. 7414) (the
"Exemption"), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by Plans
of securities representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. These securities should include
the Certificates. 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 Certificates) 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 Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(iii) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps Inc. or Fitch IBCA Inc.;
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the seller pursuant to the sale of the
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 Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Underwriter Exemptions, which extends exemptive relief to
certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The
amendment generally allows mortgage loans or other secured receivables (the
"Obligations") supporting payments to certificateholders, and having a
value equal to no more than twenty-five percent (25%) of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month period following
the closing date (the "Pre-Funding Period"), instead of requiring that all
such Obligations be either identified or transferred on or before the
Closing Date. The relief is available when the following conditions are
met:
(1) The ratio of the amount allocated to the pre-funding account
to the total principal amount of the Certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust,
which terms and conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the Certificates to
be covered by the Exemption receiving a lower credit rating from a
Rating Agency upon termination of the Pre-Funding Period than the
rating that was obtained at the time of the initial issuance of the
Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Obligations in
the Trust at the end of the Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the
Obligations transferred to the Trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations
which were transferred to the Trust:
(i) the characteristics of the Additional Obligations must
be monitored by an insurer or other credit support provider that
is independent of the depositor; or
(ii) an independent accountant retained by the depositor
must provide the depositor with a letter (with copies provided to
each Rating Agency rating the Certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to
the trust as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding
may be invested only in certain permitted investments ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account
at the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
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 holding receivables as to which
the fiduciary (or its affiliate) is an obligor provided that, among other
requirements: (i) in the case of an acquisition in connection with the initial
issuance of Securities, at least fifty (50) percent of each Class of Securities
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least fifty (50) percent of the aggregate interest in
the trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five (5) percent or
less of the fair market value of the obligations contained in the trust; (iii) a
Plan's investment in Securities does not exceed twenty-five (25) percent of all
of the Securities outstanding after the acquisition; and (iv) immediately after
the acquisition, no more than twenty-five (25) percent of the assets of any Plan
for which such person is a fiduciary 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, any 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 Secondary Mortgage Market Enforcement Act of 1984. 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.
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.
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.
AVAILABLE INFORMATION
Copies of the registration statement of which this prospectus forms a part
and the exhibits to the registration statement are on file at the offices of the
Securities and Exchange Commission in Washington, D.C.
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and files reports and other
information with the Commission.
Reports and information on file with the Commission, including the
registration statement and filings made by the Depositor can be inspected
without charge at the public reference facilities maintained by the Commission
or may be copied at rates prescribed by the Commission. The public reference
facilities are at 450 Fifth Street, N.W., Washington, D.C. 20549, at the Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at the Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048. In addition, 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
electronically with the Commission.
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
Additional Obligations.............................81 Manufactured Housing Contracts.....................12
Advances...........................................22 Minimum Principal Payment Agreement................19
Agreement..........................................11 Obligations........................................80
Asset Custodian....................................28 OID................................................54
Asset Value.........................................8 OID Regulations....................................54
Assumed Reinvestment Rate...........................8 Pay-Through Security...............................56
Capitalized Interest Account.......................31 Plan Assets Regulation.............................79
CERCLA.............................................43 Plans..............................................78
Certificates........................................6 Pre-Funded Amount..................................30
Class...............................................7 Pre-Funding Account................................30
Code...............................................53 Pre-Funding Limit..................................81
Collection Account.................................17 Pre-Funding Period.................................81
Contract Schedule..................................28 Prepayment Assumption..............................56
contracts...........................................1 PS Agreement.......................................15
Contracts..........................................12 PS Servicer........................................15
Custodian...........................................6 PS Sponsor.........................................15
Custody Account....................................38 PS Trustee.........................................15
Custody Agreement...................................6 PTE................................................79
Deleted Primary Asset..............................29 Publicly Offered Securities........................79
Deposit Agreement..................................20 Qualifying Substitute Primary Asset................29
Depositor Securities...............................52 RCRA...............................................43
Distribution Account...............................17 Regular Interest Securities........................54
DOL................................................79 REMIC..............................................53
Due Dates..........................................21 Reserve Funds......................................19
Eligible Investments...............................17 Residual Interests.................................58
Enhancement........................................17 Restricted Group...................................82
Enhancer...........................................17 Retained Interests.................................28
EPA................................................43 Scheduled Payments.................................19
ERISA..............................................78 Secured Creditor Exclusion.........................43
Escrow Accounts....................................21 Servicing Agreement................................11
Exemption..........................................80 Single Family Property.............................12
Funding Period.....................................30 Small Mixed-Use Properties.........................13
Home Improvement Contracts......................12,13 Subsequent Contracts...............................30
Installment Sales Contracts........................50 Trust Agreement....................................11
Liquidation Proceeds...............................22 U.S. Person........................................53
Manufactured Homes.................................12 Underlying Contracts................................8
</TABLE>
TABLE OF CONTENTS
RISK FACTORS.................................................................3
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATIONS OR LOWER
RETURNS.................................................................3
LIMITED ASSETS............................................................3
LIMITS ON ENHANCEMENT.....................................................4
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD..................4
JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS..............4
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY
AFFECT JUNIOR LIENHOLDERS...............................................4
ENVIRONMENTAL RISKS.......................................................5
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS.......5
RATING OF THE SECURITIES RELATE TO CREDIT RISK ONLY.......................5
LIQUIDATION VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT TO
SATISFY ALL CLAIMS AGAINST TRUST FUND...................................6
DESCRIPTION OF THE SECURITIES................................................6
GENERAL...................................................................6
VALUATION OF THE PRIMARY ASSETS...........................................8
PAYMENTS OF INTEREST......................................................8
PAYMENTS OF PRINCIPAL.....................................................8
FINAL SCHEDULED DISTRIBUTION DATE.........................................9
SPECIAL REDEMPTION........................................................9
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..............................9
WEIGHTED AVERAGE LIFE OF THE SECURITIES..................................10
THE TRUST FUNDS.............................................................11
GENERAL..................................................................11
THE CONTRACTS............................................................12
PRIVATE SECURITIES.......................................................15
COLLECTION AND DISTRIBUTION ACCOUNTS.....................................17
ENHANCEMENT.................................................................17
SUBORDINATE SECURITIES...................................................18
INSURANCE................................................................18
RESERVE FUNDS............................................................19
MINIMUM PRINCIPAL PAYMENT AGREEMENT......................................19
DEPOSIT AGREEMENT........................................................20
DERIVATIVE PRODUCTS......................................................20
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND
SIMILAR INSTRUMENTS OR AGREEMENTS......................................20
SERVICING OF CONTRACTS......................................................20
GENERAL..................................................................20
COLLECTION PROCEDURES; ESCROW ACCOUNTS...................................21
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT..................21
ADVANCES AND LIMITATIONS THEREON.........................................23
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES.........23
REALIZATION UPON DEFAULTED LOANS.........................................24
ENFORCEMENT OF DUE-ON-SALE CLAUSES.......................................25
SERVICING COMPENSATION AND PAYMENT OF EXPENSES...........................25
EVIDENCE AS TO COMPLIANCE................................................26
CERTAIN MATTERS REGARDING THE SERVICER...................................26
THE AGREEMENTS..............................................................27
ASSIGNMENT OF PRIMARY ASSETS.............................................28
PRE-FUNDING ACCOUNT......................................................30
REPORTS TO HOLDERS.......................................................31
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT..........................32
THE TRUSTEE..............................................................34
DUTIES OF THE TRUSTEE....................................................34
RESIGNATION OF TRUSTEE...................................................35
AMENDMENT OF AGREEMENT...................................................35
VOTING RIGHTS............................................................36
LIST OF HOLDERS..........................................................36
REMIC ADMINISTRATOR......................................................36
TERMINATION..............................................................36
CUSTODY RECEIPTS; CUSTODY AGREEMENTS........................................37
NOTICES; VOTING..........................................................38
DEFAULTS.................................................................39
THE CUSTODIAN............................................................39
DUTIES OF THE CUSTODIAN..................................................39
RESIGNATION OF CUSTODIAN.................................................39
AMENDMENT OF CUSTODY AGREEMENT...........................................40
VOTING RIGHTS............................................................40
TERMINATION OF CUSTODY AGREEMENT.........................................40
CERTAIN LEGAL ASPECTS OF THE CONTRACTS......................................40
CONTRACTS SECURED BY MORTGAGES...........................................41
CONTRACTS NOT SECURED BY MORTGAGES.......................................48
INSTALLMENT SALES CONTRACTS..............................................50
SOLDIERS'AND SAILORS'CIVIL RELIEF ACT OF 1940............................51
CONSUMER PROTECTION LAW..................................................50
THE DEPOSITOR...............................................................52
GENERAL..................................................................52
USE OF PROCEEDS.............................................................53
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...................................53
GENERAL..................................................................53
TAXATION OF DEBT SECURITIES..............................................54
TAXATION OF THE REMIC AND ITS HOLDERS....................................58
REMIC EXPENSES; SINGLE CLASS REMICS......................................59
TAXATION OF THE REMIC....................................................59
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES......................61
ADMINISTRATIVE MATTERS...................................................63
TAX STATUS AS A GRANTOR TRUST............................................63
SALE OR EXCHANGE.........................................................66
MISCELLANEOUS TAX ASPECTS................................................66
TAX TREATMENT OF FOREIGN INVESTORS.......................................67
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP.......................68
TAX CONSEQUENCES TO HOLDERS OF THE NOTES.................................68
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES..........................70
FASIT SECURITIES.........................................................74
STATE TAX CONSIDERATIONS....................................................78
ERISA CONSIDERATIONS........................................................78
LEGAL INVESTMENT............................................................83
RATINGS.....................................................................83
PLAN OF DISTRIBUTION........................................................83
LEGAL MATTERS...............................................................83
AVAILABLE INFORMATION.......................................................83
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________)
LEHMAN CARD ACCOUNT MASTER TRUST
[Adjustable Rate] [Variable Rate] [ __%] Asset Backed
[Senior/Subordinate] Certificates, Series ___
[Seller], Lehman ABS Corporation,
as Seller as Depositor
<TABLE>
<CAPTION>
Certificate Principal Certificate Price to Underwriting Beneficial Proceeds to
Class Balance Rate Public(5) Discount (6) Interest the Depositor(7)
- ----------------- --------------- ---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Class ______ $ % % % %
Total $ $ $ $
</TABLE>
______________
(1) [The [Class __ ] certificates will have a notional principal balance of
approximately $ [ ] ].
(2) [The [Class__ ] certificates will receive distributions of a portion of
the interest on the underlying assets and will not receive any
principal].
(3) [The [Class__ ] certificates are not offered by means of this prospectus
supplement].
(4) [The rights of holders of the [Class__ ] certificates to receive
distributions are subordinated to the rights of holders of the [Class__ ]
certificates].
(5) Plus accrued interest, if any, at the [certificate] rate from
_________________, _____, _____
(6) The depositor has agreed to indemnify Lehman Brothers against certain
liabilities, including liabilities under the Securities Act of 1933.
(7) Before deducting expenses, payable by the depositor, estimated to be
$________.
THE CERTIFICATES
o represent the entire beneficial interest in a trust, whose assets are a
pool of [consumer] [revolving] [credit card] [charge card] [debit card]
receivables generated from time to time in a portfolio of [consumer]
[revolving] [credit card] [charge card] [debit card] accounts, all monies
due in payment of the receivables [transferred to the trust by the
depositor on or prior to the closing date] [and monies on deposit in a
pre-funding account] and certain other properties
o currently have no trading market
o are obligations of the trust only and are not obligations of the
depositor, the master servicer or [its/their] affiliates
CREDIT ENHANCEMENT
o will be provided in the form of [reserve funds] [subordination of the
Class[ ] Certificates], [guarantees] [letters of credit] [cash collateral
accounts] [deposit monies in a trust account] [overcollateralization] [an
irrevocable and unconditional certificate guaranty insurance policy
issued by [insurer]]
REVIEW THE INFORMATION IN RISK FACTORS ON PAGE S-_ OF THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 2 OF THE PROSPECTUS.
o For complete information about the certificates read both this prospectus
supplement and the prospectus. This prospectus supplement must be
accompanied by the prospectus if it is being used to offer and sell the
certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these asset backed certificates or
passed upon the adequacy or accuracy of this prospectus supplement and this
prospectus. Any representation to the contrary is a criminal offense.
LEHMAN BROTHERS
<PAGE>
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 certificates 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.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary.......................................................... 1
Risk Factors..................................................... 7
The Seller....................................................... 9
The Seller's [ ] Card Activities...................... 9
[The Servicer]................................................... 10
The Receivables.................................................. 10
Maturity Assumptions............................................. 11
[Pool Factor and Related Information]............................ 13
Description of the Certificates.................................. 13
Certain Federal Income Tax Consequences.......................... 19
Underwriting..................................................... 19
Certificate Rating............................................... 20
Legal Matters.................................................... 20
Index of Principal Terms......................................... 21
PROSPECTUS
Risk Factors..................................................... 2
Description of the Securities.................................... 7
Trust Assets..................................................... 14
Enhancement...................................................... 18
Servicing of Receivables......................................... 21
The Agreements................................................... 25
Custody Receipts; Custody Agreements............................. 34
Certain Legal Aspects of the Receivables......................... 37
The Depositor.................................................... 41
Use of Proceeds.................................................. 41
Certain Federal Income Tax Considerations........................ 42
Fasit Securities................................................. 49
State Tax Considerations......................................... 53
ERISA Considerations............................................. 53
Ratings.......................................................... 53
Plan of Distribution............................................. 53
Legal Matters.................................................... 53
Available Information............................................ 54
Glossary of Terms................................................ 55
Annex I.......................................................... I-1
<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. To understand all of the terms of the offering of the
certificates, you should carefully read this entire document and the
accompanying prospectus.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of theses calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
CLASS INTEREST RATE
(FIRST DISTRIBUTION LAST SCHEDULED
DATE ONLY) INTEREST RATE/1/ PRINCIPAL BALANCE DISTRIBUTION DATE
<S> <C> <C> <C> <C>
___________% [LIBOR+%][%]
___________% [LIBOR+%][%]
</TABLE>
1 For each distribution date after the first distribution date.
2 We except the actual last distribution date for each certificate will be
significantly earlier than its last schedule distribution date.
<PAGE>
THE TRUST
Lehman Card Account Master Trust will be formed pursuant to a master pooling
and servicing agreement among Lehman ABS Corporation, as depositor,
__________, as master servicer and ____________, as trustee.
CERTIFICATES OFFERED
Each of the [Adjustable Rate] [Variable Rate] [ %] Asset Backed Certificates,
Series ___ [Class____] offered hereby represents an undivided interest in the
trust. Holders of each [class ] certificate are entitled to receive payments
of interest at the [adjustable] [variable] [fixed] rate described below,
payable [monthly] [quarterly] [semi-annually] [and payments of principal at
such time and to the extent provided below].
[The aggregate undivided interest in the trust represented by the class __
certificates as of the closing date will equal $__________ of principal or the
original invested amount, which represents [ ]% of the invested amount of the
receivables as of the cut-off date. Following the closing date, the "invested
amount" with respect to any date will be an amount equal to the original
invested amount minus the amount of principal collections previously
distributed to the holders of the certificates and minus the excess, if any,
of the aggregate amount of investor charge-offs for all payment dates
preceding such date, over the aggregate amount of any reimbursements of
investor charge-offs for all payment dates preceding such date.]
[The aggregate undivided interest in the trust represented by the class [ ]
certificates as of the closing date will equal $______ of outstanding [class [
] notional amount. The notional amount for the class [ ] certificates is equal
to the outstanding principal balance of the receivables, but is used solely
for purposes of determining interest payments and certain other rights of
holders of class [ ] certificates and does not represent any interest in or
right to receive principal payments.]
TRUST PROPERTY
The property of the trust will consist of certain [consumer] [revolving]
[credit card] [charge card] [debit card] receivables generated or to be
generated from time to time in the ordinary course of business in a portfolio
of [consumer] [revolving] [credit card] [charge card] [debit card] accounts,
and all monies due in payment of the receivables [excluding the benefits of
and payments in respect of enhancements issued with respect to any other
series (the drawing on or payment of such enhancements not being available to
holders of certificates)]. The seller will sell the receivables to Lehman ABS
Corporation.
Lehman will deposit the receivables with the trust.
We refer you to "DESCRIPTION OF THE RECEIVABLES " in this prospectus
supplement.]
On ____________ or the "closing date", the trust will purchase receivables
having an aggregate principal balance of approximately $____________ as of an
initial cut-off date, from the depositor pursuant to the pooling and servicing
agreement. On and following the closing date, pursuant to the pooling and
servicing agreement, the depositor will sell, only if they are available, and
the trust will purchase, subject to the satisfaction of certain conditions,
additional receivables from time to time during the funding period specified
in this prospectus supplement.
The amount of receivables to be purchased will have an aggregate principal
balance equal to approximately $________ (such amount being equal to an amount
on deposit in the pre-funding account on the closing date). The depositor will
designate as a cutoff date the date as of which particular subsequent
receivables are conveyed to the trust. It is expected that certain of the
subsequent receivables arising between the initial cut-off date and the
closing date will be conveyed to the trust on the closing date and that other
subsequent receivables will be conveyed to the trust as frequently as daily
thereafter on dates specified by the depositor occurring during the Funding
Period.
We refer you to "DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT -- Sale
and Assignment of Receivables; Subsequent Receivables" in this prospectus
supplement
The initial receivables have been selected, and the subsequent receivables
will be selected, from the receivables owned or originated by the seller based
on the criteria specified in the pooling and servicing agreement and described
herein.
Following the transfer of subsequent receivables to the trust, the
characteristics of the entire pool of receivables included in the trust may
vary significantly from those of the initial receivables.
We refer you to "RISK FACTORS -- The Receivables and the Pre-Funding Account"
and "The Receivables" in this prospectus supplement.
POOLING AND SERVICING AGREEMENT
The certificates will be issued pursuant to a pooling and servicing agreement
dated as of __________, between the depositor, ________, in its capacity as
master servicer and ______________ in its capacity as trustee. Pursuant to the
pooling and servicing agreement, the depositor will transfer the receivables
to the trustee in exchange for the certificates. The trustee will allocate
each distribution of principal and interest on receivables among the
certificates in accordance with the pooling and servicing agreement.
DEPOSITOR
Lehman ABS Corporation, a Delaware corporation, will act as the depositor. The
principal executive offices of the depositor are located at 200 Vesey Street,
Three World Financial Center, New York, New York 10285 (Telephone: (212)
298-2000).
We refer you to "THE DEPOSITOR" in the prospectus.
SELLER
[_________ will act as the seller and] [on or prior to the closing date, will
sell the receivables to the depositor, which in turn will transfer the
receivables to the trust pursuant to the pooling and servicing agreement.]
TRUSTEE
[ ] will act as trustee under the pooling and servicing agreement.
COLLECTIONS
All collections on the receivables will generally be allocated in accordance
with the monthly reports between amounts collected in respect of interest and
amounts collected in respect of principal.
[The master servicer will deposit any amounts required under the pooling and
servicing agreement in a collection account established under the pooling and
servicing agreement.] The trustee will deposit any amounts required under the
pooling and servicing agreement in a distribution account established under
the pooling and servicing agreement.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Payments on Receivables;
Deposits to Collection Account and Distribution Account".
INTEREST
Interest on the class [ ] certificates will be distributed [monthly]
[quarterly] [semi-annually] on the [____ day of each [month] [quarter]
[semi-annual period]] [or, if such date is not a business day then the next
succeeding business day following the payment date], commencing on _________,
at the certificate rate for the related interest period.
The certificate rate of interest will accrue on the unpaid principal amount of
the class [ ] certificates with respect to each interest period, at the rate
of [adjustable rate] [variable rate] [____%] per annum [and interest will
accrue on the notional amount of the class [ ] certificates of the per annum
rate specified in this prospectus supplement].
Interest on the certificates in respect of any payment date will accrue from
the preceding payment date (or in the case of the first payment date, from the
closing date) through the day preceding such payment date on the basis of [the
actual number of days in the interest period and a 360-day year] [a 360 day
year consisting of twelve thirty-day months].
We refer you to "DESCRIPTION OF THE CERTIFICATES" in this prospectus supplement.
[CONTROLLED AMORTIZATION PERIOD
Unless a rapid amortization period (as described below) commences, the
certificates will have a controlled amortization period during which
collections of principal receivables allocable to the percentage interest of a
series of certificates will be used on each payment date to make principal
distributions in scheduled amounts to the holders of certificates then
scheduled to receive such distributions. The amount to be distributed on any
payment date during the controlled amortization period will be limited to an
amount equal to ________ plus any existing deficit controlled amortization
amount arising from prior payment dates. The controlled amortization period
will commence at the close of business on a date specified in this prospectus
supplement and continue until the earliest of:
(a) the commencement of the rapid amortization period;
(b) payment in full of the certificates; and
(c) the series termination date].
[PRINCIPAL AMORTIZATION PERIOD
Unless a rapid amortization period (as described below) commences, the
certificates will have an amortization period during which collections of
principal receivables allocable to the percentage interest of the certificates
will be used on each payment date to make principal distributions to the
holders of the certificate then scheduled to receive such distributions. The
principal amortization period will commence at the close of business on
________________ and continue until the earlier of:
(a) the commencement of the rapid amortization period;
(b) payment in full of the certificates; and
(c) the series termination date].
[ACCUMULATION PERIOD
Unless a rapid amortization period (as described below) commences, the
certificates will have an accumulation period during which collections of
principal receivables allocable to the percentage interest of such
certificates will be deposited on the business day immediately prior to each
payment date in a principal funding account established for the benefit of the
holders of the certificates and used to make distributions of principal to the
holders on the scheduled payment date. The amount to be deposited in the
principal funding account on any transfer date will be limited to an amount
equal to [______]. The accumulation period will commence at the close of
business on ___________ and continue until the earliest of:
(a) the commencement of the rapid amortization period;
(b) payment in full of the certificates; and
(c) the series termination date].
[RAPID AMORTIZATION PERIOD
The rapid amortization period shall run from the day on which an amortization
event has occurred to the earliest of the date on which certificates have been
paid in full or the related series termination date. During the rapid
amortization period, collections of principal receivables allocable to the
percentage interest of a series of certificates will be distributed as
principal payments to the holders of the certificates monthly on each payment
date. During the rapid amortization period, distributions of principal to
holders of the certificates will not be subject to any Controlled Deposit
Amount or Controlled Distribution Amount. In addition, upon the commencement
of the rapid amortization period, any funds on deposit in a principal funding
account will be paid to the holders of certificates on the first payment date
in the rapid amortization period.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Amortization Events".
[CREDIT ENHANCEMENT
The certificates will have the benefit of an [enhancement] issued pursuant to
the pooling and servicing agreement described below. The [enhancement] will be
issued by [a provider of credit enhancements]. [description of enhancement.]]
We refer you to "[CREDIT ENHANCEMENT]" in this prospectus supplement.
MASTER SERVICER
__________________________ will act as the master servicer. The principal
executive offices of the master servicer are located at
________________________ (telephone: _____________).
SERVICING
The master servicer will be responsible for servicing, managing and making
collections on the receivables.
The master servicer will receive a [monthly] [quarterly] [semi-annual]
servicing fee equal to, on an annualized basis, ___% [on the aggregate
outstanding principal balance of the receivables].
We refer you to "DESCRIPTION OF THE CERTIFICATES--Servicing Compensation and
Payment of Expenses" in this prospectus supplement.
In certain limited circumstances, the master servicer may resign or be
removed, in which event either the trustee or a third-party servicer will be
appointed as a successor master servicer.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Certain Matters Regarding
the Master Servicer and the Depositor" in this prospectus supplement.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The trust will terminate on the payment date following [the later of (a)
payment in full of all amounts owing to the credit enhancement provider and
(b)] the earlier of:
(i) the payment date on which the principal balance of the certificates has
been reduced to zero; or
(ii) the final payment or other liquidation of the last receivable in the
trust; and
(iii) the payment date in _______.
We refer you to "DESCRIPTION OF THE CERTIFICATES-- Termination; Retirement of
the Certificates" in this prospectus supplement and "THE POOLING AND SERVICING
AGREEMENTS--Termination" in the prospectus.
In addition, the trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the depositor.
We refer you to "DESCRIPTION OF THE CERTIFICATES-- Amortization Events" in
this prospectus supplement.
[PRE-FUNDING ACCOUNT
During the funding period, an amount referred to as the pre-funded amount will
be maintained in an account in the name of the trustee. The funding period
will run from and including the closing date until the earliest of:
(i) the date on which:
(a) the amount on deposit in such pre-funding account is less
than $__;
(b) an amortization event occurs or;
(c) certain events of insolvency occur with respect to the
depositor or;
(ii) the close of business on the payment date.
The pre-funded amount will initially equal approximately $__________, and
during the funding period, will be reduced by the amount thereof used to
purchase subsequent receivables in accordance with the trust agreement. The
seller expects that the pre-funded amount will be reduced to less than
$____________ by the _____ payment date. Any pre-funded amount remaining at
the end of the funding period will be payable to the holders of the
certificates [pro rata] in proportion to the respective percentage interest of
each class of the certificates.]
[MANDATORY PREPAYMENT
The certificates will be prepaid, in part, pro rata on the basis of their
initial principal amounts, on the payment date on or immediately following the
last day of the funding period in the event that any amount remains on deposit
in the pre-funding account after giving effect to the purchase of all
subsequent receivables, including any such purchase on such date. The
aggregate principal amount of certificates to be prepaid will be an amount
equal to the certificates' percentage interest of the amount then on deposit
in the pre-funding account.]
[REGISTRATION OF CERTIFICATES
We will issue the certificates in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they
will be registered in the name of the depository.
The limited circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
We refer you to "RISK FACTORS - Book-Entry Certificates" in this prospectus
supplement.]
FEDERAL TAX CONSEQUENCES
Brown & Wood LLP is of the opinion that, the certificates are debt of the
depositor for federal, income tax purposes. Each holder of a certificate, by
acceptance of a certificate, will agree to treat the certificate as
indebtedness for Federal income tax purposes.
We refer you to "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the prospectus
for additional information concerning the application of Federal income tax
laws.
[LEGAL INVESTMENT RESTRICTIONS
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject
to restrictions on investment in the certificates.
We refer you to "Legal Investment Considerations" in this prospectus
supplement.
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan subject to ERISA or the US federal
tax code should carefully review with its legal advisors whether the purchase
or holding of certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the [US federal tax code].]
[The certificates generally may not be transferred to a fiduciary of any
employee benefit plan subject to ERISA or Section 4975 of the US federal tax
code.]
We refer you to ["ERISA CONSIDERATIONS"] in the prospectus and in this
prospectus supplement.
CERTIFICATE RATING
Before the certificates can be issued, the [trust] must obtain a rating of:
[Rating][Rating Agency]
Ratings such as the ratings obtained for the certificates address credit risk.
When evaluating credit risk, the rating agencies look at the likelihood of
whether or not you will receive your interest and principal payments. There is
no assurance that once a rating is given that it will continue for any period
of time or that it will not be revised or withdrawn entirely by such rating
agency if, in its judgment, circumstances so warrant. A revision or withdrawal
of the rating may have an adverse effect on the market price of the
certificates. A security rating is not a recommendation to buy, sell or hold
securities.
We refer you to "RATINGS" in this prospectus supplement and "RISK
FACTORS--Limited Nature of Rating" in the prospectus.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the certificates. The underwriters
currently intend to make a market in the certificates but are under no
obligation to do so. There can be no assurance that a secondary market will
develop in the certificates. If a secondary market does develop, there can be
no assurance that it will provide holders of the certificates with liquidity
of investment or that it will continue for the life of the certificates.
[THE RECEIVABLES AND THE PRE-FUNDING ACCOUNT
On the closing date, we will transfer to the trust approximately $ of
initial receivables and the approximately $ pre-funded amount. The trustee
will deposit these amounts in the pre-funding account. If the principal amount
of eligible receivables that we convey to the trust during the funding period
is less than the pre-funded amount, we will have insufficient receivables to
sell to the trust on the subsequent transfer dates. This will result in you
receiving a prepayment of principal. [The prepayment will be in an amount
equal to the applicable percentage, in respect of a class of the certificates,
of the pre-funded amount remaining in the pre-funding account following the
purchase of any subsequent receivables on such payment date. You will receive
this prepayment on the payment date on or immediately following the last day
of the funding period.
Each of the subsequent receivables must satisfy the eligibility criteria
specified in the trust agreement at the time of its addition. Moreover, our
conveyance of any subsequent receivables during any collection period will be
subject to the satisfaction, on or before the payment date following the end
of such collection period, of certain conditions subsequent, including our
receipt of written notification from the rating [agency] [agencies] that,
following the addition of the subsequent receivables, the rating [agency]
[agencies]] will rate [the Class ] [each class of the] certificates at least
"[ ]".
We will immediately repurchase any subsequent receivables, at a price
equal to the [[Purchase Amount]] thereof, upon our failure to satisfy any of
the required conditions subsequent. The rating [agency's][agencies']
confirmation of the ratings of the certificates may depend on factors other
than the characteristics of the subsequent receivables.
We anticipate that the principal amount of subsequent receivables that we
will sell to the trust will not be exactly equal to the amount on deposit in
the pre-funding account. Therefore, we expect that you will receive at least a
nominal amount of prepaid principal. Our transfer of subsequent receivables to
the trust may significantly vary the characteristics of the pool of
receivables included in the trust from those of the initial receivables.
We refer you to "--- Social, Economic and Other Factors" and "--- Our
Relationship to the Trust" below and to "THE RECEIVABLES".]
[SOCIAL, ECONOMIC AND OTHER FACTORS
Our ability to acquire subsequent receivables is largely dependent upon a
variety of social and economic factors, [such as [ ]]. We are unable to
determine and have no basis to predict whether or to which extent economic or
social factors will affect the availability of subsequent receivables.]
OUR RELATIONSHIP TO THE TRUST
We are [not] generally obligated to make any payments in respect of the
certificates or the receivables.
MATURITY ASSUMPTIONS
The rate of payment of principal (including prepayments) of the
receivables will determine:
o the rate of payment of principal of each Class [ ] certificate; and
o the aggregate amount of each distribution on and the yield to maturity of
all certificates.
[We are offering your [Class ] certificates without any original
principal amount. Therefore, the yield to maturity on your [Class ]
certificates is extremely sensitive to the rate of payment or prepayment of
the receivables. You should fully consider the associated risks, including the
risk that if the rate of principal payment on the receivables is rapid, you
may not recoup your initial investment.
We refer you to ["Yield on the Series _____ Certificates and Prepayments
of the Receivables".]]
[THE ENHANCEMENT
Although the certificates will have the benefit of an enhancement, the
amount available under the enhancement
o is limited;
o is expected to decline during either Amortization Period;
o and will be reduced by draws made under the enhancement from time to
time.
If the amount that would otherwise have been available under the
enhancement is no longer available, you will bear directly the credit and
other risks associated with your undivided interest in the trust.
We refer you to "DESCRIPTION OF THE CERTIFICATES--The Enhancement."
BOOK-ENTRY CERTIFICATES MAY BE ILLIQUID
Issuance of the certificates in book-entry form may reduce the liquidity
of such securities in the secondary trading market since investors may be
unwilling to purchase securities for which they cannot obtain physical
securities. [You may be unable to sell your certificates or a sale may result
in a lower return than expected.]
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates."
BOOK-ENTRY CERTIFICATES MAY NOT BE ABLE TO BE PLEDGED
Since transactions in the certificates can be effected only through DTC,
Cedelbank, Euroclear, participating organizations, indirect participants and
certain banks, your ability to pledge your security to persons or entities
that do not participate in the DTC, Cedelbank or Euroclear system or otherwise
to take actions in respect of such securities, may be limited due to lack of a
physical security representing the certificates.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates."
BOOK-ENTRY CERTIFICATES MAY RESULT IN DELAYED RECEIPT OF DISTRIBUTIONS
As a beneficial owner, you may experience some delay in your receipt of
distributions of interest on and principal of your certificates since such
distributions will be forwarded by the trustee to DTC and DTC will credit such
distributions to the accounts of its participants which will thereafter credit
them to the accounts of the beneficial owners either directly or indirectly
through indirect participants.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates."
RATING OF THE CERTIFICATES
The rating of the certificates will depend primarily on an assessment by
the [rating agency] of the receivables [and upon the claims-paying ability of
the enhancer. The [rating agency] may reduce the rating of the certificates if
it decides to reduce a rating assigned to the claims-paying ability of the
enhancer below the rating initially given to the certificates.] A rating is
not a recommendation to you to purchase, hold or sell certificates, inasmuch
as such rating does not comment as to market price or suitability for a
particular investor. There can be no assurance that a rating will remain for
any given period of time or that a rating agency will not lower or withdraw
entirely its rating if in its judgment circumstances in the future so warrant.
The [rating agency's] ratings of the certificates does not address the
possibility that the United States will impose a withholding tax on you if you
are a non-U.S. person.
THE SELLER
[General description of the Seller (if originator of the Receivables
portfolio) and its credit card business.]
THE SELLER'S [ ] CARD ACTIVITIES
Underwriting
Billing and Payments
Seller Portfolio Historical Performance
Delinquency Experience
Loss Experience
Revenue and Yield Experience
Interchange
Competition
[THE SERVICER]
[General description of the Servicer, if separate from Seller]
THE RECEIVABLES
Certain Receivables will be conveyed to the Trust on , [ ] (the "Initial
Closing Date") which arose in Accounts which were selected from the
receivables in the [Seller] Portfolio satisfying criteria set forth in the
Agreement (the "Criteria") as applied on , [ ] (the "Initial Cut-off Date").
All such Accounts are hereinafter referred to as the "Trust Portfolio." The
Initial Cut-off Date, is sometimes referred to herein as the "Relevant Cut-off
Date." In order to meet the Criteria, each Account must, on the Relevant
Cut-off Date, among other things, [have been in existence and maintained by
the [Seller] for at least [ ] consecutive months, not be [ or more] days
contractually delinquent, have a cardholder with a billing address in [[the
United States] [Mexico] [Canada] [Europe], its territories or possessions],
have a credit limit of not more than $[ ] and not be an account restricted by
the [Seller] as to its use]. Approximately % of the accounts in the [Seller]
Portfolio, representing approximately % of the receivables in the Seller
Portfolio, met the Criteria on the Initial Cut-off Date. The Accounts included
or designated to be included in the Trust Portfolio as of the Initial Cut-off
Date constituted approximately % of the accounts and % of the receivables in
the Seller Portfolio as of the Initial Cut-off Date. Cardholders whose
accounts are included in the Seller Portfolio have billing addresses in [all
50 states], [the District of Columbia], [Puerto Rico], [Guam], [the Virgin
Islands] [certain foreign countries][ ]. [Pursuant to the Agreement, the
Depositor may be obligated (subject to certain limitations and conditions) to
designate Additional Accounts to be included as Accounts and to convey to the
Trust all Receivables of such Additional Accounts, whether such Receivables
are then existing or thereafter created. These accounts must meet the criteria
set forth above as of the date the Depositor designates such accounts as
Additional Accounts.] [Throughout the term of the Trust, the Accounts from
which the Receivables arise will be the same [VISA(1)] [MasterCard(1)]
[American Express] [private label] [other] accounts designated by the
Depositor on the Relevant Cut-off Date [(plus any Additional Accounts
subsequently designated as described above)]. In addition, as of the Initial
Cut-off Date and on the date any new Receivables are created, the Depositor
will represent and warrant to the Trust that the Receivables meet the
eligibility requirements specified in the Agreement. See "DESCRIPTION OF THE
CERTIFICATES --- Representations, Warranties and Covenants" in the Prospectus.
[Pre-Funding Account. The Receivables will include the Initial
Receivables purchased as of the Initial Cut-off Date and will include any
Subsequent Receivables purchased as of the applicable Subsequent Cut-off Date
(the Initial Cut-off Date or any Subsequent Cut-off Date being individually
referred to herein as a "Cut-off Date").
The Initial Receivables will be purchased, and the Subsequent Receivables
were or will be purchased, by [from ] in the ordinary course of business, and
were selected from the Seller's portfolio by several criteria, some of which
are set forth herein, [to follow.] [As of the applicable Cut-off Date, no
Obligor on any Receivable was noted in the related records of the Servicer as
being the subject of a bankruptcy proceeding.] No selection procedures
believed by the Seller to be adverse to Certificateholders were used or will
be used in selecting the Receivables.
The obligation of the Trust to purchase the Subsequent Receivables on a
Subsequent Transfer Date will be subject to the Receivables in the Trust,
including the Subsequent Receivables to be conveyed to the Trust on such
Subsequent Transfer Date, meeting the following criteria: [to follow].
The Initial Receivables will represent approximately % of the aggregate
initial principal balance of the Certificates. [However, except for the
criteria described in the preceding paragraphs, there will be no required
characteristics of the Subsequent Receivables.] [Therefore,] following the
transfer of Subsequent Receivables to the Trust, the aggregate characteristics
of the entire Receivables Pool, including [characteristics described in the
following tables], may vary significantly from those of the Initial
Receivables.]
______________
(1) Visa and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively. The [Initial]
Receivables, as of , [ ], totaled $ , [consisting of
$ of Principal Receivables and $ of Finance Charge
Receivables] in Accounts. The Accounts had an average Principal Receivables
balance of and an average credit limit of $ . The percentage
of the aggregate total Receivables balance to the aggregate total credit
limit was %. The average age of the Accounts was approximately months.
The following tables summarize the Trust Portfolio by various criteria as
of the close of business on , [ ]. Because the future composition of the Trust
Portfolio may change over time, these tables are not necessarily indicative of
future results.
Composition By Account Balance
Trust Portfolio
Composition By Credit Limit
Trust Portfolio
Composition By Cut-off Date Payment Status
Trust Portfolio
Composition By Account Age
Trust Portfolio
Geographic Distribution of Accounts and Receivables
Trust Portfolio
[The composition and distribution by annual percentage rate of the
Receivables Pool as of the Initial Cut-off Date are as set forth in the
following tables.
Composition of the Receivables Pool
as of the Initial Cut-off Date]
MATURITY ASSUMPTIONS
The Agreement provides that Certificateholders will not begin to receive
payments of principal until the Payment Date in the month following the month
in which the [Controlled Amortization Period] [Principal Amortization Period]
commences, which period will commence on , [ ] (approximately months following
the issuance of the Certificates) or following the occurrence of a Series [ ]
Payout Event or a Liquidation Event which results in the commencement of the
Rapid Amortization Period or on the Scheduled Payment Date following an
Accumulation Period.
[Certain events may trigger the occurrence of a Series [ ] Payout Event or
a Liquidation Event. See "DESCRIPTION OF THE CERTIFICATES -- Series [ ] Payout
Events and Liquidation Events." In the event of the occurrence of a Series [ ]
Payout Event or a Liquidation Event, the Rapid Amortization Period will begin
on the day on which such Series [ ] Payout Event or Liquidation Event occurs.
During the Rapid Amortization Period, the Certificateholders will be entitled
to receive monthly payments of principal equal to the product of the Investor
Percentage and the amount of [collections of Principal Receivables] [Principal
Collections] received by the Trust during each month until the Investor Amount
shall be paid in full. Allocations based on the fixed percentage during an
Amortization Period will result in distributions of principal to
Certificateholders in greater amounts than would otherwise be the case if a
floating percentage were used to determine the percentage of collections
distributed in respect of such Investor Amount. Furthermore, if the total
amount of [Principal Receivables] [Principal Collections] increases during the
Rapid Amortization Period, the allocation of principal payments based on this
fixed percentage may, if cardholder payment rates do not decline, further
accelerate repayment of the Investor Amount.]
No assurance can be given that the amount of [Principal Receivables]
[Principal Collections] allocated to be paid to the [Class ] Certificateholders
will be available for distribution or accumulation for payment to [Class ]
Certificateholders on each Payment Date during the Controlled Amortization
Period, the Principal Amortization Period or Accumulation Period, or on the
Scheduled Payment Date, as applicable. [In addition, the [Depositor] [Seller]
can give no assurance that the payment rate assumptions for Series [ ] will
prove to be correct.]
[The following table sets forth the highest and lowest cardholder monthly
payment rates for the Seller Portfolio during any month in the periods shown
and the average of the cardholder monthly payment rates for all months during
the period shown, in each case calculated as a percentage of total opening
monthly account balances during the periods shown. Payments shown in the table
include amounts which would be deemed payments of [Principal Receivables and
Finance Charge Receivables] [Principal Collections and Yield Collections] with
respect to the Accounts.]
Monthly Payment Rates
The amount of collections on Receivables may vary from month to month due
to seasonal variations, general economic conditions, changes in tax law and
payment habits of individual cardholders. There can be no assurance that
collections of [Principal Receivables] [Principal Collections] with respect to
the Trust Portfolio, and thus the rate at which Certificateholders could expect
to receive payments of principal on their Certificates during an
Amortization Period will be similar to the historical experience set forth
above. In addition, since the Trust, as a master trust, may issue additional
Series from time to time, there can be no assurance that the issuance of
additional Series or the terms of any additional Series might not have an
impact on the timing of payments received by Certificateholders. Further, if a
Series [ ] Payout Event or a Liquidation Event occurs, the average life and
maturity of the Certificates could be significantly reduced.
Seller Portfolio
The yield for the Seller Portfolio shown in the above table is comprised
of [four] [three] components: [finance charges,] [interchange,] annual
cardholder fees and other service charges, such as late charges. The yield
related to annual cardholder fees [(on those accounts which assess such fees)]
and other service charges varies with the type and volume of activity in, and
the balance of, each account. The Seller currently assesses annual cardholder
fees of $ to $ for certain of its [credit][charge] card accounts. Most accounts
originated since [ ] do not carry an annual cardholder fee. See "THE SELLER'S [
] CARD ACTIVITIES" herein and in the Prospectus. As account balances increase,
an annual cardholder fee, which remains constant, represents a smaller
percentage of the aggregate account balance.
[POOL FACTOR AND RELATED INFORMATION]
The "Pool Factor" with respect to any Record Date is an [eight-digit]
decimal which the [Seller] [Servicer] will compute monthly representing the
ratio of the Investor Amount as of such Record Date to the Initial Investor
Amount. The initial Pool Factor will be [1.00000000] and such factor will
remain unchanged during the Revolving Period, except in certain limited
circumstances. See "Description of the Certificates -- Charged-Off Receivables;
Rebates and Fraudulent Charges" in the Prospectus. Thereafter, the Pool Factor
will decline to reflect reductions in the Investor Amount during an
Amortization Period. The value of a Certificateholder's pro rata share in the
interest of all Certificateholders in the Principal Receivables for a given
month can be determined by multiplying the denomination of the holder's
Certificate by the Pool Factor for that month.
Pursuant to the Agreement, [weekly] [monthly] [quarterly] [semi-annual]
reports concerning the Investor Amount, the Pool Factor and various other items
of information will be delivered to the Certificateholders. In addition, on or
before of each year, beginning in [ ], information for tax reporting purposes
will be delivered to Certificateholders. See "DESCRIPTION OF THE CERTIFICATES
- -- Reports to Certificateholders" in the Prospectus.]
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement entered into
between the Depositor, as Depositor of interests in the Receivables and [ ] as
Seller of the Receivables generated under the Accounts, [[ ], as Servicer of
the Accounts,] and [ ], as Trustee for the Certificateholders[, substantially
in the form filed as an exhibit to the Registration Statement of which the
Prospectus is a part]. Pursuant to the Agreement, the Depositor may execute
further Supplements thereof between the Depositor and the Trustee in order to
issue additional Series. The [Trustee] [Depositor] [Seller] [Servicer] will
provide a copy of the Agreement [(without exhibits or schedules)], including
any Supplements, to Certificateholders without charge upon written request. The
following summary describes certain terms of the Agreement, and is qualified in
its entirety by reference to the Agreement.
General
The Certificates will represent undivided interests in the Trust[,
including the right to [a floating percentage (in the case of [Principal
Receivables] [Principal Collections] during the Revolving Period, which will be
allocated to the Certificates and paid to the holder of the exchangeable
Transferor's Certificate or to amortizing Series, and [Finance Charge
Receivables] [Yield Collections] and Charged-Off Receivables at all times)]
[or] [a fixed percentage (in the case of [Principal Receivables] [Principal
Collections] during an Amortization Period)] ([each,] the "Investor
Percentage") of all cardholder payments on the Receivables; provided, however,
that on any Payment Date during the Controlled Amortization Period, the
Certificates shall be entitled in respect of collections of Principal
Receivables to only the Controlled Distribution Amount on such Payment Date].
[See "-- Investor Percentage and Transferor's Percentage".] [For any Due
Period, the portion of the Principal Receivables represented by the
Certificates (the "Investor Amount") will be equal to the initial Investor
Amount minus the amount of principal payments paid to the Certificateholders
and minus unreimbursed charge-offs (and minus any deposit to the Pre-Funded
Account). [Each Certificate represents the right to receive payments of
interest for the related Interest Period at the applicable Certificate Rate for
such Interest Period from collections of [Finance Charge Receivables] [Yield
Collections] allocated to the Investor Amount [and, in certain circumstances,
from draws on the Enhancement], and payments of principal during an
Amortization Period funded from collections of [Principal Receivables]
[Principal Collections] allocated to the Investor Amount [and, in certain
circumstances, from draws on the Enhancement] (plus certain collections of
[Principal Receivables] [Principal Collections] otherwise allocable to other
Series, to the extent such collections are not needed to make payments to or
for the benefit of such other Series).]
The Transferor [Seller] holds [as of the Closing Date] the interest (the
"Transferor's Amount") in the [Principal Receivables] [Principal Collections]
not represented by the Certificates and the certificates of other Series, if
any. The Depositor [Seller] holds [as of the Closing Date] an undivided
interest in the Trust (the "Transferor's Interest"), including the right to a
percentage (the "Transferor's Percentage") of all cardholder payments on the
Receivables.
During the Revolving Period, the Investor Amount will remain constant
except in certain limited circumstances. The amount of Receivables, however,
will vary each day as new Receivables are created and others are paid. The
Transferor's Amount will fluctuate daily, therefore, to reflect the changes in
the amount of the Principal Receivables. During an Amortization Period, the
Investor Amount will decline for each Due Period as cardholder payments of
[Principal Receivables] [Principal Collections] are collected and held for
distribution to the Certificateholders. As a result, the Transferor's Amount
during an Amortization Period will generally increase each month to reflect the
reductions in the Investor Amount and will also change to reflect the
variations in the amount of [Principal Receivables] [Principal Collections].
[Interest Payments
Initially, interest will accrue on the Certificates at the Certificate
Rate from the Closing Date through the day preceding the Initial Payment Date.
Thereafter, interest with respect to any Payment Date will accrue on the
Certificates from the previous Payment Date through the day preceding such
Payment Date. Interest at the applicable rate will be paid to the
Certificateholders on each Payment Date beginning on , .
Interest payments on the Certificates on any Payment Date will be
calculated on the Investor Amount as of the preceding Record Date (or, in the
case of the first Payment Date, as of the Closing Date) based upon the
Certificate Rate determined for the related Interest Period on the Rate
Determination Date immediately preceding the beginning of such Interest Period,
or in the case of the initial Interest Period, at the rate specified below.
Interest on the Certificates will be calculated on the basis of [the
actual number of days in the related Interest Period and a 360-day year] [a
360-day year consisting of twelve thirty-day months].
The Certificates will bear interest at the [fixed] [variable] [adjustable]
rate of % per annum with respect to the period from the Closing Date through
the last day of the Interest Period preceding the Initial Payment Date and,
with respect to each subsequent Interest Period, at the [fixed] [adjustable]
[variable] rate of % per annum [above] [below] [equal to] [adjustable]
[variable] [floating] rate index (the "Index") [determined as set forth
below][; provided, however, that the rate at which interest will accrue on the
Certificates will in no event [exceed] [be less than] % per annum].
[The Trustee will determine the Index for a given Interest Period on the
Rate Determination Date [immediately preceding the commencement of such
Interest Period]. The determination of the rate at which interest will accrue
on the Certificates during any Interest Period other than the initial Interest
Period will be made in accordance with the following provisions:
[Description of Certificate Rate Determination to come]
The determination of the Index by the Trustee and the Trustee's subsequent
calculation of the Certificate Rate for the relevant Interest Period shall (in
the absence of manifest error) be final and binding on each Certificateholder.
The Certificate Rate applicable to the then current and immediately preceding
Interest Period may be obtained by telephoning the Trustee at its Corporate
Trust Office at ( ) .]
[ are charge cards and not credit cards. Thus, Receivables originated
under the designated accounts are payable in full each month and not subject to
a monthly finance charge. Therefore a portion of the collections on the
Receivables in the designated accounts received in any Due Period equal to the
product of the aggregate amount of such collections and the Yield Factor will
be treated as Yield Collections and will be used, among other things, to pay
interest on the Certificates. The remainder of such collections will be treated
as Principal Collections and will be used to pay principal on the Certificates.
[Recoveries will not be considered Collections but will instead be utilized as
an offset to defaulted Receivables.] The "Yield Factor" will initially be equal
to % and, subject to certain limitations, may be changed from time to time
thereafter by the Depositor.]
Prior Series of Certificates
Investor Percentage and Transferor's Percentage
Pursuant to the Agreement, the [Servicer] [Trustee] will allocate between
the Investor Interest, the investor interest of any other Series, and the
Transferor's Interest all amounts collected on [Finance Charge Receivables],
[Principal Receivables], [Yield Collections and Principal Collections] [and all
Charged-Off Receivables]. The [Servicer] [Trustee] will make each allocation by
reference to the Investor Percentage, the investor percentage of any other
Series, and the Transferor's Percentage.
