As filed with the Securities and Exchange Commission on August 10, 1999
Registration No. 333-76627
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
Pre-Effective Amendment No. 2
to
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)
----------------------
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 Securities Amount to be Offering Price Per Aggregate Offering Amount of Registration
to Be Registered Registered(1) Unit(2) Price(2) Fee(2)
- - --------------------------------- ------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
Asset Backed Securities........ $4,046,208,717 100% $4,046,208,717 $1,151,032.94
</TABLE>
(1) This Registration Statement relates to the offering from time to time of
$4,046,208,717 aggregate principal amount of Asset-Back Securities and to any
resales of them in market making transactions by Lehman Brothers Inc., an
affiliate of the Registrant, to the extent required.
(2) Estimated for the purpose of calculating the registration fee.
(3) $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. An additional
$417,000 was paid with the initial filing of this registration statement No.
333-76627 on April 20, 1999. The remaining $417,000 was paid with Amendment
No. 1.
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 AUGUST 10, 1999
Version #1
Prospectus Supplement dated ________ __, ____ To Prospectus dated _________
__, ____
$___________
LEHMAN HOME EQUITY LOAN TRUST ____-_
Home Equity Loan Asset-Backed Certificates, Series ____-_
[ ] Lehman ABS Corporation,
as Seller and Servicer as Depositor
<TABLE>
<CAPTION>
Certificate Underwriting Proceeds to the
Principal Balance Rate Price to Public Discount Depositor
----------------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Class $ % % % %
Total $ N/A $ $ $
</TABLE>
The price to public listed above will be plus accrued interest, if any,
at the certificate rate from _____________, _____.
The proceeds to the depositor will be before deducting expenses, payable
by the depositor, estimated to be $____________.
Lehman Brothers Inc. will purchase the offered certificates from the
depositor at the price specified in the table above. Please see the
information under the heading "Underwriting" in this prospectus supplement.
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
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 SEC 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.
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......................................................................4
RISK FACTORS................................................................10
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER.................................11
[DESCRIPTION OF LC/SURETY ISSUER] THE HOME EQUITY LENDING PROGRAM..........11
SERVICING OF THE MORTGAGE LOANS.............................................14
THE HELOCS..................................................................19
MATURITY AND PREPAYMENT CONSIDERATIONS......................................25
DESCRIPTION OF THE CERTIFICATES.............................................27
USE OF PROCEEDS.............................................................39
LEGAL INVESTMENT CONSIDERATIONS.............................................39
ERISA CONSIDERATIONS........................................................39
UNDERWRITING................................................................40
LEGAL MATTERS...............................................................41
RATING......................................................................41
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, read this entire document and the accompanying prospectus
carefully.
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.
LAST SCHEDULED
CLASS CERTIFICATE RATE PRINCIPAL BALANCE DISTRIBUTION DATE
----- ---------------- ----------------- -----------------
LIBOR+ _____% $
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 ownership 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 a pool of home equity 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. Principal amounts may be drawn down by the borrower under the
lines of credit 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]
The seller's underwriting standards are less stringent than those of Fannie
Mae or Freddie Mac. Therefore, the mortgage loans may experience higher
rates of delinquencies, defaults and foreclosures than those underwritten
according to more traditional standards.
We refer you to "Risk Factors--Possibility of Higher Rates of
Delinquencies, Defaults and Foreclosures Resulting from Seller's
Underwriting Standards"; "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 lines of
credit 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, __% per annum of the pool balance.
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.
Under 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 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 on the principal balance of your certificates. You are also entitled
to receive 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 the next
business day if the ___ is not a business day, starting with __________ __,
____.
We refer you to "Description of the Certificates" in this prospectus
supplement.
Payments of principal to you of 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, as
described in this prospectus supplement. The seller will hold the seller
interest which represents the remaining undivided interest in the trust.
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 any additional draws by borrowers. 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.
[The interest in the pool balance which is represented by the certificates
will never exceed the aggregate certificate principal balance.]