The Investor Percentage and the Transferor's Percentage for any Due Period
will be calculated as follows:
[Investor Percentage: (i) with respect to [Finance Charge Receivables],
[Principal Receivables], [Yield Collections and Principal Collections] [and
Charged-Off Receivables] during the Revolving Period and with respect to
[Finance Charge Receivables] [and Charged-Off Receivables] during a Controlled
Amortization Period or Rapid Amortization Period, the percentage equivalent of
a fraction the numerator of which is the Investor Amount at the end of the last
day of the prior Due Period and the denominator of which is the aggregate
amount of Principal Receivables in the Trust at the end of such day; and
(ii) with respect to [Principal Receivables] [the principal component of
the Trust] during a Controlled Amortization Period or Rapid Amortization Period
or Accumulation Period, the percentage equivalent of a fraction the numerator
of which is the Investor Amount at the end of the last day of the Revolving
Period and the denominator of which is the greater of (A) the aggregate amount
of [Principal Receivables] [the principal component of the Trust] in the Trust
as of the end of the last day of the prior Due Period and (B) the sum of the
numerators used to calculate the investor percentages with respect to
[Principal Receivables] [the principal component of the Trust] for all Series
of certificates then outstanding;
provided, however, that with respect to any Due Period in which Additional
Accounts are added to the Trust, the calculation of the aggregate amount
of [Principal Receivables] [the principal component of the Trust] used in
determining the Investor Percentage will be modified to reflect the fact that
such Additional Accounts were not in the Trust for the entire Due Period.]
Transferor's Percentage. The Transferor's Percentage in all cases means
the [excess of 100%] over the aggregate investor percentages of all Series then
outstanding.
Application of Collections
Allocations. The [Servicer] [Trustee] will deposit into the Collection
Account, no later than the [[ ] Business Day following the date the payments
are identified as being related to the Receivables, any payment collected by
the Servicer on the Receivables.
On the day any such amounts are to be deposited into the Collection
Account or paid to the holder of the Exchangeable Transferor's Certificate, the
[Servicer] [Trustee] will allocate such amounts or pay such amounts held in the
Collection Account for application as follows:
[(a) an amount equal to the applicable Transferor's Percentage of the
aggregate amount of such deposits in respect of [Finance Charge Receivables and
Principal Receivables] [Yield Collection and Principal Collections],
respectively, will be paid to the holder of the Exchangeable Transferor's
Certificate;
(b) an amount equal to the applicable Investor Percentage of the aggregate
amounts of such deposits in respect of [Finance Charge Receivables and
Principal Receivables] [Yield Collections and Principal Collections] will be
deposited into the Collection Account;
(c) during the Revolving Period, an amount equal to the applicable
Investor Percentage of the aggregate amount of such deposits in respect of
[Principal Receivables] [Principal Collections] will be paid to the holder of
the Exchangeable Transferor's Certificate (provided that if such amount exceeds
the Transferor Amount, the excess will be treated as Unallocated Principal
Collections to be retained in the Collection Account) or to [amortizing]
[accumulating] Series;
(d) during the Principal Amortization Period, if applicable, or the Rapid
Amortization Period, an amount equal to the Principal Allocation will be
allocated to the Certificateholders and deposited into the Collection Account
or Principal Account.]
Payment of Fees and Interest. On the Business Day immediately preceding
each Payment Date (the "Transfer Date"), the Trustee, acting pursuant to the
[Seller's] [Servicer's] instructions, will withdraw and apply all amounts on
deposit in the Collection Account in respect of amounts collected on [Finance
Charge Receivables and Principal Receivables] [Yield Collections and Principal
Collections] and allocated to the Certificates for the prior Due Period to make
the following payments and deposits [provided, that the amount distributed
shall not include amounts released from the Pre-Funding Account]:
(a) an amount will be paid to the Certificateholders at the Certificate
Rate for the related Interest Period on the Investor Amount as of the end of
the last day of the prior Due Period plus accrued interest on interest
previously not so paid ("Certificate Interest");
(b) [if the Seller is no longer the Servicer or] [in certain other
circumstances as described below,] an amount equal to the Monthly Investor
Servicing Fee for the prior Due Period will be paid to such servicer or, under
certain circumstances, to the Trustee;
(c) an amount equal to the Investor Charged-Off Amount, if any, for the
prior Due Period will be paid to the Depositor during the Revolving Period and
to the Certificateholders during an Amortization Period;
[(d) an amount equal to reimbursements of Reduction Amounts, if any, with
respect to the Certificates for the prior Due Period will be paid to the
[Seller] [Depositor] during the Revolving Period and to the Certificateholders
during an Amortization Period];
(e) [if the Seller is the Servicer and the Monthly Investor Servicing Fee
has not been paid pursuant to clause (b) above,] an amount equal to the Monthly
Investor Servicing Fee for the prior Due Period will be paid to the Seller or,
under certain circumstances, to the Trustee; and
[(f) any payments owing for fees for the prior Due Dates for
Enhancements.]
[Payments of Principal. On each Transfer Date occurring in the month
following the month in which an Amortization Period begins and on each Payment
Date thereafter, the Trustee, acting in accordance with instructions from the
Servicer, will withdraw amounts deposited into the Collection Account in
respect of collections of [Principal Receivables] [Principal Collections]
allocated to the Certificates processed during the prior Due Period, any Excess
Principal Collections allocated to the Certificates and any Unallocated
Principal Collections then on deposit in the Collection Account and allocated
to the Certificates and pay such amounts to the Certificateholders [provided,
that the amount distributed shall not include amounts released from the
Pre-Funding Account].
Example of Distributions to The Certificateholders
The following is a hypothetical example of the application of the
foregoing provisions with respect to a representative Interest Period during
the Revolving Period:
[to follow]
[Enhancement
The Certificates will have the benefit of an [Enhancement] issued pursuant
to the Agreement described below.
[to follow]]
[Mandatory Prepayment
Cash distributions to Certificateholders will be made [,on a pro rata
basis,] on the Payment Date on or immediately following the last day of the
Funding Period in the event that any amount remains on deposit in the
Pre-Funding Account after giving effect to the purchase of all Subsequent
Receivables, including any such purchase on such date (a "Mandatory
Prepayment"). The aggregate principal amount of [each class of] Certificates to
be redeemed will be an amount equal [to such class'] [the Certificates]
Pre-Funded Percentage of the amount then on deposit in the Pre-Funding Account.
[Optional Repurchase
On the Payment Date occurring on or after the date that the Investor Amount
is reduced to $ ([ ]% of the Initial Investor Amount) or less, the
[Depositor] [Seller] will have the option (to be exercised in its sole to
repurchase the Certificates. The purchase price of the Certificates will be
equal to the Investor Amount as of the last day of the Due Period preceding the
Payment Date on which such purchase occurs plus accrued and unpaid interest on
the unpaid principal amount of the Certificates (and any accrued and unpaid
interest thereon). Following any such repurchase, the Certificateholders will
have not further rights with respect to the Receivables.]
Series [ ] Payout Events and Liquidation Events
The Revolving Period will continue through , [ ], unless a Series [ ]
Payout Event or a Liquidation Event occurs prior to such date. A Series [ ]
Payout Event refers to any of the following events, which are applicable only
to the Certificates (although other Series may have similar or identical payout
events):
(a) failure on the part of the [Seller] [Servicer] (i) to make any payment
or deposit on the date required under the Agreement (or within the applicable
grace period, which will not exceed [ ] business days); or (ii) to observe or
perform in any material respect any other covenants or agreements of the
[Seller][and] [Servicer] in the Agreement, which continues unremedied for a
period of [ ] days after written notice (or with respect to a failure arising
out of the creation of certain liens, immediately upon the creation thereof)
and which failure would have a material adverse effect on the
Certificateholders;
(b) any representation or warranty made by the Seller or the Depositor in
the Agreement or any information required to be given by the Seller or the
Depositor to the Trustee to identify the Accounts proves to have been incorrect
in any material respect when made and continues to be incorrect in any material
respect for a period of [ ] days after written notice and as a result the
interests of the Certificateholders are materially and adversely affected;
provided, however, that a Series [ ] Payout Event shall not be deemed to have
occurred with respect to this subparagraph (b) if the Seller or the Depositor
has accepted the transfer and reassignment of all such Receivables of the
applicable Account, if applicable, during such period in accordance with the
provisions of the Agreement;
(c) the average of the Net Portfolio Yield for three consecutive Due
Periods is a rate which is less than __________;
(d) with respect to the end of any Due Period (i) with respect to which
the Depositor's Amount is less than the Minimum Transferor's Percentage of the
Principal Receivables in the Trust as of such day, the failure of the Depositor
to convey Additional Accounts to the Trust such that the Transferor's Amount is
at least equal to the Minimum Transferor's Percentage of the Principal
Receivables in the Trust as of the last day of such Due Period or (ii) with
respect to which the aggregate Principal Receivables in the Trust are less than
the sum of the initial investor amounts of all Series outstanding as of such
day (the "Minimum Principal Receivables"), the failure of the Depositor to
convey Additional Accounts to the Trust such that the aggregate Principal
Receivables in the Trust are at least equal to the Minimum Principal
Receivables as of the last day of such Due Period;
(e) any Seller or Servicer Default (as described in the Prospectus) occurs
which would have a material adverse effect on the Certificateholders;
[(f) on any Determination Date, the Enhancement Amount is less than [ ]%
of the Investor Amount; or]
(g) the average Payment Rate for a period of [ ] consecutive months falls
below [ ]%.
A Liquidation Event refers to any of the following events, which are
applicable to the Certificates and other Series:
(h) certain events of insolvency, conservatorship or receivership relating
to the Seller or the Depositor;
(i) The Trust becomes an "investment company" within the meaning of the
Investment Company Act of 1940, as amended; or
(j) the inability of the Depositor for any reason to transfer Receivables
to the Trust.
In the case of any event described in subparagraphs (a), (b) or (e), a
Series [ ] Payout Event will be deemed to have occurred only if, after any
applicable grace period described in such clauses, the Trustee [or
Certificateholders evidencing undivided interests aggregating not less than 50%
of the aggregate principal amount of the Investor Amount,] by written notice to
the [Depositor] [the Seller] [and] [the Servicer] [(and to the Trustee if given
by the Certificateholders)] declare that a Series [ ] Payout Event has occurred
with respect to the and is continuing as of the date of such notice. In the
case of any event described in subparagraphs [(c), (d), (f), (g), (h), (i) or
(j), a Series [ ] Payout Event or a Liquidation Event will be deemed to have
occurred without any notice or other action on the part of the trustee, any
enhancement provider, the Certificateholders or the certificateholders of any
other Series immediately upon the occurrence of such event. On the date on
which a Series [ ] Payout Event or a Liquidation Event is deemed to have
occurred, the Rapid Amortization Period will commence. In such event,
distributions of principal to the Certificateholders in the priority provided
for above will begin on the first Payment Date following the month in which the
Series [ ] Payout Event or the Liquidation Event occurred.
Servicing Compensation and Payment of Expenses
The share of the Servicing Fee allocable to the Certificates with respect
to any Payment Date shall be equal to [one-twelfth of the product of (A) % and
(B) the Investor Amount as of the first day of the prior Due Period for such
Payment Date] [ ]] (the "[Monthly] Investor Servicing Fee").
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Characterization of the Certificates as Indebtedness
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents, special counsel to the Depositor
("Special Tax Counsel"), has advised the Depositor that the Certificates will
be treated as indebtedness for Federal, state and local income and franchise
tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Lehman Brothers Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase from the Depositor,
the Series [ ] Certificates.
The Underwriter is obligated to purchase all the Series [ ] Certificates
offered hereby if any are purchased.
Distribution of the Series [ ] Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Depositor,
before deducting expenses payable by the Depositor, will be [ ]% of the
aggregate original principal amount of the Certificates as of the Cut-off Date,
plus accrued interest at the [applicable] [initial] [Weighted Average]
Certificate Rate from the Cut-off Date. In connection with the purchase and
sale of the Series [ ] Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting discounts.
The Underwriter is an affiliate of the Depositor, and the participation by
the Underwriter in the offering of the Certificates complies with Schedule E of
the by-laws of the National Association of Securities Dealers, Inc. regarding
underwriting securities of an affiliate.
The Underwriting Agreement provides that the [Seller] [Depositor] will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act, or contribute to payments the Underwriter may be
required to make in respect thereof.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that they be rated "
" by a nationally-recognized statistical rating agency (the "Rating Agency").
The Rating Agency or rating agencies rating any other Series are collectively
referred to herein as the "Rating Agencies" or individually as a "Rating
Agency". The Certificates offered hereby are investment grade asset-backed
securities within the meaning of the Act and the rules promulgated thereunder.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Depositor by Brown & Wood LLP and, with respect to the
Federal tax consequences of such issuance, by [special] tax counsel, Brown &
Wood LLP. Certain legal matters relating to the issuance of the Certificates
will be passed upon for the Underwriter[s] by Brown & Wood LLP.
<PAGE>
Index of Principal Terms
Accounts.................................................................
Act......................................................................
Agreement................................................................
Amortization Period......................................................
Base Rate................................................................
Business Day.............................................................
Cede.....................................................................
Cedel....................................................................
Certificate Interest.....................................................
Certificateholders.......................................................
Certificateholders' Interest.............................................
Certificates.............................................................
Certificate Rate.........................................................
Closing Date.............................................................
Collection Account.......................................................
Commission...............................................................
Controlled Amortization Amount...........................................
Controlled Amortization Period...........................................
Controlled Amount........................................................
Controlled Distribution Amount...........................................
Depositor................................................................
Depositor's Amount.......................................................
Depositor's Interest.....................................................
Depositor's Percentage...................................................
Depositor Portfolio Due Date.............................................
Due Period...............................................................
Enhancement Account......................................................
Enhancement Trustee......................................................
ERISA....................................................................
Euroclear................................................................
Excess Principal Collections.............................................
FDIC.....................................................................
Finance Charge Receivables...............................................
Ineligible Receivable....................................................
Initial Cut-off Date.....................................................
Initial Closing Date.....................................................
Initial Investor Amount..................................................
Interchange..............................................................
Interest Period..........................................................
Investment Company Act...................................................
Investor Amount..........................................................
Investor Percentage......................................................
Liquidation Event........................................................
Minimum Principal Receivables............................................
Minimum Depositor's Percentage...........................................
Monthly Investor Servicing Fee...........................................
Net Portfolio Yield......................................................
Paired Series............................................................
Payment Date.............................................................
Payment Rate.............................................................
Pool Factor..............................................................
Prime Rate...............................................................
Principal Allocation.....................................................
Principal Receivables....................................................
Rapid Amortization Period................................................
Rate Determination Date..................................................
Rating Agency............................................................
Receivables..............................................................
Record Date..............................................................
Relevant Cut-off Date....................................................
Revolving Period.........................................................
Series...................................................................
Series [ ] Payout Event..............................................
Seller...................................................................
Seller Default...........................................................
Servicing Fee............................................................
Special Tax Counsel......................................................
Stated Series [ ] Termination Date....................................
Supplement...............................................................
Transfer Date............................................................
Treasury Rate............................................................
Trust....................................................................
Trustee..................................................................
Trust Portfolio..........................................................
Underwriters.............................................................
<PAGE>
LEHMAN CARD ACCOUNT
MASTER TRUST
$______________
[ADJUSTABLE RATE] [VARIABLE RATE] [ %]
ASSET BACKED [SENIOR/SUBORDINATE] CERTIFICATES,
SERIES ________
[CLASS ______]
LEHMAN ABS CORPORATION
-------------------------------
PR0SPECTUS SUPPLEMENT
-------------------------------
LEHMAN BROTHERS
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
Prospectus Supplement dated _________________, _____, _____
To Prospectus dated _________________, _____, _____
$_____________
LEHMAN CARD ACCOUNT MASTER TRUST
[Adjustable Rate] [Variable Rate] [ __%] Asset Backed
[Senior/Subordinate] Certificates, Series ___
<TABLE>
<CAPTION>
[Seller], Lehman ABS Corporation,
as Seller as Depositor
Certificate Principal Certificate Price to Underwriting Beneficial Proceeds to the
Class Balance Rate Public(5) Discount (6) Interest Depositor(7)
- --------------- --------------- --------------- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Class $ % % % %
______
Total $ $ $ $
</TABLE>
______________
(1) [The [Class __] certificates will have a notional principal balance of
approximately $[ ]].
(2) [The [Class __] certificates will receive distributions of a portion of the
interest on the underlying assets and will not receive any principal].
(3) [The [Class __] certificates are not offered by means of this prospectus
supplement].
(4) [The rights of holders of the [Class __] certificates to receive
distributions are subordinated to the rights of holders of the [Class __]
certificates].
(5) Plus accrued interest, if any, at the [certificate] rate from
_________________, _____, _____
(6) The depositor has agreed to indemnify Lehman Brothers against certain
liabilities, including liabilities under the Securities Act of 1933.
(7) Before deducting expenses, payable by the depositor, estimated to be
$________.
THE CERTIFICATES
o represent the entire beneficial interest in a trust, whose assets are a
pool of asset backed certificates or notes which evidence interests in one
or more portfolios of [consumer] [revolving] [credit card] [charge card]
[debit card] receivables generated from time to time in a portfolio of
[consumer] [revolving] [credit card] [charge card] [debit card] accounts,
all monies due in payment of the receivables [transferred to the trust by
the depositor on or prior to the closing date] [and monies on deposit in a
pre-funding account] and certain other properties
o currently have no trading market
o are obligations of the trust only and are not obligations of the
depositor, the master servicer or [its/their] affiliates
CREDIT ENHANCEMENT
o will be provided in the form of [reserve funds] [subordination of the
Class[ ] Certificates], [guarantees] [letters of credit] [cash collateral
accounts] [deposit monies in a trust account] [overcollateralization] [an
irrevocable and unconditional certificate guaranty insurance policy issued
by [insurer]]
REVIEW THE INFORMATION IN RISK FACTORS ON PAGE S-_ OF THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 2 OF THE PROSPECTUS.
o For complete information about the certificates read both this prospectus
supplement and the prospectus. This prospectus supplement must be
accompanied by the prospectus if it is being used to offer and sell the
certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these asset backed certificates or
passed upon the adequacy or accuracy of this prospectus supplement and this
prospectus. Any representation to the contrary is a criminal offense.
LEHMAN BROTHERS
<PAGE>
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 certificates 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.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary........................................................................1
Risk Factors...................................................................7
Description of the Certificates...............................................10
Use of Proceeds...............................................................21
Certain Federal Income Tax Consequences.......................................21
Underwriting..................................................................22
Legal Matters.................................................................22
Rating........................................................................22
Schedule I....................................................................24
Index of Principal Terms......................................................27
PROSPECTUS
Risk Factors...................................................................2
Description of the Securities..................................................7
Trust Assets..................................................................14
Enhancement...................................................................18
Servicing of Receivables......................................................21
The Agreements................................................................25
Custody Receipts; Custody Agreements..........................................34
Certain Legal Aspects of the Receivables......................................37
The Depositor.................................................................41
Use of Proceeds...............................................................41
Certain Federal Income Tax Considerations.....................................42
Fasit Securities..............................................................49
State Tax Considerations......................................................53
ERISA Considerations..........................................................53
Ratings.......................................................................53
Plan of Distribution..........................................................53
Legal Matters.................................................................53
Available Information.........................................................54
Glossary of Terms.............................................................55
Annex I......................................................................I-1
<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. To understand all of the terms of the offering of the
certificates, you should carefully read this entire document and the
accompanying prospectus.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of theses calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
[CERTIFICATE] INTEREST RATE
CLASS (FIRST DISTRIBUTION LAST SCHEDULED
DATE ONLY) INTEREST RATE1 PRINCIPAL BALANCE DISTRIBUTION DATE
<S> <C> <C> <C> <C>
__________% [LIBOR+%][%]
__________% [LIBOR+%][%]
</TABLE>
1 For each distribution date after the first distribution date.
2 We except the actual last distribution date for each certificate will be
significantly earlier than its last schedule distribution date.
THE TRUST
Lehman Card Account Master Trust will be formed pursuant to a master pooling
and servicing agreement among Lehman ABS Corporation, as depositor, __________,
as master servicer and ____________, as trustee.
CERTIFICATES OFFERED
Each of the [Adjustable Rate] [Variable Rate] [ %] Asset Backed Certificates,
Series ___ [Class____] offered hereby represents an undivided interest in the
trust. Holders of each [class ] certificate are entitled to receive payments of
interest at the [adjustable] [variable] [fixed] rate described below, payable
[monthly] [quarterly] [semi-annually] [and payments of principal at such time
and to the extent provided below].
[The aggregate undivided interest in the trust represented by the class __
certificates as of the closing date will equal $__________ of principal or the
original invested amount, which represents [ ]% of the invested amount of the
CABS as of the cut-off date. Following the closing date, the "invested amount"
with respect to any date will be an amount equal to the original invested
amount minus the amount of principal collections previously distributed to the
holders of the certificates and minus the excess, if any, of the aggregate
amount of investor charge-offs for all payment dates preceding such date, over
the aggregate amount of any reimbursements of investor charge-offs for all
payment dates preceding such date.]
[The aggregate undivided interest in the trust represented by the class [ ]
certificates as of the closing date will equal $______ of outstanding [class [
] notional amount. The notional amount for the class [ ] certificates is equal
to the outstanding principal balance of the CABS, but is used solely for
purposes of determining interest payments and certain other rights of holders
of class [ ] certificates and does not represent any interest in or right to
receive principal payments.]
TRUST PROPERTY
The property of the trust will consist of certain asset backed certificates or
notes (collectively, the "CABS"), which represent fractional undivided
interests in separate trust funds, the assets of which include portfolios of
[consumer] [revolving] [credit card] [charge card] [debit card] receivables
generated or to be generated from time to time in the ordinary course of
business in a portfolio of [consumer] [revolving] [credit card] [charge card]
[debit card] accounts, and all monies due in payment of the receivables
[excluding the benefits of and payments in respect of enhancements issued with
respect to any other series (the drawing on or payment of such enhancements not
being available to holders of certificates)]. [The CABS will be issued pursuant
to a pooling and servicing agreement, master pooling and servicing agreement,
sale and servicing agreement, indenture or trust agreement]. The seller will
sell the CABS to Lehman ABS Corporation. Lehman will deposit the CABS with the
trust. The CABS are described in further detail in Schedule 1 to this
prospectus supplement.
The principal balance of the CABS on any day is the principal balance reported
as such in the most recent monthly report received by the trustee from the
trustee for the holders of the CABS.
The trustee, as the holder of the CABS, will be entitled to [monthly]
[quarterly] [semi-annual] distributions of interest on the CABS on the ____ day
of each [month] [quarter] [semi-annual period] or, if such day is not a
business day, on the next succeeding business day, at [adjustable rate]
[variable rate] [___%] per annum. Principal distributions on the CABS will be
made on [each] CABS payment date, beginning with the _________ CABS payment
date.
[The CABS are subject to retirement under certain conditions following the CABS
payment date in _________.
We refer you to "DESCRIPTION OF THE CABS--Optional Repurchase; Series 199_
Payout Events and Liquidation Events" in Appendix 2 to this prospectus
supplement.]
On ____________ or the "closing date", the trust will purchase CABS having an
aggregate principal balance of approximately $____________ as of an initial
cut-off date, from the depositor pursuant to the pooling and servicing
agreement. On and following the closing date, pursuant to the pooling and
servicing agreement, the depositor will sell, only if they are available, and
the trust will purchase, subject to the satisfaction of certain conditions,
additional CABS from time to time during the funding period specified in this
prospectus supplement.
The amount of CABS to be purchased will have an aggregate principal balance
equal to approximately $________ (such amount being equal to an amount on
deposit in the pre-funding account on the closing date). The depositor will
designate as a cutoff date the date as of which particular subsequent CABS are
conveyed to the trust. It is expected that certain of the subsequent CABS
arising between the initial cut-off date and the closing date will be conveyed
to the trust on the closing date and that other subsequent CABS will be
conveyed to the trust as frequently as daily thereafter on dates specified by
the depositor occurring during the Funding Period.
We refer you to "DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT -- Sale and
Assignment of CABS; Subsequent CABS" in this prospectus supplement
The initial CABS have been selected, and the subsequent CABS will be selected,
from the CABS owned by the depositor based on the criteria specified in the
pooling and servicing agreement and described herein.
Following the transfer of subsequent CABS to the trust, the characteristics of
the entire pool of CABS included in the trust may vary significantly from those
of the initial CABS.
We refer you to "RISK FACTORS -- The CABS and the Pre-Funding Account" and "The
CABS Pool" in this prospectus supplement.
POOLING AND SERVICING AGREEMENT
The certificates will be issued pursuant to a pooling and servicing agreement
dated as of __________, between the depositor, ________, in its capacity as
master servicer and ______________ in its capacity as trustee. Pursuant to the
pooling and servicing agreement, the depositor will transfer the CABS to the
trustee in exchange for the certificates. The trustee will allocate each
distribution of principal and interest on CABS among the certificates in
accordance with the pooling and servicing agreement.
DEPOSITOR
Lehman ABS Corporation, a Delaware corporation, will act as the depositor. The
principal executive offices of the depositor are located at 200 Vesey Street,
Three World Financial Center, New York, New York 10285 (Telephone: (212)
298-2000).
We refer you to "THE DEPOSITOR" in the prospectus.
SELLER
[Lehman Special Securities, Inc. will act as the seller and] [on or prior to
the closing date, will sell the CABS to the depositor, which in turn will
transfer the CABS to the trust pursuant to the pooling and servicing
agreement.] Information regarding the seller's accounts and portfolio is
included in Appendix 1 to this prospectus supplement.
TRUSTEE
[ ] will act as trustee under the pooling and servicing
agreement.
COLLECTIONS
All collections on the CABS will generally be allocated in accordance with the
monthly reports between amounts collected in respect of interest and amounts
collected in respect of principal.
[The master servicer will deposit any amounts required under the pooling and
servicing agreement in a collection account established under the pooling and
servicing agreement.] The trustee will deposit any amounts required under the
pooling and servicing agreement in a distribution account established under the
pooling and servicing agreement.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Payments on CABS; Deposits to
Collection Account and Distribution Account".
INTEREST
Interest on the class [ ] certificates will be distributed [monthly]
[quarterly] [semi-annually] on the [____ day of each [month] [quarter]
[semi-annual period]] [CABS payment date; or, if such date is not a business
day then the next succeeding business day following the CABS payment date],
commencing on _________, at the certificate rate for the related interest
period.
The certificate rate of interest will accrue on the unpaid principal amount of
the class [ ] certificates with respect to each interest period, at the rate of
[adjustable rate] [variable rate] [____%] per annum [and interest will accrue
on the notional amount of the class [ ] certificates of the per annum rate
specified in this prospectus supplement].
Interest on the certificates in respect of any payment date will accrue from
the preceding payment date (or in the case of the first payment date, from the
closing date) through the day preceding such payment date on the basis of [the
actual number of days in the interest period and a 360-day year] [a 360 day
year consisting of twelve thirty-day months].
We refer you to "DESCRIPTION OF THE CERTIFICATES" in this prospectus supplement.
[CONTROLLED AMORTIZATION PERIOD
Unless a rapid amortization period (as described below) commences, the
certificates will have a controlled amortization period during which
collections of principal receivables allocable to the percentage interest of a
series of certificates will be used on each payment date to make principal
distributions in scheduled amounts to the holders of certificates then
scheduled to receive such distributions. The amount to be distributed on any
payment date during the controlled amortization period will be limited to an
amount equal to ________ plus any existing deficit controlled amortization
amount arising from prior payment dates. The controlled amortization period
will commence at the close of business on a date specified in this prospectus
supplement and continue until the earliest of:
(a) the commencement of the rapid amortization period;
(b) payment in full of the certificates; and
(c) the series termination date].
[PRINCIPAL AMORTIZATION PERIOD
Unless a rapid amortization period (as described below) commences, the
certificates will have an amortization period during which collections of
principal receivables allocable to the percentage interest of the certificates
will be used on each payment date to make principal distributions to the
holders of the certificate then scheduled to receive such distributions. The
principal amortization period will commence at the close of business on
________________ and continue until the earlier of:
(a) the commencement of the rapid amortization period;
(b) payment in full of the certificates; and
(c) the series termination date].
[ACCUMULATION PERIOD
Unless a rapid amortization period (as described below) commences, the
certificates will have an accumulation period during which collections of
principal receivables allocable to the percentage interest of such certificates
will be deposited on the business day immediately prior to each payment date in
a principal funding account established for the benefit of the holders of the
certificates and used to make distributions of principal to the holders on the
scheduled payment date. The amount to be deposited in the principal funding
account on any transfer date will be limited to an amount equal to [______].
The accumulation period will commence at the close of business on ___________
and continue until the earliest of:
(a) the commencement of the rapid amortization period;
(b) payment in full of the certificates; and
(c) the series termination date].
[RAPID AMORTIZATION PERIOD
The rapid amortization period shall run from the day on which an amortization
event has occurred to the earliest of the date on which certificates have been
paid in full or the related series termination date. During the rapid
amortization period, collections of principal receivables allocable to the
percentage interest of a series of certificates will be distributed as
principal payments to the holders of the certificates monthly on each payment
date. During the rapid amortization period, distributions of principal to
holders of the certificates will not be subject to any Controlled Deposit
Amount or Controlled Distribution Amount. In addition, upon the commencement of
the rapid amortization period, any funds on deposit in a principal funding
account will be paid to the holders of certificates on the first payment date
in the rapid amortization period.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Amortization Events".
[CREDIT ENHANCEMENT
The certificates will have the benefit of an [enhancement] issued pursuant to
the pooling and servicing agreement described below. The [enhancement] will be
issued by [a provider of credit enhancements]. [description of enhancement.]]
We refer you to "[CREDIT ENHANCEMENT]" in this prospectus supplement.
MASTER SERVICER
__________________________ will act as the master servicer. The principal
executive offices of the master servicer are located at
__________________________ (telephone: _____________).
SERVICING
The master servicer will be responsible for servicing, managing and making
collections on the CABS.
The master servicer will receive a [monthly] [quarterly] [semi-annual]
servicing fee equal to, on an annualized basis, ___% [on the aggregate
outstanding principal balance of the CABS].
We refer you to "DESCRIPTION OF THE CERTIFICATES--Servicing Compensation and
Payment of Expenses" in this prospectus supplement.
In certain limited circumstances, the master servicer may resign or be removed,
in which event either the trustee or a third-party servicer will be appointed
as a successor master servicer.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Certain Matters Regarding the
Master Servicer and the Depositor" in this prospectus supplement.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The trust will terminate on the payment date following [the later of (a)
payment in full of all amounts owing to the credit enhancement provider and
(b)] the earlier of:
(i) the payment date on which the principal balance of the certificates has
been reduced to zero; or
(ii) the final payment or other liquidation of the last CABS in the trust;
and
(iii) the payment date in _______.
We refer you to "DESCRIPTION OF THE CERTIFICATES -- Termination; Retirement of
the Certificates" in this prospectus supplement and "THE POOLING AND SERVICING
AGREEMENTS--Termination" in the prospectus.
In addition, the trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the depositor.
We refer you to "DESCRIPTION OF THE CERTIFICATES-- Amortization Events" in this
prospectus supplement.
MANDATORY RETRANSFER OF CABS
The depositor will make certain representations and warranties in the pooling
and servicing agreement with respect to the CABS. If the depositor breaches
certain of its representations and warranties with respect to any CABS so that
such breach materially and adversely affects the interests of the holders of
the certificates [or the credit enhancement provider] and the breach is not
cured within a specified period, the relevant CABS will be removed from the
trust upon the expiration of a specified period from the date on which the
depositor becomes aware or receives notice of such breach. The CABS that are
removed will be reassigned to the depositor.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Assignment of CABS" in this
prospectus supplement.
[PRE-FUNDING ACCOUNT
During the funding period, an amount referred to as the pre-funded amount will
be maintained in an account in the name of the trustee. The funding period will
run from and including the closing date until the earliest of:
(i) the date on which:
(a) the amount on deposit in such pre-funding account is less
than $__;
(b) an amortization event occurs or;
(c) certain events of insolvency occur with respect to the
depositor or;
(ii) the close of business on the payment date.
The pre-funded amount will initially equal approximately $__________, and
during the funding period, will be reduced by the amount thereof used to
purchase subsequent CABS in accordance with the trust agreement. The seller
expects that the pre-funded amount will be reduced to less than $____________
by the _____ payment date. Any pre-funded amount remaining at the end of the
funding period will be payable to the holders of the certificates [pro rata] in
proportion to the respective percentage interest of each class of the
certificates.]
[MANDATORY PREPAYMENT
The certificates will be prepaid, in part, pro rata on the basis of their
initial principal amounts, on the payment date on or immediately following the
last day of the funding period in the event that any amount remains on deposit
in the pre-funding account after giving effect to the purchase of all
subsequent CABS, including any such purchase on such date. The aggregate
principal amount of certificates to be prepaid will be an amount equal to the
certificates' percentage interest of the amount then on deposit in the
pre-funding account.]
[REGISTRATION OF CERTIFICATES
We will issue the certificates in book-entry form. You will hold your interests
through a depository. While the certificates are book-entry they will be
registered in the name of the depository.
The limited circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
We refer you to "RISK FACTORS - Book-Entry Certificates" in this prospectus
supplement.]
FEDERAL TAX CONSEQUENCES
Brown & Wood LLP is of the opinion that, the certificates are debt of the
depositor for federal, income tax purposes. Each holder of a certificate, by
acceptance of a certificate, will agree to treat the certificate as
indebtedness for Federal income tax purposes.
We refer you to "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the prospectus
for additional information concerning the application of Federal income tax
laws.
[LEGAL INVESTMENT RESTRICTIONS
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject
to restrictions on investment in the certificates.
We refer you to "Legal Investment Considerations" in this prospectus supplement.
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan subject to ERISA or the US federal
tax code should carefully review with its legal advisors whether the purchase
or holding of certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the [US federal tax code].]
[The certificates generally may not be transferred to a fiduciary of any
employee benefit plan subject to ERISA or Section 4975 of the US federal tax
code.]
We refer you to ["ERISA CONSIDERATIONS"] in the prospectus and in this
prospectus supplement.
CERTIFICATE RATING
Before the certificates can be issued, the [trust] must obtain a rating of:
[Rating][Rating Agency]
Ratings such as the ratings obtained for the certificates address credit risk.
When evaluating credit risk, the rating agencies look at the likelihood of
whether or not you will receive your interest and principal payments. There is
no assurance that once a rating is given that it will continue for any period
of time or that it will not be revised or withdrawn entirely by such rating
agency if, in its judgment, circumstances so warrant. A revision or withdrawal
of the rating may have an adverse effect on the market price of the
certificates. A security rating is not a recommendation to buy, sell or hold
securities.
We refer you to "RATINGS" in this prospectus supplement and "RISK
FACTORS--Limited Nature of Rating" in the prospectus.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the certificates. The underwriters
currently intend to make a market in the certificates but are under no
obligation to do so. There can be no assurance that a secondary market will
develop in the certificates. If a secondary market does develop, there can be
no assurance that it will provide holders of the certificates with liquidity of
investment or that it will continue for the life of the certificates.
[THE CABS AND THE PRE-FUNDING ACCOUNT
On the closing date, we will transfer to the trust approximately $ of
initial CABS and the approximately $ pre-funded amount. The trustee will
deposit these amounts in the pre-funding account. If the principal amount of
eligible CABS that we convey to the trust during the funding period is less
than the pre-funded amount, we will have insufficient CABS to sell to the trust
on the subsequent transfer dates. This will result in you receiving a
prepayment of principal. The prepayment will be in an amount equal to the
applicable [[Pre-Funded Percentage]], in respect of a class of the
certificates, of the pre-funded amount remaining in the pre-funding account
following the purchase of any subsequent CABS on such payment date. You will
receive this prepayment on the payment date on or immediately following the
last day of the funding period.
Each of the subsequent CABS must satisfy the eligibility criteria
specified in the trust agreement at the time of its addition. Moreover, our
conveyance of any subsequent CABS during any collection period will be subject
to the satisfaction, on or before the payment date following the end of such
collection period, of certain conditions subsequent, including our receipt of
written notification from the rating [agency] [agencies] that, following the
addition of the subsequent CABS, the rating [agency] [agencies]] will rate [the
Class ] [each class of the] certificates at least "[ ]".
We will immediately repurchase any subsequent CABS, at a price equal to
the [[Purchase Amount]] thereof, upon our failure to satisfy any of the
required conditions subsequent. The rating [agency's][agencies'] confirmation
of the ratings of the certificates may depend on factors other than the
characteristics of the subsequent CABS.
We anticipate that the principal amount of subsequent CABS that we will
sell to the trust will not be exactly equal to the amount on deposit in the
pre-funding account. Therefore, we expect that you will receive at least a
nominal amount of prepaid principal. Our transfer of subsequent CABS to the
trust may significantly vary the characteristics of the pool of CABS included
in the trust from those of the initial CABS.
We refer you to "--- Social, Economic and Other Factors" and "--- Our
Relationship to the Trust" below and to "DESCRIPTION OF THE CABS".]
[SOCIAL, ECONOMIC AND OTHER FACTORS
Our ability to acquire subsequent CABS is largely dependent upon a variety
of social and economic factors, [such as [ ]]. We are unable to determine and
have no basis to predict whether or to which extent economic or social factors
will affect the availability of subsequent CABS.]
OUR RELATIONSHIP TO THE TRUST
We are [not] generally obligated to make any payments in respect of the
certificates or the CABS.
MATURITY ASSUMPTIONS
The rate of payment of principal (including prepayments) of the CABS will
determine:
o the rate of payment of principal of each Class [ ] certificate;
and
o the aggregate amount of each distribution on and the yield to
maturity of all certificates.
[The issuer of the CABS may be obligated prepay the CABS upon the
occurrence of an Amortization Event, which may result from the occurrence of
the events described in this prospectus supplement and in the prospectus that
the issuer used to offer the CABS.]
[The issuer of the CABS may have the option to repurchase the CABS, but
only after the aggregate principal balance of the CABS is less than [ ]% of
their original principal balance. Any such repurchase may also affect the rate
of payment of principal of your Class [ ] certificates. The relevant issuer
would be obligated to repurchase the CABS at a purchase price equal to [ ]% of
their principal balance, plus accrued and unpaid interest. If the issuer of the
CABS exercises its right to repurchase the CABS, the repurchase price paid by [
] will be passed through to you as a payment of principal.]
[We are offering your [Class ] certificates without any original principal
amount. Therefore, the yield to maturity on your [Class ] certificates is
extremely sensitive to the rate of payment or prepayment of the CABS. You
should fully consider the associated risks, including the risk that if the rate
of principal payment on the CABS is rapid, you may not recoup your initial
investment.
We refer you to ["Yield on the Series _____ Certificates and Prepayments
of the CABS".]]
CONSIDERATIONS REGARDING CABS; RECENT DEVELOPMENTS
You should consider carefully the factors set forth under "Special
Considerations" in any excerpted sections of the prospectus relating to the
CABS for certain additional considerations relating to the CABS and investments
backed by receivables. Neither we nor the underwriter participated in the
preparation of the prospectus relating to the CABS or the offering of the CABS.
Therefore, neither we nor the underwriter can guarantee the accuracy or
completeness of the information provided in such prospectus or in the publicly
available documents referred to below. Furthermore, you should not construe
such information as a representation by us or the underwriter.
You also should be aware that information set forth in any excerpted
sections of the prospectus relating to the CABS speaks only as of the date of
the prospectus relating to the CABS. Therefore, there can be no assurance that
events have not occurred, which have not yet been publicly disclosed, that
would affect the accuracy or completeness of any statements included in any
excerpted sections of the prospectus relating to the CABS or in the publicly
available documents filed by or on behalf of the CABS trust.
[[ ], as originator of the CABS trust, is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended. Accordingly, [
] files annual and periodic reports and other information with the securities
exchange commission. Copies of such reports and other information may be
inspected and copied at certain offices of the securities exchange commission
at the addresses listed under "Available Information" in the prospectus
relating to the CABS.]
[Describe any other recent material developments that may exist from such
publicly available information.]
[THE ENHANCEMENT
Although the certificates will have the benefit of an enhancement, the
amount available under the enhancement
o is limited;
o is expected to decline during either Amortization Period;
o and will be reduced by draws made under the enhancement from time to
time.
If the amount that would otherwise have been available under the
enhancement is no longer available, you will bear directly the credit and other
risks associated with your undivided interest in the trust.
We refer you to "DESCRIPTION OF THE CERTIFICATES--The Enhancement."
BOOK-ENTRY CERTIFICATES MAY BE ILLIQUID
Issuance of the certificates in book-entry form may reduce the liquidity
of such securities in the secondary trading market since investors may be
unwilling to purchase securities for which they cannot obtain physical
securities. [You may be unable to sell your certificates or a sale may result
in a lower return than expected.]
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry
Certificates."
BOOK-ENTRY CERTIFICATES MAY NOT BE ABLE TO BE PLEDGED
Since transactions in the certificates can be effected only through DTC,
Cedelbank, Euroclear, participating organizations, indirect participants and
certain banks, your ability to pledge your security to persons or entities that
do not participate in the DTC, Cedelbank or Euroclear system or otherwise to
take actions in respect of such securities, may be limited due to lack of a
physical security representing the certificates.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates."
BOOK-ENTRY CERTIFICATES MAY RESULT IN DELAYED RECEIPT OF DISTRIBUTIONS
As a beneficial owner, you may experience some delay in your receipt of
distributions of interest on and principal of your certificates since such
distributions will be forwarded by the trustee to DTC and DTC will credit such
distributions to the accounts of its participants which will thereafter credit
them to the accounts of the beneficial owners either directly or indirectly
through indirect participants.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates."
RATING OF THE CERTIFICATES
The rating of the certificates will depend primarily on an assessment by
the [rating agency] of the CABS [and upon the claims-paying ability of the
enhancer. The [rating agency] may reduce the rating of the certificates if it
decides to reduce a rating assigned to the claims-paying ability of the
enhancer below the rating initially given to the certificates.] A rating is not
a recommendation to you to purchase, hold or sell certificates, inasmuch as
such rating does not comment as to market price or suitability for a particular
investor. There can be no assurance that a rating will remain for any given
period of time or that a rating agency will not lower or withdraw entirely its
rating if in its judgment circumstances in the future so warrant. The [rating
agency's] ratings of the certificates does not address the possibility that the
United States will impose a withholding tax on you if you are a non-U.S.
person.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject, and are qualified in their entirety by
reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of $1,000 and integral
multiples thereof (except that one Certificate may be issued in a denomination
that is not an integral multiple of $1,000) and will evidence specified
undivided interests in the Trust. The property of the Trust will consist of, to
the extent provided in the Agreement: (i) each of the CABS that from time to
time are subject to the Agreement; (ii) collections on the CABS received after
the Cut-off Date; (iii) the Collection Account, the Distribution Account [,
Pre-Funding Account or any other account in the Trust] (excluding net earnings
thereon); and [(iv) the Enhancement or other assets]. Definitive Certificates,
if issued, will be transferable and exchangeable at the corporate trust office
of the Trustee, which will initially act as Certificate Registrar. No service
charge will be made for any registration, exchange or transfer of Certificates,
but the Trustee may require payment of a sum sufficient to cover any tax or
other governmental charge.
The aggregate undivided interest in the Trust represented by the [Class
__] Certificates as of the Closing Date (as defined herein) will equal
$__________ of principal (the "Original Certificate Principal Balance" and the
"Original Invested Amount"), which represents [ ]% of the Original Invested
Amount of the CABS. Following the Closing Date, the "Invested Amount" with
respect to any Payment Date will be an amount equal to the Original Invested
Amount minus the amount of Principal Collections previously distributed to
Certificateholders and minus the excess, if any, of the aggregate amount of
Investor Charge-Offs for all Payment Dates preceding such date, over the
aggregate amount of any reimbursements of Investor Charge-Offs for all Payment
Dates preceding such date. The principal amount of the outstanding Certificates
(the "Certificate Principal Balance") on any Payment Date is equal to the
Original Certificate Principal Balance minus the aggregate of amounts actually
distributed as principal to the Certificateholders. See "-- Distributions on
the Certificates" below. Each Certificate represents the right to receive
payments of interest at the Certificate Rate and payments of principal as
described below.
ASSIGNMENT OF CABS
At the time of issuance of the Certificates, the Depositor will transfer
to the Trust all of its right, title and interest in and to each of the CABS,
including all collections received on or with respect to each of such CABS
subsequent to the Cut-off Date. The Trustee, concurrently with such transfer,
will deliver the Certificates (as defined in the Agreement) to the Depositor.
Each of the CABS transferred to the Trust will be identified on a schedule (the
"Schedule") delivered to the Trustee pursuant to the Agreement. Such Schedule
will include information as to the Cut-off Date balance of each of the CABS, as
well as information with respect to the rate.
The Agreement will require the Depositor to deliver to the Trustee (or a
custodian, as the Trustee's agent for such purpose) the CABS on or prior to the
Closing Date.
The Depositor will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each of the CABS (e.g., Cut-off Date balance and the
pass-through rate). In addition, the Depositor will represent and warrant, on
the Closing Date, that, among other things, at the time of transfer to the
Trust, the Depositor has transferred all of its right, title and interest in
each of the CABS free of any lien. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the
interests of the Certificateholders [or the Enhancer] in the related documents,
the Depositor will have a period of __ days after discovery or notice of the
breach to effect a cure. If the breach cannot be cured within the __-day
period, the Depositor will be obligated to accept a retransfer of the CABS from
the Trust. The same procedure and limitations that are set forth in the
preceding paragraph for the retransfer of CABS will apply to the retransfer of
CABS that are required to be retransferred because of a breach of a
representation or warranty in the Agreement that materially and adversely
affects the interests of the Certificateholders.
Pursuant to the Agreement, the Master Servicer will service and administer
the CABS as more fully set forth above.
PAYMENTS ON CABS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT
The Master Servicer has established and will maintain a single separate
trust account (the "Collection Account") for the benefit of the
Certificateholders. The Collection Account will be an Eligible Account, as
specified in the Agreement. Upon receipt by the Master Servicer of amounts in
respect of the CABS, the Master Servicer will deposit such amounts in the
Collection Account as are specified in the Agreement. Amounts so deposited will
be invested in Permitted Investments (as described in the Agreement) maturing
no later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
other date as may be approved by the Rating Agencies [and the Enhancer]. Not
later than the third Business Day prior to each Payment Date (the
"Determination Date"), the Master Servicer will notify the Trustee of the
amount of such deposit to be included in funds available for the related
Payment Date.
The Trustee will establish and maintain an account (the "Distribution
Account") into which will be deposited all amounts received on the CABS and
amounts withdrawn from the Collection Account for distribution in accordance
with the Agreement. The Distribution Account will be an Eligible Account.
Amounts on deposit therein will be invested in Permitted Investments maturing
on or before the Business Day prior to the related Payment Date.
Permitted Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
ALLOCATIONS AND COLLECTIONS
Except as described below, all collections on the CABS will be allocated
in accordance with the Monthly Reports with respect to the CABS between amounts
collected in respect of interest and amounts collected in respect of principal.
[Amounts received from the CABS with respect to any Seller will not be used to
pay shortfalls on any CABS with respect to other Sellers.]
As to any Payment Date, "Interest Collections" will be equal to the sum of
interest distributions thereon received by the Trustee, as identified as such
on the Monthly Report during the related Collection Period. As to any Payment
Date, "Principal Collections" will be equal to the sum of the amounts collected
during the related Collection Period and allocated to principal identified as
such on the Monthly Report.
With respect to any Payment Date, the portion of Interest Collections
allocable to the Certificates will equal the product of (a) Interest
Collections for such Payment Date and (b) the Certificateholders' percentage
interest. Principal Collections will be allocated among the Certificateholders
in accordance with their percentage interests in the Trust.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Payment Date (which will occur on __________),
distributions on the Certificates will be made by the Trustee or the Paying
Agent on each Payment Date to the persons in whose names such Certificates are
registered at the close of business on the last day of the month preceding such
Payment Date (the "Record Date"). The term "Payment Date" means the [__________
day of each [month] [quarter] [semi-annual period]] [or, if such date is not
the next succeeding Business Day following a CABS Payment Date, then the next
succeeding Business Day following such CABS Payment Date.] Distributions will
be made by check or money order mailed (or upon the request of a
Certificateholder owning Certificates having denominations aggregating at least
$5,000,000, by wire transfer or otherwise) to the address of the person
entitled thereto as it appears on the Certificate Register in amounts
calculated as described herein on the Determination Date. However, the final
distribution in respect of the Certificates will be made only upon presentation
and surrender thereof at the office or the agency of the Trustee specified in
the notice to Certificateholders of such final distribution. For purposes of
the Agreement, a "Business Day" is any day other than (i) a Saturday or Sunday
or (ii) a day on which banking institutions in the States of New York or
__________ are required or authorized by law to be closed.
Application of Interest Collections. On each Payment Date, the Trustee or
the Paying Agent will apply the Interest Collections as follows[, the priority
or inclusion of which shall be determined in the Agreement]:
(i) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon) on the [Certificate Principal Balance]
[notional amount] of the Class [___] Certificates;
(ii) to pay the Master Servicing Fee;
[(iii) as payment for any amounts due for Enhancement;]
(iv) to pay Certificateholders the product of the Certificateholders'
percentage interest and any overdue principal for such Payment Date;
[(v) to reimburse prior draws made from the Enhancement (with
interest thereon at ______________________________);]
(vi) to pay principal on the Certificates;
[(vii) any other amounts required to be deposited in an account for
the benefit of the Enhancer or owed to the Enhancer pursuant to
__________________________]; and
(viii) any other amounts required to be paid pursuant to the
Agreement.
Payments to Certificateholders pursuant to clause (i) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to
clauses (iv), (v) and (vi) will be principal payments on the Certificates and
will therefore reduce the Invested Amount and the Certificate Principal
Balance.
As to any Payment Date, the "Collection Period" is the period from but not
including the Due Date in the month preceding the month of such Payment Date
(or with respect to the first Payment Date, the Cut-off Date) through the Due
Date in the month of such Payment Date.
Interest will be distributed on each Payment Date at the Certificate Rate
for the related Interest Period (as defined below). The "Certificate Rate" for
a Payment Date will generally equal to [Adjustable Rate] [Variable Rate] [ %]
per annum. Notwithstanding the foregoing, in no event will the amount of
interest required to be distributed in respect of the Certificates on any
Payment Date exceed a rate equal to the rate for the CABS, weighted on the
basis of balance of the CABS as of the commencement of the preceding Collection
Period.
Interest on the Certificates in respect of any Payment Date will accrue on
the Certificate Principal Balance from the preceding Payment Date (or in the
case of the first Payment Date, from 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]
[a 360 day year consisting of twelve thirty-day months]. Interest payments on
the Certificates will be funded from Certificate Interest Collections [and, if
necessary, from draws on the Enhancement.]
Distributions of Principal Collections. On each Payment Date, the Trustee
or Paying Agent will apply Principal Collections as follows. [The priority of
which shall be determined in the Agreement.]
(a) payment of amounts specified in amounts due under (i) through (iv)
above; and
(b) distribution in payment of principal or appropriate in
[Amortization Period] [Controlled Amortization Period] [Rapid Amortization
Period].
The Paying Agent. The Paying Agent shall initially be the Trustee,
together with any successor thereto in such capacity (the "Paying Agent"). The
Paying Agent shall have the revocable power to withdraw funds from the
Distribution Account for the purpose of making distributions to the
Certificateholders.
[AMORTIZATION EVENTS
As described above, the Controlled Amortization Period will continue
through the Payment Date in _______, unless an Amortization Event occurs prior
to such date in which case Amortization Period will commence prior to such
date. "Amortization Event" refers to any of the following events:
(a) failure on the part of the Depositor (i) to make a payment or
deposit required under the Agreement within ____ Business Days after the
date such payment or deposit is required to be made, (ii) to record
assignments when required or (iii) to observe or perform in any material
respect any other covenants or agreements of the Depositor set forth in
the Agreement, which failure continues unremedied for a period of __ days
after written notice;
(b) any representation or warranty made by the Depositor in the
Agreement proves to have been incorrect in any material respect when made
and continues to be incorrect in any material respect for a period of
_____ days after written notice and as a result of which the interests of
the Certificateholders are materially and adversely affected; provided,
however, that an Amortization Event shall not be deemed to occur if the
Depositor has repurchased the CABS during such period (or within an
additional __ days with the consent of the Trustee) in accordance with the
provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Depositor;
(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) an Event of Servicing Termination occurs under the Agreement
(other than the event described in clause (iv) of the definition thereof);
or
[(f) when aggregate principal draws under the Enhancement exceed __%
of the Pool Balance as of the Cut-off Date.]
In the case of any event described in clause (a), (b) or (e), an
Amortization Event will be deemed to have occurred only if, after the
applicable grace period described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than __% of the
percentage interests [or the Enhancer], by written notice to the Depositor and
the Master Servicer (and to the Trustee, if given by the Certificateholders)
declare that an Amortization Event has occurred as of the date of such notice.
In the case of any event described in clause (c), (d) [or (f)], an Amortization
Event will be deemed to have occurred without any notice or other action on the
part of the Trustee or the Certificateholders immediately upon the occurrence
of such event.
In addition to the consequences of an Amortization Event discussed above,
if the Depositor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Depositor, on the day of any such filing or appointment the Depositor will
promptly give notice to the Trustee of any such filing or appointment. Within
__ days, the Trustee will publish a notice of the liquidation or the filing or
appointment stating that the Trustee intends to sell, dispose of or otherwise
liquidate the CABS in a commercially reasonable manner and to the best of its
ability. Unless otherwise instructed within a specified period by
Certificateholders representing undivided interests aggregating more than __%
of the aggregate principal amount of the Certificates, the Trustee will sell,
dispose of or otherwise liquidate the CABS in a commercially reasonable manner
and on commercially reasonable terms. [The remaining proceeds from the sale,
disposition or liquidation of the CABS will [first] be paid to the Enhancer to
the extent of unreimbursed draws under the Enhancement and other amounts owing
to the Enhancer pursuant to the Enhancement Agreement.] Any [remaining] amounts
will be treated as collections allocable to the Certificateholders and the
Certificateholders' percentage interest of such remaining proceeds will be
distributed to the Certificateholders on the date such proceeds are received
(the "Dissolution Distribution Date"). If the portion of such proceeds
allocable to the Certificateholders are not sufficient to pay in full the
remaining amount due on the Certificates, the Certificateholders will suffer a
corresponding loss. [The Enhancement will not be available to cover any such
loss.]
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Depositor and no Amortization Event
exists other than such conservatorship, receivership or insolvency of the
Depositor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Amortization Period or the sale of
CABS described above.]
[In addition, the CABS are subject to Amortization Events, Series ____
Payout Events and/or Liquidation Events. In the event an Amortization Event,
Series ____ Payout Event or Liquidation Event occurs with respect to any CABS,
a pro rata amortization of the Certificates will occur as specified in the
Agreement.]
[THE ENHANCEMENT]
[To follow]
REPORTS TO CERTIFICATEHOLDERS
[To follow]
COLLECTION AND OTHER SERVICING PROCEDURES ON CABS
[To follow]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
[The Master Servicer will receive from interest collections in respect of
the CABS a portion of such interest collections as a [monthly] [quarterly]
[semi-annual] servicing fee (the "Master Servicing Fee") in the amount of ___%
per annum (the "Master Servicing Fee Rate") [on the aggregate principal balance
of the CABS].
The Master Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Certificate
Registrar and any paying agent.]
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before _____ in each year,
beginning _______, to the Trustee 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 Agreement throughout the preceding calendar
year, except as specified in such statement.
On or before _____ of each year, beginning ______, the Master Servicer
will furnish a report prepared by the internal audit division of the Master
Servicer to the Trustee, [the Enhancer] and the Rating Agencies to the effect
that such auditors have examined certain documents and the records relating to
servicing of the CABS under the Agreement and that, on the basis of such
examination, the auditors believe that such servicing was conducted in
compliance with the Agreement except for (a) such exceptions as the auditors
believe to be immaterial and (b) such other exceptions as shall be set forth in
such report. Such internal auditor's report will be accompanied by a letter of
a firm of nationally recognized independent public accountants (who may also
render other services to the Master Servicer or the Depositor) as to the
accuracy of such report based on a review conducted in accordance with
standards established by the American Institute of Certified Public
Accountants.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The 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 with any other activities of a type and nature
presently carried on by it or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably
acceptable to the Trustee; (b) the Rating Agencies have confirmed to the
Trustee that the appointment of such proposed successor servicer as the Master
Servicer will not result in the reduction or withdrawal of the then current
rating of the Certificates[; and (c) such proposed successor servicer is
reasonably acceptable to the Enhancer.] No such resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under
the Agreement through one or more subservicers or delegates, which may be
affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
The Agreement provides that the Master Servicer will indemnify the Trust
and the Trustee from and against any loss, liability, expense, damage or injury
suffered or sustained as a result of the Master Servicer's actions or omissions
in connection with the servicing and administration of the CABS which are not
in accordance with the provisions of the Agreement. Under the Agreement, the
Depositor will indemnify an injured party for the entire amount of any losses,
claims, damages or liabilities arising out of or based on the Agreement. The
Depositor will also indemnify each Certificateholder for any such losses,
claims, damages or liabilities (other than those incurred by a
Certificateholder in the capacity of an investor in the Certificates) except to
the extent that they arise from any action by any Certificateholder. In the
event of an Event of Servicing Termination resulting in the assumption of
servicing obligations by a successor Master Servicer, the successor Master
Servicer will indemnify the Depositor for any losses, claims, damages and
liabilities of the Depositor as described in this paragraph arising from the
successor Master Servicer's actions or omissions. The Agreement provides that
neither the Depositor nor the Master Servicer nor their directors, officers,
employees or agents will be under any other liability to the Trust, the
Trustee, the Certificateholders or any other person for any action taken or for
refraining from taking any action pursuant to the Agreement. However, neither
the Depositor 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 Depositor or the Master Servicer in the performance of
its duties under the Agreement or by reason of reckless disregard of its
obligations thereunder. In addition, the Agreement provides that the 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 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
Agreement and the rights and duties of the parties thereto and the interest of
the Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Agreement
to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by the
Master Servicer to make any deposit required under the Agreement, which failure
continues unremedied for [ ] Business Days after the giving of written notice
of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by Certificateholders evidencing an aggregate,
undivided interest in the Trust of at least 51% of the Certificate 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 Agreement
which materially and adversely affects the interests of the Certificateholders
and continues unremedied for [ ] days after the giving of written notice of
such failure to the Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by Certificateholders evidencing an aggregate, undivided
interest in the Trust of at least [ ]% of the Certificate Principal Balance;
(iii) the occurrence of an "Insolvency Event" (as defined in the Agreement)
with respect to the Master Servicer or (iv) a change in control (as defined in
the Securities Exchange Act of 1934) of the Master Servicer and the debt rating
of the entity succeeding to such ownership not being rated investment grade by
the Rating Agencies. Under certain circumstances, the Enhancer with the consent
of Certificateholders evidencing an aggregate, undivided interests in the Trust
of at least [ ]% of the Certificate Principal Balance may deliver written
notice to the Master Servicer terminating all the rights and obligations of the
Master Servicer under the Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of [ ] Business Days or
referred to under clause (ii) above for a period of [ ] Business Days, shall
not constitute an Event of Servicing Termination if such delay or failure could
not be prevented by the exercise of reasonable diligence by the 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 Agreement and the Master Servicer
shall provide the Trustee, the Depositor[, the Enhancer] and the
Certificateholders prompt notice of such failure or delay by it, together with
a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either
the Trustee, or Certificateholders evidencing an aggregate, undivided interest
in the Trust of at least __% of the Certificate Principal Balance [or the
Enhancer,] may terminate all of the rights and obligations of the Master
Servicer under the Agreement, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of a servicer with all licenses and permits
required to perform its obligations under the Agreement and having a net worth
of at least $________ [and reasonably acceptable to the Enhancer] to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee will be obligated to act in such capacity unless prohibited by law.
Such successor will be entitled to receive the same compensation that the
Master Servicer would otherwise have received (or such lesser compensation as
the 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.
AMENDMENT
The Agreement may be amended from time to time by the Master Servicer, the
Depositor and the Trustee [and with the consent of the Enhancer], but without
the consent of the Certificateholders, to cure any ambiguity, to correct or
supplement any provisions therein which may be inconsistent with any other
provisions of the Agreement, to add to the duties of the Depositor or the
Master Servicer or to add or amend any provisions of the Agreement as required
by the Rating Agencies in order to maintain or improve any rating of the
Certificates (it being understood that, after obtaining the ratings in effect
on the Closing Date, neither the Depositor, the Trustee nor 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 the
Agreement which shall not be inconsistent with the provisions of the Agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any Certificateholder [or the
Enhancer]; provided, that any such amendment will not be deemed to materially
and adversely affect the Certificateholders 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 Certificates. The Agreement may also
be amended from time to time by the Master Servicer, the Depositor, and the
Trustee, with the consent of Certificateholders evidencing an aggregate,
undivided interest in the Trust of at least __% of the Certificate Principal
Balance [and the Enhancer] for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the Certificateholders, provided that
no such amendment will (i) reduce in any manner the amount of, or delay the
timing of, collections of payments on the CABS or distributions which are
required to be made on any Certificate without the consent of the holder of
such Certificate or (ii) reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all Certificates then
outstanding or (iii) adversely affect the interests of any Certificateholder
[or the Enhancer].
MANDATORY REPURCHASE
Cash distributions to Certificateholders will be made[, on a pro rata
basis,] on the Payment Date on or immediately following the last day of the
Funding Period in the event that any amount remains on deposit in the
Pre-Funding Account after giving effect to the purchase of all Subsequent CABS,
including any such purchase on such date (a "Mandatory Repurchase"). The
aggregate principal amount of [each class of] Certificates to be redeemed will
be an amount equal to the certificates' percentage interest of the amount then
on deposit in the Pre-Funding Account.]
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Payment Date following the later of [(A)
payment in full of all amounts owing to the Enhancer] and (B) the earliest of
(i) the Payment Date on which the Certificate Principal Balance of each Class
of Certificates of each Series has been reduced to zero, (ii) the final payment
or other liquidation of the last Security in the Trust [and (iii) the Payment
Date in __________, on which date the Enhancement will be available to pay any
outstanding Certificate Principal Balance.] [The Certificates will be subject
to optional retransfer to the Depositor on any Payment Date after the
Certificate Principal Balance is reduced to an amount less than or equal to __%
of the Original Certificate Principal Balance [and all amounts due and owing to
the Enhancer and unreimbursed draws on the Enhancement, together with interest
thereon, as provided under the Enhancement Agreement,] have been paid. The
retransfer price will be equal to the sum of the outstanding Certificate
Principal Balance and accrued and unpaid interest thereon at the Certificate
Rate through the day preceding the final Payment Date.] In no event, however,
will the Trust created by the Agreement continue after the death of certain
individuals named in the Agreement. Written notice of termination of the
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in the notice
of termination.
In addition, the Trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the Depositor. See
"Amortization Events" herein.
THE TRUSTEE
The commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor and/or their affiliates, including the
Master Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee[, as approved by the Enhancer.] The
Depositor may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Depositor will be obligated to
appoint a successor Trustee[, as approved by the Enhancer]. 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.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trustee
of at least __% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for __ days has neglected or refused to institute any such proceeding. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
CERTAIN ACTIVITIES
Except as otherwise provided in the Agreement, the Trust will not (i)
borrow money; (ii) make loans; (iii) invest in securities for the purpose of
exercising control; (iv) underwrite securities; (v) except as provided in the
Agreement, engage in the purchase and sale (or turnover) of investments; (vi)
offer securities in exchange for property (except Certificates for the CABS);
or (vii) repurchase or otherwise reacquire its securities. See "--Evidence as
to Compliance" above for information regarding reports as to the compliance by
the Master Servicer with the terms of the Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the CABS. [The CABS will have
been acquired by the Depositor from LSSI in privately negotiated transactions.]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents, Brown & Wood LLP, special counsel to
the Depositor ("Special Tax Counsel"), will advise the Depositor, upon each
issuance of a Series of Certificates, that the Certificates of such Series will
be treated as indebtedness for Federal, state and local income and franchise
tax purposes. See "Certain Federal Income Tax Considerations" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Lehman Brothers Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase from the Depositor,
the Series [ ] Certificates.
The Underwriter is obligated to purchase all the Series [ ] Certificates
offered hereby if any are purchased.
The Underwriter can over-allot or transact in a way to maintain the market
price of the certificates above those of the open market. If this happens, it
can be discounted at any time.
Distribution of the Series [ ] Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Depositor,
before deducting expenses payable by the Depositor, will be [ ]% of the
aggregate original principal amount of the Certificates as of the Cut-off Date,
plus accrued interest at the [applicable] [initial] [weighted Average]
Certificate Rate from the Cut-off Date. In connection with the purchase and
sale of the Series [ ] Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting discounts.
The Underwriter is an affiliate of the Depositor, and the participation by
the Underwriter in the offering of the Certificates complies with Schedule E of
the by-laws of the National Association of Securities Dealers, Inc. regarding
underwriting securities of an affiliate.
The Underwriting Agreement provides that the [Seller] [Depositor] will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act, or contribute to payments the Underwriter may be
required to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by Brown & Wood LLP and for the Underwriters by Brown & Wood
LLP, New York, New York.
RATING
It is a condition to issuance that the Certificates be rated
______________.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the CABS. The rating takes into
consideration the characteristics of the CABS and the structural, legal and tax
aspects associated with the Certificates. The ratings on the Certificates do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the CABS or the possibility that Certificateholders might
realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
<PAGE>
SCHEDULE I
Class __
CUSIP # ______ Rating: _____
<TABLE>
<CAPTION>
[monthly] [quarterly]
[semi-annual] Interest
Aggregate Notional Payment on Single Aggregate Interest Payment
Interest Payment Dates Amount Class on Single Class
- ------------------------- ------------------ --------------------- ---------------------------
<S> <C> <C> <C>
On each Payment Date $ ______________ $ ______________ $ ______________
commencing on ________,
and thereafter until the
Class __ Certificates
have been paid in full.
In the case of the first
Interest Payment Date,
interest will accrue from
and including the Closing
Date to but excluding the
____ Interest Payment
Date.
</TABLE>
Class __
CUSIP # ______ Rating: _____
<TABLE>
<CAPTION>
Aggregate Face Amount of
Principal Minimum Authorized Interest Rate on Principal
Principal Payment Dates Component Denomination Component
- ------------------------- ------------------------ ------------------ ---------------------------
<S> <C> <C> <C>
Commencing with the ____ $ ______________ $ ______________ _________%
Distribution Date, and
thereafter until the
Class __ Certificates
have been paid in full.
</TABLE>
<PAGE>
[monthly] [quarterly]
[semi-annual] Aggregate Interest
Interest Payment on Payment on Single
Interest Payment Dates Single Class Class
- -------------------------- --------------------- -------------------
On each Payment Date $ ______________ $ ______________
commencing on ________,
and thereafter until the
Class __ Certificates
have been paid in full.
In the case of the first
Interest Payment Date,
interest will accrue from
and including the Closing
Date to but excluding the
____ Interest Payment
Date.
<PAGE>
Appendix 1
THE SELLER
[General description of the Seller (if originator of the Receivables
portfolio) and its credit card business.]
[Account Underwriting]
[Creation of Accounts]
[Billing and Payments]
[Delinquencies and Loss Experiences
[Revenue and Yield Experience]
[Interchange]
[Competition]
[Composition by Credit Limit]
[Composition By Account Age]
[Geographic Distribution of Accounts and Receivables]
[Monthly Payment Rates]
<PAGE>
Appendix 2
DESCRIPTION OF THE CABS
INDEX OF PRINCIPAL TERMS
Term Page No
Accounts.................................................................
Accumulation Period......................................................
Agreement................................................................
Alternative Principal Payment............................................
Amortization Event.......................................................
BIF......................................................................
Business Day.............................................................
CABS.....................................................................
CABS Index...............................................................
(CABS) Payment Date......................................................
CABS Trustee.............................................................
Cede.....................................................................
Certificateholders.......................................................
Certificate Interest Collections.........................................
Certificate Owner........................................................
Certificate Principal Balance............................................
Certificate Rate.........................................................
Certificates.............................................................
Collection Account.......................................................
Collection Period........................................................
Controlled Amortization Amount...........................................
Controlled Amortization Period...........................................
Definitive Certificate...................................................
Depositor Company........................................................
Determination Date.......................................................
Dissolution Distribution Date............................................
Distribution Account.....................................................
DTC......................................................................
Eligible Account.........................................................
Enhancement..............................................................
Enhancement Trust........................................................
Enhancer.................................................................
ERISA....................................................................
Events of Servicing Termination..........................................
Expected Final Payment Date..............................................
Interest Collections.....................................................
Interest Period..........................................................
Investment Amount........................................................
LSSI.....................................................................
Master Servicer..........................................................
Maximum Principal Payment................................................
Monthly Report...........................................................
Original Certificate Principal Balance and Original Invested Amount......
Paying Agent.............................................................
Percentage Interest......................................................
Pool Balance.............................................................
Principal Collections....................................................
Principal Funding Account................................................
Receivables..............................................................
Record Date..............................................................
Representative...........................................................
SAIF.....................................................................
Schedule.................................................................
Seller...................................................................
Series...................................................................
Servicing Fee............................................................
Servicing Fee Rate.......................................................
Special Tax Counsel......................................................
Treasury Rate............................................................
Trust....................................................................
Trustee..................................................................
Underwriters.............................................................
Underwriter Agreement....................................................
GLOSSARY OF TERMS DEFINED
"Accounts" means [consumer] [corporate] [revolving] [credit card] [charge card]
[debit card] accounts.
"Accumulation Period" means the period beginning at the close of business on
and continuing until the earliest of (a) the commencement of an Amortization
Event, (b) payment of the Certificate Principal Balance of the Certificates in
full or (c) the Series Termination Date.
"Agreement" means the Master Pooling and Servicing agreement dated as of
[ ].
"Alternative Principal Payment" means __________________________________________
_______________________________________________________________________.
"Amortization Event" means Such an event refers to any of the following events:
(a) failure on the part of the Company (i) to make a payment or
deposit required under the Agreement within Business Days after the date
such payment or deposit is required to be made, (ii) to record assignments
or (iii) to observe or perform in any material respect any other covenants
or agreements of the Company set forth in the Agreement, which failure
continues unremedied for a period of days after written notice;
(b) any representation or warranty made by the Company in the
Agreement proves to have been incorrect in any material respect when made
and continues to be incorrect in any material respect for a period of days
after written notice and as a result of which the interests of the
Certificateholders are materially and adversely affected; provided,
however, that an Amortization Event shall not be deemed to occur if the
Company has repurchased the CABS during such period (or within an
additional days with the consent of the Trustee) in accordance with the
provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Company;
(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) an Event of Servicing Termination occurs under the Agreement
(other than the event described in clause (iv) of the definition thereof);
or
[(f) when aggregate principal draws under the Enhancement exceed % of
the Pool balance as of the Cut-off Date.]
"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 are required or
authorized by law to be closed.
"CABS" are certain asset backed certificates or notes.
"CABS Index" is the rate of interest on CABS equalling [Adjustable Rate]
[Variable Rate] [ %] per annum.
"(CABS) Payment Date" is the [ ] day of each [month] [quarter] [semi-annual]
period or if such [ ] day is not a Business Day, the next succeeding Business
Day, on which interest and principal, if any, with respect to the CABS will be
distributed.
"CABS Trustee" is the Trustee for the holders of CABS.
"Cede" means Cede & Co.
"Certificateholders" mean the holders of the certificates.
"Certificate Interest Collections" mean the portion of interest collections
allocable to the Certificates.
"Certificate Owner" means a person acquiring a beneficial ownership interest in
the Certificates.
"Certificate Principal Balance" means the principal amount of the outstanding
Certificates.
"Certificate Rate" means the rate at which interest will accrue on the [Class
_] Certificates equal to the rate of [Adjustable Rate] [Variable Rate] [ %] per
annum.
"Certificates" mean [Adjustable Rate] [Variable Rate] [ ] Asset Backed
Certificate, Series [_].
"Collection Account" means the account where the Master Servicer will deposit
or will cause to be deposited Interest Collections and Principal Collections in
respect of the CABS.
"Collection Period" means the period from but not including the Due Date in the
month preceding the month of such Payment Date (or, with respect to the first
Payment Date, the Cut-off Date) through the Due Date in the month of such
Payment Date.
"Controlled Amortization Amount" means ________________________________________
_____________________________________________________.
"Controlled Amortization Period" means the period beginning on the first
Payment Date and, unless an Amortization Event shall have occurred, ending on
the Payment Date.
"Definitive Certificate" means a definitive certificate representing a
Certificate Owner's interest.
"Depositor Company" is Lehman ABS Corporation.
"Determination Date" is the Business Day prior to each Payment Date.
"Dissolution Distribution Date" is the date on which remaining amounts of the
proceeds from the sale, disposal or liquidation of the CABS will be treated as
collections allocable to the Certificateholders and the Certificateholders'
percentage interest of such remaining proceeds will be distributed to the
Certificateholders.
"Distribution Account" is the account where the Trustee will deposit or will
cause to be deposited Interest Collections and Principal Collections in respect
of the CABS.
"DTC" is The Depository Trust Company.
"Eligible Account" is an account that is (i) maintained with a depository
institution whose debt obligations at the time of any deposit therein have the
highest short-term debt rating by the rating agencies, (ii) one or more
accounts with a depository institution which accounts are fully insured by
either SAIF or BIF of the Federal Deposit Insurance Corporation established by
such fund with a minimum long-term unsecured debt rating of Baa3, (iii) a trust
account maintained with a Trustee or (iv) otherwise acceptable to each Rating
Agency as evidenced by a letter from such Rating Agency to the Trustee, without
reduction or withdrawal of their then current ratings of the Certificates [and
acceptable to the Enhancer].
"Enhancement" is enhancement issued to the Certificates pursuant to the
Agreement.
"Enhancement Trust" is the trust that issues the enhancement.
"Enhancer" is the provider of Enhancement.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"Events of Servicing Termination" are defined as events consisting of (i) any
failure by the Master Servicer to deposit in the Distribution Account any
deposit required to be made under the Agreement, which failure continues
unremedied for three business days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and
the Trustee by Certificateholders evidencing an aggregate, undivided interest
in the Trust of at least 51% of the Certificate 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 Agreement which
materially and adversely affects the interests of the Certificateholders and
continues unremedied for 60 days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and
the Trustee by Certificateholders evidencing an aggregate undivided interest in
the trust of at least 51% of the Certificate Principal Balance; (iii) the
occurrence of an Insolvency Event with respect to the Master Servicer or (iv) a
change in control (as defined in the Securities and Exchange Act of 1934) of
the Master Servicer and the debt rating of the entity succeeding to such
ownership not being rated investment grade by Rating Agencies.
"Expected Final Payment Date" is the [ ] Payment Date upon which
Certificateholders will be entitled to receive as payment an amount equal to
the outstanding Certificate Balance.
"Interest Collections" is the amount equal to the sum of interest distributions
thereon received by the Trustee, as identified as such on the Monthly Report
during the related Collection Period.
"Interest Period" means the period from the preceding payment date (or in the
case of the first Payment Date, from the Closing Date) through the day
preceding such Payment Date.
"Investment Amount" is the amount equal to the Original Invested Amount minus
the amount of Principal Collections previously distributed to
Certificateholders.
"LIBOR" is the arithmetic mean of London interbank offered quotations for
one-month Eurodollar deposits.
"Liquidation Loss Amount" is the amount by which (x) the CABS' pro rata share
of the principal component of the required distribution amount for the CABS for
the preceding CABS Payment Date exceeds (y) the amount actually distributed on
the CABS and allocable to principal on such preceding CABS Payment Date or
Dates.
"LSSI" is Lehman Special Securities, Inc.
"Master Servicer" is [ ], as Master Servicer.
"Master Servicing Fee" is the monthly portion of interest collections that the
Master Servicer will receive on each Payment Date in respect of the CABS.
"Master Servicing Fee Rate" is the % per annum that determines the Servicing
Fee amount.
"Maximum Principal Payment" is the amount equalling the product of the
Certificateholders' percentage interest and Principal Collections for such
Payment Date.
"Monthly Report" is the most recent monthly report.
"Original Certificate Principal Balance and Original Invested Amount" is the
aggregate undivided interest in the Trust represented by the Class _]
Certificates as of the Closing Date equalling $ of principal.
"Paying Agent" shall initially be the Trustee, together with any successor
thereto in such capacity, who shall have the revocable power to withdraw funds
from the Distribution Account for the purpose of making distributions to the
Certificateholders.
"Percentage Interest" is interest in the Trust evidenced by a [Class ]
Certificate.
"Principal Collections" is the amount equal to the sum of the amounts collected
during the related Collection Period and allocated to principal identified as
such on the monthly report.
"Principal Funding Accounts" are trust accounts where collections of Principal
Receivables and certain other amounts allocable to holders of the Certificates
will be deposited on each Payment Date during the Accumulation Period.
"Receivables" are [consumer] [revolving] [credit card] [charge card] [debit
card] receivables.
"Record Date" is the last day of the month preceding such Payment Date.
"Representative" is Shearson Lehman Brothers Inc.
"SAIF" is the Savings Association Insurance Fund.
"Schedule" is the schedule used to identify each Private Security transferred
to the Trust.
"Seller" is the source of purchase of the Receivables.
"Series" is a series of Certificates.
"Treasury Rate" is the average yield on U.S. Treasury Securities, adjusted to a
constant maturity of __ years.
"Trust" refers to Lehman Credit Card Master Trust.
"Trustee" is [ ], as trustee.
"Underwriters" are the named underwriters for whom Shearson Lehman Brothers
Inc. represents.
"Underwriting Agreement" is the underwriting agreement, dated
__________________.
<PAGE>
LEHMAN CARD ACCOUNT
MASTER TRUST
$__________________
[ADJUSTABLE RATE] [VARIABLE RATE] [ %]
ASSET BACKED [SENIOR/SUBORDINATE] CERTIFICATES,
SERIES __________
[CLASS ______]
LEHMAN ABS CORPORATION
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
LEHMAN BROTHERS
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
Prospectus Supplement dated _________________, _____, _____
To Prospectus dated _________________, _____, _____
$________________
LEHMAN CARD ACCOUNT TRUST
[Adjusted Rate] [Variable Rate] [ __%] Asset Backed [Certificates] [Notes],
Series__ [Certificates] [Notes]
[Seller], Lehman ABS Corporation,
as Seller as Depositor
<TABLE>
<CAPTION>
[Certificate] Principal [Certificate] Price to Underwriting Beneficial Proceeds to
[Note] Balance [Note] Rate Public(5) Discount (6) Interest the
Class Depositor(7)
- ------------------ --------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Class ______ $ % % % %
Total $ $ $ $
</TABLE>
(1) [The [Class __ ] [certificates] [notes] will have a notional principal
balance of approximately $ [ ] ].
(2) [The [Class__ ] [certificates] [notes] will receive distributions of a
portion of the interest on the underlying assets and will not receive any
principal].
(3) [The [Class__ ] [certificates] [notes] are not being offered by means of
this prospectus supplement].
(4) [The rights of holders of the [Class__ ] [certificates] [notes] to receive
distributions are subordinated to the rights of the holders of the [Class__
] [certificates] [notes]].
(5) Plus accrued interest, if any, at the [certificate] [note] rate from
_________________, _____, _____
(6) The depositor has agreed to indemnify Lehman Brothers against certain
liabilities, including liabilities under the Securities Act of 1933.
(7) Before deducting expenses, payable by the depositor, estimated to be
$________.
THE [CERTIFICATES][NOTES]
o represent the entire beneficial interest in a trust, whose assets are a
pool of asset backed certificates or notes which evidence interests in one
or more portfolios of [consumer] [revolving] [credit card] [charge card]
[debit card] receivables generated from time to time in a portfolio of
[consumer] [revolving] [credit card] [charge card] [debit card] accounts,
all monies due in payment of the receivables [transferred to the trust by
the depositor on or prior to the closing date] [and monies on deposit in a
pre-funding account] and certain other properties
o currently have no trading market
o are obligations of the trust only and are not obligations of the depositor,
the master servicer or [its/their] affiliates
CREDIT ENHANCEMENT
o will be provided in the form of [reserve funds] [subordination of the
Class[ ] [certificates] [notes]] [guarantees] [letters of credit] [cash
collateral accounts] [deposit monies in a trust account]
[overcollateralization] [an irrevocable and unconditional certificate or
note guaranty insurance policy issued by [insurer]]
REVIEW THE INFORMATION IN RISK FACTORS ON PAGE S-__ OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 OF THE PROSPECTUS.
o For complete information about the [certificates] [notes] read both this
prospectus supplement and the prospectus. This prospectus supplement must
be accompanied by a prospectus if it is being used to offer and sell the
[certificates] [notes].
Neither the Securities and Exchange Commission or any state securities
commission has approved or disapproved of these [certificates] [notes] or passed
upon the adequacy or accuracy of this prospectus supplement and this prospectus.
Any representation to the contrary is a criminal offense.
LEHMAN BROTHERS
<PAGE>
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 [certificates] [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.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the [certificates] [notes] and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling [certificates]
[notes] will be required to deliver a prospectus supplement and prospectus for
ninety days following the date of this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary.......................................................................1
Risk Factors..................................................................7
Description of the [Certificates][Notes].....................................10
Description of the CABS......................................................13
The Depositor................................................................14
The [Trust Agreement][Indenture].............................................14
The [Trustee][Owner Trustee][Indenture Trustee]..............................16
Use of Proceeds..............................................................16
Certain Federal Income Tax Consequences......................................17
State Tax Consequences.......................................................20
ERISA Considerations.........................................................20
Prior Series of [Certificates][Notes]........................................20
Legal Investment Considerations..............................................20
Underwriting.................................................................20
Legal Matters................................................................21
Rating.......................................................................21
Schedule I...................................................................22
PROSPECTUS
Risk Factors..................................................................2
Description of the Securities.................................................7
Trust Assets.................................................................14
Enhancement..................................................................18
Servicing of Receivables.....................................................21
The Agreements...............................................................25
Custody Receipts; Custody Agreements.........................................34
Certain Legal Aspects of the Receivables.....................................37
The Depositor................................................................41
Use of Proceeds..............................................................41
Certain Federal Income Tax Considerations....................................42
FASIT Securities.............................................................49
State Tax Considerations.....................................................53
ERISA Considerations.........................................................53
Ratings......................................................................53
Plan of Distribution.........................................................53
Legal Matters................................................................53
Available Information........................................................54
Glossary of Terms............................................................55
Annex I.....................................................................I-1
<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. To understand all of the terms of the offering of the
[certificates][notes], you should carefully read this entire document and the
accompanying prospectus.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of theses calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
[CERTIFICATE] INTEREST RATE
[NOTE] (FIRST DISTRIBUTION LAST SCHEDULED
CLASS DATE ONLY) INTEREST RATE(1) PRINCIPAL BALANCE DISTRIBUTION DATE(2)
<S> <C> <C> <C> <C>
______________% [LIBOR+%][%]
______________% [LIBOR+%][%]
</TABLE>
(1) For each distribution date after the first distribution date.
(2) We expect the actual last distribution date for each [certificate][note]
will be significantly earlier than its last schedule distribution date.
<PAGE>
THE TRUST
Lehman Card Account Trust will be formed on ________ __, ____ by Lehman ABS
Corporation, ________, as seller and ______as trustee.
[Indenture trustee] will act as trustee for the benefit of the holders of the
notes.][Owner trustee] will act as trustee for the benefit of the holders of the
certificates.]
[CERTIFICATES][NOTES] OFFERED
[On the closing date, _________ __, ____, the trust will issue
[certificates][notes]. [Each certificate represents an undivided interest in the
trust. Lehman ABS Corporation will hold the remaining undivided interest in the
trust not represented by certificates] [The notes are secured by the assets of
the trust pursuant to the indenture.] The depositor has the option of issuing
[certificates][notes] in different classes with the following payment
characteristics:
[Class __: [represents] $__________ principal amount of CABS which will be
paid to you on each payment date beginning _________ (or sooner under certain
limited circumstances), plus interest at [an adjustable rate] [a variable rate]
of [ %] per annum payable [monthly] [quarterly] [semi-annually] on each payment
date.]
[Class __: entitles you to interest payments at [an adjustable rate] [a
variable rate] of [ %] per annum on a notional amount of $__________, payable
[monthly] [quarterly] [semi-annually] on each payment date. The notional amount
for the [class ] [certificates][notes] is equal to the outstanding principal
balance of the CABS, but is used solely for purposes of determining interest
payments and certain other rights of holders of [class ] [certificates][notes]
and does not represent any interest in or right to receive principal payments.]
[Class __: [represents] $ ___ aggregate principal amount of CABS and
entitles the holders of such [certificates][notes] to distributions in respect
of principal with disproportionate, nominal or no distributions in respect of
interest.]
TRUST PROPERTY
The property of the trust will consist of certain asset backed certificates or
notes (collectively, the "CABS"), which represent fractional undivided interests
in separate trust funds, the assets of which include portfolios of [consumer]
[revolving] [credit card] [charge card] [debit card] receivables generated or to
be generated from time to time in the ordinary course of business in a portfolio
of [consumer] [revolving] [credit card] [charge card] [debit card] accounts, and
all monies due in payment of the receivables [excluding the benefits of and
payments in respect of enhancements issued with respect to any other series (the
drawing on or payment of such enhancements not being available to holders of
certificates)]. [The CABS will be issued pursuant to a pooling and servicing
agreement, master pooling and servicing agreement, sale and servicing agreement,
indenture or trust agreement]. The seller will sell the CABS to Lehman ABS
Corporation. Lehman will deposit the CABS with the trust. The CABS are described
in further detail in Schedule 1 to this prospectus supplement.
The principal balance of the CABS on any day is the principal balance reported
as such in the most recent monthly report received by the trustee from the
trustee for the holders of the CABS.
The trustee, as the holder of the CABS, will be entitled to [monthly]
[quarterly] [semi-annual] distributions of interest on the CABS on the ____ day
of each [month] [quarter] [semi-annual period] or, if such day is not a business
day, on the next succeeding business day, at [adjustable rate] [variable rate]
[___%] per annum. Principal distributions on the CABS will be made on [each]
CABS payment date, beginning with the _________ CABS payment date.
[The CABS are subject to retirement under certain conditions following the CABS
payment date in _________.
We refer you to "DESCRIPTION OF THE CABS--Optional Repurchase; Series 199_
Payout Events and Liquidation Events" in Appendix 2 to this prospectus
supplement.]
[On the closing date], the depositor will assign and transfer CABS having an
aggregate principal balance of approximately $______ as of [ ] to the trust
pursuant to a [trust agreement] [indenture] to be dated as of, [ ] between the
trust and the depositor. On and following the closing date, the depositor will
sell, only if they are available, and the trust will purchase, subject to the
satisfaction of certain conditions, additional CABS from time to time during the
funding period specified in this prospectus supplement.
The amount of CABS to be purchased will have an aggregate principal balance
equal to approximately $ (such amount being equal to an amount on deposit in the
pre-funding account on the closing date). The depositor will designate as a
cutoff date the date as of which particular subsequent CABS are conveyed to the
trust. It is expected that certain of the subsequent CABS arising between the
initial cutoff date and the closing date will be conveyed to the trust on the
closing date and that other subsequent CABS will be conveyed to the trust as
frequently as [daily] thereafter on dates specified by the depositor occurring
during the funding period.
We refer you to "Description of the [Trust Agreement] [Indenture] -- Sale and
Assignment of CABS; Subsequent CABS" in this prospectus supplement.
The initial CABS have been selected, and the subsequent CABS will be selected,
from the CABS owned by the depositor based on the criteria specified in the
[trust agreement][indenture] and described in this prospectus supplement.
Following the transfer of subsequent CABS to the trust, the characteristics of
the entire pool of CABS included in the trust may vary significantly from those
of the initial CABS.
We refer you to "Risk Factors -- The CABS and the Pre-Funding Account" and "The
CABS Pool" in this prospectus supplement.
[TRUST AGREEMENT] [INDENTURE]
The [certificates][notes] will be issued pursuant to a [trust
agreement][indenture] dated as of __________, [ ] between the depositor and
______________ in its capacity as [trustee][owner trustee][indenture trustee].
Pursuant to the [trust agreement][indenture], the depositor will transfer the
CABS to the [trustee][owner trustee][indenture trustee] in exchange for the
[certificates][notes]. The [trustee] [owner trustee][indenture trustee] will
allocate each distribution of principal and interest on CABS among the
[certificates] [notes] in accordance with the [trust agreement][indenture].
DEPOSITOR
Lehman ABS Corporation, a Delaware corporation, will act as the depositor. The
principal executive offices of the depositor are located at 200 Vesey Street,
Three World Financial Center, New York, New York 10285 (Telephone: (212)
298-2000).
We refer you to "THE DEPOSITOR" in the prospectus.
SELLER
[Lehman Special Securities, Inc. will act as the seller and] [on or prior to the
closing date, will sell the CABS to the depositor, which in turn will transfer
the CABS to the trust pursuant to the [trust agreement][indenture]. Information
regarding the seller's accounts and portfolio is included in Appendix 1 to this
prospectus supplement.
[TRUSTEE][OWNER TRUSTEE][INDENTURE TRUSTEE]
[ ] will act as [trustee][owner trustee][indenture trustee]
under the [trust agreement][indenture].
COLLECTIONS
All collections on the CABS will generally be allocated in accordance with the
monthly reports between amounts collected in respect of interest and amounts
collected in respect of principal.
[The master servicer will deposit any amounts required under the [trust
agreement][indenture] in a collection account established under the [trust
agreement][indenture].] The [trustee][owner trustee][indenture trustee] will
deposit any amounts required under the [trust agreement][indenture] in a
distribution account established under the [trust agreement][indenture].
We refer you to "Description of the [Certificates][Notes]--Payments on CABS;
Deposits to Collection Account and Distribution Account".
INTEREST PAYMENTS
Interest will accrue on the unpaid principal amount of the [class ]
[certificates][notes] at the per annum rate specified herein [and interest will
accrue on the notional amount of the [class __ ][certificates][notes] at the per
annum rate specified in this prospectus supplement]. Interest will be
distributed to [holders of certificates][holders of notes] on each interest
payment date.
[Distributions of interest will be made pro rata to the holders of [class ]
[certificates][notes] according to the ratio that the interest rate on the
[certificates] [notes] bears to the interest rate on the CABS.
We refer you to "Description of the [Certificates][Notes]--Payments of Interest"
in this prospectus supplement.]
INTEREST PAYMENT DATES
You will be entitled to receive interest payments on each payment date beginning
on _________ and thereafter until the [class __] [certificates][notes] have been
paid in full at the [certificate][note] rate for the related interest period. In
the case of the first interest payment date, interest will accrue from and
including the closing date to but excluding the _________ interest payment date.
The [certificate][note] rate of interest will accrue on the unpaid principal
amount of the class [ ] [certificates][notes] with respect to each interest
period, at the rate of [adjustable rate] [variable rate] [____%] per annum [and
interest will accrue on the notional amount of the class [ ]
[certificates][notes] of the per annum rate specified in this prospectus
supplement].
Interest on the [certificates][notes] in respect of any payment date will accrue
from the preceding payment date (or in the case of the first payment date, from
the closing date) through the day preceding such payment date on the basis of
[the actual number of days in the interest period and a 360-day year] [a 360 day
year consisting of twelve thirty-day months].
PRINCIPAL PAYMENTS; PRINCIPAL PAYMENT DATES
[You will not be entitled to receive payments of principal as a holder of [class
__] [certificates][notes] until the ___________ payment date [or, upon the
occurrence of an amortization event, the first payment date with respect to the
rapid amortization period], as described in this prospectus supplement.]
[The class __ [certificates][notes] do not have a [certificate][note] principal
balance, and as a holder of such [certificates][notes], you are entitled only to
distributions of a portion of the interest received on the CABS and are not
entitled to any distributions in respect of principal.]
[The holders of class __ [certificates][notes] are entitled only to
distributions of principal.]
[You will receive payments of principal beginning with the ___________ payment
date, and thereafter until the [class __] [certificates][notes] have been paid
in full.]
PAYMENT DATE
Payments on the [certificates][notes] will be made on each day that payments of
principal or interest are made on the CABS as described in this prospectus
supplement [or as otherwise described in the [trust agreement][indenture]].
[COMBINATION OF [CERTIFICATES][NOTES]
During any combination period and upon payment of a combination fee, a holder if
notes may surrender to the [trustee] [owner trustee][indenture trustee]] such
[certificates][notes] in the relative proportions, by principal amount,
specified in this prospectus supplement. Upon such surrender, the holder of
notes will be entitled to receive, in exchange, a like principal amount of the
[CABS]. The combination fee will equal ___% of the principal amount of the
[certificates][notes] surrendered, and will be determined after giving effect to
payments of principal to be made thereon on the following payment date. The
procedure for exchanging such [certificates][notes] will differ slightly if the
beneficial owner of such [certificates][notes] is an employee benefit plan
subject to the Employee Retirement Income Security Act of 1974 or ERISA. A
holder may exchange such [certificates][notes] [monthly][quarterly] on any
business day during the combination periods [ ], commencing [ ]. However, the
right to exchange [certificates] [notes] will expire [ ].
We refer you to "Description of the [Certificates][Notes] -- Combination of
[Certificates][Notes]" in this prospectus supplement.
[MANDATORY PREPAYMENT
The [certificates][notes] will be prepaid, in part, pro rata on the basis of
their initial principal amounts, on the payment date on or immediately following
the last day of the funding period in the event that any amount remains on
deposit in the pre-funding account after giving effect to the purchase of all
subsequent CABS, including any such purchase on such date. The aggregate
principal amount of [certificates] [notes] to be prepaid will be an amount equal
to the [certificates] [notes] [percentage interest of][entitlement to] the
amount then on deposit in the pre-funding account.]
[PRE-FUNDING ACCOUNT
During the funding period, the pre-funded amount will be maintained in an
account in the name of the [trustee][owner trustee][indenture trustee]. The
funding period will run from and including the closing date until the earliest
of:
(i) the date on which:
(a) the amount on deposit in such pre-funding account is less than
$ ;
(b) an Amortization Event occurs; or
(c) certain events of insolvency occur with respect to the depositor;
or
(ii) the close of business on the payment date.
The pre-funded amount will initially equal approximately $ , and during the
Funding Period, will be reduced by amounts used to purchase subsequent CABS in
accordance with the [trust agreement][indenture]. The depositor expects that the
pre-funded amount will be reduced to less than $ by the payment date. Any
pre-funded amount remaining at the end of the funding period will be paid to the
[holders of the certificates] [holders of the notes] [pro rata] in proportion to
the respective [percentage interest][entitlement] of each class of
[certificates][notes].]
REGISTRATION OF [CERTIFICATES][NOTES]
We will issue the [certificates][notes] in book-entry form. You will hold your
interests through a depository. While the [certificates][notes] are book-entry
they will be registered in the name of the depository.
The limited circumstances under which definitive [certificates][notes] will
replace the book-entry [certificates][notes] are described in this prospectus
supplement.
We refer you to "Risk Factors - Book-Entry Securities" in this prospectus
supplement.
FEDERAL TAX CONSEQUENCES
[Brown & Wood LLP is of the opinion that, the trust should be classified as [a
grantor trust for federal income tax purposes, and not as an association taxable
as a corporation] [as an owner trust and the notes will be treated as debt
instruments for Federal income tax purposes as of the closing date.] We refer
you to "Certain Federal Income Tax Consequences" in the prospectus for
additional information concerning the application of Federal income tax laws.
[LEGAL INVESTMENT RESTRICTIONS
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject to
restrictions on investment in the [certificates][notes].
We refer you to "Legal Investment Considerations" in this prospectus supplement.
ERISA CONSIDERATIONS
[A fiduciary of any employee benefit plan subject to ERISA, or the US federal
tax code should carefully review with its legal advisors whether the purchase or
holding of certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the [US federal tax code].]
[The [certificates][notes] generally may not be transferred to a fiduciary of
any employee benefit plan subject to ERISA or Section 4975 of the US federal tax
code].]
We refer you to ["ERISA CONSIDERATIONS"] in the prospectus and in this
prospectus supplement.
[CERTIFICATE][NOTE] RATING:
Before the [certificates][notes] can be issued, the [trust][indenture] must
obtain a rating on the [certificates][notes] of:
[Rating][Rating Agency]
Ratings such as the ratings obtained for the [certificates][notes] address
credit risk. When evaluating credit risk, the rating agencies look at the
likelihood of whether or not you will receive your interest and principal
payments. There is no assurance that once a rating is given that it will
continue for any period of time or that it will not be revised or withdrawn
entirely by such rating agency if, in its judgment, circumstances so warrant. A
revision or withdrawal of the rating may have an adverse effect on the market
price of the [certificates][notes]. A security rating is not a recommendation to
buy, sell or hold securities.
We refer you to "Ratings" and "Risk Factors - Ratings of the
[Certificates][Notes]" in [the prospectus] and in this prospectus supplement.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There is currently no secondary market for the [certificates][notes].
Lehman Brothers currently intends to make a market in the [certificates][notes]
but is under no obligation to do so. There can be no assurance that a secondary
market will develop in the [certificates][notes]. If a secondary market does
develop, there can be no assurance that it will provide holders of the
[certificates][notes] with liquidity of investment or that it will continue for
the life of the [certificates][notes].
[THE CABS AND THE PRE-FUNDING ACCOUNT
On the closing date, we will transfer to the trust approximately $ of
initial CABS and the approximately $ pre-funded amount. The trustee will
deposit these amounts in the pre-funding account. If the principal amount of
eligible CABS that we convey to the trust during the funding period is less than
the pre-funded amount, we will have insufficient CABS to sell to the trust on
the subsequent transfer dates. This will result in you receiving a prepayment of
principal. The prepayment will be in an amount equal to the applicable
[[Pre-Funded Percentage]], in respect of a class of the [certificates][notes],
of the pre-funded amount remaining in the pre-funding account following the
purchase of any subsequent CABS on such payment date. You will receive this
prepayment on the payment date on or immediately following the last day of the
funding period.
Each of the subsequent CABS must satisfy the eligibility criteria specified
in the [trust agreement] [indenture] at the time of its addition. Moreover, our
conveyance of any subsequent CABS during any collection period will be subject
to the satisfaction, on or before the payment date following the end of such
collection period, of certain conditions subsequent, including our receipt of
written notification from the rating [agency] [agencies] that, following the
addition of the subsequent CABS, the rating [agency] [agencies]] will rate [the
Class ][each class of the] [certificates][notes] at least "[ ]".