INTEREST
Interest will be distributed monthly on each distribution date, starting on
__________ __, ____. Interest will accrue during the period starting on the
preceding distribution date ,or from the closing date for the first
distribution 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 allocable to the investor interest from
the portion of the interest collections collected during the immediately
preceding calendar month, or the period from _____________, ___ through the
last day of the calendar month immediately preceding such distribution date
for the first distribution date. 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.
PRINCIPAL PAYMENTS; 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.
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. The amortization period will begin
__________ __, ____ or, on the date an early amortization event occurs. The
amortization period will end when the certificate principal balance has
been reduced to zero or when the trust terminates. Payments of principal
will be made on each distribution date starting on the distribution date in
the month following the month in which the amortization period commences.
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 pool balance.
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 as reimbursement
for payments.
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 and all unreimbursed
loss amounts to zero; 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 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 WHICH MAY AFFECT PAYMENTS TO YOU.
The servicer may permit an increase in the credit limit under a HELOC.
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:
(1) do not materially adversely affect the interest of the
certificateholders,
(2) are consistent with prudent business practice,
(3) are also being applied to the comparable segment of home equity
credit lines being held for the servicer's own account, and
(4) 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 HELOCS.
Changes in the terms of the HELOCS 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 delinquent
mortgage loans 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 by the mount of that shortfall which would result in a reduction in
the aggregate amount of principal returned to the certificateholders, in the
amount of interest collections allocable to the investor interest and in the
amount of interest collections available to provide protection against
defaults in subsequent collection periods. In the amount of interest
collections mortgage loans which are delinquent may be more likely to
experience losses.
POSSIBILITY OF HIGHER RATES OF DELINQUENCIES, DEFAULTS AND FORECLOSURES
RESULTING FROM SELLER'S UNDERWRITING STANDARDS
The seller's underwriting standards are less stringent than those of
Fannie Mae or Freddie Mac. Therefore, the mortgage loans may experience higher
rates of delinquencies, defaults and foreclosures than those underwritten
according to more traditional standards.
RECHARACTERIZATION OF CERTIFICATES BY IRS COULD RESULT IN TAX LIABILITY.
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
as either a partnership or an association taxable as a corporation that owns
the mortgage loans. This recharacterization may result in taxes that would
impact the amount of interest and principal you receive. We refer you to
"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 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.
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:
(1) 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;
(2) obtaining a verification of employment from the applicant's
employer;
(3) obtaining and reviewing pay stubs, income tax returns and/or W-2
forms in order to verify the applicant's income; and
(4) obtaining a drive-by appraised value of the property to be mortgaged
through an independent frontal exterior inspection and neighborhood
observation.
Although no complete title search of a property to be mortgaged is
required, the borrower must supply a bring-down to the date of origination of
the complete title search obtained by the borrower at the time of his original
purchase of the mortgaged property.
The Bank calculates the maximum amount of the loan that the customer may
obtain by taking ___%, of the appraised value of the property and subtracting
any outstanding senior mortgage balance. Financial insurance premiums and fees
are not included in the loan amount when making such computation.
Applications for loans with loan-to-value ratios exceeding ___% 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 in accounts of the
borrower held by the Bank and pre-existing relationships between the borrower
and the trust department of the Bank. However, balances in other accounts of
the borrower, may not be available if the related home equity line of credit
defaults or becomes delinquent. The bank uses these.
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 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 period so 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 state usury limitations. See
"Certain Legal Aspects of the Loans--Applicability of Usury Laws" in the
prospectus. The monthly rate on the home equity lines of credit is 1/12th of
the annual percentage rate which is equal to the sum of [prime] plus the
margin specified in the related loan agreement.
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.
Each month a borrower is required to pay 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.
o A borrower who selects an "interest only" option has no minimum
principal payment during the first ten year draw period 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.
o 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.
o After the first ten year draw period, the minimum monthly payment is
1/120th of the principal amount outstanding on the last day of the
first ten year draw period.
Billing statements are mailed monthly. The billing 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.