We will immediately repurchase any subsequent CABS, at a price equal to the
[[Purchase Amount]] thereof, upon our failure to satisfy any of the required
conditions subsequent. The rating [agency's][agencies'] confirmation of the
ratings of the [certificates][notes] may depend on factors other than the
characteristics of the subsequent CABS.
We anticipate that the principal amount of subsequent CABS that we will
sell to the trust will not be exactly equal to the amount on deposit in the
pre-funding account. Therefore, we expect that you will receive at least a
nominal amount of prepaid principal. Our transfer of subsequent CABS to the
trust may significantly vary the characteristics of the pool of CABS included in
the trust from those of the initial CABS.
We refer you to "--- Social, Economic and Other Factors" and "--- Our
Relationship to the Trust" below and to "DESCRIPTION OF THE CABS".]
[SOCIAL, ECONOMIC AND OTHER FACTORS
Our ability to acquire subsequent CABS is largely dependent upon a variety
of social and economic factors, [such as [ ]]. We are unable to determine
and have no basis to predict whether or to which extent economic or social
factors will affect the availability of subsequent CABS.]
OUR RELATIONSHIP TO THE TRUST
We are [not] generally obligated to make any payments in respect of the
[certificates][notes] or the CABS.
MATURITY ASSUMPTIONS
The rate of payment of principal (including prepayments) of the CABS will
determine:
o the rate of payment of principal of each Class [ ]
[certificate][note]; and
o the aggregate amount of each distribution on and the yield to
maturity of all [certificates][notes].
[The issuer of the CABS may be obligated prepay the CABS upon the
occurrence of an Amortization Event, which may result from the occurrence of the
events described in this prospectus supplement and in the prospectus that the
issuer used to offer the CABS.]
[The issuer of the CABS may have the option to repurchase the CABS, but
only after the aggregate principal balance of the CABS is less than [ ]% of
their original principal balance. Any such repurchase may also affect the rate
of payment of principal of your Class [ ] [certificates][notes]. The relevant
issuer would be obligated to repurchase the CABS at a purchase price equal to [
]% of their principal balance, plus accrued and unpaid interest. If the issuer
of the CABS exercises its right to repurchase the CABS, the repurchase price
paid by [ ] will be passed through to you as a payment of principal.]
[We are offering your [Class ] [certificates][notes] without any original
principal amount. Therefore, the yield to maturity on your [Class ]
[certificates][notes] is extremely sensitive to the rate of payment or
prepayment of the CABS. You should fully consider the associated risks,
including the risk that if the rate of principal payment on the CABS is rapid,
you may not recoup your initial investment.
We refer you to ["Yield on the Series _____ [Certificates][Notes] and
Prepayments of the CABS".]]
CONSIDERATIONS REGARDING CABS; RECENT DEVELOPMENTS
You should consider carefully the factors set forth under "Special
Considerations" in any excerpted sections of the prospectus relating to the CABS
for certain additional considerations relating to the CABS and investments
backed by receivables. Neither we nor the underwriter participated in the
preparation of the prospectus relating to the CABS or the offering of the CABS.
Therefore, neither we nor the underwriter can guarantee the accuracy or
completeness of the information provided in such prospectus or in the publicly
available documents referred to below. Furthermore, you should not construe such
information as a representation by us or the underwriter.
You also should be aware that information set forth in any excerpted
sections of the prospectus relating to the CABS speaks only as of the date of
the prospectus relating to the CABS. Therefore, there can be no assurance that
events have not occurred, which have not yet been publicly disclosed, that would
affect the accuracy or completeness of any statements included in any excerpted
sections of the prospectus relating to the CABS or in the publicly available
documents filed by or on behalf of the CABS trust.
[[ ], as originator of the CABS trust, is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended. Accordingly,
[ ] files annual and periodic reports and other information with the securities
exchange commission. Copies of such reports and other information may be
inspected and copied at certain offices of the securities exchange commission at
the addresses listed under "Available Information" in the prospectus relating to
the CABS.]
[Describe any other recent material developments that may exist from such
publicly available information.]
BOOK-ENTRY CERTIFICATES MAY BE ILLIQUID
Issuance of the [certificates][notes] in book-entry form may reduce the
liquidity of such securities in the secondary trading market since investors may
be unwilling to purchase securities for which they cannot obtain physical
securities. [You may be unable to sell your [certificates][notes] or a sale may
result in a lower return than expected.]
We refer you to "Description of the [Certificates][Notes] - Book-Entry
Certificates."
BOOK-ENTRY CERTIFICATES MAY NOT BE ABLE TO BE PLEDGED
Since transactions in the [certificates][notes] can be effected only
through DTC, Cedelbank, Euroclear, participating organizations, indirect
participants and certain banks, your ability to pledge your security to persons
or entities that do not participate in the DTC, Cedelbank or Euroclear system or
otherwise to take actions in respect of such securities, may be limited due to
lack of a physical security representing the [certificates][notes].
We refer you to "Description of the [Certificates][Notes]--Book-Entry
Certificates."
BOOK-ENTRY CERTIFICATES MAY RESULT IN DELAYED RECEIPT OF [DISTRIBUTIONS]
[PAYMENTS]
As a beneficial owner, you may experience some delay in your receipt of
[distributions][payments] of interest on and principal of your
[certificates][notes] since such [distributions][payments] will be forwarded by
the trustee to DTC and DTC will credit such [distributions][payments] to the
accounts of its participants which will thereafter credit them to the accounts
of the beneficial owners either directly or indirectly through indirect
participants.
We refer you to " Description of the [Certificates][Notes]--Book-Entry
Certificates."
RATING OF THE [CERTIFICATES][NOTES]
It is a condition to our issuance and sale of each Class of
[certificates][notes] that at least one nationally recognized rating agency
rates such [certificates][notes] in [one of the four highest] rating categories.
A rating is not a recommendation to you to purchase, hold or sell
[certificates][notes], inasmuch as such rating does not comment as to market
price or suitability for a particular investor. The ratings address the
likelihood of your receipt of distributions due on the [certificates][notes]
pursuant to their terms. However, a rating agency does not evaluate, and the
ratings of the [certificates][notes] do not address, the possibility that you
may receive a lower yield than anticipated or the possibility that you may not
receive the return of your initial principal investment. There can be no
assurance that a rating will remain for any given period of time or that a
rating agency will not lower or withdraw entirely its rating if in its judgment
circumstances in the future so warrant.
DESCRIPTION OF THE [CERTIFICATES][NOTES]
GENERAL
The [Certificates][Notes] will be issued pursuant to the [Trust
Agreement][Indenture] dated as of ________, 199_, between the Depositor and
____________, as [Trustee][Owner Trustee][Indenture Trustee]. The Depositor will
provide a copy of the [Trust Agreement][Indenture] to prospective investors
without charge upon request.
The following summaries describe certain terms of the [Certificates]
[Notes] and the [Trust Agreement][Indenture]. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the [Trust Agreement][Indenture]. Wherever particular defined
terms of the [Trust Agreement][Indenture] are referred to, such defined terms
are thereby incorporated herein by reference. See "The [Trust
Agreement][Indenture]" herein for a summary of additional terms of the [Trust
Agreement][Indenture].
The [Certificates][Notes] will be issued in fully registered form only and
will represent undivided interests in the Trust. The [Class __]
[Certificates][Notes] will be freely transferable and exchangeable at the
corporate trust office of the [Trustee][Owner Trustee][Indenture Trustee] at its
Corporate Trust Department.
PAYMENTS ON [CERTIFICATES][NOTES]
Payments on the [Certificates][Notes], as described below, will be made by
the [Trustee][Owner Trustee][Indenture Trustee] on the applicable Payment Date
to persons in whose names the [Certificates][Notes] are registered on the Record
Date. Distributions to each [Certificateholder][Noteholder] will be made by wire
transfer to an account specified in writing by such holder as of the preceding
Record Date or in such other manner as may be agreed to by the [Trustee][Owner
Trustee][Indenture Trustee] and such holder. The final distribution in
retirement of a [Certificate][Note] will be made only upon surrender of the
[Certificate][Note] to the [Trustee][Owner Trustee][Indenture Trustee] at the
office thereof specified in the notice to [Certificateholders][Noteholders] of
such final distribution. Notice will be mailed prior to the Payment Date on
which the final distribution of principal [and interest] on a [Class __]
[Certificate][Note] [or interest on a Class __ [Certificate][Note]] is expected
to be made to the holder thereof.
PAYMENTS OF INTEREST
[Certificateholders][Noteholders] will be entitled to receive the
distributions of interest on the CABS made on the related Payment Date. The
[Certificateholders][Noteholders] of [Class __] [Certificates][Notes] will be
entitled to receive interest at an annual rate equal to [Adjustable Rate]
[Variable Rate] [ %] on the aggregate principal amount of the [Class __]
[Certificates][Notes]. [The [Certificateholders][Noteholders] of Class __
[Certificates][Notes] will be entitled to receive interest at a rate equal to
____% on the notional amount of the Class __ [Certificates][Notes]]. Interest
will be calculated on the basis of [the actual number of days in the Interest
Period and a 360-day year] [a 360-day year consisting of twelve 30-day months].
Amounts allocable to the [Class __] [and Class __] [Certificates][Notes] will be
distributed to the [Certificateholders][Noteholders] of such class of [Class __]
[or Class __] [Certificate][Note], as applicable, in proportion to the
respective Percentage Interests represented by such Class of
[Certificates][Notes].
If on any Interest Payment Date the distribution of interest on the CABS is
greater or less than the amount of interest payable on the [Certificates]
[Notes] pursuant to the preceding paragraph on such Interest Payment Date, such
difference shall be allocated pro rata among all the [Certificates][Notes] based
on their respective Percentage Interests. Principal distributions on the CABS
shall not be available to pay interest on the [Certificates][Notes]. Interest
with respect to the [Certificates][Notes] due but not paid on any Interest
Payment Date will be due on the next succeeding Interest Payment Date with
additional interest on such amount at the applicable rate.
PAYMENTS OF PRINCIPAL
[Certificateholders][Noteholders] of the [Class __] [Certificates][Notes]
will be entitled to receive on each Principal Payment Date the distribution of
principal on the CABS for such Payment Date. Amounts distributable in respect of
the [Class __] [Certificates][Notes] will be distributed to the
[Certificateholders][Noteholders] of [Class __] [Certificates][Notes] in
proportion to the respective Percentage Interests represented by such
[Certificates][Notes]. Interest distributions on the CABS shall not be available
to pay principal of the [Certificates][Notes]. [No distributions of principal of
the CABS will be made until the ___________ Principal Payment Date [or, upon the
occurrence of an Amortization Event, the first Payment Date with respect to the
Amortization Period.]
The principal balance of the [Class __] [Certificates][Notes] at any time
will be equal to the outstanding principal balance of the CABS at such time. As
more fully described herein, the outstanding principal balance of the CABS will
be reduced as a result of principal payments on the Receivables that are
distributed in respect of the CABS.
COMBINATION OF [CERTIFICATES][NOTES]
Right to Exchange Combined [Certificates][Notes]. On any Business Day
during a Combination Period, a [Certificateholder][Noteholder] may surrender to
the [[Trustee] [Owner Trustee][Indenture Trustee]] such [Certificates][Notes]
(the "Combined [Certificates][Notes]") in the following proportions, by
principal amount:
COMBINED [CERTIFICATES][NOTES] PROPORTION
Upon such surrender, the [Certificateholder][Noteholder] will be entitled
to receive, in exchange, a like principal amount of CABS. Such CABS will have an
unpaid principal balance equal to the outstanding principal amount of the
Combined [Certificates][Notes], in each case determined after giving effect to
the principal payments to be made thereon on the Payment Date in the month
following such Combination Period. A Holder may exchange Combined
[Certificates][Notes] [monthly][quarterly] on any Business Day during the
periods [ ], commencing [ ]. However, the right to exchange Combined
[Certificates][Notes] will expire on [ ].
Combination Fee. Lehman Brothers will charge a Combination Fee for each
----------------
exchange of Combined [Certificates][Notes] equal to ____% of the unpaid
principal amount of such Combined [Certificates][Notes], determined after giving
effect to the principal payments to be made thereon on the Payment Date in the
month following the related Combination Period.
Procedure for Exchange. A Holder desiring to effectuate an exchange of
------------------------
Combined [Certificates][Notes] on any Business Day within a Combination Period
must notify the [Trustee][Owner Trustee][Indenture Trustee] in writing or by
telecopy not earlier than the [ ] Business Day and not later than the [ ]
Business Day preceding the desired exchange date within such Combination Period,
which notice will become irrevocable on the [ ] Business Day preceding such
exchange date, except as provided below. The address of the [Trustee][Owner
Trustee][Indenture Trustee] is _________________ (telefax _________). Promptly
after receipt of such notice, the [Trustee][Owner Trustee][Indenture Trustee]
will provide the [Certificateholder][Noteholder] with instructions for
delivering the Combined [Certificates][Notes] and the Combination Fee to the
[Trustee][Owner Trustee][Indenture Trustee] by wire transfer. Unless such notice
contains an affirmative statement by such [Certificateholder][Noteholder] that
the Beneficial Owner of the Combined [Certificates][Notes] is an employee
benefit plan subject to ERISA, such Beneficial Owner, as defined herein, will be
conclusively presumed by Lehman Brothers and the [Trustee][Owner
Trustee][Indenture Trustee] not to be such a Plan and the surrender of Combined
[Certificates][Notes] by such [Certificateholder][Note-holder] will constitute a
representation and warranty to Lehman Brothers and the [Trustee][Owner
Trustee][Indenture Trustee] that such Beneficial Owner is not such a Plan.
Upon a proper surrender of Combined [Certificates][Notes] and receipt of
the Combination Fee, Lehman Brothers will, at its option retire all of the
Combined [Certificates][Notes] and cause the Trust to retire like principal
amounts of CABS, in which case the [Certificateholder][Noteholder] of the
Combined [Certificates][Notes] will receive a portion of the CABS.
However, if the [Certificateholder][Noteholder] of the Combined
[Certificates][Notes] has given notice that the Beneficial Owner of such
Combined [Certificates][Notes] is an employee benefit plan subject to ERISA,
Lehman Brothers will notify such [Certificateholder][Noteholder] no later than
the [ ] Business Day preceding such exchange date of the identity of the CABS
proposed to be issued to such [Certificateholder][Noteholder] in exchange for
such Combined [Certificates][Notes]. Unless Lehman Brothers is notified by such
[Certificateholder][Noteholder] within [ ] Business Days thereafter that such
[Certificateholder][Noteholder] has decided not to effectuate such exchange,
such [Certificateholder][Noteholder] will be deemed to have elected to accept
such CABS, and the exchange will occur as set forth above.
Payments of principal and interest on Combined [Certificates][Notes]
(including such [Certificates][Notes] that are retired) will be made on the
Payment Date immediately following the Combination Period to the
[Certificateholder][Noteholder] of record as of the related Record Date, in the
same manner as if such Combined [Certificates][Notes] had not been exchanged.
DISTRIBUTIONS ON THE CABS; CERTIFICATE ACCOUNT
All distributions on the CABS will be remitted directly to an account (the
"Certificate Account") to be established with the [Trustee][Owner
Trustee][Indenture Trustee] under the [Trust Agreement][Indenture] on the
closing date. Amounts on deposit in the [Certificate] Account will be invested
as described in the [Trust Agreement][Indenture].
TERMINATION
The obligations of the Depositor and the [Trustee][Owner Trustee][Indenture
Trustee] created by the [Trust Agreement][Indenture] will terminate upon the
distribution to [Certificateholders][Noteholders] of all amounts required to be
distributed to them pursuant to the [Trust Agreement][Indenture]. [In addition,
the occurrence of certain Amortization Events with regard to the CABS will lead
to an early termination of the obligations of the Depositor and the
[Trustee][Owner Trustee][Indenture Trustee] created by the [Trust
Agreement][Indenture].]
DESCRIPTION OF THE CABS
GENERAL
This Prospectus Supplement sets forth certain relevant terms with respect
to the CABS. It does not purport to summarize such securities or to provide
complete or updated information with respect to the issuer thereof or the
Receivables relating thereto. Appendix A to this Prospectus Supplement contains
[excerpts from] the prospectus pursuant to which $[ ] or [ ]% CABS were offered
and sold in [date]. This Prospectus Supplement relates only to the
[Certificates] [Notes] offered hereby and does not relate to the CABS. See "Risk
Factors--Considerations Regarding CABS; Recent Developments".
Although the Depositor has no reason to believe the information concerning
[ ], the CABS Trust or the prospectus relating to the CABS is not reliable, the
Depositor has not verified either its accuracy or its completeness. Neither the
Depositor nor the Underwriter warrants that there have not occurred events, not
publicly disclosed by [CABS issuer], which would affect either the accuracy or
the completeness of the information contained therein. See "Risk
Factors--Considerations Regarding CABS; Recent Developments" above and
"--Certain Updated Information with Respect to the CABS" below.
The CABS are [ ]% [name of asset backed securities] issued by the CABS
Trust, pursuant to ____________, among [ ], as seller, [ ], as servicer, and
[ ], as trustee.
Set forth below is certain information excerpted and summarized from the
prospectus relating to the CABS. The following information has been provided by
[ ]. [Information regarding payments of interest and principal, amortization
events and amortization to be excerpted from the prospectus.
[The CABS will include the Initial CABS purchased as of the Initial Cutoff
Date and will include any Subsequent CABS purchased as of the applicable
Subsequent Cutoff Date (the Initial Cutoff Date or any Subsequent Cutoff Date
being individually referred to herein as a "Cutoff Date").
The obligation of the Trust to purchase the Subsequent CABS on a Subsequent
Transfer Date will be subject to the CABS in the Trust, including the Subsequent
CABS to be conveyed to the Trust on such Subsequent Transfer Date, meeting the
following criteria: [to follow].
The Initial CABS will represent approximately % of the aggregate initial
principal balance of the [Certificates][Notes]. [However, except for the
criteria described in the preceding paragraphs, there will be no required
characteristics of the Subsequent CABS.] [Therefore,] following the transfer of
Subsequent CABS to the Trust, the aggregate characteristics of the pool of CABS,
including [characteristics described in the following tables], may vary
significantly from those of the Initial CABS.]
CERTAIN UPDATED INFORMATION WITH RESPECT TO THE CABS
[ ], as originator of the CABS Trust, is subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Accordingly, [ ] files reports, and other information with respect to the
CABS Trust, including monthly Servicer Reports regarding the Receivables, with
the Commission. A summary of certain of the information included in the most
recent monthly Servicer Reports filed with the Commission is included as
Appendix [ ] hereto. Copies of such reports and other information may be
inspected and copies at certain offices of the Commission at the address listed
under "Available Information" in the Prospectus. [Servicer Reports available
from the CABS Trustee for privately offered CABS.]
Neither the Depositor nor the Underwriter participated in the preparation
of such Servicer Reports, and the information provided therein or in the
publicly available documents referred to above is not guaranteed as to accuracy
or completeness, and is not to be construed as a representation, by the
Depositor or the Underwriter. In particular, information set forth in the
Servicer Reports speaks only as of the date of such Servicer Report; there can
be no assurance that events have not occurred, which have not yet been publicly
disclosed, that would affect the accuracy or completeness of any statements
included in such Servicer Reports or in the publicly available documents filed
by or on behalf of the CABS Trust.
THE DEPOSITOR
Lehman ABS Corporation (the "Depositor") was incorporated in the State of
Delaware on January 29, 1988. As of January 4, 1993, the Depositor is a wholly
owned, special purpose subsidiary of Lehman Commercial Paper Inc. ("LCPI"),
which is itself a wholly owned subsidiary of Lehman Brothers Inc. ("Lehman
Brothers"), which is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). None of Lehman Brothers, LCPI, Holdings or the Depositor, nor any
affiliate of the foregoing, has guaranteed or is otherwise obligated with
respect to the [Certificates][Notes] of any Series.
The Depositor has determined that its financial statements are not relevant
to the offering made hereby and such financial statements are therefore not
included in this Prospectus Supplement.
The principal executive offices of the Depositor are located at 200 Vesey
Street, Three World Financial Center, New York, New York 10285 (Telephone: (212)
289-2000). See "The Depositor" in the Prospectus.
THE [TRUST AGREEMENT][INDENTURE]
The following summary describes certain terms of the [Trust
Agreement][Indenture]. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
[Trust Agreement][Indenture]. Whenever particular sections or defined terms of
the [Trust Agreement][Indenture] are referred to, such sections or defined terms
are thereby incorporated herein by reference. See "Description of the
[Certificates][Notes]" herein for a summary of certain additional terms of the
[Trust Agreement][Indenture].
COLLECTION OF PAYMENTS ON [CERTIFICATES][NOTES]
The [Certificates][Notes] will be registered in the name of the
[Trustee][Owner Trustee][Indenture Trustee] or its nominee name so that all
distributions thereon will be made directly to the [Trustee][Owner
Trustee][Indenture Trustee]. The obligation of the [Trustee][Owner
Trustee][Indenture Trustee] in making distributions on the [Certificates] Notes]
is limited to distributions on the underlying CABS which were actually received
by it. However, if the [Trustee][Owner Trustee][Indenture Trustee] has not
received a distribution with respect to a CABS by the [ ] Business Day after the
date on which such distribution was due and payable pursuant to the terms of
such CABS, the [Trust Agreement][Indenture] will require it to request that the
payment be made as promptly as possible and legally permitted and to take such
legal action as the [Trustee] [Owner Trustee][Indenture Trustee] deems
appropriate under the circumstances, including the prosecution of any claims in
connection therewith. The reasonable legal fees and expenses incurred by the
[Trustee][Owner Trustee][Indenture Trustee] in connection with the prosecution
of any legal action will be reimbursable to the [Trustee][Owner
Trustee][Indenture Trustee] out of the proceeds of any such action and will be
retained by the [Trustee][Owner Trustee][Indenture Trustee] prior to the deposit
of any remaining proceeds in the [Certificate][Note] Account pending
distribution thereof to [Certificateholders][Noteholders]. Distributions on the
[Certificates][Notes] will be reduced by an aggregate amount equal to such fees
and expenses in proportion to the distributions of principal and interest that
would have been otherwise made on the [Certificates][Notes] on the Payment Date
following the recovery of any such proceeds. In the event that the [Trustee]
[Owner Trustee][Indenture Trustee] has reason to believe that the proceeds of
any such legal action may not be sufficient to reimburse it for its projected
legal fees and expenses, the [Trustee][Owner Trustee][Indenture Trustee] will
notify the [Certificateholders][Noteholders] that it is not obligated to pursue
any such available remedies unless adequate indemnity for its legal fees and
expenses is provided by the [Certificateholders][Noteholders].
REPORTS TO [CERTIFICATEHOLDERS][NOTEHOLDERS]
On or prior to each Payment Date the [Trustee][Owner Trustee][Indenture
Trustee] will mail to each [Certificateholder][Noteholder] at its address listed
on the [Certificate][Note] Register maintained with the [Trustee][Owner
Trustee][Indenture Trustee] a report stating (i) the amounts of principal and
interest, respectively, distributed on each $[ ] in face amount of
[Certificates][Notes] with a denomination of $[ ] and (ii) the aggregate
principal balance of the underlying CABS.
The [Trustee][Owner Trustee][Indenture Trustee] shall forward by mail to
each [Certificateholder][Noteholder] the most current Payment Date Statement
received by the [Trustee][Owner Trustee][Indenture Trustee] as of the date of
such request.
AMENDMENT
The [Trust Agreement][Indenture] for the [Certificates][Notes] may be
amended by the Depositor and the [Trustee][Owner Trustee][Indenture Trustee],
without consent of the [Certificateholders][Noteholders], to cure any ambiguity,
to correct or supplement any provision therein which may be inconsistent with
any other provision therein or to amend any provision with respect to matters or
questions arising under such [Trust Agreement][Indenture]; provided, however,
that such action will not, as evidenced by an opinion of counsel satisfactory to
the [Trustee][Owner Trustee][Indenture Trustee], adversely affect in any
material respect the interests of any [Certificateholders][Noteholders]. The
[Trust Agreement][Indenture] may also be amended by the Depositor and the
[Trustee] [Owner Trustee][Indenture Trustee] with the consent of
[Certificateholders] [Noteholders] owning Percentage Interests aggregating not
less than [ ]% for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the [Trust Agreement][Indenture]
or modifying in any manner the rights of the [Certificateholders][Noteholders];
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, payments received on CABS which are required
to be distributed in respect of any [Certificates][Notes] without the consent of
each [Certificateholder][Noteholder] affected thereby or (ii) reduce the
aforesaid percentage of [Certificates][Notes] the [Certificateholders]
[Noteholders] of which are required to consent to any such amendment without the
consent of all [Certificateholders][Noteholders] then outstanding.
[MANDATORY PREPAYMENT
Cash distributions to [Certificateholders][Noteholders] will be made [, on
a pro rata basis,] on the Payment Date on or immediately following the last day
of the Funding Period in the event that any amount remains on deposit in the
Pre-Funding Account after giving effect to the purchase of all Subsequent CABS,
including any such purchase on such date (a "Mandatory Prepayment"). The
aggregate principal amount of [each class of] [Certificates][Notes] to be
redeemed will be an amount equal to [Certificates] [Notes] [percentage interest]
[entitlement to] the amount then on deposit in the Pre-Funding Account.
VOTING RIGHTS
At all times, ___% of the voting rights of [Certificateholders]
[Noteholders] under the [Trust Agreement][Indenture] will be allocated to the
[Class __] [Certificates][Notes] based upon such Class __' pro rata interests in
the Trust. [The [Certificateholders][Noteholders] of the [Class __]
[Certificates][Notes] will be allocated ___% of such voting rights.] Voting
rights will be allocated among the [Class __] [and Class __]
[Certificates][Notes] of the same Class __ in proportion to their Percentage
Interests of the respective [Certificates][Notes].
CERTAIN MATTERS REGARDING THE [TRUSTEE][OWNER TRUSTEE][INDENTURE TRUSTEE] AND
THE DEPOSITOR
Neither the Depositor, the [Trustee][Owner Trustee][Indenture Trustee] nor
any director, officer or employee of the Depositor or the [Trustee][Owner
Trustee][Indenture Trustee] will be under any liability to the Trust or the
related [Certificateholders][Noteholders] for any action taken or for refraining
from the taking of any action in good faith pursuant to the [Trust
Agreement][Indenture] or for errors in judgment; provided, however, that none of
the [Trustee][Owner Trustee][Indenture Trustee], the Depositor and any director,
officer or employee thereof will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of duties or by reason of reckless disregard of obligations
and duties under the [Trust Agreement][Indenture].
Subject to certain limitations set forth in the [Trust Agreement]
[Indenture], the [Trustee][Owner Trustee][Indenture Trustee] and any director,
officer, employee or agent of the [Trustee][Owner Trustee][Indenture Trustee]
shall be indemnified by the Trust and held harmless against any loss, liability
or expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the [Trust
Agreement][Indenture] or the underlying CABS other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties under such [Trust Agreement] [Indenture] or by
reason of reckless disregard of its obligations and duties under the [Trust
Agreement][Indenture]. Any such indemnification by the Trust will reduce the
amount distributable to the [Certificateholders] [Noteholders].
All persons into which the [Trustee][Owner Trustee][Indenture Trustee] may
be merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the [Trustee][Owner
Trustee][Indenture Trustee] under each [Trust Agreement][Indenture].
THE [TRUSTEE][OWNER TRUSTEE][INDENTURE TRUSTEE]
____________________ is the [Trustee][Owner Trustee][Indenture Trustee]
under the [Trust Agreement][Indenture]. The mailing address of the
[Trustee][Owner Trustee][Indenture Trustee] is ________________________,
Attention: ________________. [The Depositor maintains a banking and lending
relationship with the [Trustee][Owner Trustee][Indenture Trustee] in the
ordinary course of business.]
USE OF PROCEEDS
The net proceeds from the sale of the [Certificates][Notes] will be applied
by the Depositor on the Closing Date towards the purchase price of the CABS, the
payment of expenses related to such sale and the purchase of the CABS and other
corporate purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the [Class __] [and
Class __] [Certificates][Notes]. This summary is based on laws, regulations,
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
[Certificates][Notes] applicable to all categories of investors, some of which
(for example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the [Class __] [and Class __] [Certificates][Notes].
[CHARACTERIZATION AS GRANTOR TRUST
In the opinion of Brown & Wood LLP the Trust will be classified as a
grantor trust under subpart E, Part I of subchapter J of the Code and will not
be classified as an association taxable as a corporation. In this case,
beneficial owners ("Owners") of [Certificates][Notes] will be treated for
federal income tax purposes as owners of the Trust's assets as described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT
Generally, the Owner of a [Certificate] must include in gross income the
sum of the "daily portions", as defined below, of the original issue discount
("OID") on the CABS for each day on which it owns a [Certificate], including the
date of purchase but excluding the date of disposition. In the case of an
original Owner, the daily portions of original issue discount with respect to a
[Certificate] generally will be determined as follows under the amendments made
by the Tax Reform Act of 1986 (the "1986 Act") and the original issue discount
regulations issued on February 2, 1994 (the "OID Regulations"). A calculation
will be made of the portion of OID on the CABS that accrues during each
successive semi-annual accrual period (or shorter period from the date of
original issue). This will be done, in the case of each full monthly accrual
period, by adding (i) the present value of all remaining payments to be received
on the CABS and (ii) any payments received during such accrual period, and
subtracting from that total the "adjusted issue price" of the CABS at the
beginning of such accrual period. The "adjusted issue price" of the CABS at the
beginning of any accrual period is the "adjusted issue price" at the beginning
of the immediately preceding accrual period plus the amount of OID allocable to
that accrual period and reduced by the amount of any payment made at the end of
or during that accrual period. The OID accruing during such accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the period.
If an Owner purchases a [Certificate] at a cost greater than the "adjusted
issue price" of the CABS, then the "daily portion" for any day will be reduced
by an amount equal to the product of (i) such "daily portion" and (ii) a
fraction, the numerator of which is the amount by which such cost exceeds the
"adjusted issue price" and the denominator of which is the sum of the "daily
portions" for the CABS for all days on and after the date the [Certificates] are
purchased.
The Code currently provides for a top marginal tax rate applicable to
ordinary income of individuals of 39.6% while maintaining a maximum marginal
rate for the long-term capital gains of individuals of 28%.
SALE OF THE [CERTIFICATES]
Sale or exchange of a [Certificate] prior to its maturity will result in
gain or loss equal to the difference, if any, between the amount received on the
[Certificate] and the Owner's adjusted basis in the [Certificate]. Such adjusted
basis generally will equal the Owner's purchase price for a [Certificate],
increased by the OID included in the Owner's gross income with respect to a
[Certificate], and reduced by principal payments on the [Certificates]
previously received by the Owner. Such gain or loss will be capital gain or loss
to an Owner for which the [Certificates] are a "capital asset" within the
meaning of Code Section 1221, and will be long-term or short-term depending on
whether the [Certificates] have been owned for the long-term capital gain
holding period (currently more than one year).
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will furnish or make available, within a reasonable time after
the end of each calendar year, to each Owner or each person holding a
[Certificate] on behalf of an Owner at any time during such year, such
information as the Trustee deems necessary or desirable to assist Owners in
preparing their federal income tax returns. If an Owner or other recipient of
payment on behalf of an Owner fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not reported all interest and dividend income required to be shown on
its federal income tax return, the applicable backup withholding may be required
with respect to any payments. Any amounts of United States federal income tax
deducted and withheld from a distribution to an Owner or other recipient of
payment on behalf of an Owner would be allowed as a credit against such holder's
federal income tax liability.
NON-U.S. PERSONS
In general, payments of interest or payments made with respect to OID made
by the person required to withhold tax under Code Sections 1441 or 1442 to an
Owner that is a non-U.S. Person with respect to the [Certificate] will generally
not be subject to federal income or withholding tax if (i) such Owner does not
actually or constructively own 10% or more of the combined voting power of all
classes of equity in the issuer of the [Certificates] (which may include the
Depositor); (ii) such Owner is not a controlled foreign corporation within the
meaning of Code Section 957 related to the Trust; and (iii) such Owner complies
with certain certification procedures requiring the delivery of a statement
under penalty of perjury identifying such Owner.
For this purpose, the term "non-U.S. Person" is defined as any person who
is as to the United States a foreign corporation, a non-resident alien
individual, a non-resident fiduciary of a foreign estate or trust, or a foreign
partnership one or more of the members of which is, for United States federal
income tax consequences, a foreign corporation, a non-resident alien, a non-
resident individual or a non-resident fiduciary of a foreign estate or trust.]
[TREATMENT OF THE NOTES AS INDEBTEDNESS.
The Seller will agree, and the Noteholders will agree by their purchase of
Notes, to treat the Notes as debt for federal income tax purposes. Special Tax
Counsel will advise the Trust that the Notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the Notes is correct.
INTEREST INCOME ON THE NOTES
To the extent that the Notes are 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. A purchase 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.
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 interests and accrued market
discount not previously included in income. Capital losses generally may be used
to offset capital gains.
A portion of any gain from the sale of a Note that might otherwise be
capital gain may be treated as ordinary income to the extent such Note is held
as part of a "conversion transaction" within the meaning of new Section 1258 of
the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in Notes or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain realized in a conversion transaction that may be
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment in such
transaction at 120% of the appropriate "applicable Federal rate" (which rate is
computed and published monthly by the IRS), subject to appropriate reduction (to
the extent provided in regulations to be issued) to reflect prior inclusion of
interest or other ordinary income items from the transaction.
FOREIGN HOLDERS
Under the Code, unless interest (including OID) paid on a Note 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 of
the Notes, or (ii) the recipient is a controlled foreign corporation to which
the issuer of the Notes is a related person) and will be exempt from U.S.
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 treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to Nonresidents.
Interest and OID of Noteholders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Noteholder. They will, however, generally be subject to the
regular United States income tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will furnish or make available, within a reasonable time after
the end of each calendar year, to each Owner or each person holding a Note on
behalf of an Owner at any time during such year, such information as the Trustee
deems necessary or desirable to assist Owners in preparing their federal income
tax returns. If an Owner or other recipient of payment on behalf of an Owner
fails to supply an accurate taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, the
applicable backup withholding may be required with respect to any payments. Any
amounts of United States federal income tax deducted and withheld from a
distribution to an Owner or other recipient of payment on behalf of an Owner
would be allowed as a credit against such holder's federal income tax liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES
If, contrary to the opinion of Special Tax Counsel, the IRS successfully
asserted that one or more of the Notes did not represent debt for federal income
tax purposes, the Notes might be treated as equity interests in the Trust. If so
treated, the Trust might be taxable as a corporation or, alternatively, as a
publicly traded partnership.]
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the [Certificates][Notes] offered hereunder. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investments in the
[Certificates][Notes] offered hereunder.
ERISA CONSIDERATIONS
[ ]
PRIOR SERIES OF [CERTIFICATES][NOTES]
[ ]
LEGAL INVESTMENT CONSIDERATIONS
[ ]
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Lehman Brothers Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase from the Depositor,
the Series [ ] [Certificates][Notes].
The Underwriter is obligated to purchase all the Series [ ]
[Certificates][Notes] offered hereby if any are purchased.
The Underwriter can over-allot or transact in a way to maintain the market
price of the certificates above those of the open market. If this happens, it
can be discounted at any time.
Distribution of the Series [ ] [Certificates][Notes] will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the Depositor, before
deducting expenses payable by the Depositor, will be [ ]% of the aggregate
original principal amount of the [Certificates][Notes] as of the Cutoff Date,
plus accrued interest at the [applicable] [initial] [weighted average]
[Certificate][Note] Rate from the Cut-off Date. In connection with the purchase
and sale of the Series [ ] [Certificates][Notes], the Underwriter may be deemed
to have received compensation from the Depositor in the form of underwriting
discounts.
The Underwriter is an affiliate of the Depositor, and the participation by
the Underwriter in the offering of the [Certificates][Notes] complies with
Schedule E of the by-laws of the National Association of Securities Dealers,
Inc. regarding underwriting securities of an affiliate.
LEGAL MATTERS
Certain legal matters with respect to the [Certificates][Notes] will be
passed upon for the Depositor by Brown & Wood LLP, and for the Underwriter by
Brown & Wood LLP, New York, New York.
RATING
It is a condition to issuance that the [Certificates][Notes] be rated in
[one of the four highest] rating categories by at least one nationally
recognized Rating Agency.
A securities rating addresses the likelihood of the receipt by
[Certificateholders][Noteholders] of [Certificates][Notes] of distributions on
the CABS. The rating takes into consideration the characteristics of the CABS
and the structural, legal and tax aspects associated with the [Certificates]
[Notes]. The ratings on the [Certificates][Notes] do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the CABS or
the possibility that [Certificateholders][Noteholders] of [Certificates][Notes]
might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
<PAGE>
SCHEDULE I
Class ___
CUSIP #________ Rating:________
<TABLE>
<CAPTION>
[Monthly] [Quarterly]
[Semi-Annual] Interest Aggregate Interest payment
Interest Payment Dates Aggregate Notional Amount Payment on Single Class on Single Class
- ---------------------- ------------------------- ----------------------- ---------------------------
<S> <C> <C> <C>
On each Payment Date $_______________ $_______ $________
commencing on ________,
and there- after until
the Class ___
[Certificates] [Notes]
have been paid in full.
In the case of the
first Interest Payment
Date, interest will
accrue from and
including the Closing
Date to but excluding
the _________Interest
Payment Date.
</TABLE>
Class ___
CUSIP #________ Rating:________
<TABLE>
<CAPTION>
Aggregate Face Amount of Minimum Authorized Interest Rate on Principal
Principal Payment Dates Principal Component Denomination Component
- ----------------------- ------------------------- --------------------- ---------------------------
<S> <C> <C> <C>
Commencing with the Payment $_______________ $_______ $________
Date, and thereafter until
the Class ___
[Certificates] [Notes] have
been paid in full.
</TABLE>
[Monthly] [Quarterly]
[Semi-Annual]
Monthly Interest Payment Aggregate Interest Payment
Interest Payment Dates on Single Class on Single Class
- ---------------------- ------------------------ --------------------------
On each Payment Date $_____________ $_____________
commencing on ______,
____ and thereafter
until the Class __
[Certificates][Notes]
have been paid in
full. In the case of
the first Interest
Payment Date, interest
will accrue from and
including the Closing
Date to but excluding
the _______, ____
Interest Payment Date.
<PAGE>
LEHMAN CARD ACCOUNT
TRUST
$________________
[ADJUSTABLE RATE] [VARIABLE RATE] [ %]
ASSET BACKED [CERTIFICATES] [NOTES],
SERIES __________
[CLASS ______]
LEHMAN ABS CORPORATION
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
LEHMAN BROTHERS
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated April 20, 1999
Prospectus
LEHMAN ABS CORPORATION
Asset-Backed Notes
Asset-Backed Certificates
(Issuable in Series)
Lehman ABS Corporation, as depositor, may offer from time to time under this
prospectus and related prospectus supplements securities that are either
asset-backed notes and asset-backed certificates and asset-backed note custody
receipts which may be sold from time to time in one or more series. Each
series of securities will be issued in one or more classes.
The related prospectus supplement will set forth the specific assets of the
trust and the seller or sellers or transferor or transferors from whom the
assets are required. The assets may include:
(a) (i) one or more pools of receivables generated or
to be generated from time to time in the ordinary
course of business in one or more portfolios of
credit card and similar accounts;
(ii) certificates or notes backed by credit card and
similar receivables;
(b) all monies due under the above assets (which may be net
of certain amounts payable to the servicer); and
(c) certain funds, enhancement and other assets.
In addition, the assets may include monies on deposit in the pre-funding
account to be established by the trustee, which will be used to purchase
additional receivables or CABS securities from a seller from time to time
during the funding period specified in the related prospectus supplement.
The assets comprising the trust may be divided into one or more asset groups
and each class of the related series will be secured by, or will evidence
beneficial ownership of, the corresponding asset group, as applicable.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE RISK FACTORS ON PAGE 2 AND ON PAGE __ OF THE PROSPECTUS
SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the offered securities or determined if
this prospectus is accurate or complete. Making any contrary representation is
a criminal offense.
LEHMAN BROTHERS
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATION OR LOWER RETURNS
There will be no market for the securities of any series prior to its
issuance 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 that any such market will continue for the life of the
securities of such series. The underwriters presently expect to make a
secondary market in the securities, but have no obligation to do so. Absent a
secondary market for the securities you may experience a delay if you choose
to sell your securities or the price you receive may be less than that which
is offered for a comparable liquid security.
LIMITED ASSETS
THE DEPOSITOR. 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 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 securities.
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 provider of any enhancement 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 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 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 and you may experience a
loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to certain representations and
warranties. The depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
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.
WE REFER YOU TO "THE AGREEMENTS - ASSIGNMENT OF PRIMARY ASSETS."
LIMITS ON ENHANCEMENT
Although enhancement for the Securities is intended to reduce the
risk of delinquent payments or losses to holders of securities entitled to the
benefit thereof, the amount of the enhancement will be limited, as set forth
in the related prospectus supplement. In addition the amount available will
decline and could be depleted under certain circumstances prior to the payment
in full of the related series of securities, and as a result you may suffer
losses.
WE REFER YOU TO "ENHANCEMENT."
POTENTIAL PRIORITY OF LIENS
Each seller will warrant in its pooling and servicing agreement, master
pooling and servicing agreement, sale and servicing agreement or trust
agreement that the transfer of the receivables by it to the trust is and will
be either a valid transfer and assignment of all right, title and interest in
the receivables and all proceeds thereof to the trust or the grant to the
trust of a security interest in the receivables. The seller has taken and will
take certain actions required to perfect the trust's interest in the
receivables. The seller has warranted that if the transfer by it to the trust
is deemed to be a grant to the trust of a security interest in the
receivables, the trustee will have a first priority perfected security
interest therein. If the transfer of the receivables and all proceeds thereof
to the trust is deemed to create a security interest therein, a tax or
government lien on property of the seller arising before receivables come into
existence may have priority over the trust's interest in such receivables.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE RECEIVABLES - TRANSFER OF
RECEIVABLES."
INSOLVENCY OF SELLER MAY RESULT IN DELAY, REDUCTION OR ACCELERATION OF PAYMENTS
If any seller is a regulated financial institution, to the extent that
a seller grants a security interest in the receivables to the trust and that
security interest is validly perfected before any insolvency of the seller and
is not granted or taken in contemplation of insolvency or with the intent to
hinder, delay or defraud the seller or its creditors, that security interest
should not be subject to avoidance in the event of insolvency and
receivership, and payments to the trust with respect to the receivables should
not be subject to recovery by a conservator or receiver for the seller. If,
however, the conservator or receiver were to assert a contrary position, or
were to require the trustee to establish its right to those payments by
submitting to and completing the administrative claims procedure established
under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), or the conservator or receiver were to request a stay of
proceedings with respect to the seller as provided under FIRREA, delays in
payments on the securities and possible reductions in the amount of those
payments could occur.
Upon the occurrence of a liquidation event, if a conservator or
receiver were appointed for the seller and no liquidation event other than
such conservatorship, receivership or insolvency of the seller existed, the
conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the receivables and the commencement of the
rapid amortization period. In addition, a conservator or receiver for the
seller may have the power to cause early payment of the securities.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE RECEIVABLES - TRANSFER OF
RECEIVABLES."
INSOLVENCY OF SELLER MAY CAUSE TERMINATION OF TRUST AND LOSS TO SECURITYHOLDERS
If a conservator or receiver were appointed for the seller pursuant to
the applicable agreement, new principal receivables would not be transferred
to the trust and the trustee would sell the portion of the receivables
allocable in accordance with the applicable agreement to each series (unless
holders of the securities representing more than 50% of the investor amount of
each series, or if any such series has more than one class of each class of
such series, instruct otherwise), thereby causing early termination of the
trust and a loss to the holders of the securities if the net proceeds of such
sale were insufficient to pay securities in full.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE RECEIVABLES - CERTAIN
MATTERS RELATING TO RECEIVERSHIP."
SERVICER DEFAULT MAY PREVENT TRANSFER OF SERVICING TO A SUCCESSOR SERVICER
In the event of a servicer default, if a conservator or receiver is
appointed for the servicer, and no servicer default other than such
conservatorship or receivership or insolvency of the servicer exists, the
conservator or receiver may have the power to prevent either the trustee or
the majority of the holders of the securities from effecting a transfer of
servicing to a successor servicer.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE RECEIVABLES - CERTAIN
MATTERS RELATING TO RECEIVERSHIP."
POSSIBLE EFFECTS OF LEGISLATION ON THE COLLECTION AND TRANSFER OF RECEIVABLES
The accounts and the receivables are subject to numerous federal and
state consumer protection laws which impose requirements on the making and
collection of consumer loans. Such laws, as well as any new laws or rulings
which may be adopted, may adversely affect the servicer's ability to collect
on the receivables or maintain previous levels of finance charges, annual
cardholder fees and other fees, and failure by the seller or the servicer to
comply with such requirements also could adversely affect the servicer's
ability to collect on the receivables. Pursuant to the applicable agreement,
the depositor covenants to accept the transfer of all receivables in an
account if any receivable in such account does not comply with all
requirements of law, if any receivable is charged off as uncollectible or if
the proceeds of any receivable in such account are not available to the trust.
The depositor also makes certain other representations and warranties relating
to the validity and enforceability of the accounts and the receivables.
However, the trustee will not make any examination of the receivables or the
records relating thereto for the purpose of establishing the presence or
absence of defects, compliance with such representations and warranties, or
for any other purpose. The sole remedy if any such representation or warranty
is breached and such breach continues beyond the applicable cure period, if
any, is that the depositor or the servicer, as the case may be, will generally
be obligated to accept the transfer of all receivables in the account affected
thereby. In addition, in the event of a breach of certain representations and
warranties, the depositor may be obligated to accept the reassignment and
transfer of the interest in the trust of the holders of all series.
Application of federal and state bankruptcy and debtor relief laws
would affect the interests of the holders of the securities in the
receivables, if such laws result in any receivables being written off as
uncollectible.
CERTAIN LEGAL CONCERNS APPLICABLE TO ACCOUNTS
In November 1991, the United States Senate voted to amend a
then-proposed Senate banking bill to include an amendment to the Federal
Truth-in-Lending Act which would have limited the annual percentage rate
charged on credit card accounts to a rate not exceeding four percentage points
over the rate charged by the IRS on underpayments of federal taxes. Based on
the then-current IRS rate, such amendment would have limited the maximum
annual percentage rate for all credit card accounts to 14%. Although the
amendment was not approved by the House of Representatives, the depositor
cannot predict whether Congress will pass a similar bill in the future or if
such a bill would be signed by the President.
The potential effect of any legislation which limits the amount of
finance charges that may be charged on credit card balances could be to reduce
the net portfolio yield of a series. If such net portfolio yield for such
series is reduced, a liquidation event may occur, and the rapid amortization
period for such series could commence prior to the scheduled amortization date
for such series. In addition, during the past year, there has been increased
consumer awareness of the level of finance charges and fees and other
practices of card issuers. As a result of these developments and other
factors, there can be no assurance as to whether any federal or state
legislation will be promulgated which would impose additional limitations on
the monthly periodic finance charges or fees relating to the accounts.
Since October 1991, a number of lawsuits and administrative actions
have been filed in several states against out-of-state banks (both federally
insured state-chartered banks and federally insured national banks) which
issue cards. These actions challenge various fees and charges (such as late
fees, over-the-limit fees, returned payment check fees and annual membership
fees) assessed against residents of the states in which such suits were filed,
based on restrictions or prohibitions under such states' laws alleged to be
applicable to the out-of-state cards issuers. There can be no assurance that
one of the sellers will not be named as a defendant in similar lawsuits or
other administrative actions. In December 1994, the Superior Court of
Pennsylvania reinstated a class-action law suit, stating that not all of
Pennsylvania's consumer protection laws which purport to prohibit credit card
fees and contingent default charges have been preempted by federal law. This
case has been appealed to the Pennsylvania Supreme Court. The Supreme Courts
of California, Colorado and New Jersey have also recently handed down
decisions in similar actions. The California and Colorado Supreme Courts
opined that federal law governs late fees and found for the defendant credit
card issuers, while the New Jersey Supreme Court found that late payment fees
are not interest and that, therefore, state law is not preempted by federal
law with respect to such fees. On January 19, 1996, the United States Supreme
Court accepted an appeal from the California Supreme Court's decision, which
found that the charge in question was governed by federal law and was,
therefore, proper.
COMPETITION WILL AFFECT SELLER'S ABILITY TO GENERATE NEW RECEIVABLES
The credit card and charge card industry is highly competitive. There
is increased competitive use of advertising, target marketing and pricing
competition in interest rates and annual cardholder fees as both traditional
and new credit card and charge card issuers seek to expand or to enter the
market. As a result of this competition, certain major credit card and charge
card issuers assess finance charges for selected portions of their portfolios
at rates lower than the rates currently being assessed on the accounts. A
seller's ability to compete in the credit card and charge card industry will
affect its ability to generate new receivables.
CERTAIN FACTORS MAY CAUSE DELAY OR ACCELERATION OF PAYMENTS AND MATURITY
The receivables in the trust may be paid at any time and there is no
assurance that there will be additional receivables created in the accounts
the receivables of which are designated for inclusion in the trust or that any
particular pattern of cardholder repayments will occur. The continuation of
the revolving period of a series will be dependent upon the continued
generation of new receivables for the trust. A significant decline in the
amount of receivables generated in the accounts could result in the occurrence
of a liquidation event for one or more series and the commencement of the
rapid amortization period for each such series. A decrease in the rate of
payment by cardholders could delay the return of principal to the holders of
the securities during the amortization periods for each series. Each agreement
will provide that the depositor or the related seller may, or will be required
to, designate additional accounts, the receivables of which will be added to
the trust in the event that the amount of the principal receivables is not
maintained at a certain minimum amount. If additional accounts are not
designated by the depositor or the related seller when required, a liquidation
event for one or more series may occur and result in the commencement of a
rapid amortization period for such series.
WE REFER YOU TO "RECEIVABLE YIELD CONSIDERATIONS" IN THE RELATED
PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF OTHER EVENTS WHICH MIGHT LEAD
TO THE COMMENCEMENT OF THE RAPID AMORTIZATION PERIOD FOR A SERIES.
BASIS RISK
If so specified in the related prospectus supplement, a portion of the
accounts in a trust will have finance charges set at a variable rate above a
designated prime rate or other designated index. A series of securities issued
by such trust may bear interest at a fixed rate or at a floating rate based on
an index other than the prime rate or other designated index. If there is a
decline in the prime rate or other designated index, the amount of collections
of finance charge receivables on such accounts may be reduced, whereas the
amounts payable as monthly interest on such series of securities and other
amounts required to be funded out of finance charge receivables with respect
to such series may not be similarly reduced.
SOCIAL, GEOGRAPHIC AND ECONOMIC FACTORS
Changes in card use, payment patterns and the rate of defaults by
cardholders may result from a variety of social, economic and geographic
factors. Social factors include the public's perceptions of the use of credit
cards. Legal factors include any charges in the current legal structure
affecting the relative balance of power between credit card issuers and the
obligors under credit card accounts. Economic factors include the rate of
inflation and relative interest rates offered for various types of loans.
Adverse changes in economic conditions in any states where cardholders are
located could have a direct impact on the timing and amount of payments on the
securities of any series. The depositor is unable to determine and has no
basis to predict whether, or to what extent, economic, social or geographic
factors will affect future card use or repayment patterns. New credit card
issuers have been entering the market while other issuers have been seeking to
expand market share through increased advertising, target marketing and
pricing competition. Additionally, the use of incentive or affinity programs
(E.G., gift awards for card usage) may affect card usage patterns.
A SELLER'S ABILITY TO CHANGE TERMS OF THE RECEIVABLES
Any seller may have the right to determine the finance charges and the
other fees and charges which will be applicable from time to time on its
accounts, to alter the minimum monthly payment required under the accounts and
to change various other terms of its agreement with cardholders with respect
to the accounts. A decrease in the finance charges and the other fees and
charges assessed on the accounts would decrease the effective yield on the
accounts and could result in the occurrence of a liquidation event for one or
more series and commencement of the rapid amortization period for each such
series. Under an agreement a seller may agree that, unless required by law or
as is otherwise necessary, in its good faith judgment, to maintain its credit
card business on a competitive basis, it will not reduce the annual percentage
rate at which finance charges are assessed on the receivables or the other
fees and charges assessed on the accounts, if, as a result of such reduction,
the net portfolio yield for any series as of such date would be less than the
base rate for such series. The seller may also covenant that it will change
the terms relating to the accounts only if the change is made applicable to
the comparable segment of the accounts owned and serviced by the seller with
characteristics the same as or substantially similar to the accounts, except
as otherwise restricted by the terms of the applicable cardholder agreement.
In servicing accounts, a servicer will be required to exercise the same care
and apply the same policies that it exercises in handling similar matters for
its own comparable accounts. Except as set forth above, the agreement does not
contain any restrictions on the ability of a seller to change the terms of the
accounts or the receivables. There can be no assurance that changes in
applicable law, changes in the marketplace or prudent business practice might
not result in a determination by a seller to decrease finance charges or other
fees and charges for existing accounts, or take actions which would otherwise
change the terms of the accounts.
LIMITED NATURE OF RATING
Any rating assigned to the securities of a series or a class of a
series by a rating agency will reflect such rating agency's assessment solely
of the likelihood that the holders of the securities will receive the payments
of interest and principal required to be made under the agreement and will be
based primarily on the value of the primary assets in the trust and the
availability of any enhancement with respect to such series or class of such
series. The rating will not be a recommendation to purchase, hold or sell
securities of such series or class of such series, and such rating will not
comment as to the marketability of such securities, any market price or
suitability for a particular investor. There is no assurance that any rating
will remain for any given period of time or that any rating will not be
lowered or withdrawn entirely by a rating agency if in such rating agency's
judgment circumstances so warrant. The value of the securities may be reduced
if their credit rating is lowered or withdrawn.
LIMITATIONS OF BOOK-ENTRY SECURITIES
Issuance of the securities in book-entry form may reduce the liquidity
of such securities in the secondary trading market since investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Because transactions in the securities can be effected only through
DTC, Cedelbank, Euroclear, participating organizations, indirect participants
and certain banks, the ability of a security owner to pledge a security to
persons or entities that do not participate in the DTC, Cedelbank or Euroclear
system, or otherwise to take actions in respect of such securities, may be
limited due to lack of a physical certificate representing the securities.
Security owners may experience some delay in their receipt of
distributions of interest and principal on the securities because such
distributions will be forwarded by the trustee to DTC and DTC will credit such
distributions to the accounts of its participants which will thereafter credit
them to the accounts of security owners either directly or indirectly through
indirect participants.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES - BOOK-ENTRY
REGISTRATION".
DESCRIPTION OF THE SECURITIES
GENERAL
The notes will be issued in series pursuant to an indenture (the
"Indenture") between the related Trust 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 (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 Receivables, 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. The Custody
Receipts will be issued in series pursuant to a custody agreement (a "Custody
Agreement") among the Depositor and the entity named in the related Prospectus
Supplement as Custodian (the "Custodian"). A form of Custody Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. A Series may consist of any combination of Notes,
Certificates and Custody Receipts.
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. As
described herein under "CUSTODY RECEIPTS; CUSTODY AGREEMENTS", Custody
Receipts entitle the related Securityholders to certain payments that are made
on Classes of Notes held by the related Custodian. Accordingly, to the extent
the following descriptions apply to Notes, including the effect payments on
the Receivables may have on Notes that are secured by Receivables, such
descriptions also apply to Custody Receipts.
Each Series of Securities will consist of one or more classes of
Securities (each a "Class"), one or more of which may be Compound Interest
Securities, Fixed Interest Securities, Variable Interest Securities, Planned
Amortization Class ("PAC") Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities, Participating Securities and Custody
Receipts. A Series may also include one or more Classes of Subordinate
Securities (the "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 payment date (each , a "Payment Date") 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 Payment 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 Payment 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 or by a Custodian,
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
credit enhancement specified in the Prospectus Supplement (the "Enhancement")
will be deposited directly into a separate account established by the Trustee
or the Servicer (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 Payment Date, as the
case may be. See "THE TRUST ASSETS--Collection and Distribution Accounts."
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 Payment Date and in the priority
specified in the related Prospectus Supplement. The rate of interest on
Securities of a Series may be floating. 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 Payment Date will accrue and be added to the
principal thereof on such Payment Date.
Interest payable on the Securities on a Payment 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 Payment Date the effective yield to Securityholders 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 Payment Date.
PAYMENTS OF PRINCIPAL
On each Payment 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.
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.
FINAL SCHEDULED PAYMENT DATE
The Final Scheduled Payment Date of each Class of a Series of
Securities will be specified in the related Prospectus Supplement and will be
the date (calculated on the basis of the assumptions applicable to such Series
described therein) on which the entire aggregate principal balance of such
Class is expected to be reduced to zero. Because 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 Payment
Date of any such Class will occur earlier, and may occur substantially
earlier, than its Final Scheduled Payment Date. The Final Scheduled Payment
Date of a Class may equal the maturity date of the Primary Assets in the
related Trust which has the latest stated maturity or will be determined as
described in this Prospectus and in the related Prospectus Supplement.
COMPANION SERIES
If so specified in the related Prospectus Supplement, a Series of
Securities may be paired with another Series issued by the related Trust (a
"Companion Series") on or prior to the commencement of an Accumulation Period
or Amortization Period for such Series. As the Investor Interest of the Series
having a Companion Series is reduced, the Investor Interest of the Companion
Series will increase by an equal amount. Upon payment in full of such Series,
the Investor Interest of the Companion Series will be equal to the amount of
the Investor Interest paid to Securityholders of such Series.
OPTIONAL PURCHASE OR TERMINATION
The Depositor 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 Payment 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 Securities, the
Depositor, the Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of a
Trust by repurchasing all of the Primary Assets from such Trust 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 Securities 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 purchase or termination must be given by the Depositor or the Trustee
prior to the related date. The purchase or repurchase price will be set forth
in the related Prospectus Supplement. The redemption, purchase or repurchase
price will be set forth in the related Prospectus Supplement.
In addition, the related 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 as a result of the
occurrence of an Early Amortization Event.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, Securityholders
may hold their Securities through The Depository Trust Company ("DTC") (in the
United States) or Cedelbank or Euroclear (in Europe) if they are participants
of such systems, or indirectly through organizations which are participants in
such systems.
Cede & Co. ("Cede"), as nominee for DTC, will hold one or more global
Securities. Unless and until Definitive Securities are issued under the
limited circumstances described in the related Prospectus Supplement, all
references in this Prospectus or in such Prospectus Supplement to actions by
Securityholders shall refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references in this
Prospectus to distributions, notices, reports and statements to
Securityholders shall refer to distributions, notices, reports and statements
to DTC or Cede, as the registered holder of the Securities, as the case may
be, for distribution to Securityholders in accordance with DTC procedures.
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 Morgan Guaranty Trust Company of New York will act as
depositary for Euroclear (in such capacities, the "Depositaries").
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between Cedelbank Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank or
Euroclear participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing
system by its Depositary; however, 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 its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures
for same-day funds settlement applicable to DTC. Cedelbank Participants and
Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a DTC participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Cedelbank participant on such business
day. Cash received in Cedelbank or Euroclear as a result of sales of
securities by or through a Cedelbank Participant or a Euroclear Participant to
a DTC participant will be received with value on the DTC settlement date but
will be available in the relevant Cedelbank or Euroclear cash account only as
of the business day following settlement in DTC. For additional information
regarding clearance and settlement procedures for the Securities, see Annex I
hereto and for information with respect to tax documentation procedures
relating to the Securities, see Annex I hereto and "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS - Foreign Investors."
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations (including the
Underwriters). Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodian relationship with a Participant, either directly or
indirectly (the "Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Securities may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal of and interest on the Securities from the Trustee, as paying agent,
or its successor in such capacity (the "Paying Agent"), through the
Participants who in turn will receive them from DTC. Under a book-entry
format, Securityholders may experience some delay in their receipt of
payments, since such payments will be forwarded by the Paying Agent to Cede,
as nominee for DTC. DTC will forward such payments to its Participants which
thereafter will forward them to Indirect Participants or Securityholders. It
is anticipated that the only "Securityholder" for a Series may be Cede, as
nominee of DTC. Securityholders would not then be recognized by the Trustee as
Securityholders, as such term is used in the Agreement, and Securityholders
would only be permitted to exercise the rights of Securityholders indirectly
through the Participants who in turn will exercise the rights of
Securityholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments
on behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, Securityholders will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC will take any action permitted to be taken by a Securityholder
under the Agreement only at the direction of one or more Participants to whose
account with DTC the Securities are credited. Additionally, DTC will take such
actions with respect to specified percentages of the Securityholders'
interests only at the direction of and on behalf of Participants whose
holdings include undivided interests that satisfy such specified percentages.
DTC may take conflicting actions with respect to other undivided interests to
the extent that such actions are taken on behalf of Participants whose
holdings include such undivided interests.
Cedelbank ("Cedelbank") is incorporated under the laws of Luxembourg as
a professional depositary. 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 certificates. Transactions may
be settled in Cedelbank in any of 28 currencies, including United States
dollars. Cedelbank provides to its 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 depositary,
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 and may
include the Underwriters. 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.
The Euroclear System was created in 1968 to hold securities for its
participants ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating both the need for physical
movement of certificates and the risk resulting from transfers of securities
and cash that are not simultaneous.
The System has subsequently been extended to clear and settle
transactions between Euroclear Participants and counterparties both in
Cedelbank and in many domestic securities markets. Transactions may be settled
in any of 32 settlement currencies, including United States dollars. In
addition to safekeeping (custody) and securities clearance and settlement, the
Euroclear System includes securities lending and borrowing and money transfer
services. The Euroclear System is operated by the Brussels, Belgium, office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation that establishes policy on behalf of Euroclear Participants. The
Euroclear Operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the
New York State Banking Department, as well as the Belgian Banking Commission.
All operations are conducted by the Euroclear Operator and all
Euroclear securities clearance accounts and cash accounts are accounts with
the Euroclear Operator. They 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 all transfers of securities and
cash, both within the System and receipts and withdrawals of securities and
cash. All securities in the Euroclear System are held on a fungible basis
without attribution of specific certificates to specific securities clearance
accounts.
Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Securities 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 its Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Certain Federal Income Tax Considerations." The
Cedelbank or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Securityholder under the Agreement on behalf
of a Cedelbank Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities 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.
DEFINITIVE SECURITIES
The Securities of any Series will be issued in fully registered,
certificated form to Securityholders or their respective nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to the
Securities, and the Trustee or the Depositor are unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Servicer
Default, Securityholders of the related series evidencing not less than 50% of
the aggregate unpaid principal amount of the Securities advise the Trustee and
DTC through Participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the best interests
of the Securityholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities. Upon surrender by DTC of
the definitive certificates representing the Securities, and instructions for
re-registration, the Trustee will issue such Securities in the form of
Definitive Securities, and thereafter the Trustee will recognize the holders
of such Definitive Securities as Securityholders, under the Agreement and the
Series Supplement ("Holders").
If Definitive Securities are issued, distribution of principal and
interest on the Definitive Securities will be made by the Paying Agent or the
Trustee directly to the Holders in whose names the Definitive Securities were
registered on the related Record Date in accordance with the procedures set
forth in this Prospectus and in the Agreement and the Series Supplement.
Distributions will be made by check mailed to the address of each Holder as it
appears on the register maintained by the Trustee, except that the final
payment on any Definitive Security will be made only upon presentation and
surrender of such Definitive Security on the date for such final payment at
such office or agency as is specified in the notice of final distribution to
Holders. The Trustee will provide such notice to Holders not later than the
fifth day of the month of the final distribution.
Definitive Securities will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be
Citibank. No service charge will be imposed for any registration of transfer
or exchange, but the Transfer Agent and Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
TRUST ASSETS
GENERAL
The Trust for each Series of Securities will be composed of certain
assets delivered, assigned and transferred to the Trustee by the Depositor, in
each case consisting, unless otherwise specified in the related Prospectus
Supplement, of:
(i) the Primary Assets;
(ii) any Enhancement; and
(iii) the amount, if any, initially deposited in the Collection
Account, Distribution Account or Pre-Funding Account for
a Series, as specified in the related Prospectus
Supplement.
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 CABS Securities or an affiliate thereof, or, in the
case of the Receivables, in privately negotiated transactions, which may
include transactions with affiliates. Receivables relating to a Series will be
serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, either pursuant to a Pooling and Servicing Agreement or
a Sale and Servicing Agreement.
Primary Assets included in the Trust for a Series may consist of any
combination of Receivables and CABS Securities, to the extent and as specified
in the related Prospectus Supplement.
The following is a brief description of the Primary Assets expected to
be included in the Trusts. Specific information regarding the Primary Assets
will be provided in the related Prospectus Supplement and, to the extent not
contained in the related Prospectus Supplement, in a report on Form 8-K to be
filed with the Securities and Exchange Commission within fifteen days after
the initial issuance of the related Securities. A form of the Pooling and
Servicing Agreement with respect to each Series of Securities, or the
Indenture with respect to each Series of Notes, has been filed as an exhibit
to this Registration Statement and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement.
THE RECEIVABLES
GENERAL. The Primary Assets for a Series may consist, in whole or in
part, of consumer, corporate, revolving credit card, charge card or debit card
receivables (collectively, the "Receivables") generated from time to time in
the ordinary course of business in a portfolio of consumer, corporate,
revolving credit card, charge card or debit card accounts (collectively, the
"Accounts"). The Accounts will consist of the Initial Accounts sold by a
Seller, as well as any Additional Accounts added from time to time, but will
not include any Removed Accounts. Each Seller will convey to the Trust all
Receivables existing on the Cut-off Date in certain consumer, revolving credit
card, charge card or debit card accounts (the "Initial Accounts") and all
Receivables arising in the Initial Accounts from time to time thereafter until
the termination of the Trust. The Receivables may be payable in U.S. dollars
or in any other foreign currency. After the Cut-off Date, the Seller will
convey to the Trust the Receivables in certain New Accounts and the
Receivables in certain other Accounts included in certain Lump Sum Additions,
in each case in accordance with the provisions of the Agreement. In addition,
pursuant to the Agreement, the Seller in some circumstances will be obligated
to designate Additional Accounts the Receivables in which will be included in
the Trust or, in lieu thereof or in addition thereto, to include
Participations in the Trust. Additional Accounts will consist of New Accounts
and accounts relating to any Lump Sum Additions. The Seller will convey to the
Trust all Receivables in Additional Accounts, whether such Receivables are
then existing or thereafter created. The addition to the Trust of Receivables
in Additional Accounts or Participations will be subject to certain
conditions.
Pursuant to the Agreement, the Seller will have the right (subject to
certain limitations and conditions), but not the obligation, to remove the
Receivables in certain Accounts from the Trust ("Removed Accounts"). If so
specified in the related Prospectus Supplement, the Seller will be able to
include in the related Trust, participations representing undivided interests
in a pool of assets primarily consisting of revolving credit card accounts or
other revolving credit accounts owned by the Seller or any affiliate thereof
and collections thereon ("Participations").
CREDIT CARD ACCOUNTS AND RECEIVABLES. The Credit Card Receivables
consist of periodic finance charges, annual membership fees, cash advance fees
and late charges on amounts charged for merchandise and services and certain
other fees designated by the Seller ("Finance Charge Receivables") and all
amounts charged by cardholders for merchandise and services, amounts advanced
to cardholders as cash advances and all other fees billed to cardholders on
the Accounts ("Principal Receivables"). In addition, certain Interchange
attributed to cardholder charges for merchandise and services in the Accounts
may be treated as Finance Charge Receivables. Recoveries of charged-off
Finance Charge Receivables will be treated as collections of Finance Charge
Receivables and recoveries of charged-off Principal Receivables will be
applied against charge-offs of Principal Receivables. From time to time,
subject to certain conditions, certain of the amounts described above which
are included in Principal Receivables may be treated as Finance Charge
Receivables. The amount of Receivables will fluctuate from day to day as new
Receivables are generated or added to the Trust and as existing Receivables
are collected, charged-off as uncollectible or otherwise adjusted.
"Interchange" consists of certain fees received by a credit card-issuing bank
from the VISA and MasterCard International associations as partial
compensation for taking credit risk, absorbing fraud losses and funding
receivables for a limited period prior to initial billing. Under the VISA and
MasterCard International systems, a portion of the Interchange in connection
with cardholder charges for merchandise and services is passed from banks
which clear the transactions for merchants to credit card-issuing banks. VISA
and MasterCard International may from time to time change the amount of
Interchange reimbursed to banks issuing their credit cards.
CHARGE CARD ACCOUNTS AND RECEIVABLES. Charge Card Receivables consist
of amounts charged on designated Accounts for merchandise and services, and
all annual membership fees and certain other administrative fees billed to the
designated Accounts. Receivables originated under Charge Card Accounts are not
subject to a monthly finance charge.
There are distinctions between the Credit Card Accounts and the Charge
Card Accounts. The Credit Card Accounts offer revolving credit plans to their
customers. Charge Card Accounts generally have no pre-set spending limit and
are designed for use as a convenient method of payment for the purchase of
merchandise and services. Charge Card Accounts generally cannot be used as a
means of financing such purchases. Accordingly, the full balance of a month's
purchases is billed to cardmembers and is due upon receipt of the billing
statement. By contrast, revolving credit plans allow customers to make a
minimum monthly payment and to borrow the remaining outstanding balance from
the credit issuer up to a predetermined limit. As a result of these payment
requirement differences, the Charge Card Accounts have a high monthly payment
rate and balances which turn over rapidly relative to their charge volume when
compared to Credit Card Accounts.
Another distinction between Charge Card Accounts and Credit Card
Accounts is that Charge Card Account balances are generally not subject to
monthly finance charges. As described above, the full Account balance is
billed monthly and is due upon receipt of the billing statement. Cardmembers
do not have the option of using their Charge Card Accounts to extend payment
and to pay a finance charge on the remaining outstanding balance. Credit Card
Accounts, by contrast, do allow customers to pay a specified minimum portion
of an outstanding amount and to finance the balance at a finance charge rate
determined by the credit card issuer. (Because Charge Card Account balances
are not assessed finance charges, for the purpose of providing yield to the
Trust a portion of Collections on Receivables in Accounts received in any Due
Period equal to the product of Collections and the Yield Factor will generally
be treated as Yield Collections.) Each related Prospectus Supplement, where
applicable, will describe the Yield Calculation for a specific portfolio of
Charge Card Accounts.
ADDITIONAL INFORMATION RELATING TO RECEIVABLES
The related Prospectus Supplement for each Series will provide
information with respect to the Receivables that are Primary Assets as of the
Cut-off Date, including, among other things, the aggregate principal balance
of the Receivables and whether the Receivables are Credit Card Receivables or
Charge Card Receivables.
The eligibility criteria which shall apply with respect to the Primary
Assets will be specified in the related Prospectus Supplement. The related
Prospectus Supplement will provide information, including, among other things:
(a) underwriting criteria;
(b) the loss and delinquency experience for the portfolio of
Receivables;
(c) the composition of the portfolio by account balance; and
(d) the geographic distribution of Accounts and Receivables.
The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Receivables for a Series.
If information of the nature described above respecting the Receivables
is not known to the Seller at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the related 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.
CABS SECURITIES
GENERAL. Primary Assets for a Series may consist, in whole or in part,
of CABS Securities which include certificates evidencing an undivided interest
in, or notes or loans secured by, Receivables generated in Accounts. Such
certificates, notes or loans will have previously been (a) offered and
distributed to the public pursuant to an effective registration statement or
are being registered under the Securities Act of 1933 in connection with the
offering of a Series of Securities 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. CABS Securities will have been issued pursuant
to a Pooling and Servicing Agreement, a Master Pooling and Servicing
Agreement, a Sale and Servicing Agreement, a Trust Agreement, Indenture or
similar agreement (a "CABS Agreement"). The seller/servicer of the underlying
Receivables will have entered into the CABS Agreement with the trustee under
such CABS Agreement (the "CABS Trustee"). Receivables underlying a CABS
Security will be serviced by a servicer (the "CABS Servicer") directly or by
one or more sub-servicers who may be subject to the supervision of the CABS
Servicer.
All purchases of CABS Securities for a Series by the Seller or the
Depositor will be made in secondary market transactions, not from the issuer
of such CABS Securities or any affiliate thereof. As a result, no such
purchases of CABS 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 CABS Securities.
The issuer of the CABS Securities (the "CABS Issuer") will be a
financial institution, corporation, or other entity engaged generally in the
business of issuing credit or charge cards; any form of store or merchandiser
that issues credit or charge cards; or a limited purpose corporation organized
for the purpose of, among other things, establishing trusts and acquiring and
selling receivables to such trusts, and selling beneficial interests in such
trusts; or one of such trusts. If so specified in the related Prospectus
Supplement, the CABS Issuer may be an affiliate of the Depositor. The
obligations of the CABS Issuer 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 CABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the CABS Securities issued under the
CABS Agreement.
Distributions of principal and interest will be made on the CABS
Securities on the dates specified in the related Prospectus Supplement. The
CABS 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 CABS Securities by the CABS Trustee or the
CABS Servicer. The CABS Issuer or the CABS Servicer may have the right to
repurchase assets underlying the CABS Securities after a certain date or under
other circumstances specified in the related Prospectus Supplement.
UNDERLYING RECEIVABLES. The Receivables underlying the CABS Securities
may consist of Credit Card Receivables or Charge Card Receivables.
ENHANCEMENT RELATING TO CABS SECURITIES. Enhancement in the form of
reserve funds, subordination of other CABS issued under the CABS Agreement,
guarantees, letters of credit, cash collateral accounts, insurance policies or
other types of Enhancement may be provided with respect to the Receivables
underlying the CABS Securities or with respect to the CABS Securities
themselves. The type, characteristics and amount of Enhancement will be a
function of certain characteristics of the Receivables and other factors and
will have been established for the CABS Securities on the basis of
requirements of the rating agencies.
ADDITIONAL INFORMATION. The related Prospectus Supplement for a Series
for which the Primary Assets includes CABS Securities will specify, 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 CABS Securities to be included in the Primary Assets;
(ii) certain characteristics of the Receivables which comprise
the underlying assets for the CABS Securities including:
(a) whether such Receivables are Credit Card Receivables
or Charge Card Receivables;
(b) the fees and charges associated with such
Receivables; and
(c) the servicing fee or range of servicing fees with
respect to the Receivables;
(iii) the expected and final maturity of the CABS Securities;
(iv) the interest rate of the CABS Securities;
(v) the CABS Issuer, the CABS Servicer (if other than the
CABS Issuer) and the CABS Trustee for such CABS
Securities;
(vi) certain characteristics of Enhancement, if any, such as
reserve funds, insurance policies, letters of credit or
guarantees relating to the Receivables underlying the
CABS Securities or to such CABS Securities themselves;
(vii) the terms on which the underlying Receivables for such
CABS Securities may, or are required to, be purchased
prior to their stated maturity or the stated maturity of
the CABS Securities; and
(viii) the terms on which Receivables may be substituted for
those originally underlying the CABS Securities.
If information of the nature described above representing the CABS
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 related 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 of 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 Securityholders. 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 Payment 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. From time to time, various
accounts including Pre-Funding Accounts may be created under the terms of the
documents related to a specific Series.
ENHANCEMENT
GENERAL
For any Series, Enhancement may be provided with respect to one or more
Classes thereof. Enhancement may be in the form of the subordination of one or
more Classes of the Securities of such Series, a letter of credit, the
establishment of a cash collateral guaranty or account, a surety bond,
insurance, the use of cross support features or another method of Enhancement
described in the related Prospectus Supplement, or any combination of the
foregoing. Enhancement may also include any type of derivative product or
arrangement. If so specified in the related Prospectus Supplement, any form of
Enhancement may be structured so as to be drawn upon by more than one Class to
the extent described therein.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the Enhancement will not provide protection against all risks of loss
and will not guarantee repayment of the entire principal balance of the
Securities and interest thereon. If losses occur which exceed the amount
covered by the Enhancement or which are not covered by the Enhancement,
holders of the Securities will bear their allocable share of deficiencies.
If Enhancement is provided with respect to a Series, the related
Prospectus Supplement will include a description of:
(a) the amount payable under such Enhancement;
(b) any conditions to payment thereunder not otherwise
described in this Prospectus;
(c) the conditions (if any) under which the amount payable
under such Enhancement may be reduced and under which
such Enhancement may be terminated or replaced; and
(d) any material provisions of any agreement relating to such
Enhancement.
Additionally, the related Prospectus Supplement may set forth certain
information with respect to the issuer of any third-party Enhancement,
including:
(i) any material provisions of any agreement relating to such
Enhancement;
(ii) a brief description of its principal business activities;
a brief description of its principal business activities;
(iii) its principal place of business, place of incorporation
and the jurisdiction under which it is chartered or
licensed to do business;
(iv) if applicable the identity of regulatory agencies which
exercise primary jurisdiction over the conduct of its
business; and
(v) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
related Prospectus Supplement.
SUBORDINATION
If so specified in the related Prospectus Supplement, one or more
Classes of a Series may be subordinated to one or more other Classes of a
Series. If so specified in the related Prospectus Supplement, the rights of
the holders of the subordinated Securities to receive distributions of
principal and/or interest on any Payment Date will be subordinated to such
rights of the holders of the Securities which are senior to such subordinated
Securities to the extent set forth in the related Prospectus Supplement. The
amount of subordination will decrease whenever amounts otherwise payable to
the holders of subordinated Securities are paid to the holders of the
Securities which are senior to such subordinated Securities.
LETTER OF CREDIT
If so specified in the related Prospectus Supplement, a letter of
credit with respect to a Series or Class of Securities may be issued by the
bank or financial institution specified in the related Prospectus Supplement
(the "L/C Bank"). Under the letter of credit, the L/C Bank will be obligated
to honor drawings thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, equal to the amount described in the related
Prospectus Supplement. The amount available under the letter of credit will be
reduced to the extent of the unreimbursed payments thereunder.
CASH COLLATERAL GUARANTY OR ACCOUNT
If specified in the related Prospectus Supplement, the Securities of
any Class or Series may have the benefit of a Cash Collateral Guaranty issued
pursuant to a trust agreement between a cash collateral depositor, a cash
collateral trustee and the Seller and Servicer or a Cash Collateral Account
directly. The Cash Collateral Guaranty will generally be an obligation of the
cash collateral trust and not of the cash collateral depositor, the cash
collateral trustee (except to the extent of amounts on deposit in the cash
collateral account), the Trustee or the Seller or the Servicer.
The Servicer will determine on each Determination Date with respect to
the Series enhanced by the Cash Collateral Guaranty or the Cash Collateral
Account whether a deficiency exists with respect to the payment of interest
and/or principal on the Securities so enhanced. If the Servicer determines
that a deficiency exists, it shall instruct the Trustee for such Series to
draw an amount equal to such deficiency from the Cash Collateral Guaranty or
the Cash Collateral Account, up to the maximum amount available thereunder.
RESERVE FUND
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor or the Seller will deposit into one or more funds to
be established with the Trustee as part of the Trust for such Series or for
the benefit of any Enhancer with respect to such Series (the "Reserve Fund")
cash, a letter or letters of credit, 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.
SURETY BOND OR INSURANCE POLICY
If so specified in the related Prospectus Supplement, insurance with
respect to a Series or Class of Securities may be provided by one or more
insurance companies. Such insurance will guarantee, with respect to one or
more Classes of the related Series, distributions of interest or principal in
the manner and amount specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a surety bond may
be purchased for the benefit of the holders of any Series or Class of such
Series to assure distributions of interest or principal with respect to such
Series or Class of Securities in the manner and amount specified in the
related Prospectus Supplement.
SPREAD ACCOUNT
If so specified in the related Prospectus Supplement, support for a
Series or one or more Classes of a Series may be provided by the periodic
deposit of certain available excess cash flow from the Trust assets into an
account (the "Spread Account") intended to assure the subsequent distribution
of interest and principal on the Securities of such Class or Series in the
manner specified in the related Prospectus Supplement.
DERIVATIVE PRODUCTS
If so specified in the related Prospectus Supplement, the Depositor may
enter into a derivative arrangement with respect to the Securities of any
Class or Series. Such derivative arrangement may include a guaranteed rate
agreement, a maturity liquidity facility, a tax protection agreement, an
interest rate cap or floor agreement to provide protection against changes in
floating rates of interest payable on the Receivables or the Securities, an
interest rate or currency swap agreement to convert floating or fixed rate
payments or currencies or any other similar arrangement.
SERVICING OF RECEIVABLES
GENERAL
Customary servicing functions with respect to Receivables comprising or
underlying the Primary Assets in the Trust will be provided by the Servicer
directly pursuant to an Agreement. In performing its functions, the Servicer
will exercise the same degree of skill and care that it customarily exercises
with respect to similar receivables serviced by it. In addition, the Servicer,
if so specified in the related Prospectus Supplement, will act as custodian
and will be responsible for maintaining custody of certain documentation
relating to the Receivables on behalf of the Trustee.
COLLECTION PROCEDURES
The Servicer will make reasonable efforts to collect all payments
required to be made under the Accounts 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 receivables
held in its own portfolio.
DEPOSITS TO THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, 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 herein are rated as described in the related
Prospectus Supplement and as specified by each Rating Agency rating the
Securities of such Series 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 Seller, the Trustee or the Depositor, as appropriate, will
deposit into the Collection Account for each Series, within two business days
after the date of receipt thereof, the following payments and collections
received or made by it:
(i) all payments on account of principal, including
prepayments, on such Primary Assets;
(ii) all payments on account of interest or finance charges 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 applicable
Agreement, the Servicing Fee in respect of such Primary
Assets;
(iii) all amounts received by the Servicer in connection with
the liquidation of Primary Assets other than amounts
required to be paid or refunded to the obligor pursuant
to the terms of the applicable 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 amounts required to be deposited therein from any
applicable Enhancement for such Series pursuant to the
related Trust Agreement;
(v) all repurchase prices of any such Primary Assets
repurchased by the Depositor, the Seller or the Servicer
pursuant to the related Agreement;
(vi) any amounts payable to the applicable person with respect
to each Primary Asset acquired that has been repurchased
or removed from the Trust 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) all amounts payable to the Trustee of such Series for
deposit into the Distribution Account, if any, or for
remittance to the Securityholders of such series as
provided for in the related Trust Agreement; and
(viii) all amounts necessary 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a 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.
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 expenses or otherwise, may be subordinate to the rights of
Securityholders of such Series.
EVIDENCE AS TO COMPLIANCE
The Agreement for each Series may 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 Receivables 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 the 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.
The Agreement for each Series will 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 the Agreement
throughout the preceding calendar year.
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 Seller and may
have other business relationships with the Depositor and its affiliates.
If an event of default occurs with respect to the Servicer under an
Agreement, the Servicer may be replaced by the Trustee or a successor
Servicer. Unless otherwise specified in the related Prospectus Supplement,
Servicer 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" and " - Rights upon
Events of Default".
Unless otherwise provided in the related Prospectus Supplement, the
Servicer may not resign from its obligations and duties under the Agreement,
except:
b (a) upon determination that:
(i) the performance of its duties under the Agreement is no
longer permissible under applicable law; and
(ii) there is no reasonable action which the Servicer could
take to make the performance of its duties hereunder
permissible under applicable law;
(b) in connection with a conveyance, consolidation or merger by the
Servicer with any corporation, or conveyance or transfer of its
properties or assets substantially as an entirety to any other
person permitted under the Agreement; or
(c) upon the satisfaction of the following conditions:
(i) the acceptance and assumption, by an agreement
supplemental thereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, of the
obligations and duties of the Servicer thereunder by a
proposed successor Servicer;
(ii) the Servicer having given written notice to each Rating
Agency of such transfer and such Rating Agency having
notified the Servicer in writing to the effect that its
then current rating of Securities of any Series will not
be reduced or withdrawn as a result of such transfer;
(iii) the written consent of any provider of Enhancement (such
consent not to be unreasonably withheld); and
(iv) the proposed successor Servicer being an Eligible
Servicer (as defined below).
Notwithstanding anything in the Agreement to the contrary, any
successor Servicer appointed under clause (c) above will be deemed to be a
successor Servicer. Any such determination permitting the resignation of the
Servicer will be evidenced as to clause (a) above by an opinion of counsel to
such effect delivered to the Trustee. No such resignation will become
effective until the Trustee or a successor Servicer shall have assumed the
responsibilities and obligations of the Servicer in accordance with the
Agreement.
"Eligible Servicer" means the Trustee or an entity which, at the time
of its appointment as Servicer:
(i) is an established financial institution having capital or
a net worth of not less than $100,000,000;
(ii) is servicing a portfolio of consumer credit card or
charge card accounts;
(iii) is legally qualified and has the capacity to service the
Accounts;
(iv) has demonstrated the ability to professionally and
completely service a portfolio of similar accounts in
accordance with standards of skill and care customary in
the industry; and
(v) is qualified to use the software that is then currently
being used to service the Accounts or obtains the right
to use or has its own software which is adequate to
perform its duties under the Agreement.
INDEMNIFICATION
Except to the extent otherwise provided therein, each Agreement will
provide that the Servicer will indemnify the Trust, the Trustee and the
Securityholders of all series from and against any loss, liability, expense,
damage or injury suffered or sustained by reason of any acts, omissions or
alleged acts or omissions arising out of activities of the Servicer with
respect to the Trust or the Trustee or any co-trustee pursuant to this
Agreement, including those arising from acts or omissions of the Servicer
pursuant to the Agreement, including but not limited to any judgment, award,
settlement, reasonable attorneys' fees and other costs or expenses incurred in
connection with the defense of any actual or threatened action, proceeding or
claim; provided, however, that the Servicer shall not indemnify:
(i) the Trust or the Trustee if such acts, omissions or
alleged acts or omissions constitute fraud, gross
negligence, breach of fiduciary duty or misconduct by the
Trustee;
(ii) the Trust, the Trustee or the Securityholders of any
series for any liability, cost or expense of the Trust
with respect to any action taken by the Trust at the
request of the Securityholders of a Series in accordance
with the Agreement nor with respect to any Federal, state
or local income or franchise taxes (or any interest or
penalties with respect thereto) required to be paid by
the Trust or the Securityholders of a Series in
connection herewith to any taxing authority; or
(iii) the Trust or Securityholders for any losses incurred by
any of them as a result of defaulted Receivables or
Receivables which are written off as uncollectible unless
such write-off is caused by a breach of the Agreement by
the Servicer. Subject to certain exceptions in the
Agreement, any indemnification pursuant to the Agreement
will be only from the assets of the Servicer.
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 Agreements.
ASSIGNMENT OF PRIMARY ASSETS
RECEIVABLES; PRE-FUNDING ACCOUNTS. On the Closing Date specified with
respect to any given Trust in the related Prospectus Supplement (the "Closing
Date"), the Seller will transfer and assign to the applicable Trustee, without
recourse, its entire interest in the Initial Receivables of the related
receivables pool. Each such Receivable will be identified at such time of
transfer. The applicable Trustee will, concurrently with such transfer and
assignment, execute and deliver the related Securities. Unless otherwise
provided in the related Prospectus Supplement, the net proceeds received from
the sale of the Securities of a given series will be applied to the purchase
of the related CABS Securities from the Seller and, to the extent specified in
the related Prospectus Supplement, to the deposit of the Pre-Funded Amount
into the Pre-Funding Account. The related Prospectus Supplement for a given
Trust will specify whether, and the terms, conditions and manner under which,
Subsequent CABS will be sold by the Seller to the applicable Trust from time
to time during the Funding Period on each date specified as a transfer date in
the related Prospectus Supplement (each, a "Subsequent Transfer Date").
GENERAL. In connection with any transfer of the Initial Receivables and
any transfer of Subsequent Receivables and CABS Securities pursuant to an
Agreement each Seller will annotate and indicate in its computer files that
the Receivables and CAB Securities have been conveyed to the Trust. In
addition, the Seller will provide to the Trustee a computer file or a
microfiche list containing a true and complete list showing each Account, the
Receivables of which have been designated for inclusion in the Trust,
identified by account number, collection status, the amount of Receivables
outstanding and the amount of Principal Receivables as of the Cut-off Date.
The Seller will not deliver to the Trustee any other records or agreements
relating to such Account or the Receivables. The records and agreements
relating to such Accounts and the Receivables maintained by the Seller or the
Servicer will not be segregated by the Seller or the Servicer from other
documents and agreements relating to other Accounts and Receivables and will
not be stamped or marked to reflect the transfer of the Receivables to the
Trust. Each Seller will file the UCC financing statements meeting the
requirements of applicable state law with respect to the Receivables. See
"RISK FACTORS" and "CERTAIN LEGAL ASPECTS OF THE RECEIVABLES."
ASSIGNMENT OF CABS SECURITIES; PRE-FUNDING ACCOUNTS. The Depositor will
cause CABS Securities to be registered in the name of the Trustee (or its
nominee or correspondent). The Trustee (or its agent or correspondent) will
have possession of any certificated CABS 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 CABS
Security. See "THE TRUST ASSETS - CABS Securities". Each CABS Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"CABS 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 CABS Security conveyed to the
Trustee.
In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the CABS Securities: (i) that the information contained in
the CABS Schedule is true and correct in all material respects; (ii) that,
immediately prior to the conveyance of the CABS Securities, the Depositor had
good title thereto, and was the sole owner thereof; (iii) that there has been
no other sale by it of such CABS Securities; and (iv) that there is no
existing lien, charge, security interest or other encumbrance on such CABS
Securities.
Unless otherwise provided in the related Prospectus Supplement, the net
proceeds received from the sale of the Securities of a given series will be
applied to the purchase of the related CABS Securities from the Seller and, to
the extent specified in the related Prospectus Supplement, to the deposit of
the Pre-Funded Amount into the Pre-Funding Account. The related Prospectus
Supplement for a given Trust will specify whether, and the terms, conditions
and manner under which, Subsequent CABS will be sold by the Seller to the
applicable Trust from time to time during the Funding Period on each date
specified as a transfer date in the related Prospectus Supplement (each, a
"Subsequent Transfer Date").
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 is found by the Trustee within 45 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 does not cure such defect within 90 days, or within
such other period specified in the related Prospectus Supplement, the
Depositor 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 Servicer, as the case may be, of the defect, repurchase the
related Primary Asset from the Trustee at a price equal to (a) the outstanding
principal balance of such 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.
If provided in the related Prospectus Supplement, the Depositor may,
rather than repurchase the Primary Asset as described above, remove such
Primary Asset from the Trust (the "Deleted Primary Asset") and substitute in
its place one or more other Primary Assets (each, a "Qualifying Substitute
Primary Asset").
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 Payments due in
the month of substitution, at least equal to 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
Securityholders), (ii) an interest rate not less 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.
The Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or
such entity cannot cure a breach of any such representations and warranties in
all material respects within the time period specified in the related
Prospectus Supplement after notification by the Trustee of such breach, and if
such breach is of a nature that materially and adversely affects the value of
such Primary Asset, the Depositor or such entity is obligated to repurchase
the affected Primary Asset or, if provided in the related Prospectus
Supplement, provide a Qualifying Substitute Primary Asset therefor, subject to
the same conditions and limitations on purchases and substitutions as
described above.
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".
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the
sole remedies available to the Securityholders or the Trustee for a material
defect in a document for a Primary Asset.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, on the related
Closing Date the Depositor will deposit cash in an amount (the "Pre-Funded
Amount") specified in such Prospectus Supplement into an account (the
"Pre-Funding Account"). In no event shall the Pre-Funded Amount exceed 50% of
the initial aggregate principal amount of the Certificates and/or Notes of the
related Series of Securities. The Pre-Funded Amount will be used to purchase
Receivables ("Subsequent Receivables") in a period from the related Closing
Date to a date not more than one year after such Closing Date (such period,
the "Funding Period") from the Seller. The Pre-Funding Account will be
maintained with the Trustee for the related Series of Securities and is
designed solely to hold funds to be applied by such Trustee during the Funding
Period to pay to the Seller the purchase price for Subsequent Receivables.
Monies on deposit in the Pre-Funding Account will not be available to cover
losses on or in respect of the related Receivables. To the extent that the
entire Pre-Funded amount has not been applied to the purchase of Subsequent
Receivables by the end of the related Funding Period, any amounts remaining in
the Pre-Funding Account will be distributed as a prepayment of principal to
the holders of the related Securities on the Payment Date immediately
following the end of the Funding Period, in the amounts and pursuant to the
priorities set forth in the related Prospectus Supplement. Any reinvestment
risk resulting from such prepayment will be borne entirely by the holders of
one or more classes of the related Series of Securities. Monies on deposit in
the Pre-Funding Account may be invested in Permitted Investments under the
circumstances and in the manner described in the related Agreement. Earnings
on investment of funds in the Pre-Funding Account will be deposited into the
trust account specified in the related Prospectus Supplement and losses will
be charged against the funds on deposit in the Pre-Funding Account.
In addition, if so provided in the related Prospectus Supplement, on
the related Closing Date the Depositor will deposit in an account (the
"Capitalized Interest Account") cash in such amount as is necessary to cover
shortfalls in interest on the related Series of Securities that may arise as a
result of utilization of the Pre-Funding Account as described above. The
Capitalized Interest Account shall be maintained with the Trustee for the
related Series of Securities and is designed solely to cover the
above-mentioned interest shortfalls. Monies on deposit in the Capitalized
Interest Account has not been applied to cover shortfalls in interest on the
related Series of Securities by the end of the Funding Period, any amounts
remaining in the Capitalized Interest Account will be paid to the Depositor.
REPORTS TO HOLDERS
The Trustee will prepare and forward to each Securityholder on each
Payment Date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any Series, among other things:
(i) with respect to a Series, the amount of such distribution
allocable to interest or finance charges on the Primary
Assets;
(ii) with respect to a Series the amount of such distribution
allocable to principal on the Primary Assets;
(iii) the amount of servicing compensation with respect to the
Primary Assets paid during the period commencing on the
Due Date to which such distribution relates and the
amount of servicing compensation during such period
attributable to penalties and fees;
(iv) the aggregate outstanding principal balance of the
Primary Assets as of the opening of business on the Due
Date, after giving effect to distributions allocated to
principal and reported under (i) above;
(v) the aggregate outstanding principal amount of the
Securities of such Series as of the Due Date after giving
effect to distributions allocated to principal reported
under (ii) above;
(vi) with respect to Securities that are Compound Interest
Securities or Zero Coupon Securities, the amount of
interest accrued on such Securities during the related
interest accrual period and added to the Compound Value
thereof;
(vii) in the case of Securities that are Variable Interest
Securities, the rate applicable to the distribution being
made;
(viii) if applicable, the amount of any shortfall (i.e., the
difference between the aggregate amounts of principal and
interest which Securityholders would have received if
there were sufficient eligible funds in the Distribution
Account and the amounts actually distributed);
(ix) if applicable, the number and aggregate principal
balances of Primary Assets delinquent for (A) two
consecutive payments and (B) three or more consecutive
payments, as of the close of business on the
Determination Date to which such distribution relates;
(x) in the case of any Enhancement described in the related
Prospectus Supplement, the amount of coverage of such
Enhancement as of the close of business on the applicable
Payment Date;
(xi) in the case of any Series which includes a Class of
Subordinate Securities, the subordinated amount, if any,
determined as of the related Determination Date and if
the distribution to the Senior Securityholders is less
than their required distribution, the amount of the
shortfall;
(xii) the amount of any withdrawal from any applicable Reserve
Fund included in amounts actually distributed to
Securityholders and the remaining balance of each Reserve
Fund, if any, on such Payment Date, after giving effect
to distributions made on such date;
(xiii) for each such date during the Funding Period (if any),
the remaining Pre-Funded Amount;
(xiv) for the first such date that is on or immediately
following the end of the Funding Period (if any), the
amount of any remaining Pre-Funded Amount that has not
been used to fund the purchase of Subsequent Receivables
and that is being passed through as payments on the
Securities of the related Series; and
(xv) such other information as is 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) through (iv), (vi) and (viii) above for such calendar year and (b) such
information specified in the 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 Payment Date
reports and the annual reports provided to the holders will not have been
examined and reported upon by an independent public accountant. However, each
Servicer will provide to the Trustee an annual report by independent public
accountants with respect to the Servicer's servicing of the Receivables. See
"SERVICING OF RECEIVABLES - Evidence as to Compliance".
EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT. Unless otherwise specified in the
related Prospectus Supplement, Events of Default under the Pooling and
Servicing Agreement for each Series of Certificates include:
(i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the
Trustee to distribute to Certificateholders of such
Series any required payment, which failure continues
unremedied for the number of days specified in the
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 Certificates of such Series evidencing not less than
25% of the aggregate voting rights of the Certificates
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 Agreement which continues unremedied
for the number of days specified in the 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 Certificates
of such Series evidencing not less than 25% of the
aggregate voting rights of the Certificates; 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.
RIGHTS UPON EVENTS OF DEFAULT
So long as an Event of Default remains unremedied under the Agreement
for a Series, the Trustee for such Series or, unless otherwise specified in
the Prospectus Supplement, 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 Agreement and in and to the Receivables, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the 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 the 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 Prospectus Supplement to act as successor Servicer under the provisions of
such Agreement relating to the servicing of the Receivables. 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 the
Agreement.
During the continuance of any Event of Default of a Servicer under the
Agreement for a Series, 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 Certificateholders of such Series, and, unless
otherwise specified in the 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 Securityholders have offered the Trustee reasonable
security or indemnity against the costs, 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 prejudiced to the nonassenting
Securityholders.
No Securityholder of a Series, solely by virtue of such holder's status
as a Securityholder, will have any right under the Agreement for such Series
to institute any proceeding with respect to the 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.
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 five (5) days or more in the payment of any
interest on any Note of such Series or the default in the
payment of the principal of any Note at such Note's
maturity;
(ii) failure to perform any other covenant of the Depositor or
the Trust 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 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 bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust; 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, 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 662/3% of the then aggregate
outstanding amount of the Notes of such Series. In the event that one or more
Classes of a Series have the benefit of a security insurance policy, the
issuer of such policy will have the right to consent to any sale described
above.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default, 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 Holders of the
Notes 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.
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 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
Securityholders 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
Securityholders in an Event of Default. See "- Rights Upon Events of Default"
above. 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) by the Depositor, 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 more than 50% of
the aggregate voting rights of the Securities in the
Trust upon 30 days' advance 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 THE AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer,
and the Trustee with respect to such Series, without notice to or consent of
the Securityholders:
(iv) to cure any ambiguity;
(v) to correct any defective provisions or to correct or
supplement any provision therein which may be
inconsistent with any other provision therein;
(vi) to add to the duties of the Depositor or Servicer;
(vii) to add any other provisions with respect to matters or
questions arising under such Agreement or related
Enhancement;
(viii) 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
(ix) to comply with any requirements imposed by the Code;
provided that any such amendment pursuant to clause (iv) above will not
adversely affect in any material respect the interests of any Securityholders
of such Series, as evidenced by an opinion of counsel. Any such amendment,
except pursuant to clause (vi) above, shall be deemed not to adversely affect
in any material respect the interests of any Securityholder 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 of such Securities.