Interest on the home equity lines of credit accrues based on an index of
the "prime rate" published in the "Money Rates" section of The Wall Street
Journal on the applicable billing date, or if such day is not a banking day,
on the banking day immediately preceding such day. Changes in the interest
rate on the loans take effect 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 provide that if publication of the index is
discontinued, the Bank will change the index upon notification.
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 home equity line of credit originated
prior to ____________, with 30 days' prior written notice of the amendment or
longer notice period if applicable in accordance with Federal and applicable
state law, to change any of the loan's terms, including increasing the monthly
periodic rate or changing the index. Unless otherwise indicated in the notice
to the borrower, 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 borrower and
changes that are considered immaterial. Notwithstanding the foregoing, no
change shall be made to the terms of the home equity lines of credit 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.
If a payment on a loan is ten days past due, a late notice is computer
generated and mailed to the borrower. A collector attempts to contact the
borrower when the home equity line of credit is 15 to 30 days past due to make
payment arrangements.
When an account is between 45 and 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
after its due date, drawing privileges are cancelled. After 90 days of
delinquency, the loan is referred to outside counsel and is placed on a
"non-accrual" status. All legal expenses are assessed to the account and
become the responsibility of the borrower. When the servicer determines that
there is no possibility of recovery from the mortgaged property or from other
leviable assets or wage attachments, the line is charged-off.
The borrower can make reinstatement arrangements for a delinquent loan 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, which
means that 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 loans pursuant to the pooling and
servicing 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. There can be no assurance that the delinquency and loss
experience of the loans will be similar to that set forth below.
For purposes of the following table, the period of delinquency is based
on the number of days payments are contractually past due, but not including
loans that have been charged off.
DELINQUENCY EXPERIENCE (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of December 31,
As of ---------------------------------------------------------------------------------------
, 1999(1) 1998 1997 1996 1995 1994
---------------- ---------------------------------------------------------------------------------------
Number Number Number Number Number Number
of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal
Outstanding at
Period End.......... $ $ $ $ $ $
Delinquency $ $ $ $ $ $
30-59 Days..........
60-89 Days..........
90 or More Days,
including loans in
foreclosure but not
charged off.........
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Delinquencies... $ $ $ $ $ $
Total Delinquencies
as a Percentage of
the Portfolio at
Period End.......... % % % % % % % % % % % %
</TABLE>
<PAGE>
For purposes of the table below, net losses equal the total of
principal charged off less any recoveries.
LOSS EXPERIENCE (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of December 31,
As of ---------------------------------------------------------------------------------------
, 1999(1) 1998 1997 1996 1995 1994
---------------- ---------------------------------------------------------------------------------------
Number Number Number Number Number Number
of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal
Outstanding at
Period End........ $ $ $ $ $ $
Gross Losses........ $ $ $ $ $ $
Recoveries.......... $ $ $ $ $ $
Net Losses.......... $ $ $ $ $ $
Net Losses as a
Percentage of
Portfolio at
Period End........ %(1) %(1) % % % % % %
</TABLE>
- - -----------
(1) 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.
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 are not forthcoming.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE DELINQUENCY AND LOSS EXPERIENCE
[to be completed in connection with actual transaction]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicing compensation to be paid to the servicer in respect of its
servicing activities relating to the loans will be paid to it from collections
of interest on the loans at the time such collections are received and will be
equal to ____% per annum, of the pool balance. The Investor Percentage of the
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 pooling
and servicing 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 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 proceeds received on the loans in
liquidation.
<PAGE>
THE HELOCS
The trust will be formed pursuant to the pooling and servicing agreement.
The depositor will transfer the loans to the trust, without recourse, in
exchange for the certificates to be offered to the public and a certificate to
be held by the Seller representing the Seller's interest in the trust. 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 Seller"
herein.
The loans to be transferred to the trust (collectively, the "Pool") are
evidenced by loan agreements secured by credit line [deeds of trust]
[mortgages] (which are primarily second [deeds of trust] [mortgages] on
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. The principal
balance of the loans as of ___ in many cases is less than the credit limit of
those loans. Additional draws on those 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
available credit limit of the loans and assumed rates of draws on similar
loans.
Each HELOC was originated between __________ and the Cut-Off Date [in the
ordinary course of the Bank's home equity revolving credit program]. The
[Bank's] general policy was to require that the combined loan-to-value ratio
under a loan at its origination not exceed 80% of the market value of the
related property, based upon an appraisal at origination, as described under
"The Home Equity Lending Program" herein. Substantially all of the properties
were one- to four-family residential properties. As of the Cut-Off Date, the
weighted average utilization rate of the credit limits was approximately
_____%.
On the closing date, no more than 5% of the loans (by aggregate principal
balance as of the cut-off date) will have characteristics that deviate from
the description of the loans in this prospectus supplement. Set forth below is
a description of certain additional characteristics of the loans as of _______:
<PAGE>
<TABLE>
LOAN POOL STATISTICS
CUT-OFF DATE LOAN BALANCES
<CAPTION>
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>
CUT-OFF DATE LOAN RATES
<CAPTION>
Number of Aggregate % of Pool
Range of Home Equity Loan by Aggregate
Loan Rates Credit Lines Balances Loan Balances
- - ------------------------------------------- ----------------------- --------------------- -------------------------
<S> <C> <C> <C>
% to.....%..................
% to.....%..................
% to.....%..................
% to.....%..................
% to.....%..................
% to.....%..................
Total..................................... $ %
======================= ===================== =========================
</TABLE>
<TABLE>
CUT-OFF DATE MARGIN RANGES - PRIME INDEXED MORTGAGE LOANS
<CAPTION>
Number of Aggregate % of Pool
Home Equity Loan by Aggregate
Margin Credit Lines Balances Loan Balances
- - ------ ----------------------- --------------------- -------------------------
<S> <C> <C> <C>
%........................................ $ %
%........................................
Total..................................... $ %
======================= ===================== =========================
</TABLE>
<TABLE>
CREDIT LIMIT UTILIZATION RATES
<CAPTION>
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>
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>
COMBINED LOAN-TO-VALUE RATIOS(1)
<CAPTION>
Range of
Combined Number of Aggregate %of Pool
Loan-to-Value Home Equity Loan by Aggregate
Ratios Credit Lines Balances Loan Balances
- - ------ ------------------ ----------------- -------------------
<S> <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.................................................... $ %
================== ================= ===================
</TABLE>
(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>
MORTGAGE LOAN INTEREST RATE FLOORS
<CAPTION>
Number of Aggregate % of Pool
Interest Home Equity Loan by Aggregate
Rate Floors Credit Lines Balances Loan Balances
- - ----------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
None.........................................
%..................................
%..................................
======================= ==================== =====================
Total.......................... $ %
======================= ==================== =====================
</TABLE>
<TABLE>
MORTGAGE LOAN INTEREST RATE CEILINGS
<CAPTION>
Number of % of Pool by
Interest Home Equity Aggregate Aggregate
Rate Ceilings Credit Lines Loan Balances Loan Balances
- - ------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
%..................................
%..................................
None.........................................
----------------------- -------------------- ---------------------
Total.......................... $ %
======================= ==================== =====================
</TABLE>
<TABLE>
PROPERTY USE OF MORTGAGE LOANS
<CAPTION>
Percent of
Mortgage Loans
Number of Aggregate by Principal
Property Use Mortgage Loans Balance Balance
- - ------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
Owner Occupied........................
Non-Owner Occupied....................
Unknown...............................
----------------------- -------------------- ---------------------
Total.......................... $ 100.00%
======================= ==================== =====================
</TABLE>
<TABLE>
LIEN PRIORITY OF MORTGAGE LOANS
<CAPTION>
Percent of
Mortgage Loans
Number of Aggregate by Principal
Lien Priority Mortgage Loans Balance Balance
- - ------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
First Mortgage........................
Second Mortgage.......................
Third Mortgage........................