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series may also be amended by the Trustee, the Servicer 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 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 Securityholders 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 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, if other
than set forth in this Prospectus.
LIST OF HOLDERS
Upon written request of three or more Securityholders of record of a
Series for purposes of communicating with other Securityholders with respect
to their rights under the Agreement or under the Securities for such Series,
which request is accompanied by a copy of the communication which such
Securityholders propose to transmit, the Trustee will afford such
Securityholders access during business hours to the most recent list of
Securityholders of that Series held by the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Securityholders.
TERMINATION
POOLING AND SERVICING AGREEMENT. The obligations created by the
Agreement for a Series will terminate upon the distribution to Securityholders
of all amounts distributable to them pursuant to such Agreement after the
earlier of (i) the final payment or other liquidation of the last Primary
Asset remaining in the Trust for such Series or (ii) the repurchase, as
described below, by the Servicer or other entity specified in the Prospectus
Supplement from the Trustee for such Series of all Primary Assets and other
property at that time subject to the Agreement. The Agreement for each Series
permits, but does not require, the Servicer or other entity specified in the
Prospectus Supplement to repurchase from the Trust for such Series all
remaining Primary Assets at a price equal to 100% (or such other percentage
set forth in the Prospectus Supplement) 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, and unreimbursed expenses (that are reimbursable pursuant to
the terms of the Agreement), plus 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. The exercise of such right will effect
early retirement of the Securities of such Series, but the Servicer'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 Cut-off Date aggregate
Principal Balance. 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 Securityholder, and the final
distribution will be made only upon surrender and cancellation of the
Securities at an office or agency specified in the notice of termination. If
so provided in the related Prospectus Supplement for a Series, the Depositor
or another entity may effect an optional termination of the Trust under the
circumstances described in such related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES - Optional Purchase or Termination".
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.
CUSTODY RECEIPTS; CUSTODY AGREEMENTS
A series of Securities may include one or more classes of Custody
Receipts. Custody Receipts entitle the related Securityholders to certain
payments made on Notes that are held by a Custodian. Such Notes will be issued
pursuant to an Indenture and if the Primary Assets securing the Notes are
Receivables, the Receivables will be serviced pursuant to a Pooling and
Servicing Agreement, a Sale and Servicing Agreement or a Servicing Agreement.
The Custody Receipts will be issued pursuant to a Custody Agreement between
the Depositor and the Custodian. The identity of the commercial bank, savings
and loan association or trust company named as custodian for each series of
securities that includes Custody Receipts will be set forth in the related
Prospectus Supplement. The entity serving as Custodian may have normal banking
relationships with the Depositor or Servicer.
Payments on Notes held by a Custodian will be made by the related
Indenture Trustee to the Custodian. The Custodian will in turn remit to
Holders of Custody Receipts, from payments on the Notes, the amounts to which
such Holders are entitled in accordance with the terms of the Custody
Receipts.
If a Series of Securities includes Custody Receipts, the related
Prospectus Supplement will describe:
o the Primary Assets that are security for the related Notes
o the terms of the related Notes, and
o the terms of the Custody Receipts.
At the time of issuance of a Series of Securities that includes one
or more Classes of Custody Receipts the Depositor will deposit the related
Notes with the Custodian. Such Notes will be registered in the name of and
held by the Custodian in a Custody Account. The Custody Account will be
required at all times to be maintained as a custodial account in the corporate
trust department of the Custodian for the benefit of the Holders of the
Custody Receipts, separated and segregated on the books of the Custodian from
all other accounts, funds and property in the possession of the Custodian.
The Custodian will not have any equitable or beneficial interest in
the related Notes. The Notes held by the Custodian will not be available to
the Custodian for its own use or profit, nor will any Note be deemed to be
part of the general assets of the Custodian. Neither the Notes held by the
Custodian nor the proceeds of such Notes will be subject to any right, charge,
security interest, lien or claim of any kind in favor of the Custodian.
No Holder of a Custody Receipt will have the right to withdraw the
related Notes from the Custody Account and the Custodian will not deliver the
related Notes to such Holder.
Neither the Depositor nor the Custodian shall have any obligation to
advance its own funds to make any payment to any Holder of a Custody Receipt.
NOTICES; VOTING
Upon receipt from a Trustee or Servicer under Agreements relating to
the Notes held by the Custodian of any notice with respect to a Note, the
Custodian shall promptly transmit a copy of such notice by mail to the Holders
of the related Custody Receipts. For such purpose, the Holders shall consider
the date of the receipt by the Custodian of any such notice as the record date
for the purpose of determining the Holders of record to whom such notices
shall be transmitted. In the event such notice requests or requires any vote,
action or consent by the Holders of such a Note, the Custodian shall within
the time period specified in the related Prospectus Supplement following
receipt of such notice, deliver to the Holders of the Custody Receipts of a
letter of direction with respect to such vote, action or consent, returnable
to the Custodian, and the Custodian shall vote such Notes in accordance with
such letter of direction. Any record date established by such notice for
purposes specified in such notice shall be the record date for the purpose of
determining the Holders of record for such purposes. If no record date is
established by the related Trustee, the date such notice is received by the
Custodian shall be the record date.
Notwithstanding the above, without the consent of all of the Holders
of Custody Receipts of a Series, neither the Custodian nor the Holders of
Custody Receipts shall vote or consent to any amendments to the related
Indenture or any other actions which would reduce the amount of or change the
amount or timing or currency of payment on the Custody Receipts.
DEFAULTS
The Custodian is not authorized to proceed against the Servicer or
the Trustee under any Agreement relating to Notes held by the Custodian in the
event of a default under the related Servicing Agreement or Indenture and has
no power or obligation to assert any of the rights and privileges of the
Holders of the Custody Receipts. In the event of any default in payment on the
Notes or any Event of Default or similar event with respect to the Servicer,
as the case may be, each Holder of a Custody Receipt will have the right to
proceed directly and individually against the Issuer or the Servicer in
whatever manner is deemed appropriate by such Holder by directing the
Custodian to take specific actions on behalf of such Holder. A Holder of a
Custody Receipt will not be required to act in concert with any Holder. The
Custodian will not be required to take any actions on behalf of Holders except
upon receipt of reasonable indemnity from such Holders for resulting costs and
liabilities.
THE CUSTODIAN
Under the Custody Agreement, the Note Custodian will not be liable
other than by reason of bad faith or gross negligence in the performance of
such duties as are specifically set forth in the Custody Agreement except in
regard to payments under Notes received by it for the benefit of the Owners
and safekeeping of Notes, with respect to which it shall be a fiduciary. The
Custodian will not be liable for any damages resulting from any distribution
from the Custody Account to a Holder at the address of record of such Holder
on the books of the Custodian. The Custodian will not be liable for any action
or inaction by it done in reasonable reliance upon the written advice of its
accountants or legal counsel. The Custodian may request and rely and shall be
fully protected in acting in reliance upon any written notice, request,
direction or other document reasonably believed by it to be genuine and to
have been signed or presented by the proper party or parties.
DUTIES OF THE CUSTODIAN
The Custodian makes no representations as to the validity or
sufficiency of the Custody Agreement, the Securities or of any Primary Asset
or related documents. The Custodian is required to perform only those duties
specifically required of it under the Custody Agreement.
The Custodian 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 Custody 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 CUSTODIAN
The Custodian may, upon written notice to the Depositor, resign at
any time in which event the Depositor will appoint a successor Custodian. If
no successor Custodian has been appointed and has accepted the appointment
within 90 days after giving such notice of resignation, the resigning
Custodian may petition any court of competent jurisdiction for appointment of
a successor Custodian.
The Custodian may also be removed at any time upon 30 days notice
from the Depositor or by Holders of Custody Receipts evidencing at least 66
2/3% of the aggregate voting rights of all Custody Receipts of the related
Series.
Any resignation or removal of the Custodian and appointment of a successor
Custodian will not become effective until acceptance of the appointment by the
successor Custodian.
AMENDMENT OF CUSTODY AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the
Agreement for each Series of Custody Receipts may be amended by the Depositor,
the Servicer (with respect to a Series relating to Receivables), and the
Custodian 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 or the Custodian or
(iv) to add any other provisions with respect to matters or questions
arising under such Custody Agreement or provided that any such
amendment will not adversely affect in any material respect the
interests of any Holders of such Series, as evidenced by an
opinion of counsel. Any such amendment shall be deemed not to
adversely affect in any material respect the interest of any
Holder if the Custodian receives written confirmation from each
Rating Agency that such amendment will not cause such Rating
Agency to reduce the then current rating thereof.
Unless otherwise specified in the Prospectus Supplement, the Custody Agreement
for each Series may also be amended by the Custodian 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 Custody
Receipts 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 Custody 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 Custody Receipt
without the consent of the Holder of such Custody Receipts or (b) reduce the
aforesaid percentage of the aggregate outstanding principal amount of Custody
Receipts 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 Custody Receipts affected
thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to Custody Receipts
included in a Series.
TERMINATION OF CUSTODY AGREEMENT
The obligations of the parties to the Custody Agreement for a Series
will terminate upon the payment in full of the Notes held by the Custodian and
the receipt by Holders of Custody Receipts of all amounts to which they are
entitled.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of certain legal aspects of
credit, charge and debit card receivables 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 to
reflect the laws of any particular state, nor to encompass the laws of all
states in which Receivables originate. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Receivables.
TRANSFER OF RECEIVABLES
Each Seller will warrant in the applicable Agreement that the transfer
of the Receivables by it to the Depositor constitutes either a valid transfer
and assignment to the Depositor of all right, title and interest of the Seller
in and to the Receivables free and clear from liens arising from or through
the Seller, except, to the extent specified in the related Prospectus
Supplement, for certain potential tax liens, any interest of the Seller as
holder of the Exchangeable Transferor's Certificate and the Depositor's right
to receive interest and investment earnings (net of losses and investment
expenses) in respect of the Collection Account, or a valid grant to the
Depositor of a security interest in the Receivables. The Seller will also
warrant in the Agreement that, in the event the transfer of the Receivables by
the Seller to the Depositor is deemed to create a security interest under the
Uniform Commercial Code (the "UCC") as in effect in the state in which its
principal office is located, there will exist a valid, subsisting and
enforceable first priority perfected security interest in the Receivables in
favor of the Depositor and a valid, subsisting and enforceable first priority
perfected security interest in the Receivables created thereafter in favor of
the Depositor on and after their creation, except for certain liens as
described in the Agreement.
The Receivables are generally considered to be "accounts" for purposes
of the UCC. Both the transfer of accounts and the transfer of accounts as
security for an obligation are treated under Article 9 of the UCC as creating
a security interest therein and are subject to its provisions, and the filing
of appropriate financing statements is required to perfect the security
interest of the Depositor. Financing statements covering the Receivables will
be filed with the appropriate governmental authority to protect the interest
of the Depositor in the Receivables.
There are certain limited circumstances under the UCC in which a prior
or subsequent transferee of Receivables coming into existence after the date
on which such Receivables are transferred to the Depositor could have an
interest in such Receivables with priority over the Depositor's interest.
Under the Agreement, however, the Seller will warrant that it has transferred
the Receivables to the Depositor free and clear of the lien of any third
party, except for certain tax and other governmental liens. In addition, the
Seller will covenant that, except as permitted by the Agreement, it will not
sell, pledge, assign, transfer or grant any lien on any Receivable (or any
interest therein) other than to the Depositor. A tax or other government lien
on property of the Seller arising prior to the time a Receivable comes into
existence may also have priority over the interest of the Depositor in such
Receivable. In addition, if a Seller is a Bank, if the FDIC were appointed as
receiver of the Bank, certain administrative expenses of the receiver may also
have priority over the interest of the Depositor in such Receivables.
A case recently decided by the United States Court of Appeals for the
Tenth Circuit contains language to the effect that accounts sold by an entity
which subsequently became bankrupt remained property of the debtor's
bankruptcy estate. If a Seller were to become a debtor under the federal
bankruptcy code and a court were to follow the reasoning of the Tenth Circuit,
Securityholders could experience a delay or reduction in distributions.
CERTAIN MATTERS RELATING TO RECEIVERSHIP
It is likely that many of the Sellers to the Depositor will be banking
institutions. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), which became effective August 9, 1989, sets forth certain
powers that the FDIC could exercise if it were appointed as receiver of a
Seller which is a national bank.
Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC before the passage of FIRREA
that the FDIC in its capacity as receiver for the Seller would not interfere
with the timely transfer to the Depositor of payments collected on the
Receivables or interfere with the timely liquidation of Receivables as
described below. To the extent that the Seller granted a security interest in
the Receivables to the Depositor, and that interest was validly perfected
before the Seller's insolvency and was not taken or granted in contemplation
of insolvency or with the intent to hinder, delay or defraud the Seller or its
creditors, that security interest should not be subject to avoidance, and
payments to the Depositor with respect to the Receivables should not be
subject to recovery by the FDIC as receiver of the Seller. If, however, the
FDIC were to assert a contrary position, or were to require the Trustee to
establish its right to those payments by submitting to and completing the
administrative claims procedure established under FIRREA, delays in payments
on the Securities of any Series relating to such Seller outstanding at such
time and possible reductions in the amount of those payments could occur.
Each Agreement as to which a Bank is the Seller will provide that, upon
the appointment of a receiver for the Seller, the Seller will promptly give
notice thereof to the Trustee, and a Liquidation Event will occur. Under the
Agreement, no new Principal Receivables will be transferred to the Trust and,
unless otherwise instructed within a specified period by the holders of
Securities representing undivided interests aggregating more than 50% of the
Investor Amount of each Series (or if any such Series has more than one Class,
of each Class of such Series) or unless otherwise prohibited by law, the
Trustee will proceed to sell, dispose of or otherwise liquidate the
Receivables in a commercially reasonable manner and on commercially reasonable
terms. The proceeds from the sale of the Receivables would then be treated by
the Trustee as collections on the Receivables. This procedure could be delayed
as described above. The net proceeds of any such sale will first be treated by
the Trustee as collections on the Finance Charge Receivables, if any. Upon the
occurrence of a Liquidation Event, if a conservator or receiver is appointed
for the Seller and no Liquidation Event other than such conservatorship or
receivership or insolvency of the Seller exists, the conservator or receiver
may have the power to prevent the early sale, liquidation or disposition of
Receivables and the commencement of a Rapid Amortization Period with respect
to any outstanding Series. In addition, a conservator or receiver for the
Seller may have the power to cause early payment of the Securities.
If the Seller Bank is servicing its Receivables and a conservator or
receiver is appointed for the Servicer, and no Servicer Default other than
such conservatorship or receivership or insolvency of the Servicer exists, the
conservator or receiver may have the power to prevent either the Trustee or
the majority in interest of the Securityholders from effecting a transfer of
servicing to a successor Servicer.
CONSUMER PROTECTION LAWS
The relationship of cardholder and card issuer is extensively regulated
by Federal and state consumer protection laws. The most significant of these
laws include the Federal Truth-in-Lending Act, Equal Credit Opportunity Act,
Fair Credit Reporting Act, Electronic Funds Transfer Act and, to the extent
that the Seller is a bank, the National Bank Act (if such Seller is a national
banking association), as well as the banking statutes of the state in which
the bank is located, and comparable statutes in the states in which
cardholders reside. These statutes impose disclosure requirements when an
account is advertised, when it is opened, at the end of monthly billing
cycles, upon account renewal for accounts on which annual fees are assessed,
and at year end and, in addition, limit cardholder liability for unauthorized
use, prohibit certain discriminatory practices in extending credit, and impose
certain limitations on the type of account-related charges that may be
assessed. Newly adopted Federal legislation requires card issuers to disclose
to consumers the interest rates, annual cardholder fees, grace periods, and
balance calculation methods associated with their accounts. Cardholders are
entitled under current law to have payments and credits applied to the account
promptly, to receive prescribed notices and to have billing errors resolved
promptly.
Various proposed laws and amendments to existing laws have been
introduced in Congress and certain state and local legislatures that, if
enacted, would further regulate the credit card industry. Certain such laws
would, among other things, impose a ceiling of the rate at which a financial
institution may assess finance charges on credit card accounts that would be
substantially below the rates of the finance charges currently assessed by
most Sellers on their accounts. A proposed bill of this nature was defeated in
the United
States House of Representatives in 1987, and on November 14, 1991, the
United States Senate approved by a vote of 74 to 19 a measure which could have
established, if it were enacted as law, a ceiling on credit card interest
rates of 4% above the rate that the IRS charges on the underpayment of taxes.
Such a law would, in effect, reduce all interest rates on credit cards to 14%
per annum until the IRS calculates the new rate, which is currently done on a
quarterly basis. Although this proposed legislation was not passed by
Congress, the issue of federal regulation of interest rates on credit cards
continues to be debated, and there can be no assurance that such a bill will
not become law in the future. The potential effect of any legislation which
limits the amount of finance charges that may be charged on credit cards could
be to reduce the Net Portfolio Yield of each Series. If such Net Portfolio
Yield of a Series is reduced, a Liquidation Event for such Series may occur,
and the Rapid Amortization Period for such Series would commence.
In October 1991, the United States District Court for the State of
Massachusetts held that Greenwood Trust Company (a federally-insured,
Delaware-chartered bank that issues the Discover credit card) was prohibited
by Massachusetts law from assessing late charges on credit card accounts of
Massachusetts residents. On August 6, 1992, that decision was reversed by the
United States Court of Appeals for the First Circuit, which held that the
Massachusetts law was preempted by federal law permitting the charges in
question. In November 1992, the Commonwealth of Massachusetts petitioned the
United States Supreme Court to accept the case. On January 11, 1993, the U.S.
Supreme Court denied the petition of the Commonwealth to review the decision
of the First Circuit. Since October 1991, a number of lawsuits and
administrative actions have been filed in several states against out-of-state
banks (both federally insured state-chartered banks and federally insured
national banks) which issue cards. These actions challenge various fees and
charges (such as late fees, overlimit fees, returned payment check fees and
annual membership fees) assessed against residents of the states in which such
suits were filed, based on restrictions or prohibitions under such states'
laws alleged to be applicable to the out-of-state card issuers. The California
Supreme Court in March 1992 refused to review a lower court's determination
that the practice by Wells Fargo Bank of charging its cardholders
over-the-limit and late payment fees violated California laws that require
banks to limit such charges to their costs. Such actions and similar actions
which may be brought in other states as a result of such actions, if resolved
adversely to card issuers, could have the effect of limiting certain charges,
other than periodic finance charges, that could be assessed on accounts of
residents of such states and could require card issuers to pay refunds and
civil penalties with respect to charges previously imposed on cardholders in
such states.
The Depositor may be liable for certain violations of consumer
protection laws that apply to the Receivables, either as assignee of the
Seller with respect to obligations arising before transfer of the Receivables
to the Depositor or as a party directly responsible for obligations arising
after the transfer. In addition, a cardholder may be entitled to assert such
violations by way of set-off against his obligation to pay the amount of
Receivables owing. Each Seller will covenant in the Agreement to accept the
transfer of all Receivables in an Account if any Receivable in such Account
has not been created in compliance with the requirements of such laws.
Application of Federal and state bankruptcy and debtor relief laws
would adversely affect the interests of the Securityholders if such laws
result in any Receivables being written off as uncollectible.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988. As of January 4, 1993, the Depositor is a wholly owned subsidiary of
LCPI, which is a wholly owned subsidiary of Lehman Brothers Inc., 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) 526-7000.
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 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) 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 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 offered hereby and by the related
Prospectus Supplement 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 a Pre-Funding Account for such Series;
(iv) to establish any Reserve Funds or Cash Collateral Accounts
described in the related Prospectus Supplement;
(v) to provide enhancement for any other Series or for securities
issued by another issuer; and
(vi) 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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain United States federal income
tax consequences of the purchase, ownership and disposition of the Securities.
This discussion does not purport to deal with all aspects of federal income
taxation that may be relevant to holders of the Securities in light of their
personal investment circumstances, nor to certain types of holders subject to
special treatment under the United States federal income tax laws (for
example, banks, life insurance companies and tax-exempt organizations).
Prospective investors are advised to consult their own tax advisors with
regard to the United States federal income tax consequences of holding and
disposing of the Securities, as well as the tax consequences arising under the
laws of any state, foreign country or other jurisdiction. This discussion is
based upon present provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the regulations promulgated thereunder, and judicial or ruling
authority, all of which are subject to change, which change may be
retroactive. No ruling on any of the issues discussed below will be sought
from the Internal Revenue Service (the "IRS").
The Securities of a Series may be classified for United States federal
income tax purposes as (i) indebtedness, (ii) an ownership interest in some or
all of the assets included in the Trust for a Series, or (iii) otherwise
specified in the Prospectus Supplement for a Series.
As used in this Prospectus, the term "U.S. Person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any state
thereof, including the District of Columbia (other than a partnership that is
not treated as a United States person under any applicable Treasury
regulations), or an estate whose income is subject to United States 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 of 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
also be considered U.S. persons.
TREATMENT OF THE NOTES AS INDEBTEDNESS
The Seller will agree, and the Noteholders will agree by their purchase
of Notes, to treat the Notes as debt for federal income tax purposes. If so
specified in the Prospectus Supplement for a Series, Tax Counsel will advise
the Trust that the Notes of a Series will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct. If, contrary to the opinion of Special Tax Counsel, the IRS
successfully asserted that one or more of the Notes did not represent debt for
federal income tax purposes, the Notes might be treated as equity interests in
the Trust. If so treated, the Trust might be taxable as a corporation or,
alternatively, as a publicly traded partnership.
TAXATION OF DEBT SECURITIES
INTEREST INCOME TO SECURITYHOLDERS. Assuming the Securities are debt
obligations for U.S. federal income tax purposes, interest thereon will be
taxable as ordinary income for U.S. federal income tax purposes when received
by Securityholders utilizing the cash basis method of accounting and when
accrued by Securityholders utilizing the accrual method of accounting.
Interest received on the Securities may also constitute "investment income"
for purposes of certain limitations of the Code concerning the deductibility
of investment interest expense. In addition, a Securityholder who buys a
Security for less than its principal amount (assuming the Security is issued
without OID) will be subject to the "market discount" rules of the Code, and a
Securityholder who buys a Security for more than its principal amount will be
subject to the premium amortization rules of the Code. See "Original Issue
Discount" below for a description of the United States federal income tax
consequences if the Securities are issued with OID.
The Trustee will be required to report annually to the IRS, and to each
Securityholder of record, the amount of interest paid (and OID accrued, if
any) on the Securities (and the amount of interest withheld for United States
federal income taxes, if any) for each calendar year, except as to exempt
holders. See "Backup Withholding".
The Code currently provides for a top marginal tax rate applicable to
ordinary income of individuals of 39.6% while maintaining a maximum marginal
rate for the long-term capital gains of individuals of 20%.
ORIGINAL ISSUE DISCOUNT. The following summary is a general discussion
of the United States federal income tax consequences to Securityholders who
are United States persons owning Securities issued with original issue
discount ("OID Securities" and "OID", respectively). It is based upon income
tax regulations (the "OID Regulations") finalized on January 27, 1994 under
Code Sections 1271 through 1273 and 1275.
In general, the OID with respect to any OID Security will equal the
difference between the principal amount of the Security and its issue price
(defined as the initial offering price to the public at which price a
substantial amount of the OID Securities have been sold), if such excess is
0.25% or more of the OID Security's principal amount multiplied by the number
of complete years to its maturity (the "de minimis amount"). Even if such
excess is less than the de minimis amount, if a failure to pay interest
currently on the Securities is not a default it is possible that all stated
interest could be treated as principal for this purpose (and for purposes of
the computations described below) with the result that the Securities could be
viewed as OID Securities. Holders of OID Securities must include OID in income
for United States federal income tax purposes as it accrues under a method
that takes account of the compounding of interest, in advance of receipt of
the related cash payments.
In general, each Securityholder of an OID Security, whether such
Securityholder uses the cash or accrual method of accounting for tax purposes,
will be required to include in ordinary gross income the sum of the "daily
portions" of OID on the Security for each day during the taxable year that the
Securityholder owns the Security. The daily portion of OID on an OID Security
is determined by allocating to each day in any "accrual period" a ratable
portion of the original issue discount allocable to that accrual period. In
the case of an initial Securityholder, the amount of original issue discount
on an OID Security allocable to each accrual period is determined by (i)
multiplying the "adjusted issue price" (as defined below) of the Security by a
fraction, the numerator of which is the annual yield to maturity of such
Security and the denominator of which is the number of accrual periods in a
year, and (ii) subtracting from the product the amount of interest paid during
that accrual period. The "adjusted issue price" of an OID Security at the
beginning of any accrual period will be the sum of its issue price and the
amount of OID allocable to all prior accrual periods, minus the amount of all
payments (other than payments of qualified stated interest) previously made
with respect to the OID Security. As a result of such "constant yield" method
of including OID income, the amounts so includible in income are lower in the
early years and greater in the later years than the amounts that would be
includible on a straightline basis.
In the event that a Securityholder purchases an OID Security at an
"acquisition premium," i.e., at a price in excess of the issue price, plus the
OID accrued prior to acquisition and minus any principal payments made with
respect to the OID Security prior to acquisition, the amount includible in
income in each taxable year as OID will be reduced by that portion of the
premium properly allocable to such year. Moreover, a Securityholder who
purchases an OID Security at a price less than the price described in the
preceding sentence will be subject to the market discount rules of the Code.
A Securityholder's tax basis in an OID Security generally will be the
Securityholder's cost increased by any OID included in income (and market
discount, if any, if the Securityholder has elected to include accrued market
discount in income on a current basis) and decreased by the amount of any
principal payment received with respect to the OID Security. Gain or loss on
the sale, exchange or redemption of an OID Security generally will be
long-term capital gain or loss if the OID Security has been held for more than
a year except to the extent that such gain represents accrued market discount
not previously included in the Securityholder's income.
If an Early Amortization Event or Asset Composition Event occurs, the
early payments of principal as a result of either such event could result in
acceleration of income corresponding to a portion of the unaccrued OID.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders of Securities that are
treated as Debt Securities for United States federal income tax purposes will
be required to report income with respect to such Securities under an accrual
method without giving effect to delays and reductions in distributions
attributable to a default or delinquency on the Primary Assets, 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 Primary Asset 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.
SALE OR EXCHANGE. A Securityholder'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 a capital gain or loss, assuming that the Security
is held as a capital asset.
A portion of any gain from the sale of a Security that might otherwise
be capital gain may be treated as ordinary income to the extent such Security
is held as part of a "conversion transaction" within the meaning of new
Section 1258 of the Code. A conversion transaction generally is one in which
the taxpayer has taken two or more positions in Securities or similar property
that reduce or eliminate market risk, if substantially all of the taxpayer's
return is attributable to the time value of the taxpayer's net investment in
such transaction. The amount of gain realized in a conversion transaction that
may be recharacterized as ordinary income generally will not exceed the amount
of interest that would have accrued on the taxpayer's net investment in such
transaction at 120% of the appropriate "applicable Federal rate" (which rate
is computed and published monthly by the IRS), subject to appropriate
reduction (to the extent provided in regulations to be issued) to reflect
prior inclusion of interest or other ordinary income items from the
transaction.
FOREIGN INVESTORS. If so specified in the Prospectus Supplement for a
Series, Tax Counsel will give its opinion that the Securities of a Series of
Securities will properly be classified as debt for United States federal
income tax purposes. If the Securities are treated as debt:
(a) interest paid to a nonresident alien or foreign corporation or
partnership would be exempt from United States withholding taxes
(including backup withholding taxes), provided the holder
complies with applicable identification requirements (and does
not actually or constructively own 10% or more of the voting
stock of the Depositor and is not a controlled foreign
corporation with respect to the Depositor). Applicable
identification requirements will be satisfied if there is
delivered to a securities clearing organization (or bank or
other financial institution that holds the Securities on behalf
of the customer in the ordinary course of its trade or business)
(i) IRS Form W-8 signed under penalties of perjury by the
beneficial owner of such Securities stating that the holder is
not a U.S. Person and providing such holder's name and address,
(ii) IRS Form 1001 signed by the beneficial owner of such
Securities or such owner's agent claiming exemption from
withholding under an applicable tax treaty, or (iii) IRS Form
4224 signed by the beneficial owner of such Securities of such
owner's agent claiming exemption from withholding of tax on
income connected with the conduct of a trade or business in the
United States; provided in any such case (x) the applicable form
is delivered pursuant to applicable procedures and is properly
transmitted to the United States entity otherwise required to
withhold tax and (y) none of the entities receiving the form has
actual knowledge that the holder is a U.S. person or that any
certification on the form is false;
(b) a holder of a Security who is a nonresident alien or foreign
corporation will not be subject to United States federal income
tax on gain realized on the sale, exchange or redemption of such
Security, provided that (i) such gain is not effectively
connected to a trade or business carried on by the holder in the
United States, (ii) in the case of a holder that is an
individual, such holder is not present in the United States for
183 days or more during the taxable year in which such sale,
exchange or redemption occurs and (iii) in the case of gain
representing accrued interest, the conditions described in
clause (a) are satisfied; and
(c) a Security held by an individual who at the time of death is a
nonresident alien will not be subject to United States federal
estate tax as a result of such individual's death if,
immediately before his death, (i) the individual did not
actually or constructively own 10% or more of the voting stock
of the Depositor and (ii) the holding of such Security was not
effectively connected with the conduct by the decedent of a
trade or business in the United States.
On October 6, 1997, the Treasury Department issued new withholding
regulations (the "New Regulations") which make certain modifications to the
certification requirements and information reporting rules described above.
The New Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective investors
are urged to consult their own tax advisors regarding the New Regulations.
Interest and OID of Securityholders who are foreign persons are not
subject to withholding if they are effectively connected with a United States
business conducted by the Securityholder. They will, however, generally be
subject to the regular United States income tax.
If the IRS were to contend successfully that a Series of Securities are
interests in a partnership (not taxable as a corporation), a Securityholder
that is a nonresident alien or foreign corporation might be required to file a
United States individual or corporate income tax return and pay tax on its
share of partnership income at regular United States rates, including, in the
case of a corporation, the branch profits tax (and would be subject to
withholding tax on its share of partnership income). If the Securities are
recharacterized as interests in an association taxable as a corporation or a
"publicly traded partnership' taxable as a corporation, to the extent
distributions on the Securities were treated as dividends, a nonresident alien
individual or foreign corporation would generally be taxed on the gross amount
of such dividends (and subject to withholding) at a rate of 30% unless such
rate were reduced by an applicable treaty.
BACKUP WITHHOLDING. A Securityholder 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 Securities to or through brokers
that represent interest or OID 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 Securityholders, including payments to certain exempt
recipients (generally, holders that are corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to
their status as nonresidents) and to certain Nonresidents (as defined below).
Each nonexempt Securityholder will be required to provide, under penalties of
perjury, a certificate on IRS Form W-9 containing such holder's name, address,
federal taxpayer identification number and a statement that such holder is not
subject to backup withholding. Should a nonexempt Securityholder fail to
provide the required certification, the Trustee will be required to withhold
(or cause to be withheld) 31% of the interest (and principal) otherwise
payable to the holder, and remit the withheld amounts to the IRS as credit
against the holder's federal income tax liability. The New Regulations also
make certain modifications to backup withholding and related information
reporting requirements. The New Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Holders of the Securities should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption, and the changes contained in the New Regulations.
The Trustee will report to the Securityholders 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. The Trustee will furnish or make available, within a reasonable
time after the end of each calendar year, to each Securityholder or each
person holding a Security on behalf of a Securityholder at any time during
such year, such information as the Trustee deems necessary or desirable to
assist Securityholders in preparing their federal income tax returns.
TAX STATUS AS A GRANTOR TRUST
GENERAL. If specified in the related Prospectus Supplement, in the
opinion of Brown & Wood LLP, special counsel to the Depositor, the Trust Fund
relating to a Series of Certificates will be classified for United States
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 Certificates of such Series, "Pass-Through Securities"). In some Series
there will be no separation of the principal and interest payments on the
Securities. In such circumstances, a Certificateholder will be considered to
have purchased a pro rata undivided interest in the Securities. In other cases
("Stripped Securities"), sale of the Certificates 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 Securities.
Each Certificateholder must report on its United States federal income
tax return its share of the gross income derived from the Securities (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
Certificateholder's tax accounting method had it held its interest in the
Securities directly, received directly its share of the amounts received with
respect to the Securities, 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 Securities 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 Certificateholder owns an interest. The
Certificateholder will generally be entitled to deduct 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 the
applicable amount 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 Code currently provides for a top marginal tax rate applicable to
ordinary income of individuals of 39.6% while maintaining a maximum marginal
rate for the long-term capital gains of Individuals of 28%. 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 thereafter for certain
individual taxpayers who meet specified conditions). Prospective investors
should consult their own tax advisors concerning these tax law changes.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. Discount on a
Pass-Through Security represents OID or market discount. In the case of a CABS
Security with OID in excess of a prescribed de minimis amount or a Stripped
Security, a holder of a Certificate will be required to report as interest
income in each taxable year its share of the amount of OID that accrues during
the year.
STRIPPED SECURITIES. A Stripped Security may represent a right to
receive only a portion of the interest payments on a CABS Security (a
"Stripped Coupon"), a right to receive only principal payments on a CABS
Security or a right to receive certain payments of both interest and principal
(a "Stripped Bond"). 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 OID, 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.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to Stripped
Securities. Although the tax treatment of Stripped Securities is not entirely
clear, based on recent guidance by the IRS, a Stripped Bond Certificate
generally should be treated as a single debt instrument issued on the day it
is purchased for purposes of calculating any OID. Generally, under Treasury
regulations issued on December 28, 1992 (the "Section 1286 Treasury
Regulations"), if the discount on a Stripped Bond Certificate is larger than a
de minimis amount (as calculated for purposes of the OID rules of the Code)
such Stripped Bond Certificate will be considered to have been issued with
OID. Based on the preamble to the Section 1286 Treasury Regulations, it
appears that stated interest on a Stripped Bond Certificate will be treated as
"qualified stated interest" within the meaning of the Section 1286 Treasury
Regulations and such income will be so treated in the Trustee's tax
information reporting.
Under the foregoing rules, it is anticipated that Stripped Bond
Certificates will be considered to be issued with de minimis OID, which will
therefore be considered to be zero and Stripped Coupon Certificates will be
issued with OID. If Stripped Bond Certificates are issued with OID, the rules
described in this paragraph would apply. Generally, the owner of a Stripped
Security issued or acquired with OID must include in gross income the sum of
the "daily portions," as defined below, of the OID on such Stripped Security
for each day on which it owns a Stripped Security, including the date of
purchase but excluding the date of disposition. In the case of an original
Stripped Security holder, the daily portions of OID with respect to a Stripped
Security generally would be determined as follows. A calculation will be made
of the portion of OID that accrues on the Stripped Security during each
successive monthly accrual period (or shorter period in respect of the date of
original issue or the final Distribution Date) that ends on the earlier to
occur of the day in the calendar year corresponding to each Distribution Date
or the last day of the related accrual period. This will be done, in the case
of each full monthly accrual period, by adding (i) the present value of all
remaining payments to be received on the Stripped Security and (ii) any
payments received during such accrual period, and subtracting from that total
the "adjusted issued price" of the Stripped Security at the beginning of such
accrual period. The "adjusted issue price" of a Stripped Security at the
beginning of the first accrual period is its issue price (as determined for
purposes of the original issue discount rules of the Code) and the "adjusted
issue price" of a Stripped Security at the beginning of a subsequent accrual
period is the "adjusted issued price" at the beginning of the immediately
preceding accrual period plus the amount of OID allocable to that accrual
period and reduced by the amount of any payment made at the end of or during
that accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under either an exact or
approximate method set forth in proposed Treasury regulations with respect to
OID, or some other reasonable method, provided that such method is consistent
with the method used to determine the yield to maturity of the Stripped
Security.
SALE OR EXCHANGE. A Certificateholder's tax basis in its Certificate is
the price such holder pays for a Certificate, 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 Certificate,
measured by the difference between the amount realized and the Certificate's
basis as so adjusted, will generally be capital gain or loss, assuming that
the Certificate is held as a capital asset.
Gain or loss from the sale of a Grantor Trust Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent such
Certificate is held as part of a "conversion transaction" within the meaning
of new Section 1258 of the Code. A conversion transaction generally is one in
which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain realized in a conversion
transaction that may be recharacterized as ordinary income generally will not
exceed the amount of interest that would have accrued on the taxpayer's net
investment in such transaction at 120% of the appropriate "applicable Federal
rate" (which rate is computed and published monthly by the IRS), subject to
appropriate reduction (to the extent provided in regulations to be issued) to
reflect prior inclusion of interest or other ordinary income items from the
transaction.
FOREIGN INVESTORS. Under the Code, unless interest (including OID) paid
on a Certificate 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 of the Securities, or (ii) the recipient is a
controlled foreign corporation to which the issuer of the Securities is a
related person) and will be exempt from United States 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, however, may be subject to withholding to the extent that the
Securities were originated on or before July 18, 1984.
Interest and original issue discount of Certificateholders who are
foreign persons are not subject to withholding if they are effectively
connected with a United States business conducted by the Certificateholder.
They will, however, generally be subject to the regular United States income
tax.
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 debt securities including 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
have 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 U.S. 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 U.S. 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 U.S. 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 underlying a Series (or one or more designated pools of
assets held in the Trust) 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 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 is not a
regulated investment company as defined in Code Section 851(a).
ASSET COMPOSITION
In order for a Trust (or one or more designated pools of assets held by
a Trust) to be eligible for FASIT status, substantially all of the assets of
the Trust (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 regular interests if issued by a Real Estate Mortgage Investment Conduct as
defined in Code Section 860D ("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 interest, 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 Treasure 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).
Interest will be considered to be based on a permissible variable rate 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," a combination of a single fixed rate and
one or more "qualified floating rate," one "qualified inverse floating rate,"
or a combination of "qualified floating rates" that do not operate in a manner
that significantly accelerates or defers interest payments on such FASIT
Regular Security.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) above, 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 "Certain 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 the year and thereafter. If
FASIT status is lost, the treatment of the former FASIT and the interests
therein for U.S. 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 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 debt instruments. 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 Notes. See "Certain Federal Income
Tax Consequences - Taxation of Debt Securities - Original Issue Discount,"
above. High-Yield Securities may be held only by Eligible 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.
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 the REMIC Securities would be so considered. In
addition, FASIT Regular Securities held by a financial institution to which
Code Section 585 applies will be treated as evidences of indebtedness for
purposes of Code Section 582(c)(1). FASIT Securities will not qualify as
"Government securities" for either REIT or RIC qualification purposes.
SALE, EXCHANGE OR REDEMPTION. If a FASIT Regular Security is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the seller's adjusted basis in the FASIT Regular
Security. Such adjusted basis generally will equal the cost of the FASIT
Regular Security to the seller, increased by any OID and market discount
included in the seller's gross income with respect to the FASIT Regular
Security, and reduced (but not below zero) by payments included in the stated
redemption price at maturity previously received by the seller and by any
amortized premium. See "Certain Federal Income Tax Consequences - Taxation of
Debt Securities - Sale or Exchange." Similarly, a holder who receives a
payment that is part of the stated redemption price at maturity of a FASIT
Regular Security will recognize gain equal to the excess, if any, of the
amount of the payment over the holders' adjusted basis in the FASIT Regular
Security. A FASIT Regular Securityholder who receives a final payment that is
less than the holder's adjusted basis in the FASIT Regular Security will
generally recognize a loss. Except as provided in the following paragraph, any
such gain or loss will generally be a capital gain or loss, provided that the
FASIT Regular Security is held as a "capital asset" (generally, property held
for investment) within the meaning of Code Section 1221.
The Certificates will constitute "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a FASIT Regular Security by a bank or a thrift institution to which
such Section applies will be ordinary income or loss.
The FASIT Regular Security information reports will include a statement
of the adjusted issue price of the FASIT Regular Security at the beginning of
each accrual period. In addition, the reports will include information
necessary to compute the accrual of any market discount that may arise upon
secondary trading of FASIT Regular Securities. Because exact computation of
the accrual of market discount on a constant yield method would require
information relating to the holder's purchase price which the FASIT may not
have, it appears that the information reports will only require information
pertaining the appropriate proportionate method of accruing market discount.
TREATMENT OF HIGH-YIELD INTEREST
High-Yield Interests are subject to special rules regarding the
eligibility of holders of such interest, and the ability of such holders to
offset income derived from their FASIT Security with losses. High-Yield
interest 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 Interest to disqualified holders will be disregarded for federal
income tax purposes, and the transferor will continue to 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 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 Securities as are holders of High-Yield Interest. See
"Certain Federal Income Tax Consequences - FASIT Securities - Tax Treatment of
FASIT Regular Securities Treatment of High-Yield Interest."
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 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 Code 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 the marked-to market rules or the
securities' value after applying special valuation rules contained in the
FASIT provision. 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
Holders of FASIT Securities will be subject to backup withholding to
the same extent holder of REMIC Securities would be subject. See "Certain
Federal Income Tax Consequences - Taxation of Debt Securities - Backup
Withholding."
STATE TAX CONSIDERATIONS
In addition to the U.S. federal income tax consequences described in
"Certain Federal Income Tax Considerations," potential investors should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Securities. State income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, potential
investors should consult their own tax advisors with respect to the various
state tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans ("Plans")
subject to ERISA and persons who have certain specified relationships to such
Plans ("Parties in Interest"). ERISA also imposes certain duties on persons
who are fiduciaries of Plans subject to ERISA and prohibits certain
transactions between a Plan and Parties in Interest with respect to such Plans
("Prohibited Transactions"). Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of
a Plan is considered to be a fiduciary of such Plan (subject to certain
exceptions not here relevant). Similar restrictions also apply to Plans that
are subject to the Code.
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.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Certificates or Notes through
Lehman Brothers Inc. ("Lehman Brothers") or one or more other firms that may
be designated at the time of each offering of such Certificates of Notes. 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 Certificates or Notes will
set forth the specific terms of the offering of such Series of Certificates or
Notes and of each Class within such Series, the names of the underwriters, the
purchase price of the Certificates or Notes, the proceeds to the Depositor
from such sale, any securities exchange on which the Certificates or Notes 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 Certificates or Notes will also be set forth in the
Prospectus Supplement relating to such Series.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement,
certain legal matters in connection with the Certificates and the Notes will
be passed upon for the Depositor and for the underwriters by Brown & Wood llp,
New York, New York.
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 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 Commission maintains a Web site at http://www.sec.gov
containing reports, proxy and information regarding registrants, including the
Depositor, that file electronically with the Commission.
The Prospectus does not contain all the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
relating thereto which the Depositor has filed with the Commission in
Washington, D.C. Copies of the information and the exhibits are on file at the
offices of the Commission and may be obtained, upon payment of the fee
prescribed by the Commission, or may be examined without charge at the offices
of the Commission.
Neither Lehman Brothers Inc. nor any of its affiliates, including the
Depositor, are obligated with respect to the Certificates or the Notes.
Accordingly, the Depositor has determined that financial statements of Lehman
Brothers and its affiliates including the Depositor are not material to the
offering made hereby.
<PAGE>
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental
Glossary" in the Prospectus Supplement for a Series, such definitions shall
apply to capitalized terms used in such Prospectus Supplement. The definitions
may vary from those in the related Agreement for a Series and the related
Agreement for a Series generally provides a more complete definition of
certain of the terms. Reference should be made to the related Agreement for a
Series for a more complete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Payment Date specified in the related Prospectus
Supplement.
"Accounts" means with respect to the Primary Assets of a Series,
portfolios of revolving credit, charge and debit card accounts.
"Advance" means a cash advance by the Servicer in respect of delinquent
payments of principal of and interest on an Account, and for any other
purposes specified in the related Prospectus Supplement.
"Agreement" means a Master Pooling and Servicing Agreement, Pooling and
Servicing Agreement, Sale and Servicing Agreement or Trust Agreement entered
into among the Seller, the Servicer, the Depositor and the Trustee with
respect to the issuance of a CABS Security.
"Asset Group" means, with respect to the Primary Assets of a Series, a
group of such Primary Assets having the characteristics described in the
related Prospectus Supplement.
"Asset Value" means, for any Primary Asset, the amount set forth in or
determined in accordance with 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.
"Bankruptcy Code" means the federal bankruptcy code, Title 11 United
States Code Section 101 et seq., and related rules and regulations promulgated
thereunder.
"base rate" for each Series has the meaning set forth in the Prospectus
Supplement relating to such Series.
"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.
"CABS Agreement" means a Pooling and Servicing Agreement, a Master
Pooling and Servicing Agreement, a Sale and Servicing Agreement, a Trust
Agreement or similar agreement.
"CABS Issuer" means the issuer or issuers of the CABS.
"CABS" or "CABS Security" means a certificate evidencing an undivided
interest in, or a note or loan secured by Receivables generated in Accounts.
CABS or CABS Security may also include a certificate evidencing an undivided
interest in, or a note or a loan secured by CABS.
"CABS Servicer" means the servicer or servicers of the CABS.
"CABS Trustee" means the trustee or trustees of the Securities.
"Cash Collateral Guaranty" means the guaranty that provides support for
a Series or one or more Classes of a Series if so specified in the related
Prospectus Supplement.
"Cash Collateral Account" see "Reserve Fund."
"Cedelbank Participants" means Cedelbank's participating organizations.
"Certificateholder" means a holder of a Certificate.
"Certificates" means the Asset-Backed Certificates.
"Certificate Schedule" means a schedule appearing as an exhibit to the
related Agreement identifying each CABS Security.
"Citibank" means Citibank, N.A.
"Class" means a Class of Certificates or Notes of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Certificates 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 with the Trustee or the Servicer in the name of the Trustee for
the deposit by the Servicer of payments received from the Primary Assets.
"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 Payment 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 thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Cooperative" means Euroclear Clearance System S.C., a Belgian
cooperative corporation.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Debt Securities" means Certificates or Notes characterized as
indebtedness for federal income tax purposes.
"Definitive Securities" means Securities of any Series issued in fully
registered, certificated form.
"Deleted Primary Asset" means a Primary Asset removed from the Trust.
"de minimis amount" is equal to .25% or more of the OID Certificate's
principal amount multiplied by the number of complete years to its maturity.
"Depositor" means Lehman ABS Corporation.
"Depositor Securities" means Depositor's bonds, notes, debt or equity
securities, obligations and other securities and instruments.
"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.
"DTC" means The Depository Trust Company.
"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.
"Eligible Servicer" means the Trustee or an entity which, at the time
of its appointment as Servicer, (i) is an established financial institution
having capital or a net worth of not less than $100,000,000, (ii) is servicing
a portfolio of consumer credit card or charge card accounts, (iii) is legally
qualified and has the capacity to service the Accounts, (iv) has demonstrated
the ability to professionally and completely service a portfolio of similar
accounts in accordance with standards of skill and care customary in the
industry and (v) is qualified to use the software that is then currently being
used to service the Accounts or obtains the right to use or has its own
software which is adequate to perform its duties under the Agreement.
"Enhancement" means the Enhancement for a Series, if any, specified in
the related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified
in the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Euroclear" or "Euroclear Operator" means Morgan Guaranty Trust Company
of New York, Brussels, Belgium office.
"Euroclear Participants" means participants of the Euroclear system.
"Final Scheduled Payment Date" means, with respect to a Class of a
Series of Securities, the date after which no Securities of such Class will
remain outstanding based on the assumptions set forth in the related
Prospectus Supplement.
"Finance Charge Receivables" means all periodic finance charges, annual
membership fees, cash advance fees and late charges on amounts charged for
merchandise and services and certain other fees designated in the related
Prospectus Supplement.
"FIRREA" means the Financial Institutions Reform, Recovery and
Enforcement Act of 1987.
"Global Securities" means the globally offered Securities.
"Holders" or "holders" means holders of any Certificates or any Notes.
"Holdings" means Lehman Brothers Holdings Inc.
"Indirect Participants" consist of banks, brokers, dealers and trust
companies that clear through or maintain a custodian relationship with a
Participant either directly or indirectly.
"Initial Accounts" means Receivables existing on the Cut-Off Date in
certain consumer, corporate, revolving credit card, charge card or debit card
accounts.
"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.
"Issuer" means, with respect to Securities, the issuer, depositor or
seller/servicer under an Agreement.
"Investor Interest" means a specific undivided interest in the assets
of the Trust allocated to the Securities.
"IRS" means the Internal Revenue Service.
"L/C Bank" means the issuer of the letter of credit.
"LCPI" means Lehman Commercial Paper Inc.
"Lehman Brothers" means Lehman Brothers Inc.
"Liquidation Proceeds" means all amounts received by the Servicer in
connection with the liquidation of Primary Assets other than amounts required
to be paid or refunded to the obligor pursuant to the terms of the applicable
documents or otherwise pursuant to law.
"Mastercard International" means Mastercard International Incorporated.
"Modification" means a change in any term of a Receivable.
"Morgan" means Morgan Guaranty Trust Company of New York.
"1986 Act" means the Tax Reform Act of 1986.
"1992 Form 10-K" means the Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
"net portfolio yield" for each Series has the meaning set forth in the
Prospectus Supplement relating to such Series.
"Nonresidents" means a nonresident alien individual, foreign
partnership or foreign corporation.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities used solely for convenience
in expressing the calculation of interest and does not represent the right to
receive distributions allocable to principal.
"OID" means original issue discount.