----------------------- -------------------- ---------------------
Unknown...............................
Total.......................... $ 100.00%
======================= ==================== =====================
</TABLE>
<TABLE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGE LOANS
<CAPTION>
Percent of
Mortgage Loans
Number of Aggregate by Principal
State Mortgage Loans Balance Balance
- - ----- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
Total.......................... $ 100.00%
======================= ==================== =====================
</TABLE>
<TABLE>
PROPERTY TYPE OF MORTGAGE LOANS
<CAPTION>
Percent of
Mortgage Loans
Number of Aggregate by Principal
Number of Units Mortgage Loans Balance Balance
- - ------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
Single Family Detached................
Single Family Attached................
2-4 Family............................
Condominium...........................
Cooperative...........................
Unknown...............................
----------------------- -------------------- ---------------------
Total.......................... $ 100.00%
======================= ==================== =====================
</TABLE>
<TABLE>
ORIGINATION YEAR OF MORTGAGE LOANS
<CAPTION>
Percent of
Loan Pool
Number of Aggregate by Aggregate
Origination Year Mortgage Loans Loan Balance Loan Balance
- - ---------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
19....................................
19....................................
19....................................
19....................................
19....................................
19....................................
19....................................
19....................................
......................................
Total.......................... $ 100.00%
======================= ==================== =====================
</TABLE>
<TABLE>
DAYS DELINQUENT AS OF CUT-OFF DATE
<CAPTION>
Percent of
Loan Pool
Number of Aggregate by Aggregate
Days Delinquent Mortgage Loans Loan Balance Loan Balance
- - --------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C>
30-59.................................
60-89.................................
----------------------- -------------------- ---------------------
Total.......................... $ 100.00%
======================= ==================== =====================
</TABLE>
No assurance can be given that the values of the 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 the area in which the properties are
located should experience an overall decline in property values such that the
outstanding loan balances of the loans, together with any senior financing on
the properties, equal or exceed the value of the 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 properties, see "Risk
Factors--Decrease in Value of Mortgaged Property Would Disproportionately
Affect Junior Lienholders" 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 loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the pool. To the extent that 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
properties are based upon the pool as it is expected to be constituted as of
the close of business on ______. Prior to the issuance of the certificates,
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 loans may be included in the
pool prior to the issuance of the certificates, so long as including those
loans would materially alter the characteristics of the pool 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 other characteristics of the loans may vary.
A current report on Form 8-K containing a detailed description of the
loans will be available to purchasers of the certificates on or shortly after
the closing date and will be filed with the SEC within fifteen days after the
closing date, if there is a material difference between the description of the
loans contained herein and the loans as constituted on the closing date. The
Form 8-K will specify the precise aggregate outstanding principal balance of
the loans as of _____ and will set forth on a precise basis the other
information presented herein on an approximate basis.
MATURITY AND PREPAYMENT CONSIDERATIONS
The pooling and servicing agreement provides that the certificateholders
will not receive payments of principal until the distribution date in
___________ which is the first distribution date after the first collection
period following the end of the Revolving Period or earlier if an Early
Amortization Event occurs. 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 pooling and
servicing agreement permits the seller, at its option, but subject to the
satisfaction of the conditions specified in the agreement, including the
conditions described herein, to remove 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 seller may also, under certain circumstances, add additional 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 Seller"]
All of the loans may be prepaid without penalty in full or in part at any
time. Since prepayments on the loans will increase principal collections in
the related collection period, the prepayment experience of the loans will
affect the life of the certificates.
The rate of prepayment on the loans cannot be predicted. Home equity
credit lines such as the loans have been originated in significant volume only
during the past few years and neither the seller nor the depositor is aware of
any publicly available studies or statistics on the rate of prepayment of
similar loans. Generally, home equity credit lines are not viewed by borrowers
as permanent financing. Accordingly, the loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because
the 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 loans may be affected by a wide variety of
factors, including general economic conditions, economic conditions in
geographic location of the related properties, prevailing interest rate
levels, the availability of alternative financing and homeowner mobility, the
frequency and amount of any future draws on the loans and changes affecting
the deductibility for Federal income tax purposes of interest payments on home
equity credit lines.
Substantially all of the loans contain "due-on-sale" provisions, and the
servicer intends to enforce such provisions, so long as enforcement is
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related loan. See "Certain Legal
Aspects of Loans--'Due-on-sale' Clauses in Mortgage Loans" 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 loans is actually different from the rate
anticipated by the investor at the time of the purchase.
Collections on the loans may vary because, among other things, borrowers
may make payments during any month as low as the minimum monthly payment for
such month or as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. In addition, it is possible that
borrowers may fail to make scheduled payments. Further, collections on the
loans may vary due to seasonal purchasing and payment habits of borrowers.
Because the 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 loans to any significant degree. See "Description of the
Securities--Weighted Average Life of the Securities" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued pursuant to the pooling and servicing
agreement. The form of the pooling and servicing agreement has been filed as
an exhibit to the registration statement of which this prospectus supplement
and the prospectus are a part. The following summaries describe the material
provisions of the pooling and servicing agreement.
GENERAL
The certificates will be issued in denominations of [$1,000] and
multiples of $1 and will evidence undivided ownership 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 Certificate principal balance of the certificates 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 any
losses allocated to the certificates and not 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 seller interest which is the interest in the
trust not represented by the certificates. The seller interest will represent
an undivided interest in the trust, including the right to receive a
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. There can be no assurance that
the seller interest will be sufficient for that 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 loans, liquidation losses are incurred, additional
balances are drawn down by borrowers, loans are retransferred to the Seller or
Eligible Additional Mortgage Loans are transferred to the trust. Consequently,
the amount of the seller interest will fluctuate each day to reflect the
changes in the pool balance. During the Amortization Period, the certificate
principal balance will decline as 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 and may change each day to
reflect the variations in the pool balance.
ASSIGNMENT OF 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 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 the loans subsequent to the closing
date (other than any amounts received in respect of taxes insurance premiums,
assessments and similar items, as provided in the pooling and servicing
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 or upon the order of the depositor. Each loan assigned to the
trust will be identified in a schedule appearing as an exhibit to the pooling
and servicing agreement.
The depositor will deliver the mortgage files containing, among other
things, the loan agreement, the mortgage note and the mortgage relating to
each loan to the trustee or its custodian. The trustee or its custodian will
review each mortgage file within ___ days of receipt thereof. If any document
is found not to have been executed or received or to be unrelated to the loan
or to be otherwise defective, the trustee or its custodian will notify the
seller, and the seller 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 that loan
from the trust. Upon retransfer, the loan balance of that 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 to
the collection account of the Retransfer Deposit Amount, which is the amount
by which the seller Interest is less than zero. Notwithstanding the foregoing,
no retransfer shall be considered to have occurred unless the seller actually
deposits the Retransfer Deposit Amount. The obligation of the seller to accept
a retransfer of a defective 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 seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
trustee with respect to each loan on the schedule of loans appearing as an
exhibit to the pooling and servicing agreement including, among other things,
that:
(1) [each Mortgage Loan has been generated under an eligible home equity
line of credit;
(2) at the time of transfer to the trust, the seller has transferred all
of the seller's right, title and interest in each loan, free of any
lien (subject to certain exceptions);
(3) each loan complied, at the time of origination, in all material
respects with applicable state and Federal laws; and
(4) as of the date of origination, 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 home equity line
of credit and the unpaid principal balance of any mortgage loan
senior thereto].
Upon discovery of a breach of any of the above representations and
warranties which materially and adversely affects the interests of the trust,
the certificateholders or the [Letter of Credit] [Surety Bond] Issuer in the
related loan, the seller 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 seller will be obligated to accept a retransfer of
the loan from the trust subject to the same restrictions and procedures
described above.
Any loan required to be retransferred to the seller as described in the
preceding two paragraphs is referred to as a "Defective Mortgage Loan".