"OID Securities" means Securities issued with OID.
"Participants" means organizations participating in the Prospectus
Supplement.
"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.
"Participations" means participations representing undivided interests
in a pool of assets primarily consisting of revolving charge card accounts or
other revolving credit accounts owned by the Depositor or any affiliate
thereof and collections thereon.
"Parties in Interest" means persons who have certain specified
relationships to such plans.
"Pass-Through Securities" means classified certificates of a grantor
trust under Subpart E, Part 1 of Subchapter J of the Code.
"Paying Agent" means the Trustee, or its successor in such capacity.
"Payment 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.
"Payments" means the payments of principal and finance charges to be
made by obligors on Securities or by Cardholders.
"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.
"Plans" means employee benefit plans.
"Pooling and Servicing Agreement" means the pooling and servicing
agreement relating to a Series of Securities among the Depositor, the Servicer
and the Trustee.
"Pre-Funding Account" means the Pre-Funding Account which may be deemed
necessary by a Prospectus Supplement.
"Pre-Funded Amount" means the amount on deposit in the Pre-Funded
Account.
"Primary Assets" means one or more pools of Receivables arising under
Accounts purchased from the Seller specified in the related Prospectus
Supplement and Securities which are included in the Trust Fund for such
Series. A Primary Asset refers to a specific Receivable or CABS Security, 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 (i) 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, (ii) the principal portion of the purchase price of any Primary
Asset removed from the Trust Fund and (iii) the principal portion of any
liquidation proceeds.
"Principal Only Securities" means a Class of Securities entitled solely
or primarily to distributions of Principal and identified as such in the
Prospectus Supplement.
"Principal Receivables" means all amounts charged by cardholders for
merchandise and services, amounts advanced and certain other fees billed to
cardholders on the Accounts.
"Prohibited Transactions" means certain transactions between a Plan and
Parties in Interest with respect to such Plans prohibited by ERISA.
"Proposed OID Regulations" means proposed income tax regulations.
"Prospectus Supplement" means a supplement to this Prospectus.
"Qualifying Substitute Primary Asset" means Primary Assets substituted
for a Deleted Primary Asset.
"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.
"Receivables" may consist of, with respect to the Primary Series,
consumer, corporate, revolving credit card, charge card or debit card
receivables.
"Removed Account" means receivables removed from certain Accounts from
the Trust.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the Pooling and Servicing Agreement.
"Revolving Period" means the period during which Primary Assets will be
continuously purchased and no principal will be paid to the Securityholders.
"Sale and Servicing Agreement" means, in the case of a Series in which
Receivables are serviced by the Seller, the agreement among the Depositor, the
Seller and the Trustee for the sale and servicing of the Mortgage Loans.
"Section 1286 Treasury Regulations" means Treasury Regulations issued
on December 28, 1992.
"Securityholder" means a holder of a Security.
"Seller" means the entity transferring the Receivables to the Depositor.
"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 Subordinated Securities, to the extent specified
in the related Prospectus Supplement.
"Series" means a separate series of Certificates or Notes sold pursuant
to this Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series secured by Receivables, the
Person, if any, designated in the related Prospectus Supplement to service
Receivables for that Series, or the successors or assigns of such Person.
"Servicing Agreement" means, in the case of a Series which includes
Receivables not serviced by the Seller, the agreement among the Depositor, the
Trustee and the Servicer for the servicing of such Receivables.
"Servicing Fee" means the amount payable as fees to the Trustee and the
Servicer.
"Spread Account" means an Account which supports a Series or one or
more Classes of Series by assuring the subsequent distribution of interest or
principal on the Securities of such Class or Series.
"Stripped Coupon" means a right to receive only a portion of the
interest payments on a CABS Security.
"Stripped Securities" means Securities whose sale produces 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 Securities.
"Subordinated Securityholder" means a holder of a Subordinated Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
allocated losses and shortfalls prior to the allocation thereof to other
Classes of Securities, to the extent and under the circumstances specified in
the related Prospectus Supplement.
"Subsequent Receivables" means additional receivables which the related
Trust may be required to purchase.
"Subsequent Transfer Date" means the transfer dates on which Subsequent
Receivables will be sold from time to time during the Funding Period.
"Terms and Conditions" means Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System.
"Trust" means, with respect to any Series of Securities, all money,
instruments, securities and other property, including all proceeds thereof,
which are held for the benefit of the Securityholders by the Trustee under the
Agreement, including, without limitation, the Primary Assets, all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions
on the Primary Assets (net of servicing fees, if any), and reinvestment
earnings on such net distributions and any Enhancement and all other property
and interests held by the Trustee pursuant to the Trust Agreement for such
Series.
"Trustee" means the trustee under an Agreement and its successors.
"UCC" means the Uniform Commercial Code.
"Variable Interest Security" means a Security on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed
periodic intervals, all as set forth in the related Prospectus Supplement.
"VISA" means VISA U.S.A., Inc.
"Zero Coupon Security" means a Security entitling the holder to receive
only payments of principal as specified in the related Prospectus Supplement.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Securities (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities
through any of The Depository Trust Company ("DTC"), 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.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
participants holding Global Securities will be effected on a
delivery-against-payment basis through Citibank, N.A. ("Citibank") and Morgan
Guaranty Trust Company of New York ("Morgan") as the respective depositaries
of Cedelbank and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S.
withholding taxes, provided that 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, Citibank and Morgan, which in turn will hold such
positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to securities previously issued by
the Depositor. 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 securities
previously issued by the Depositor in same-day funds.
Trading between Cedelbank and/or Euroclear participants. Secondary
market trading between Cedelbank participants and/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
participant at least one business day prior to settlement. Cedelbank or
Euroclear will instruct Citibank or Morgan, respectively 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. For transactions settling
on the 31st day of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by
Citibank or Morgan to the DTC participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedelbank participant's or
Euroclear participant's account. The Global Securities credit will appear the
next day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedelbank or Euroclear cash debit 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, participants can elect not to preposition funds and allow that
credit line to be drawn upon to finance settlement. Under this 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 participant's particular
cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global
Securities to Citibank or Morgan for the benefit of Cedelbank participants or
Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participant a cross-market
transaction will settle no differently than a trade between two DTC
participants.
Trading between Cedelbank or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedelbank and Euroclear participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through Citibank or
Morgan, to a DTC participant. The seller will send instructions to Cedelbank
or Euroclear through a participant at least one business day prior to
settlement. In these cases, Cedelbank or Euroclear will instruct Citibank or
Morgan, as appropriate, to deliver the bonds to the participant's account
against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment date to and excluding
the settlement date. For transactions selling on the 31st day 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 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 or Euroclear participant
have a line of credit with its respective clearing system and elect to be in
debit in anticipation of receipt of the sale proceeds in its account,
back-valuation will extinguish any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedelbank 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 automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem.
(1) 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;
(2) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least
one day prior to the value date for the sale to the Cedelbank participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A holder 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 such holder takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8). Non U.S. persons that are
beneficial owners can obtain a complete exemption from the withholding tax by
filing a signed Form W-8 (Certificate of Foreign Status).
Exemption for non-U.S. persons with effectively connected income (Form
4224). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (exemption from withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S.persons resident in treaty
countries (Form 1001). Non-U.S. persons that are beneficial owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Class A2 Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternately files Form W-8, Form 1001 may be filed by the
beneficial owner or his agent.
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Global Security
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom he holds (the
clearing agency, in the case of persons holding directly on the books for the
clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of federal income tax
withholding that may be relevant to foreign holders of these Global
Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of these Global
Securities.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuances and Distribution.*
The estimated expenses in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are:
SEC Filing Fees.................................... $417,000.00
Legal Fees and Expenses............................ 100,000.00
Accounting Fees and Expenses....................... 20,000.00
Blue Sky Fees and Expenses......................... 12,500.00
Trustee's Fees and Expenses........................ 6,000.00
Rating Agency Fees................................. 64,000.00
Printing and Engraving Fees........................ 30,000.00
Miscellaneous...................................... 10,000.00
Total..................................... $659,500.00
===========
Item 15. Indemnification of Directors and Officers.
Article VIII, Section 6, of the By-Laws of the Depositor sets forth
certain rights of the directors and officers of the Depositor to
indemnification. In addition, Section 145 of the Delaware General Corporation
Law contains detailed provisions on indemnification of directors and officers
of a Delaware corporation against expenses, judgments and the like in
connection with litigation. Reference is made to Exhibit 3.2 to this
Registration Statement for the complete text of Article VIII, Section 6 of the
By-laws.
Item 16. Exhibits.
1.1- Form of Underwriting Agreement.*
1.2 Form of Underwriting Agreement.**
3.1 Restated Certificate of Incorporation of Lehman ABS Corporation.***
3.2- Form of By-Laws of Lehman ABS Corporation.+
4.1- Form of Pooling and Servicing Agreement.*
4.2- Form of Pooling Agreement.++
4.3- Form of Trust Agreement.**
4.4- Form of Master Pooling and Servicing Agreement.**
4.5- Form of Sale Agreement.**
4.6- Form of Indenture.**
4.7- Form of Trust Agreement.++++++
4.8- Form of Custody Agreement
- ------------------
* All amounts, except the SEC Filing Fee, are estimates for expenses incurred
or to be incurred in connection with the issuance and distribution of one or
more series Securities in an aggregate principal amount assumed for these
purposes to be equal to the aggregate of the $1,500,000,000 of Securities
registered hereby and the amount previously registered and currently
outstanding.
5.1- Opinion of Brown & Wood LLP as to legality.
8.1- Opinion of Brown & Wood LLP as to tax matters.
10.1- Form of Mortgage Loan Purchase Agreement.++++++
23.1- Consent of Brown & Wood LLP (included as part of
Exhibits 5.1 and 8.1).
24.1- Power of Attorney of Directors and Officers of Company.
- ------------------
* Previously filed in Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the Commission
by the Registrant on August 17, 1993.
** Previously filed in Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-69720), filed with the Commission
by the Registrant on November 16, 1993.
*** Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-67542), filed with the
Commission by the Registrant on August 17, 1993.
+ Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-20084), filed with the
Commission by the Registrant on January 13, 1993.
++ Previously filed in Post-Effective Amendment No. 5 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the Commission
by the Registrant on February 28, 1994.
**** Previously filed in Post-Effective Amendment No. 2 to Registration
Statement on Form S-3 (Reg. No. 33- 90642), filed with the Commission
by the Registrant on July 17, 1995.
++++++ Previously filed in Registration Statement on Form S-3 (Reg. No.
33-85946) and Post-Effective Amendment No. 6 to Registration Statement
on Form S-3 (Reg No. 33-78396), filed with the Commission by the
Registrant on November 3, 1994.
Item 17. Undertakings.
A. Undertaking Pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933 each such post- effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; provided, however, that paragraphs (1)(i) and
(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
B. Filings Incorporating Subsequent Exchange Act Documents by
Reference.
The Registrant hereby undertakes that, for the purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 19th day of April, 1999.
LEHMAN ABS CORPORATION
By /s/ Martin P. Harding
---------------------
Martin P. Harding
Managing Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Samir A. Tabet, Mark L. Zusy and
Martin P. Harding, or any of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Mark L. Zusy Chairman of the Board April 19, 1999
- -------------------- (Principal Executive Officer),
Mark L.Zusy Director and Managing Director
/s/ Neal B. Leonard Director and Managing Director April 19, 1999
- ---------------------
Neal B. Leonard
/s/ David Goldfarb Controller (Principal Accounting April 19, 1999
- --------------------- Officer)
David Goldfarb
/s/ James J. Sullivan Director April 19, 1999
- ---------------------
James J. Sullivan
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
1.1 - Form of Underwriting Agreement.*
1.2 - Form of Underwriting Agreement.**
3.1 - Restated Certificate of Incorporation of Lehman ABS
Corporation.***
3.2 - Form of By-Laws of Lehman ABS Corporation.+
4.1 - Form of Pooling and Servicing Agreement.*
4.2 - Form of Pooling Agreement.++
4.3 - Form of Trust Agreement.**
4.4 - Form of Master Pooling and Servicing Agreement.**
4.5 - Form of Sale Agreement.**
4.6 - Form of Indenture.**
4.7 - Form of Trust Agreement.++++++
4.8 - Form of Custody Agreement
5.1 - Opinion of Brown & Wood LLP as to legality.
8.1 - Opinion of Brown & Wood LLP as to tax matters.
10.1 - Form of Mortgage Loan Purchase Agreement.++++++
23.1 - Consent of Brown & Wood LLP (included as part of
Exhibits 5.1 and 8.1).
24.1 - Power of Attorney of Directors and Officers of Company.
- ------------------------
* Previously filed in Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the Commission
by the Registrant on August 17, 1993.
** Previously filed in Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-69720), filed with the Commission
by the Registrant on November 16, 1993.
*** Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-67542), filed with the
Commission by the Registrant on August 17, 1993.
+ Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-20084), filed with the
Commission by the Registrant on January 13, 1993.
++ Previously filed in Post-Effective Amendment No. 5 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the Commission
by the Registrant on February 28, 1994.
**** Previously filed in Post-Effective Amendment No. 2 to Registration
Statement on Form S-3 (Reg. No. 33- 90642), filed with the Commission
by the Registrant on July 17, 1995.
++++++ Previously filed in Registration Statement on Form S-3 (Reg. No.
33-85946) and Post-Effective Amendment No. 6 to Registration Statement
on Form S-3 (Reg No. 33-78396), filed with the Commission by the
Registrant on November 3, 1994.
Exhibit 4.8
- --------------------------------------------------------------------------------
CUSTODY AGREEMENT
between
[Entity],
as Note Custodian
and
[Entity],
as Depositor
Dated
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
ARTICLE I
DEFINITIONS
ARTICLE II
CUSTODY ACCOUNTS AND CUSTODY RECEIPTS
Section 2.01. Creation of Custody Accounts................................3
Section 2.02. Custody Receipts............................................5
Section 2.03. Mutilated, Lost, Stolen or Destroyed Custody
Receipts...................................................6
Section 2.04. Registration and Transfer of Ownership; Persons
Treated as Owners..........................................7
Section 2.05. Deposits With Depositories.................................10
Section 2.06. Payment on Custody Receipts................................12
ARTICLE III
ADMINISTRATION AND CUSTODY ACCOUNTS
Section 3.01. Payments in Respect of the Underlying Securities...........13
Section 3.02. Redemptions; Notices; Consents to Amendments
to Issuance Agreements....................................14
Section 3.03. Statements to Owners.......................................15
Section 3.04. Defaults...................................................15
Section 3.05. Unclaimed Monies...........................................16
Section 3.06. Obligation of Owners With Respect to
Certain Taxes and Filings.................................17
Section 3.07. Transfers of Related Underlying Securities
by Note Custodian.........................................17
Section 3.08. Termination of Custody Accounts............................17
ARTICLE IV
THE NOTE CUSTODIAN
Section 4.01. Standard of Liability......................................17
Section 4.02. Resignation and Removal of the Note Custodian:
Appointment of Successor..................................19
Section 4.03. Charges and Expenses.......................................20
Section 4.04. Limitation of Liability....................................20
Section 4.05. Non-Petition...............................................21
ARTICLE V
MISCELLANEOUS
Section 5.01. Amendments, Etc............................................21
Section 5.02. Counterparts...............................................21
Section 5.03. Exclusive Benefit of Parties; Effective Date...............22
Section 5.04. Invalidity of Provisions...................................22
Section 5.05. Notices....................................................22
Section 5.06. Business Day...............................................23
Section 5.07. Term of Agreement..........................................23
Section 5.08. Governing Law..............................................23
Section 5.09. Headings...................................................23
<PAGE>
CUSTODY AGREEMENT
PRELIMINARY STATEMENT
CUSTODY AGREEMENT dated [DATE], between [ENTITY], as custodian for the
Owners from time to time of Custody Receipts (the "Note Custodian"), and
[ENTITY], as depositor (the "Depositor"), for the benefit of the Owners from
time to time of Custody Receipts. (Capitalized terms used herein and not
otherwise defined shall have the meanings provided in Article I hereof.)
WHEREAS, the Note Custodian and the Depositor desire to enter into
this Custody Agreement to provide for the issuance of Custody Receipts, Series
[DESIGNATION] to be composed of Class [A] Custody Receipts and Class [A-IO]
Custody Receipts evidencing the Underlying Securities indicated on the related
Custody Receipts Register on the terms and conditions set forth herein and in
the Schedule of Terms; and
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which the Underlying Securities are to be deposited
with, and held in custody by, the Note Custodian, the terms and conditions for
the issuance, transfer and exchange of Custody Receipts and the terms for the
payment of certain fees and expenses associated with this Custody Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto do hereby agree, for the benefit of the Owners from time to time
of Custody Receipts, as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used herein and not defined in this Article I are
used with the definitions assigned thereto in Appendix A to the related
Schedule of Terms which is incorporated herein and made a part hereof.
"Authorized Denomination" means the Authorized Denomination set forth
in the related Schedule of Terms.
"Authorized Officer" means with respect to the Note Custodian, any
officer assigned to the Corporate Trust Office, including any managing
director, vice president, assistant vice president, assistant treasurer,
assistant secretary or any other officer of the Note Custodian customarily
performing functions similar to those performed by any of the above designated
officers and having direct responsibility for the administration of this
Agreement, and also, with respect to a particular matter, any other officer, to
whom such matter is referred because of such officer's knowledge of and
familiarity with the particular subject.
["Beneficial Owner" means, with respect to a Custody Receipt that is a
Book-Entry Custody Receipt, the person or entity who is the beneficial owner of
such Book-Entry Custody Receipt.]
["Book-Entry Custody Receipt" means any beneficial interest in the
Custody Receipts, ownership and transfers of which shall be made through book
entries by the Depository as described in Section 2.06(c) hereof.]
"Class A Distribution Amount" means, as to the Class A Custody
Receipts and any Payment Date, an amount equal to the sum of (i) the related
Scheduled Principal Amount and (ii) the Class A Custody Receipt Interest
Distribution.
"Custody Account" means the account established and maintained
pursuant to Section 2.01 of this Custody Agreement.
"Definitive Custody Receipts" has the meaning set forth in Section
2.06(c).
["Depository" means, with respect to the Custody Receipts which are
Book-Entry Custody Receipts or any Underlying Securities which are issued in
book-entry form, the securities depository with which the Related Underlying
Securities or the Book-Entry Custody Receipts are deposited, which depository
shall be registered under Section 17A of the Securities Exchange Act of 1934.]
["Depository Agreement" means, with respect to Book-Entry Custody
Receipts, the letter of representations relating to such Custody Receipts among
the Depositor, the Note Custodian and the Depository substantially in the form
attached to the related Schedule of Terms.]
["Depository Participant" means a broker, dealer, bank, other
financial institution or other person or entity for whom from time to time a
Depository effects book-entry transfers and pledges of Custody Receipts
deposited with such Depository.]
"Fee Letter" means the side letter between the Depositor and the Note
Custodian dated _____________ regarding the amounts payable to the Note
Custodian in respect of its fees and expenses under this Custody Agreement, as
amended from time to time by written agreement of the parties hereto.
"Issuance Agreement" means, with respect to the Custody Receipts, the
agreement pursuant to which the related Underlying Securities were issued and
which is specified in the related Schedule of Terms.
"Issuer" means, with respect to the Custody Receipts, the Issuer of
the related Underlying Securities, if any, specified in the related Schedule of
Terms.
"Mail" means mail by first-class postage to specified Owners of a
Series of Custody Receipts at their addresses set forth in the Related Custody
Receipts Register.
"Note Custodian's Principal Office" means the principal office of the
Note Custodian at which at any particular time its corporate trust business
shall be administered which office at the date of the execution of this
Agreement is located at or at any other time at such other address as the Note
Custodian may designate from time to time by notice to the Depositor.
"Notice of Transfer or Exchange" means the Notice of Transfer or
Exchange printed on a Custody Receipt.
"Payment Date" means, with respect to the Underlying Securities, any
Payment Date set forth in the related Schedule of Terms.
"Schedule of Terms" means, with respect to the Custody Receipts, the
Schedule of Terms, in the form set forth in Annex I hereto.
"Servicer" means the person or entity as specified in the related
Schedule of Terms.
"Transfer Limitations" means, with respect to the Custody Receipts,
the Transfer Limitations set forth in the related Schedule of Terms.
"Trustee" means the bank or trust company serving as trustee or
indenture trustee with respect to the Underlying Securities, as specified in
the related Schedule of Terms.
"Underlying Securities" means the Underlying Securities specified in
the related Schedule of Terms.
"Voting Rights" means, with respect to the Class [A] Custody Receipts
% and with respect to the Class [A-IO] Custody Receipt % and such Voting Rights
with respect to each Custody Receipt of a Class means the pro rata share of the
percentage allocated to the related Class of Custody Receipts based on the
Initial Custody Receipt Balance or the Initial Aggregate Class [A-IO] Custody
Receipt Notional Amount, as the case may be.
ARTICLE II
CUSTODY ACCOUNTS AND CUSTODY RECEIPTS
Section 2.01. Creation of Custody Accounts. The Note Custodian shall
establish and maintain a separate Custody Account in the corporate trust office
of the Note Custodian to be designated "[Name of Related Underlying Securities
(as specified in the related Schedule of Terms) --Custody Receipts Series []]
- --Custody Account." The Note Custodian shall purchase the Underlying Securities
from the Depositor, without recourse, in return for the Custody Receipts. The
Note Custodian shall deposit into such Custody Account the related Underlying
Securities, and any monies received in connection therewith. The Custody
Account shall at all times be maintained as a custodial account for the benefit
of the related Owners, separated and segregated on the books of the Note
Custodian from all other accounts, funds and property in the possession of the
bank or trust company acting as Note Custodian, including any other Custody
Account. The Underlying Securities and any monies held in a Custody Account
shall not at any time be commingled on the books of the Note Custodian with any
other assets or property held by the Note Custodian. The Note Custodian shall
maintain separate records in connection with any monies which it may hold, in
such Custody Account or otherwise, in connection with the Underlying
Securities. To the extent practicable, the Note Custodian shall arrange for
distributions on the Underlying Securities to be made in immediately available
funds to the Note Custodian, by wire transfer or otherwise, pursuant to the
payment provisions of each Issuance Agreement. The Custody Account shall be
maintained at all times with an Eligible Institution. If the Note Custodian
ceases to be an Eligible Institution, the Custody Account shall be transferred
to an Eligible Institution within five Business Days.
It is the express intent of the parties hereto that the conveyance of
the Underlying Securities and any monies received in connection therewith to
the Note Custodian, by the Depositor be, and be construed as, an absolute sale
of the Underlying Securities and related property. It is, further, not the
intention of the parties that such conveyance be deemed a pledge of the
Underlying Securities and related property by the Depositor to the Note
Custodian to secure a debt or other obligation of the Depositor. However, in
the event that, notwithstanding the intent of the parties, the Underlying
Securities or any related property is held to be the property of the Depositor,
or if for any other reason this Agreement is held or deemed to create a
security interest in the Underlying Securities or any related property, then:
(1) this Agreement shall be deemed to be a security agreement; and
(2) the conveyance provided for hereunder shall be deemed to be a
grant by the Depositor to the Note Custodian, of a security
interest in all of the Depositor's right, title, and
interest, whether now owned or hereafter acquired, in and to
the Underlying Securities, any monies received in connection
therewith and any proceeds thereof.
The Depositor shall, to the extent consistent with this Agreement, take such
reasonable actions as may be necessary to ensure that, if this Agreement were
deemed to create a security interest in the property described above, such
security interest would be deemed to be a perfected security interest of first
priority under applicable law and will be maintained as such throughout the
term of this Agreement. The Depositor shall file all filings necessary to
maintain the effectiveness of any original filings necessary under the Uniform
Commercial Code as in effect in any jurisdiction to perfect such security
interest in such property. In connection herewith, the Note Custodian shall
have all of the rights and remedies of a secured party under the Uniform
Commercial Code as in force in the relevant jurisdiction.
Section 2.02 Custody Receipts. The Note Custodian shall issue the
Series [ ] Custody Receipts in Authorized Denominations as hereinafter
provided, composed of Class [A] Custody Receipts and Class [A-IO] Custody
Receipts evidencing a beneficial ownership interest in the related Underlying
Securities for such Custody Receipts (as set forth in such Custody Receipt and
in the Custody Receipt Register) on the terms and conditions set forth herein
and in the related Schedule of Terms. Class [A] Custody Receipts shall be
substantially in the form set forth in Exhibit 1 hereto, and shall be assigned
consecutive registration numbers. The Class [A-IO] Custody Receipts shall be
substantially in the form set forth in Exhibit 2 hereto, and shall be assigned
consecutive registration numbers. Each Custody Receipt shall be executed by the
Note Custodian by the manual signature of an Authorized Officer and no Custody
Receipt shall be entitled to any benefits under this Custody Agreement, or be
valid or obligatory for any purpose, unless so executed by the Note Custodian.
In case any Authorized Officer whose signature shall appear on any Custody
Receipt shall cease to be an Authorized Officer, such signature shall
nevertheless be valid and sufficient for all purposes as if such person had
remained in office. The Custody Receipts shall not evidence any financial
obligation of the Depositor or the Note Custodian except that the Note
Custodian shall be required, as provided in Section 3.01 hereof, to distribute
in the amount specified in the related Schedule of Terms all payments received
in respect of the related Underlying Securities deposited hereunder to the
Custody Receipts evidencing such Underlying Securities without making any
deduction whatsoever, other than as expressly provided in this Custody
Agreement.
Section 2.03 Delivery of Custody Receipts. The Note Custodian shall
deliver, at the direction of the Depositor, to the Owners thereof the initial
Custody Receipts of a Series, registered in the names and in the denominations
specified in writing by the Depositor at least three Business Days prior to
such delivery, upon receipt by the Note Custodian of the following:
(a) original executed counterparts of the related Schedule of
Terms;
(b) in the case of related Underlying Securities issued in
certificated form, the related Underlying Securities in the aggregate
outstanding principal amount specified in the related Schedule of
Terms, registered in the name of the Note Custodian (or its nominee or
its agent's nominee) or endorsed by the registered owner thereof for
transfer to the Note Custodian (or its nominee or its agent's nominee)
or in blank, and all documents necessary to effect the registration of
the related Underlying Securities (as specified in the related
Issuance Agreement) in the name of the Note Custodian;
(c) a list of the names, addresses and United States taxpayer
identification numbers (or, if a United States taxpayer identification
number is not appropriate, a copy of Form W-8 or such other
appropriate federal tax identification as the Note Custodian may
reasonably request) of the persons in whose names, and the
denominations in which, such Custody Receipts are to be registered;
and
(d) a copy of the related Issuance Agreement.
The Note Custodian may accept the form of the related Issuance Agreement
delivered to it by the Depositor as being a true and correct copy of such
Issuance Agreement and shall not be deemed to have knowledge of, and need not
give effect to, any amendment unless a copy of such amendment is delivered to
it.
The initial Custody Receipts of a Series to be executed and delivered
by the Note Custodian as provided in this Section 2.03 shall be delivered to or
upon the written order of the Depositor in The City of New York (or such other
city in the United States of America as may be specified by the Depositor and
agreed upon by the Note Custodian) at a location specified by the Depositor and
agreed upon by the Note Custodian. Such delivery shall be made on the date that
the related Underlying Securities are received by the Note Custodian as
provided in paragraph (b) of this Section 2.03. If the Depositor shall so
request reasonably in advance, the Note Custodian shall make such Custody
Receipts available to the Depositor or the person designated by the Depositor
for inspection on the Business Day preceding the date of any such delivery, at
a location in The City of New York (or such other city specified above)
specified by the Depositor and agreed upon by the Note Custodian. The Depositor
shall provide the Note Custodian, on (and in the numbers specified in) the Note
Custodian's reasonable request, Custody Receipt forms to facilitate issuance
and transfer of Custody Receipts and permit any temporary Custody Receipts
issued to be exchanged for permanent Custody Receipts.
Any temporary Custody Receipts that may be issued shall be
exchangeable for definitive Custody Receipts upon surrender of the temporary
Custody Receipts at the Note Custodian's Principal Office without charge to the
Owner and after any waiting period that may be applicable. Any tax or
governmental charge that may be imposed in connection with any such exchange
shall be borne by the Owner. Upon surrender for cancellation of any one or more
temporary Custody Receipts, the Note Custodian shall execute and deliver in
exchange therefor definitive Custody Receipts of like denominations. Until so
exchanged, the temporary Custody Receipts shall in all respects be entitled to
the same benefits under this Agreement as definitive Custody Receipts.
Section 2.04. Mutilated, Lost, Stolen or Destroyed Custody Receipts.
In the event a Custody Receipt is mutilated, lost, stolen or destroyed, the
Note Custodian shall cancel such Custody Receipt, if possible, and execute and
deliver in lieu thereof a new Custody Receipt of the same Series, Class and
denomination, provided that:
(a) in the case of any mutilated Custody Receipt, such mutilated
Custody Receipt shall be first surrendered to the Note Custodian; and
(b) in the case of any lost, stolen or destroyed Custody Receipt,
there shall first be delivered to the Note Custodian evidence of such
loss, theft or destruction satisfactory to the Note Custodian and the
Depositor, together with indemnity satisfactory to each of them, and
neither the Depositor nor the Note Custodian shall have received
written notice that such Custody Receipt has been acquired by a bona
fide purchaser for value.
All replacement Custody Receipts issued pursuant to this Section shall be
entitled to the full benefits hereunder, whether or not, in the case of clause
(b), any lost, stolen or destroyed Custody Receipt shall be found at any time.
The Note Custodian shall be entitled to customary compensation from the Owner
for its expenses, including any tax or governmental charge that may be payable
by it, in connection with any such replacement of Custody Receipts.
Section 2.05. Registration and Transfer of Ownership; Persons Treated
as Owners.
(a) The Note Custodian shall maintain a Custody Receipts Register
at the Note Custodian's Principal Office to provide for the
registration of the Custody Receipts and the registration of transfers
of such Custody Receipts entitled to be registered or transferred as
herein provided. A copy of the Custody Receipts Register for each
class of Custody Receipts shall be provided by the Note Custodian to
the Depositor (or its designee), to a designated representative of
Owners of Custody Receipts evidencing more than 25% of the Initial
Custody Receipt Balance or of the Initial Aggregate Class [A-IO]
Custody Receipt Notional Amount at the expense of and upon written
request by the Depositor or such Owners, as the case may be. The Note
Custodian shall maintain on the Custody Receipts Register, with
respect to each such Custody Receipt, (i) the name, address and,
unless not required to be maintained under applicable laws and
regulations, United States taxpayer identification number of the Owner
of such Custody Receipt, (ii) the registration number of such Custody
Receipt and (iii) the Custody Receipt Balance or the Custody Receipt
Notional Amount.
(b) The initial issuance of the Custody Receipts of a Series
shall be recorded on the Custody Receipts Register in such names as
the Depositor shall specify upon satisfaction of the conditions set
forth in Section 2.05(g) and as provided in Section 2.03 hereof.
Thereafter, registration of transfer of such Custody Receipts may be
made only on the Custody Receipts Register upon satisfaction of the
conditions set forth in Section 2.05(g). Upon surrender for
registration of transfer of any Custody Receipt to the Note Custodian
at the Note Custodian's Principal Office, with the Notice of Transfer
or Exchange for such Custody Receipt fully completed, the Note
Custodian shall (A) execute and deliver to the transferee or
transferees named in such Notice at the Note Custodian's Principal
Office a new Custody Receipt or Receipts of the same Series and Class
in Authorized Denominations, evidencing Initial Custody Receipt
Balance or Initial Aggregate Class[ A-IO] Custody Receipt Notional
Amount, as the case may be, or portion thereof of the surrendered
Custody Receipt so transferred, registered in the name or names of
such transferee or transferees and (B) execute and deliver to the
Owner of the surrendered Custody Receipt at the Note Custodian's
Principal Office a new Custody Receipt or Receipts of the same Series
and Class in Authorized Denominations evidencing the portion of
Initial Custody Receipt Balance or Initial Aggregate Class [A-IO]
Custody Receipt Notional Amount of the surrendered Custody Receipt not
so transferred. Each Custody Receipt issued upon such a registration
of transfer shall bear a registration number not assigned previously.
(c) A Custody Receipt or Receipts may be exchanged for a Custody
Receipt or Receipts of the same Series and Class evidencing in the
aggregate the same Initial Custody Receipt Balance or Initial
Aggregate Class [A-IO] Custody Receipt Notional Amount, but having
different denominations, upon surrender of such Custody Receipt or
Receipts to the Note Custodian at the Note Custodian's Principal
Office with the Notice of Transfer or Exchange for such Custody
Receipt fully completed. The Note Custodian shall execute and deliver
to the Owner of the exchanged Custody Receipt, at the Note Custodian's
Principal Office, a Custody Receipt or Receipts of the same Series and
Class, denominated in Authorized Denominations registered in the name
of such Owner and bearing registration numbers not assigned
previously.
(d) The Note Custodian may require payment by the Owner of a
Custody Receipt of a sum sufficient to cover any tax, governmental fee
or other governmental charge that may be imposed in connection with
any registration of a transfer or exchange of such Custody Receipt,
and may require that such taxes, fees or other charges be paid prior
to the issuance of a new Custody Receipt, and shall have no obligation
to issue such new Custody Receipt in the absence of such payment. The
Note Custodian may, but shall not be required to issue or register the
transfer of any Custody Receipt during any period when the related
Trustee would not be required to issue or register the transfer of any
related Underlying Security pursuant to the terms of the related
Issuance Agreement.
(e) The Note Custodian may treat the person in whose name a
Custody Receipt is registered as the absolute owner thereof, for all
purposes whatsoever, and shall not be bound or affected by any notice
to the contrary, other than an order of a court having jurisdiction in
the premises.
(f) Whenever any Custody Receipt shall be delivered to the Note
Custodian for registration of transfer, exchange or final payment,
upon such registration of transfer, exchange or payment, the Note
Custodian shall cancel such Custody Receipt, and shall maintain a
record of such cancellation, in accordance with its standard
procedures.
(g) If so specified in the related Schedule of Terms
[Any Applicable Transfer Restrictions].
[Section 2.06. Deposits With Depositories.
(a) Notwithstanding anything in this Custody Agreement to the
contrary, to the extent Underlying Securities are eligible for deposit
with a Depository, the Note Custodian may take delivery of the related
Underlying Securities by transfer of such Underlying Securities to its
account (or the account of its nominee or the nominee of its agent)
with such Depository and may maintain such Underlying Securities on
deposit with such Depository.
(b) In the event the Schedule of Terms provides that one or more
Classes of Custody Receipts will be Book-Entry Custody Receipts, then
such Class of Custody Receipts shall, upon original issuance, be
issued in the form of one or more typewritten certificates
representing such Class of Book-Entry Custody Receipts and shall be
delivered to the Depository by, or on behalf of, the Depositor. The
Book-Entry Custody Receipts shall initially be registered on the
Custody Receipts Register in the name of the Depository or its
nominee, and no Beneficial owner of a Book-Entry Custody Receipt will
receive a definitive certificate representing such Beneficial Owner's
interest in a Book-Entry Custody Receipt except as provided in
subsections (c) and (d) below. Unless and until definitive, fully
registered Custody Receipts ("Definitive Custody Receipts") have been
issued to Beneficial Owners of Custody Receipts pursuant to
subsections (c) and (d) below:
(i) the provisions of this Section 2.06(b) shall be in full
force and effect;
(ii) the Depositor and the Note Custodian may deal with the
Depository which is the registered holder of the Custody Receipts
for all purposes (including the making of distributions on the
Custody Receipts) as the authorized representative of the
Beneficial Owners of Custody Receipts;
(iii) to the extent that the provisions of this Section
2.06(b) conflict with any other provisions of this Custody
Agreement, the provisions of this Section 2.06(b) shall control;
(iv) the rights of Beneficial Owners of Custody Receipts
shall be exercised only through the Depository which is the
registered holder of the Custody Receipts and the Depository
Participants and shall be limited to those established by law and
agreement between such Beneficial Owners of Custody Receipts and
the Depository and/or the Depository Participants. Pursuant to
the Depository Agreement, unless and until Definitive Custody
Receipts are issued pursuant to subsection (c) below, the initial
Depository will make book-entry transfers among the Depository
Participants and receive and transmit distributions on the
Custody Receipts to such Depository Participants; and
(v) Whenever a notice, report or other communication to the
Beneficial Owners of Custody Receipts is required under this
Custody Agreement, unless and until Definitive Custody Receipts
shall have been issued to Beneficial Owners of Custody Receipts
pursuant to subsection (c) below, the Note Custodian shall give
all such notices and communications specified herein to be given
to Beneficial Owners of Custody Receipts to the Depository which
is the registered holder of the Custody Receipts.
(c) In the event that:
(i) (A) the Depositor advises the Note Custodian in writing
that the Depository which is the registered holder of the Custody
Receipts is no longer willing or able to discharge properly its
responsibilities as Depository, and (B) the Depositor is unable
to locate a qualified successor; or
(ii) the Depositor, at its option, advises the Note
Custodian in writing that it elects to terminate the book-entry
system through the Depository; or
(iii) after the occurrence of a default by the Servicer
under the Servicing Agreement or an Event of Default under the
Indenture, Beneficial Owners representing at least a majority of
the aggregate outstanding principal amount of the Custody
Receipts advise the Depository in writing that the continuation
of a book-entry system through the Depository is no longer in the
best interests of the Beneficial Owners;
the Note Custodian shall notify all Beneficial Owners, through the Depository
which is the registered holder of the Custody Receipts, of the occurrence of
any such event and of the availability of Definitive Custody Receipts to
Beneficial Owners of Custody Receipts requesting the same. Upon surrender to
the Note Custodian of the Custody Receipts by the Depository, accompanied by
registration instructions from the Depository which is the registered holder of
the Custody Receipts, the Note Custodian shall issue the Definitive Custody
Receipts which shall be issued in Authorized Denominations. Neither the
Depositor nor the Note Custodian shall be liable for any delay in delivery of
such instructions and may conclusively rely on, and shall be protected in fully
relying on, such instructions. The Depositor shall arrange for, and will bear
the costs of, printing, issuance and delivery of any Definitive Custody
Receipts.
(d) Custody Receipts purchased by, or beneficial interests in
Book-Entry Custody Receipts transferred to, institutional accredited
investors will be evidenced by Definitive Custody Receipts, registered
in the name of the purchaser thereof or any nominee of such purchaser.
Definitive Custody Receipts will be issued to a Beneficial Owner (or
its nominee) at any time (subject to the rules and procedures of DTC)
upon the request to the Custodian by such Beneficial Owner that its
interest in a Book-Entry Custody Receipt be exchanged for a Definitive
Custody Receipt or Custody Receipts.]
Section 2.07. Payment on Custody Receipts. So long as the Note
Custodian is the registered holder of the Underlying Securities, the Note
Custodian shall, on each Payment Date, make the following payment to Holders of
Custody Receipts to the extent of Custody Receipt Available Funds for such
Payment Date in the following order of priority:
(i) to the Holders of Class [A] Custody Receipts and Class
[A-IO] Custody Receipts, the Class [A] Custody Receipt Interest
Distribution and the Class [A-IO] Custody Receipt Interest
Distribution, respectively (any shortfall being allocated between
each such Class of Custody Receipts based on the total amount
each such Class would otherwise have been entitled to);
(ii) to the Holders of the Class [A] Custody Receipts, any
Unpaid Principal Shortfall due and payable in respect of the
Class [A] Custody Receipts; and
(iii) to the Holders of the Class [A] Custody Receipts, an
amount up to the Scheduled Principal Amount until the Aggregate
Outstanding Principal Amount of the Class [A] Custody Receipts is
reduced to zero.
ARTICLE III
ADMINISTRATION AND CUSTODY ACCOUNTS
Section 3.01. Payments in Respect of the Underlying Securities.
(a) Unless otherwise provided in the Schedule of Terms, the Note
Custodian shall remit to the Owners of Class [A] Custody Receipts on
the Record Date preceding any Payment Date, other than the final
Payment Date, the [Class A] Distribution Amount with respect to such
Payment Date, on each Payment Date. The Note Custodian shall remit to
the Owners of Class [A-IO] Custody Receipts on the Record Date
preceding any Payment Date, other than the final Payment Date, the
Class [A-IO] Custody Receipt Interest Distribution with respect to
such Payment Date. The Class [A] Distribution Amount, the Class [A-IO]
Custody Receipt Interest Distribution shall be paid to Owners of
Custody Receipts of the related class pro rata based on the Initial
Custody Receipt Balance or Initial Aggregate Class [A-IO] Custody
Receipt Notional Amount of the Custody Receipts held by such Owners.
(b) The Note Custodian (or its agent) shall duly present (or
cause to be presented) each related Underlying Security for payment on
or prior to its final Payment Date in accordance with the provisions
of the related Underlying Security and the related Issuance Agreement.
Upon receipt of such payment, the Note Custodian shall, on the
Business Day following receipt of such payment, remit to the Owners of
Class [A] Custody Receipts and Class [A-IO] Custody Receipts, on the
date set by the related Issuance Agreement (initially, as set forth in
the related Schedule of Terms) as the date for determining the person
to whom such payment shall be paid, the final Class [A] Distribution
Amount, the final Class [A-IO] Custody Receipt Interest Distribution
Amount with respect such Payment Date for such Class of Custody
Receipts. The final Class [A] Distribution Amount, the final Class
[A-IO] Custody Receipt Interest Distribution shall be paid to Owners
of Custody Receipts of the related class pro rata based on the Initial
Custody Receipt Balance or Initial Aggregate Class [A-IO] Custody
Receipt Notional Amount of the Custody Receipts held by such Owners.
(c) Payments to an Owner pursuant to Sections 3.01(a) and 3.01(b)
shall be made by bank check payable in currency of the United States
of America sent by Mail to such Owner at the address shown on the
Custody Receipt Register or by such other method as may be requested
in writing by an Owner and consented to by the Note Custodian;
provided that payments with respect to Custody Receipts on deposit
with a Depository will be made in accordance with the procedures of
such Depository. Notwithstanding the preceding sentence, in the event
that the related Issuance Agreement requires (initially, as set forth
in the related Schedule of Terms) the presentment of the related
Underlying Securities as a condition to receipt of any payment
(including a redemption payment contemplated by Section 3.02 hereof)
then, likewise, any payment received by the Note Custodian upon such
presentment shall be remitted, in accordance with the terms of this
Custody Agreement, by the Note Custodian to the Owners of the Class
[A] Custody Receipts and the Owners of the Class [A-IO] Custody
Receipts evidencing such Underlying Securities upon presentation of
such Custody Receipt at the Note Custodian's Principal Office.
(d) Neither the Depositor nor the Note Custodian shall have any
obligation to advance its own funds to make any payment to any Owner.
Section 3.02. Redemptions; Notices; Consents to Amendments to Issuance
Agreements.
(a) Upon receipt of any notice of redemption of a related
Underlying Security, the Note Custodian shall promptly forward a copy
of such notice by Mail to the Owners of the Class [A] Custody Receipts
and the Owners of the Class [A-IO] Custody Receipts evidencing such
Underlying Security. Upon receipt of any such notice, the Note
Custodian (or its agent) shall present the Underlying Security so
called for redemption on or prior to the date of such redemption to
the related Trustee on behalf of such Owners for redemption in
accordance with the terms of such notice and, if applicable, the
related Issuance Agreement. The redemption price received by the Note
Custodian shall be paid to such Owners in accordance with the
provisions of Section 3.01 hereof.
(b) Upon receipt from a Trustee of any other notice with respect
to a related Underlying Security, the Note Custodian shall promptly
transmit a copy of such notice by Mail to the Owners of the Class [A]
Custody Receipts evidencing such Underlying Security and the Owners of
the Class [A-IO] Custody Receipts evidencing such Underlying Security.
For such purpose, the Note Custodian shall consider the date of the
receipt of any such notice as the record date for the purpose of
determining the Owners of record to whom such notices shall be
transmitted. In the event such notice requests or requires any vote,
action or consent by the holder of any related Underlying Security,
the Note Custodian shall no later than the Business Day following
receipt of such notice, Mail to the Owners of the Class [A] Custody
Receipts and Owners of Class [A-IO] Custody Receipts evidencing such
Underlying Security a letter of direction with respect to such vote,
action or consent, returnable to the Note Custodian, and subject to
Section 3.02(c), the Note Custodian shall vote such Underlying
Security in accordance with such letters of direction proportionately
based on the Voting Rights of the related Owners. The Note Custodian
shall not vote, take any action or consent except in accordance with
such letters of direction. Any record date established by such notice
for purposes specified in such notice shall be the record date for the
purpose of determining the Owners of record for such purposes. If no
record date is established by the Related Trustee, the date such
notice is received by the Note Custodian shall be the record date.
(c) Notwithstanding Section 3.02(b), without the consent of all
of the Owners of the Class [A-IO] Custody Receipts, neither the Note
Custodian nor the Owners of the Class [A] Custody Receipts shall vote
or consent to any amendments to the related Issuance Agreement or any
other actions which would reduce the amount of or change the timing of
or currency of any amounts to be paid to Owners of Class [A-IO]
Custody Receipts.
(d) The Note Custodian shall promptly transmit by hand or
telecopy to the Depositor a copy of any notice received from a Trustee
with respect to any Underlying Securities.
Section 3.03. Statements to Owners.
(a) With each distribution on the Custody Receipts the Note
Custodian shall prepare and forward by Mail (together with a copy of
any report relating to a Payment Date received by the Note Custodian
from the related Trustee pursuant to the related Issuance Agreement) a
statement to the Rating Agencies and each Owner of Custody Receipts of
such Series stating:
(ii) the Class [A] Distribution Amount, the Scheduled
Principal Amount and the Class [A] Custody Receipt Interest
Distribution distributable with respect to the related Payment
Date to the Owner of a Class [A] Custody Receipt of such Series
in the denomination of $[100,000];
(iii) the Class [A-IO] Custody Receipt Interest Distribution
distributable with respect to the related Payment Date to the
Owner of a Class [A-IO] Custody Receipt of such Series in the
notional amount of $[100,000];
(iv) the aggregate outstanding principal balance of the
related Underlying Securities evidenced by the Custody Receipts
after giving effect to the Scheduled Principal Amount distributed
thereon on the related Payment Date.
(b) The Note Custodian shall prepare and file all federal, state
and local tax and information returns and reports required to be filed
with respect to the custody arrangement created pursuant to the
Custody Agreement and, in connection with any such filing, shall
assume that such arrangement constitutes a device to facilitate the
creation of "stripped coupons" from the Underlying Securities within
the meaning of section 1286 of the Code. Consistent with the above
treatment, the Custodian shall, within a reasonable time after the end
of each calendar year, furnish to each Owner such information which is
necessary, or required by federal, state and local tax law, to enable
such Owners to prepare their tax returns and properly account for
their allocable share of income from the Underlying Securities.
Section 3.04. Defaults.
(a) The Note Custodian is not authorized hereunder to proceed
against any Servicer or any Trustee in the event of a default under
the related Issuance Agreement and has no power or obligation
hereunder to assert any of the rights and privileges of the related
Owners.
(b) In the event of any default in payment by an Issuer or
Trustee, as the case may be, or any Servicer default or similar event
with respect to an Issuer, a Trustee or a Servicer, as the case may
be, each Owner will have the right to direct the Note Custodian to
take specific actions on behalf of such Owner pursuant to Section
3.04(c) hereof. Such Owner will not be required to act in concert with
the Note Custodian (unless such Owner so directs) or other Owners. The
Note Custodian shall take such actions as reasonably directed by the
Owners in accordance with their respective Voting Rights. The parties
hereto understand and agree that the Owners of Custody Receipts are
the beneficial owners of the related Underlying Securities evidenced
thereby on the terms and conditions set forth herein and in the
related Schedule of Terms and that the Note Custodian shall hold
Underlying Securities as custodian for the Owners of Custody Receipts
evidencing such Underlying Securities.
(c) Notwithstanding anything in this Section 3.04 to the
contrary, the Note Custodian, shall have no obligation to undertake to
perform any ministerial acts unless it has received from the Owners
requesting such action indemnity satisfactory to it against all costs,
losses, liabilities and expenses (including legal fees and expenses)
and such requests have been confirmed in writing.
(d) The Note Custodian shall have no obligation to notify the
Depositor or any Owner of any default in payment by an Issuer or
Trustee, as the case may be, or any Servicer default or similar event
with respect to an Issuer, a Trustee or a Servicer, and shall not be
deemed to have knowledge thereof unless an Authorized Officer of the
Note Custodian has actual knowledge thereof or is informed thereof in
writing.
(e) In the event that the Note Custodian fails to distribute the
Class [A] Distribution Amount, the Class [A-IO] Custody Receipt
Interest Distribution within 3 days following receipt of the full
amount required to be distributed on the related Underlying
Securities, Owners of Custody Receipts evidencing more than 50% of
Voting Rights may terminate the Note Custodian as custodian hereunder.
The provisions of Section 4.02 hereof relating to appointment of a
successor custodian in the event of a removal of the Note Custodian by
the Owners of Custody Receipts shall apply in the event of a
termination of the Note Custodian pursuant to this Section 3.04(e).
Section 3.05. Unclaimed Monies. In the event any monies to be paid to
an Owner of a Custody Receipt in respect of the final payment thereof remains
unclaimed, the Note Custodian shall segregate and hold such monies in a
subaccount within the related Custody Account, without liability for interest
thereon, for the account of the Owner entitled thereto. Such monies shall not
be invested by the Note Custodian, but shall be held in trust for the benefit
of such Owner. All such monies that remain in any such subaccount on the date
that is two (2) years and eleven (11) months after the date on which such
monies were originally due, and as to which such Owner has not indicated an
interest as evidenced by a memorandum on file with the Note Custodian, shall be
disbursed to the Depositor and such Owner shall thereafter look only to the
Depositor for payment.
Section 3.06. Obligation of Owners With Respect to Certain Taxes and
Filings. If any tax or other governmental charge shall become payable by or on
behalf of the Note Custodian, including any tax or charge required to be
withheld from any payment to or by the Note Custodian under the provisions of
any applicable law or regulation, with respect to any Custody Receipt or any
related Underlying Security, such tax or charge shall be payable by the Owner
of such Custody Receipt (in the case of any tax or charge with respect to such
Custody Receipt) or by the Owners of the related Class [A] and Class [A-IO]
Custody Receipts in proportion to their respective share of the interest
payable on such related Underlying Security (in the case of any tax or charge
with respect to such related Underlying Security) and may, following written
notice from the Note Custodian to such Owner, be withheld by the Note
Custodian.
Section 3.07. Transfers of Related Underlying Securities by Note
Custodian. The Note Custodian shall hold the related Underlying Securities in
custody only and shall not assign, transfer, pledge, set off or otherwise
dispose of any Underlying Security or any interest therein except as
specifically provided hereunder or as required by an order of a court having
jurisdiction in the premises.
Section 3.08. Termination of Custody Accounts. The Note Custodian
shall maintain in the Custody Account each Underlying Security until payment of
all amounts in respect of such Underlying Security in full, on its expected
final payment date or earlier redemption. The Note Custodian hereby disclaims
any equitable or beneficial interest in the Underlying Securities. No
Underlying Security will be available to the Note Custodian for its own use or
profit, nor will any Underlying Security be deemed part of the general assets
of the Note Custodian or be reflected as an asset of the Note Custodian on any
balance sheet or similar document prepared by the Note Custodian in its
individual capacity. The Underlying Securities will not be subject to any
right, charge, security interest, lien or claim of any kind in favor of the
Note Custodian.
ARTICLE IV
THE NOTE CUSTODIAN
Section 4.01. Standard of Liability.
(a) The Note Custodian shall not be liable under this Custody
Agreement other than by reason of bad faith or gross negligence in the
performance of such duties as are specifically set forth in this
Custody Agreement. The Note Custodian shall not be liable for any
damages resulting from any distribution from a related Custody Account
to an Owner at the address of record of such Owner in the related
Custody Receipts Register. The Note Custodian shall not be liable for
any action taken or inaction by it in reliance upon the written
opinion of its legal counsel or the written advice of its accountants.
The Note Custodian may request and conclusively rely and shall be
fully protected in acting in reliance upon any written notice,
request, direction or other document reasonably believed by it to be
genuine and to have been signed or presented by the proper party or
parties.
(b) The Depositor agrees to indemnify the Note Custodian and any
of its agents, officers, directors or employees for, and to hold them
harmless against any cost, loss, liability or expense, including legal
fees and expenses incurred without their own gross negligence or bad
faith, arising, directly or indirectly, out of, relating to, or in
connection with the acceptance, administration or performance of their
duties, or the duties of the Note Custodian, as well as the costs and
expenses of defending themselves against any action, suit, or other
proceeding involving any claim or liability arising directly or
indirectly, out of, relating to or in connection with the exercise or
performance of any of their powers or duties hereunder.
Notwithstanding any provisions of this Agreement to the contrary, the
obligations of the Depositor to indemnify the Note Custodian and its
agents, officers, directors and employees under this Section 4.01
shall survive the resignation or removal of the Note Custodian or the
termination of this Custody Agreement.
(c) The Note Custodian shall have no duties or responsibilities
other than those expressly set forth herein. No implied duties or
obligations shall be read into this Custody Agreement against the Note
Custodian. The Note Custodian shall be under no liability to any party
hereto, or to any Owner, by reason of any failure on the part of the
Depositor or any maker, guarantor, endorser or other signatory of any
document or instrument, including any Underlying Security, or any
other person to perform such person's obligations under any such
document or instrument. Except for amendments to this Custody
Agreement referred to below, and except for instructions, notices or
demands to the Note Custodian under this Custody Agreement, the Note
Custodian shall not be obligated to recognize any agreement between
the Depositor and any owner, or between any Owner and any other person
or entity, notwithstanding whether or not it has knowledge thereof.
(d) In the absence of gross negligence or bad faith on the part
of the Note Custodian, the Note Custodian may rely conclusively and
shall be fully protected in acting upon any order, notice, demand,
certificate, opinion of counsel (including counsel chosen by the Note
Custodian), statement, instrument, report or other paper or document
(not only as to its due execution and the validity and effectiveness
of its provisions, but also as to the truth, completeness and
acceptability of any information therein contained) which is believed
by the Note Custodian to be genuine and, without independent
investigation, to be correct and to be signed or presented by the
proper person or persons.
(e) The Note Custodian shall not be responsible for the
sufficiency or accuracy, the form or the execution, validity, value or
genuineness of any document or property received or held by it
hereunder, including without limitation any Underlying Securities, or
the authority of the Depositor in executing this Custody Agreement.
(f) ANY ACTION OR PROCEEDING ALLEGING ANY BREACH BY THE NOTE
CUSTODIAN OF ITS DUTIES UNDER THIS CUSTODY AGREEMENT SHALL BE
PROSECUTED ONLY IN A STATE OR FEDERAL COURT LOCATED IN THE STATE OF
NEW YORK, COUNTY OF NEW YORK. THE NOTE CUSTODIAN SHALL HAVE THE RIGHT
AT ANY TIME TO SEEK INSTRUCTIONS FROM ANY COURT OF COMPETENT
JURISDICTION.
(g) No provision of this Custody Agreement shall require the Note
Custodian to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder
or in the exercise of its rights and powers hereunder, and the Note
Custodian shall not be required to take any action which, in the Note
Custodian's sole and absolute judgment, could involve it in expense or
liability unless furnished with security and indemnity which the Note
Custodian deems, in its sole and absolute discretion, to be
satisfactory.
(h) The Note Custodian does not have any equitable or beneficial
interest in the Underlying Securities deposited with it hereunder but
is serving as custodian only and having only possession and legal
title thereof. The Note Custodian makes no representation as to the
validity, value, genuineness or collectibility of any Underlying
Security or other document or instrument held by or delivered to it.
The Note Custodian shall not be called upon to advise any Owner as to
the wisdom in selling or retaining or taking or refraining from taking
any action with respect to any Underlying Security or other property
deposited hereunder.
(i) The Note Custodian shall be deemed to have exercised
reasonable care in the custody and preservation of the Underlying
Securities in its possession if the Underlying Securities are accorded
treatment substantially equal to that which a prudent person accords
its own property, it being understood that, except as expressly
provided herein, the Note Custodian shall not have responsibility for
(i) ascertaining or taking action with respect to calls, conversions,
exchanges, maturities, tenders or other matters relative to any
Underlying Security, whether or not the Note Custodian has or is
deemed to have knowledge of such matter, or (ii) taking any necessary
steps to preserve rights against any parties with respect to any
Underlying Securities.
Section 4.02. Resignation and Removal of the Note Custodian:
Appointment of Successor.
(a) The Note Custodian may resign with respect to all of its
duties hereunder at any time by written notice thereof delivered to
the Depositor and given by Mail to each Owner, such resignation to
take effect upon the appointment of a successor Note Custodian and its
acceptance of such appointment as hereinafter provided. Upon 30 days'
written notice to the Note Custodian, either the Depositor or the
Owners of Custody Receipts evidencing Voting Rights at least 66-2/3%
of the Voting Rights allocated to the Class [A] Custody Receipts and
to the Class [A-IO] Custody Receipts of a Series may remove the Note
Custodian, in which event the Depositor may appoint a successor Note
Custodian meeting the qualifications set forth in the next succeeding
paragraph. In the event of such removal or resignation, the Note
Custodian shall pay over to its successor Note Custodian any fees or
charges previously paid to the Note Custodian in respect of duties not
yet performed under this Custody Agreement which remain to be
performed by a successor Note Custodian. No resignation or removal of
the Note Custodian shall be effective until the appointment of a
successor Note Custodian and its acceptance of such appointment as
hereinafter provided.
(b) In case at any time the Note Custodian acting hereunder shall
resign or be removed, the Depositor shall, within 90 days after the
delivery of the notice of resignation, appoint a successor Note
Custodian. Any successor Note Custodian shall be (i) a bank or trust
company having its principal office in the United States of America
and having a combined capital and surplus of at least $[50,000,000]
and (ii) an Eligible Institution whose long-term unsecured debt or
bank deposits are rated at least Baa3 (or the equivalent) by [Rating
Agencies] and, if not rated by [Rating Agencies]. If no successor Note
Custodian has been appointed within such 90 days, the resigning Note
Custodian may petition any court of competent jurisdiction for the
appointment of a successor Note Custodian.
(c) In the event of removal or resignation of the Note Custodian,
the fees of a successor Note Custodian shall be borne by the Depositor
in accordance with the Fee Letter (except if the Note Custodian is
removed by the Owners [(other than the Credit Enhancer in which case
such fees shall be borne by the Depositor),] in which case the fees of
a successor Note Custodian are required to be borne by the owners
voting in favor of removing the Note Custodian). Any successor Note
Custodian shall execute and deliver to its predecessor and to the
Depositor an instrument in writing accepting its appointment
hereunder, and thereupon such successor Note Custodian, without any
further act or deed, shall become fully vested with all the rights,
powers, duties and obligations of its predecessor and for all purposes
shall be the Note Custodian under this Custody Agreement, and such
predecessor, upon payment of all sums due it and on the written
request of the Depositor shall execute and deliver an instrument
transferring to such successor all rights, obligations and powers of
such predecessor hereunder, and shall duly assign, transfer and
deliver all right, title and interest in the Custody Account and all
records relating thereto to such successor. Any successor Note
Custodian shall promptly give notice of its appointment to the related
Owners by Mail.
(d) Any corporation into or with which the Note Custodian may be
merged, consolidated or converted or any transferee of all or
substantially all of the Note Custodian's corporate trust business
shall be the successor of such Note Custodian without the execution or
filing of any document or any further act.
Section 4.03. Charges and Expenses. Except as expressly provided in
this Custody Agreement, no charges or expenses of the Note Custodian or any
other person shall be payable by or withheld from any Owner. The Depositor
shall be responsible for the fees and expenses of the Note Custodian as
provided in the Fee Letter.
Section 4.04. Limitation of Liability. It is expressly understood and
agreed by the parties hereto that (a) this Agreement is executed and delivered
by [Entity], not individually or personally but solely as Note Custodian, in
the exercise of the powers and authority conferred and vested in it and (b)
under no circumstances shall [Entity] be personally liable for the payment of
any indebtedness or expenses of the Depositor or be liable for the breach or
failure of any obligation, representation, warranty or covenant made or
undertaken by the Depositor under this Agreement.
Section 4.05. Non-Petition. None of the Note Custodian or any Owner of
Custody Receipts shall, prior to the date that is one year and one day after
the payment in full of all Custody Receipts, petition or otherwise invoke the
process of any court or government authority for the purpose of commencing or
sustaining a case against the Depositor under any Bankruptcy Law or appointing
a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Depositor or any substantial part of the property of
either, or ordering the winding up or liquidation of the affairs of the
Depositor.
ARTICLE V
MISCELLANEOUS
Section 5.01. Amendments, Etc. Without notice to or consent of any
Owners, any provisions of this Custody Agreement may be amended (i) to cure any
formal defect, omission, inconsistency or ambiguity in this Custody Agreement,
(ii) to add to the covenants and agreements of the Note Custodian or the
Depositor or to surrender any right or power herein conferred upon the Note
Custodian or the Depositor, (iii) to effectuate the assignment of the Note
Custodian's rights and duties hereunder to a qualified successor as provided
herein, or (iv) to modify, alter, amend or supplement this Custody Agreement in
any other respect not inconsistent herewith which, in the opinion of counsel
acceptable to the Note Custodian, is not adverse to the Note Custodian or any
of the Owners. Except for amendments made pursuant to clause (i), (ii), (iii)
or (iv) above, no amendment affecting the Owners of Custody Receipts of any
class of any Series may be made to this Custody Agreement without the consent
of Owners of Custody Receipts of such class evidencing at least 66-2/3% of the
Voting Rights allocated to such class, provided that no amendment may be made
which would (i) reduce the Voting Rights or the amount or change timing or
currency of any payments to be made to the Owners of any Class of Custody
Receipts without the consent of each Owner affected thereby or (ii) modify any
of the provisions of this Section 5.01 except to provide that certain other
provisions of this Custody Agreement cannot be modified without the consent of
any Owner affected thereby. No amendment or waiver of any provision of this
Custody Agreement nor consent to any departure herefrom shall in any event be
effective unless the same shall be in writing and signed by the Note Custodian
and the Depositor, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given; provided,
however, that the Note Custodian shall have no duty to sign any amendment,
waiver or consent which affects its rights and powers under this Agreement. In
connection with any amendment pursuant to this Section, the Note Custodian
shall send to the Rating Agencies a copy of each proposed amendment prior to
its adoption and a copy of each executed amendment.
Section 5.02. Counterparts. This Custody Agreement may be executed in
any number of counterparts by the parties hereto on separate counterparts, each
of which, when so executed and delivered, shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument. Copies
of this Custody Agreement shall be filed with the Note Custodian and shall be
open to inspection at reasonable times during business hours at the Note
Custodian's Principal Office by any owner upon prior written notice.
Section 5.03. Exclusive Benefit of Parties; Effective Date. This
Custody Agreement is for the exclusive benefit of the Note Custodian, the
Depositor and the Owners of the Custody Receipts from time to time, and their
respective successors hereunder, and shall not be deemed to give any legal or
equitable right, remedy or claim to any other person whatsoever. The Owners
shall be the beneficiaries of this Custody Agreement and, pursuant to the terms
of the Custody Receipts, shall acknowledge and accept all of the terms and
conditions and agree to be bound by all of the provisions hereof and of the
Custody Receipts by acceptance of delivery of the Custody Receipts without the
necessity of any written acknowledgement or signature. This Custody Agreement
shall become effective as to the Note Custodian upon execution of this Custody
Agreement.
Section 5.04. Invalidity of Provisions. In case any one or more of the
provisions contained in this Custody Agreement or in the Custody Receipts
should be or become invalid, illegal or unenforceable in any respect, the
validity, legality and enforce ability of the remaining provisions contained
herein or therein shall in no way be affected, prejudiced or disturbed thereby.
Section 5.05. Notices. Notices given owners shall be given by Mail and
shall be effective two Business Days following the date postmarked. All other
communications shall be mailed or delivered as follows:
(a) To the Depositor:
(b) To the Note Custodian:
or as to each party at such other address as shall be designated by such party
in a written notice to the other parties.
Any communication so addressed and mailed or delivered to the
Depositor or the Note Custodian shall be deemed to be given when received, and
any notice sent by telecopy shall be deemed to be given when receipt of such
transmission is acknowledged, and any communication delivered in person shall
be deemed to be given when receipted for or actually received by an authorized
officer of the recipient.
Section 5.06. Business Day. In any case where the date on which any
action is required to be taken hereunder shall not be a Business Day, then such
action shall be taken on the next succeeding Business Day with the same force
and effect as if made on the date that such action is otherwise required to be
taken hereunder.
Section 5.07. Term of Agreement. Whenever the Underlying Securities
have been paid in full on an expected final payment date or earlier redemption
and the Owners of the Class [A] and Class [A-IO] Custody Receipts of such
Series have received all the amounts to which they are entitled, this Agreement
shall terminate.
The bankruptcy, death or other incapacity of any or all Owners of
Class [A] or Class [A-IO] Custody Receipts shall not operate to terminate this
Custody Agreement, nor entitle any such Owner's legal representatives or heirs
to claim an accounting or to take any action or proceeding in any court for a
partition or winding up of the custodial arrangement created by this Custody
Agreement, nor otherwise affect the rights, obligations and liabilities of the
parties hereto or any of the Owners of the Class [A] or Class [A-IO] Custody
Receipts.
Section 5.08. Governing Law. THIS CUSTODY AGREEMENT AND THE CUSTODY
RECEIPTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.
Section 5.09. Headings. The headings of articles and sections in this
Custody Agreement have been inserted and the table of contents has been
provided for convenience only and are not to be regarded as a part of this
Custody Agreement or to have any bearing upon the meaning or interpretation of
any provision contained herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Master Custody Agreement, all as of the day and year first above
mentioned.
[ENTITY]
as Depositor
By:
Name:
Title:
[ENTITY]
not in its individual capacity,
but solely as Note Custodian
By:
Name:
Title:
<PAGE>
3
APPENDIX A
DEFINITIONS
The definitions contained herein are incorporated into and made a part
of the Custody Agreement.
Affiliate shall mean with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
[Aggregate Notional Amount shall mean as of any date of determination
with respect to the Class [A-IO] Custody Receipts, the Initial Aggregate
Notional Amount of the Class [A-IO] Custody Receipts, less any payment of
principal paid to the Class A-2 Notes prior to such date of determination.]
Authorized Officer (i) in the case of the Issuer, shall mean the
_________________ , (ii) in the case of the Servicing Advisor or the
____________________ , shall mean any Vice President or more senior officer,
(iii) in the case of the Servicer, shall mean any officer assigned to the
Corporate Trust Office, including any managing director, vice president,
assistant vice president, assistant treasurer, assistant secretary or any other
officer of the Servicer customarily performing functions similar to those
performed by any of the above designated officers and having direct
responsibility for the administration of the Servicing Agreement, and also,
with respect to a particular matter, any other officer, to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject, (iv) in the case of any Prospective Owner or any transferor
or prospective transferee of Class C Notes, shall mean any Vice President or
more senior officer, and (v) in the case of the Indenture Trustee, shall mean a
trust officer or other officer in the Corporate Trust Department of the
Indenture Trustee customarily performing functions similar to those of a trust
officer.
Class [A] Custody Receipt shall mean each Class [A] Custody Receipt
issued pursuant to Article II of the Custody Agreement.
Class [A] Custody Receipt Interest Distribution shall mean with
respect to the Class [A] Custody Receipts on any Payment Date, the sum of (a)
the amount of interest accrued during the related Accrual Period at the Class
[A] Custody Receipt Interest Rate on the sum of (i) the Custody Receipt Balance
of the Class [A] Custody Receipts on the Business Day immediately prior to such
Payment Date and (ii) any previously accrued and unpaid interest at the Class
[A] Custody Receipt Interest Rate for prior Payment Dates, and (b) any
previously accrued and unpaid interest at the Class [A] Custody Receipt
Interest Rate for prior Payment Dates.
Class A Custody Receipt Interest Rate shall mean a rate equal to
_______ % per annum.
Class [A-IO] Custody Receipt shall mean each Class [A-IO] Custody
Receipt issued pursuant to Article II of the Custody Agreement.
Class [A-IO] Custody Receipt Interest Distribution shall mean with
respect to the Class [A-IO] Custody Receipts, the sum of (a) the amount of
interest accrued during the related Accrual Period at the Class [A-IO] Custody
Receipt Interest Rate on the sum of (i) the Aggregate Notional Amount of the
Class [A-IO] Custody Receipts on the Business Day immediately prior to such
Payment Date and (ii) any previously accrued and unpaid interest at the Class
[A-IO] Custody Receipt Interest Rate for prior Payment Dates, and (b) any
previously accrued and unpaid interest at the Class [A-IO] Custody Receipt
Interest Rate for prior Payment Dates.
Class A-IO Custody Receipt Interest Rate shall mean %.
[Credit Enhancement Policy means the policy issued by the Credit
Enhancer that guarantees Insured Payments on the Underlying Notes.]
[Credit Enhancer shall mean , a _______________ domiciled monoline
stock insurance company.]
Custody Receipt Available Funds shall mean for each Payment Date [
_______________________ ].
Custody Receipt Balance shall mean with respect to the Class [A]
Custody Receipts and any Payment Date, [ ].
Custody Receipt Rate shall mean either the Class [A] Custody Receipt
Interest Rate or the Class [A-IO] Custody Receipt Interest Rate, as. the case
may be.
Custody Receipt Registrar shall mean [Entity] and any successor
thereto under the Custody Agreement.
Custody Receipts shall mean the Class [A] Custody Receipts and the
Class [A-IO] Custody Receipts.
Eligible Institution shall mean (a) a depository institution
acceptable to the Credit Enhancer organized under the laws of the United States
of America or any one of the States thereof, the deposits of which depository
institution are insured, to the full extent permitted by applicable law, by the
FDIC, which is subject to supervision and examination by federal or state
authorities and whose long-term unsecured debt obligations are rated at least
["A" by Standard & Poor's and Duff & Phelps and "A2" by Moody's, or if not
rated by Duff & Phelps, rated at least "A" by Standard & Poor's and "A2" by
Moody's at the time of any deposit therein], or (b) a federal or state
chartered depository institution whose long-term unsecured debt obligations are
rated at least ["A" by Standard & Poor's and Duff & Phelps and "A2" by Moody's,
or if not rated by Duff & Phelps, rated at least "A" by Standard & Poor's and
"A2" by Moody's] subject to regulations regarding fiduciary funds on deposit
substantially similar to 12 C.F.R. Section 9.10(b).
Event of Default shall have the meaning specified in Section ______ of
the Indenture.
Initial Aggregate Class [A-IO] Custody Receipt Notional Amount shall
mean $ .
Initial Custody Receipt Balance shall mean $ .
Outstanding Notional Amount shall mean as of any date of determination
with respect to any Class [A-IO] Custody Receipt, the Initial Notional Amount
thereof less any reductions of the notional amount thereof prior to such date
of determination.
Owner means the registered owner of a Custody Receipt.
Rating Agencies shall mean _________ , __________ and _________ , and
their successors.
Record Date shall mean, with respect to a Payment Date, (i) the last
day of the immediately preceding calendar month or (ii) with respect to the
initial Payment Date, the Closing Date.
Servicer shall mean _____________________ , a ______________ banking
corporation, in its capacity as servicer under the Servicing Agreement,
together with its subservicers, successors and assigns as permitted thereunder.
<PAGE>
Exhibit 1
[Insert Transfer Limitations Legend and, Depository Legend, if applicable]
No. [ ]
CLASS [A] Custody Receipt
SERIES 199 -A
RELATING TO THE NOTES, SERIES 199 -A
CLASS [A-1] AND CLASS [A-2]
Registered Owner:
Date of Original Issue:
Class [A] Custody Receipt Interest Rate:
Initial Custody Receipt Balance:
This Class [A] Custody Receipt, Series 199 -A ("Class [A] Custody
Receipt") evidences an undivided beneficial ownership interest (on the terms
and conditions set forth in the Custody Agreement and related Schedule of Terms
referred to below) by the Owner hereof in the following Underlying Securities
and the rights relating to this Class [A] Custody Receipt under the Custody
Agreement:
[Issuer and Name of Underlying Securities] [Indicate
aggregate original principal amount and aggregate outstanding
principal amount of Underlying Securities and the registered
certificate number or numbers of certificates representing
such Underlying Securities],
including the right to receive with respect to each Payment Date the Class [A]
Distribution Amount payable from the distributions made with respect to the
Underlying Securities. Concurrently with the issuance of this Class [A] Custody
Receipt, Class [A-IO] Custody Receipts, Series 199 -[A] (the "Class [A-IO]
Custody Receipts") are being issued which evidence, together with the Class [A]
Custody Receipts, a 100% undivided beneficial ownership interest in such
Underlying Securities, the right to receive the Class [A-IO] Custody Receipt
Interest Distribution also payable from the distributions made with respect to
such Underlying Securities and the rights relating to such Custody Receipt
under the Custody Agreement referred to below. The Owner of this Class [A]
Custody Receipt will have no interest in that portion of the distributions on
the Underlying Securities distributable to Owners of the Class [A-IO] Custody
Receipts.
The Underlying Securities are being held in a Custody Account by
[Entity], as custodian (together with any successor custodian, the "Note
Custodian"), pursuant to the terms of a Custody Agreement (the "Custody
Agreement") dated [DATE] between the Note Custodian and [Entity] (together with
any successor, the "Depositor") pursuant to which the Class [A] and Class
[A-IO] Custody Receipts have been executed, registered and delivered by the
Note Custodian.
THE TERMS AND CONDITIONS OF THE CUSTODY AGREEMENT AND THE RELATED
SCHEDULE OF TERMS ARE HEREBY INCORPORATED IN THIS CLASS [A] CUSTODY RECEIPT AS
IF FULLY SET FORTH HEREIN AND, EXCEPT AS OTHERWISE DEFINED HEREIN, TERMS USED
HEREIN SHALL HAVE THE MEANINGS ASCRIBED THERETO IN THE CUSTODY AGREEMENT OR THE
RELATED SCHEDULE OF TERMS. THE OWNER HEREOF ASSENTS TO ALL OF THE TERMS AND
CONDITIONS OF THE CUSTODY AGREEMENT AND THE RELATED SCHEDULE OF TERMS, COPIES
OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE NOTE
CUSTODIAN.
The Custody Account will be maintained on the books of the Note
Custodian as a custodial account, separate and segregated, whose contents may
not be commingled with any other assets or property held by the Note Custodian.
The Owner of this Class [A] Custody Receipt may not withdraw the Underlying
Securities evidenced by this Class [A] Custody Receipt from the Custody
Account.
Pursuant to the Custody Agreement, the Note Custodian shall:
(a) on each Payment Date to the extent Custody Receipt
Available Funds are available therefor in the order of priority set
forth in the Custody Agreement, remit to the person who is the Owner
of this Class [A] Custody Receipt on the Record Date preceding any
Payment Date, other than the final Payment Date, the Class [A]
Distribution Amount with respect to such Payment Date for this Class
[A] Custody Receipt, on such Payment Date by the Custodian.
(b) duly present (or cause to be presented) each
Underlying Security for payment on or prior to its final Payment Date
in accordance with the provisions of the related Issuance Agreement.
Upon receipt of such payment, the Note Custodian shall on the same
Payment Date remit to the person who is the Owner of this Class [A]
Custody Receipt on the date set by the related Issuance Agreement as
the date for determining the person to whom such payment shall be
paid, the Class [A] Distribution Amount with respect to such Payment
Date for this Class [A] Custody Receipt.
Payments to the Owner of this Class [A] Custody Receipt of the Class
[A] Distribution Amount with respect to any Payment Date shall be made by bank
check payable in currency of the United States of America sent by mail to such
Owner at the address shown on the related Custody Receipt Register or by such
other method as may be requested by the Owner and consented to in writing by
the Note Custodian; provided that if this Class [A] Custody Receipt is on
deposit with a Depository, payments with respect to this Class [A] Custody
Receipt will be made in accordance with the procedures of such Depository.
Notwithstanding the preceding sentence, in the event that the related Issuance
Agreement requires the presentment of the Underlying Securities as a condition
to receipt of any payment (including a redemption payment) then, likewise, any
payment received by the Note Custodian upon such presentment shall be remitted
by the Note Custodian to the Owner of this Class [A] Custody Receipt upon
presentation of this Class [A] Custody Receipt at the Note Custodian's
Principal Office.
Neither the Depositor nor the Note Custodian shall have any obligation
to advance its own funds to make any payment to any Owner.
Upon receipt of any notice of redemption of an Underlying Security
evidenced by this Class [A] Custody Receipt, the Note Custodian shall promptly
forward such notice by Mail to the Owner of this Class [A] Custody Receipt. The
Note Custodian (or its agent) shall present the Underlying Security so called
for redemption on or prior to the date of such redemption to the related
Trustee for redemption in accordance with the terms of such notice and, if
applicable, the related Issuance Agreement.
Upon receipt from a Trustee of any other notice with respect to an
Underlying Security, the Note Custodian shall follow the procedures and take
such actions as are in accordance with the provisions of Section 3.01 of the
Custody Agreement.
Except as provided in the Custody Agreement, the Note Custodian has no
power or obligation to assert any of the rights and privileges of the Owners of
this Class A Custody Receipt with respect to the Underlying Securities.
The Note Custodian may resign pursuant to the Custody Agreement upon
appointment of a successor Note Custodian and its acceptance of such
appointment as provided in the Custody Agreement. Either the Depositor or the
Owners of Custody Receipts evidencing at least 66-2/3% of the Voting Rights
allocated to each Class of Custody Receipts may remove the Note Custodian in
respect of Custody Receipts and appoint a successor thereto pursuant to the
provisions of the Custody Agreement.
Except as otherwise provided in the Custody Agreement, no amendment
affecting the Owners of Custody Receipts of any Class may be made to the
Custody Agreement without the consent of the Owners of Custody Receipts of such
Class evidencing at least 66-2/3% of the Voting Rights allocated to the Class
of Custody Receipts affected thereby; provided that no amendment shall reduce
Voting Rights or the amount of or change the timing or currency of any payment
to be made to Owners of Custody Receipts without the consent of each Owner
affected thereby. In addition, the Note Custodian shall not consent to any
amendment of the related Issuance Agreement that would have the effect of
reducing the amount of or changing the timing or currency of payments to be
made to Owners of Class [A-IO] Custody Receipts without the consent of the
Owner of each Class [A-IO] Custody Receipt.
This Class [A] Custody Receipt is transferable by the Owner in person,
or by an attorney duly authorized in writing, at the Note Custodian's Principal
Office, upon (i) surrender and cancellation of this Class [A] Custody Receipt
and due execution of the Notice of Transfer or Exchange attached to this Class
[A] Custody Receipt, (ii) compliance by the transferee with the Transfer
Limitations (as defined in the Custody Agreement) and (iii) agreement on the
part of such transferee that it shall indemnify the Note Custodian, the Issuer,
the Trustee, the Servicer and the Depositor for any expenses or liability that
may result from such transfer. Upon any such registration of transfer, a new
Class [A] Custody Receipt or Custody Receipts in authorized denominations will
be issued to the transferee or transferees in exchange for this Class [A]
Custody Receipt.
THE CUSTODY AGREEMENT AND THIS CLASS A CUSTODY RECEIPT SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
The Note Custodian may treat the person in whose name this Class [A]
Custody Receipt is registered as the absolute owner hereof, for all purposes
whatsoever, and shall not be bound or affected by any notice to the contrary,
other than an order of a court having jurisdiction in the premises.
This Class [A] Custody Receipt shall not be valid for any purpose
unless executed by the Note Custodian by the manual signature of its authorized
officer or other authorized signatory.
IN WITNESS WHEREOF, the Note Custodian has caused this Class [A]
Custody Receipt to be executed by one of its duly authorized officers.
Date:
[ENTITY],
not in its individual
capacity, but solely
as Note Custodian
By________________________
<PAGE>
NOTICE OF TRANSFER OR EXCHANGE
Please be advised, pursuant to the terms of the Custody Agreement (the
"Custody Agreement") between [ENTITY], as Note Custodian, and _________________
_______________, as Depositor, with respect, to the Custody Receipt on which
this Notice of Transfer or Exchange is printed, that the undersigned hereby
notifies you, as of the date received by you, of the following transactions,
and requests you to process the transaction(s) as required by the Custody
Agreement. This notice may also be used for exchanges of Custody Receipts in
which event the Transferee should be noted to be the same as the Transferor.
Capitalized terms used in this Notice but not defined herein have the meanings
given them in the Custody Agreement.
Name of Transferor:
Registration Number of Custody Receipt:
Initial Custody Receipt Balance:
Initial Custody Receipt Balance To Be Retained:
1. Name of Transferee:
Address of Such Transferee:
U.S. Taxpayer Identification Number of Such Transferee:
Initial Custody Receipt Balance
To Be Transferred to Such Transferee:
2. Name of Transferee:
Address of Such Transferee:
U.S. Taxpayer Identification Number of Such Transferee:
Initial Custody Receipt Balance
To Be Transferred to Such Transferee:
Dated:
By
Its
SIGNATURE GUARANTEED:
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers this Custody Receipt to the person or persons indicated on the Notice
of Transfer or Exchange printed on this Custody Receipt. In the case of a
transfer to a third party, the undersigned hereby authorizes and instructs the
Note Custodian to immediately record the transferees listed on the Notice of
Transfer or Exchange as the Owner of such Custody Receipt.
Dated:
(Authorized Signature)
Notice: The signature of this
assignment must correspond with the
name of the registered owner as it
appears on the Custody Receipt in
every particular and must be
guaranteed by an officer of a
national or state commercial bank
or trust company or a member of a
registered national securities
exchange or the National
Association of Securities Dealers,
Inc.
SIGNATURE GUARANTEED:
<PAGE>
Exhibit 2
[Insert Transfer Limitations Legend and, Depository Legend, if applicable]
No. [ ]
CLASS [A-IO] Custody Receipt
SERIES 199 -A
RELATING TO THE NOTES, SERIES 199 -A
CLASS [A-1] AND CLASS [A-2]
Registered Owner:
Date of Original Issue:
Initial Aggregate Class [A-IO] Custody
Receipt Notional Amount:
Class [A-IO] Interest Rate:
This Class [A-IO] Custody Receipt, Series 199 -A ("Class [A-IO]
Custody Receipt") evidences an undivided beneficial ownership interest (on the
terms and conditions set forth in the Custody Agreement and related Schedule of
Terms referred to below) by the Owner hereof in the following Underlying
Securities and the rights relating to this Class [A-IO] Custody Receipt under
the Custody Agreement:
[Issuer and Name of Underlying Securities] [Indicate
aggregate original principal amount and aggregate outstanding
principal amount of Underlying Securities and the registered
certificate number or numbers of certificates representing
such Underlying Securities],
including the right to receive with respect to each Payment Date the Class
[A-IO] Custody Receipt Interest Distribution Amount payable from the
distributions made with respect to the Underlying Securities.
The Class [A-IO] Custody Receipt has no principal balance and will
receive no payments of principal.
Concurrently with the issuance of this Class [A-IO] Custody Receipts,
Class [A] Custody Receipts, Series 199 -A (the "Class [A] Custody Receipts")
are being issued which evidence, together with the Class [A-IO] Custody
Receipts, a 100% undivided beneficial ownership interest in such Underlying
Securities, the right to receive with respect to each Payment Date the Class
[A] Distribution Amount. The Owner of this Class [A-IO] Custody Receipt will
have no interest in that portion of the distributions on such Underlying
Securities distributable to Owners of the Class [A] Custody Receipts.
The Underlying Securities are being held in a Custody Account by
[Entity], as custodian (together with any successor custodian, the "Note
Custodian"), pursuant to the terms of a Custody Agreement (the "Custody
Agreement") dated ______________________ between the Note Custodian and
[Entity] (together with any successor, the "Depositor") pursuant to which Class
[A] and Class [A-IO] Custody Receipts have been executed, registered and
delivered by the Note Custodian.
THE TERMS AND CONDITIONS OF THE CUSTODY AGREEMENT AND THE RELATED
SCHEDULE OF TERMS ARE HEREBY INCORPORATED IN THIS CLASS [A-IO] CUSTODY RECEIPT
AS IF FULLY SET FORTH HEREIN AND, EXCEPT AS OTHERWISE DEFINED HEREIN, TERMS
USED HEREIN SHALL HAVE THE MEANINGS ASCRIBED THERETO IN THE CUSTODY AGREEMENT
OR THE RELATED SCHEDULE OF TERMS. THE OWNER HEREOF ASSENTS TO ALL OF THE TERMS
AND CONDITIONS OF THE CUSTODY AGREEMENT AND THE RELATED SCHEDULE OF TERMS,
COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
NOTE CUSTODIAN.
The Custody Account will be maintained on the books of the Note
Custodian as a custodial account, separate and segregated, whose contents may
not be commingled with any other assets or property held by the Note Custodian.
The Owner of this Class [A-IO] Custody Receipt may not withdraw the Underlying
Securities evidenced by this Class [A-IO] Custody Receipt from the Custody
Account.
Pursuant to the Custody Agreement, the Note Custodian shall:
(a) on each Payment Date to the extent Custody Receipt
Available Funds are available therefor in the order of priority set
forth in the Custody Agreement, remit to the person who is the Owner
of this Class [A-IO] Custody Receipt on the Record Date preceding any
Payment Date, other than the final Payment Date, the Class [A-IO]
Custody Receipt Interest Distribution with respect to such Payment
Date for this Class [A-IO] Custody Receipt, on such Payment Date by
the Custodian.
(b) duly present (or cause to be presented) each
Underlying Security for payment on or prior to its final Payment Date
in accordance with the provisions of the related Issuance Agreement.
Upon receipt of such payment, the Note Custodian shall on the same
Payment Date remit to the person who is the Owner of this Class [A-IO]
Custody Receipt on the date set by the related Issuance Agreement as
the date for determining the person to whom such payment shall be
paid, to the extent Custody Receipt Available Funds are available
therefor in the order of priority set forth in the Custody Agreement,
the Class [A-IO] Custody Receipt Interest Distribution with respect to
such Payment Date for this Class [A-IO] Custody Receipt.
Payments to the Owner of this Class [A-IO] Custody Receipt of the
Class [A-IO] Custody Receipt Interest Distribution with respect to any Payment
Date shall be made by bank check payable in currency of the United States of
America sent by mail to such Owner at the address shown on the related Custody
Receipt Register or by such other method as may be requested by the Owner and
consented to in writing by the Note Custodian; provided that if this Class
[A-IO] Custody Receipt is on deposit with a Depository, payments with respect
to this Class [A-IO] Custody Receipt will be made in accordance with the
procedures of such Depository. Notwithstanding the preceding sentence, in the
event that the related Issuance Agreement requires the presentment of the
Underlying Securities as a condition to receipt of any payment (including a
redemption payment) then, likewise, any payment received by the Note Custodian
upon such presentment shall be remitted by the Note Custodian to the Owner of
this Class [A-IO] Custody Receipt upon presentation of this Class [A-IO]
Custody Receipt at the Note Custodian's Principal Office.
Neither the Depositor nor the Note Custodian shall have any obligation
to advance its own funds to make any payment to any Owner.
Upon receipt of any notice of redemption of an Underlying Security,
the Note Custodian shall promptly forward such notice by Mail to the Owner of
this Class [A-IO] Custody Receipt. The Note Custodian (or its agent) shall
present the Underlying Security so called for redemption on or prior to the
date of such redemption to the related Trustee for redemption in accordance
with the terms of the related Issuance Agreement.
Upon receipt from a Trustee of any other notice with respect to an
Underlying Security, the Note Custodian shall follow the procedures and take
such actions as are in accordance with the provisions of Section 3.01 of the
Custody Agreement.
Except as provided in the Custody Agreement, the Note Custodian has no
power or obligation to assert any of the rights and privileges of the Owners of
this Class [A-IO] Custody Receipt with respect to the Underlying Securities.
The Note Custodian may resign pursuant to the Custody Agreement upon
appointment of a successor Note Custodian and its acceptance of such
appointment as provided in the Custody Agreement. Either the Depositor or the
Owners of Custody Receipts evidencing at least 66-2/3% of the Voting Rights
allocated to each Class of Custody Receipts of this Series may remove the Note
Custodian in respect of Custody Receipts and appoint a successor thereto
pursuant to the provisions of the Custody Agreement.
Except as otherwise provided in the Custody Agreement, no amendment
affecting the Owners of Custody Receipts of any Class may be made to the
Custody Agreement without the consent of the Owners of Custody Receipts of such
Class evidencing at least 66-2/3% of the Voting Rights allocated to the Class
of Custody Receipts affected thereby; provided that no amendment shall reduce
the Voting Rights or the amount of or change the timing or currency of any
payment to be made to Owners of Custody Receipts without the consent of each
Owner affected thereby. In addition, the Note Custodian shall not consent to
any amendment of the Issuance Agreement that would have the effect of reducing
the amount of or changing the timing or currency of payments to be made to
Owners of Class [A-IO] Custody Receipts without the consent of the Owner of
each Class [A-IO] Custody Receipt.
This Class [A-IO] Custody Receipt is transferable by the Owner in
person, or by an attorney duly authorized in writing, at the Note Custodian's
Principal Office, upon (i) surrender and cancellation of this Class [A-IO]
Custody Receipt and due execution of the Notice Of Transfer or Exchange
attached to this Class [A-IO] Custody Receipt, (ii) compliance by the
transferee with the Transfer Limitations (as defined in the Custody Agreement)
and (iii) agreement on the part of such transferee that it shall indemnify the
Note Custodian, the Issuer, the Trustee, the Servicer and the Depositor for any
expenses or liability that may result from such transfer. Upon any such
registration of transfer, a new Class [A-IO] Custody Receipt or Custody
Receipts in authorized denominations will be issued to the transferee or
transferees in exchange for this Class [A-IO] Custody Receipt.
THE CUSTODY AGREEMENT AND THIS CLASS A-IO CUSTODY RECEIPT SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
The Note Custodian may treat the person in whose name this Class
[A-IO] Custody Receipt is registered as the absolute owner hereof, for all
purposes whatsoever, and shall not be bound or affected by any notice to the
contrary, other than an order of a court having jurisdiction in the premises.
This Class [A-IO] Custody Receipt shall not be valid for any purpose
unless executed by the Note Custodian by the manual signature of its authorized
officer or other authorized signatory.
IN WITNESS WHEREOF, the Note Custodian has caused this Class [A-IO] Custody
Receipt to be executed by one of its duly authorized officers.
Date:
[ENTITY],
not in its individual
capacity, but solely
as Note Custodian
By
<PAGE>
NOTICE OF TRANSFER OR EXCHANGE
Please be advised, pursuant to the terms of the Custody Agreement (the
"Custody Agreement") between [Entity], as custodian and Orinda Management
Company, as depositor, with respect, to the Custody Receipt on which this
Notice of Transfer or Exchange is printed, that the undersigned hereby notifies
you, as of the date received by you, of the following transactions, and
requests you to process the transaction(s) as required by the Custody
Agreement. This notice may also be used for exchanges of Custody Receipts in
which event the Transferee should be noted to be the same as the Transferor.
Capitalized terms used in this Notice but not defined herein have the meanings
given them in the Custody Agreement.
Name of Transferor:
Registration Number of Custody Receipt:
Initial Class A-IO Custody Receipt Notional Amount:
Initial Class A-IO Custody Receipt
Notional Amount To Be Retained:
1. Name of Transferee:
Address of Such Transferee:
U.S. Taxpayer Identification Number of Such Transferee:
Initial Class A-IO Custody Receipt Notional
Amount To Be Transferred to Such Transferee:
2. Name of Transferee:
Address of Such Transferee:
U.S. Taxpayer Identification Number of Such Transferee:
Initial Class A-IO Custody Receipt Notional
Amount To Be Transferred to Such Transferee:
Dated:
By
Its
SIGNATURE GUARANTEED:
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers this Custody Receipt to the person or persons indicated on the Notice
of Transfer or Exchange printed on this Custody Receipt. In the case of a
transfer to a third party, the undersigned hereby authorizes and instructs the
Note Custodian to immediately record the transferees listed on the Notice of
Transfer or Exchange as the Owner of such Custody Receipt.
Dated:
(Authorized Signature)
Notice: The signature of this
assignment must correspond with the
name of the registered Owner as it
appears on the Custody Receipt in
every particular and must be
guaranteed by an officer of a
national or state commercial bank
or trust company or a member of a
registered national securities
exchange or the National
Association of Securities Dealers,
Inc.
SIGNATURE GUARANTEED:
<PAGE>
Annex I
to Custody Agreement
SCHEDULE OF TERMS
[Date]
[ENTITY], as Note Custodian
[ADDRESS]
Re: Custody Agreement dated , between [ENTITY]
and [ENTITY], as Note Custodian; Series [ ] Custody Receipts
The following information is provided in connection with the issuance
of Custody Receipts evidencing the Underlying Securities described below, all
in accordance with the above-referenced Agreement, as amended from time to
time:
Authorized
Denomination:
Custody Account
Designation:
Date of Issuance of
Underlying Securities:
Depositor:
Payment Date:
Initial Trustee:
Issuance Agreement:
Issuer:
Record Date: (As defined in the Issuance
Agreement]
Requirement, if any, for Delivery on Payment Dates of Reports to the Trustee:
Servicer:
Transfer Limitations:
Underlying Securities: [Describe, including Series name, CUSIP No. and
aggregate original principal amount and aggregate
outstanding principal amount]
The Depositor hereby sells, transfers, assigns and otherwise conveys
to the Custodian for the benefit of the Owners of Custody Receipts, without
recourse and in exchange for the Custody Receipts, the Underlying Securities.
Capitalized terms used but not defined herein have the meanings provided in
Appendix A attached hereto and made a part hereof.
By
Authorized Officer
Accepted:
[ENTITY],
as Note Custodian
By
Title:
Exhibit 5.1
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
April 20, 1999
Lehman ABS Corporation
Three World Financial Center
New York, New York 10285
Re: Lehman ABS Corporation
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Lehman ABS Corporation, a Delaware
corporation (the "Company"), in connection with the preparation of the
registration statement on Form S-3 (the "Registration Statement") relating to
the Securities (defined below) and with the authorization and issuance from
time to time in one or more series (each, a "Series") of up to $1,500,000,000
aggregate principal amount of asset-backed securities (the "Securities").
Pursuant to Rule 429 under the Securities Act of 1933, as amended (the "1933
Act"), the Registration Statement constitutes Post-Effective Amendment No. 1 to
Registration Statement No. 333-39649. As set forth in the Registration
Statement, each Series of Securities will be issued under and pursuant to the
conditions of a separate pooling and servicing agreement, master pooling and
servicing agreement, pooling agreement, trust agreement or indenture (each, an
"Agreement") among the Company, a trustee (the "Trustee") and where
appropriate, a servicer (the "Servicer"), each to be identified in the
prospectus supplement for such Series of Securities.
We have examined copies of the Company's Restated Certificate of
Incorporation, the Company's By-laws and forms of each Agreement, as filed or
incorporated by reference as exhibits to the Registration Statement, and the
forms of Securities included in any Agreement so filed or incorporated by
reference in the Registration Statement and such other records, documents and
statutes as we have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
When any Agreement relating to a Series of Securities has been duly
and validly authorized by all necessary action on the part of the Company and
has been duly executed and delivered by the Company, the Servicer, if any, the
Trustee and any other party thereto, such Agreement will constitute a legal,
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors' rights
generally or by general equity principles.
When a Series of Securities has been duly authorized by all necessary
action on the part of the Company (subject to the terms thereof being otherwise
in compliance with applicable law at such time), duly executed and
authenticated by the Trustee for such Series in accordance with the terms of
the related Agreement and issued and delivered against payment therefor as
described in the Registration Statement, such Series of Securities will be
legally and validly issued, fully paid and nonassessable, and the holders
thereof will be entitled to the benefits of the related Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the United
States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in each Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
1933 Act or the Rules and Regulations of the Commission issued thereunder, with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/S/ BROWN & WOOD LLP
<PAGE>
Exhibit 8.1
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
April 20, 1999
Lehman ABS Corporation
Three World Financial Center
New York, New York 10285
Re: Lehman ABS Corporation
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special tax counsel for Lehman ABS Corporation, a
Delaware corporation (the "Company"), in connection with the preparation of the
registration statement on Form S-3 (the "Registration Statement") relating to
the Securities (defined below) and with the authorization and issuance from
time to time in one or more series (each, a "Series") of up to $1,500,000,000
aggregate principal amount of asset-backed securities (the "Securities").
Pursuant to Rule 429 under the Securities Act of 1933, as amended (the "1933
Act"), the Registration Statement also constitutes Post-Effective Amendment No.
1 to Registration Statement No. 333-39649. The Registration Statement is being
filed with the Securities and Exchange Commission under the 1933 Act. As set
forth in the Registration Statement, each Series of Securities will be issued
under and pursuant to the conditions of a separate pooling and servicing
agreement, master pooling and servicing agreement, pooling agreement, trust
agreement or indenture (each an "Agreement") among the Company, a trustee (the
"Trustee") and, where appropriate, a servicer (the "Servicer"), each to be
identified in the prospectus supplement for such Series of Securities.
We have examined the prospectuses contained in the Registration
Statement (each, a "Prospectus") and such other documents, records and
instruments as we have deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the part
of the Company, the Trustee, the Servicer (where applicable) and any other
party thereto for such Series of Securities and will be duly executed and
delivered by the Company, the Trustee, the Servicer and any other party thereto
substantially in the applicable form filed or incorporated by reference as an
exhibit to the Registration Statement, that each Series of Securities will be
duly executed and delivered in substantially the forms set forth in the related
Agreement filed or incorporated by reference as an exhibit to the Registration
Statement, and that Securities will be sold as described in the Registration
Statement.
As special tax counsel to the Company, we have advised the Company
with respect to certain federal income tax aspects of the proposed issuance of
each Series of Securities pursuant to the related Agreement. Such advice has
formed the basis for the description of selected federal income tax
consequences for holders of such Securities that appear under the heading
"Certain Federal Income Tax Considerations" in each Prospectus forming a part
of the Registration Statement. Such description does not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Securities, but with respect to those federal income tax consequences which are
discussed, in our opinion, the description is accurate in all material
respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion
as to the matters set forth herein could change with respect to a particular
Series of Securities as a result of changes in fact or circumstances, changes
in the terms of the documents reviewed by us, or changes in the law subsequent
to the date hereof. Because the Prospectuses contemplate Series of Securities
with numerous different characteristics, you should be aware that the
particular characteristics of each Series of Securities must be considered in
determining the applicability of this opinion to a particular Series of
Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Federal Income Tax Considerations" in each Prospectus forming a part
of the Registration Statement, without admitting that we are "experts" within
the meaning of the 1933 Act or the Rules and Regulations of the Commission
issued thereunder, with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours
/s/ Brown & Wood LLP