The seller may, but is not obligated to, retransfer a Defective Mortgage
Loan to the trust within ____ days of the transfer of that loan to the seller
if all defects in respect of that loan have been cured and that loan satisfies
the applicable representations and warranties in the pooling and servicing
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 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 that period the seller will be obligated to transfer to
the trust Eligible Additional Mortgage Loans to the extent of availability,
which may be generated under home equity credit lines in any billing cycle to
increase the seller Interest to 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 complies with the representations and warranties described
under "Assignment of Mortgage Loans" above. In addition, the seller 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 its custodian; and
(iii) the seller shall have given notice of the proposed transfer to the
rating agency and the rating agency has not notified the seller 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.
[OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE SELLER
Subject to the conditions specified in the pooling and servicing
agreement, the seller may, at its option, require the retransfer of one or
more loans 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 seller will be required to satisfy the
following conditions, among others:
(i) the seller 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% of the Mortgage Loans, based on loan balances, after
giving effect to the proposed transfer, are delinquent more than 30
days and the weighted average delinquency of all of the loans is not
more than 60 days;
(iii) the seller shall have represented that no selection procedures
reasonably believed by the seller to be adverse to the interests of
the certificateholders or the [Letter of Credit] [Surety Bond]
Issuer were used to select the loans to be removed;
(iv) the seller shall have received evidence satisfactory to it that the
reassignment will not, as of the date thereof, prevent the transfer
of the loans 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 shall not have
notified the seller 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 collection procedures with respect to the loans
as it follows from time to time with respect to mortgage loans in its
servicing portfolio comparable to the loans in the trust. See "Servicing of
the Loans--Collection Procedures; Escrow Accounts" in the prospectus.
The servicer will establish and maintain a collection account, which is a
separate account in the name of the trustee for the benefit of the
certificateholders and the [Letter of Credit] [Surety Bond] Issuer. 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 for
the collection account 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 pooling and
servicing agreement, the servicer will allocate between the Investor Interest
and the Seller Interest all Principal Collections, which are all amounts
collected under the loans on account of principal, including the principal
portion of any liquidation proceeds in excess of litigation expenses, and any
Liquidation Loss Amounts, which are 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. A "Defaulted Mortgage Loan" is a loan that has been written off
as uncollectible by the servicer. The collection period for a distribution
date is the calendar month preceding that 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 the first distribution
date occurs. The servicer will make each allocation by reference to the
Investor Percentage and the Seller 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, Liquidation Loss Amounts and Principal
Collections during the Revolving Period. 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. 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 is a set percentage that 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 on any date of determination will, in all
cases, be equal to 100% minus the Investor Percentage on that date.
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 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 first 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 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 will be deposited and retained in the collection
account for payment to the Seller, during the Revolving Period, if and when
the Seller Interest is greater than zero and, during the Amortization Period,
to the Seller Interest.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions on the certificates will be made by the trustee on each
distribution date out of amounts on deposit in the distribution account to the
persons in whose names such certificates are registered at the close of
business on the day prior to each distribution date. Distributions will be
made by check mailed (or upon the request of a certificateholder owning
certificates having denominations aggregating at least $___________, 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. 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 that distribution date.
(1) [to the certificateholders, interest at the certificate rate for the
interest period preceding that distribution date on the certificate
principal balance outstanding immediately prior to that 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;
(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 the Seller,
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; and
(7) to the certificateholders, accrued and unpaid interest on the
outstanding amount described in clause (6) above (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 the loss, in accordance
with the priority of distributions in clauses (5) and (6) above described. 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 (1)
the [Letter of Credit] [Surety Bond] Amount and (2) 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 received (or drawn on the
[Letter of Credit] [Surety Bond] in respect thereof) in the preceding
collection period and any Unallocated Principal Collections then on deposit in
the distribution account. The aggregate distributions of principal to the
certificateholders will not exceed their certificate principal balance on the
Closing Date.
[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.___%. However, if the certificate rate
calculated as described in the preceding sentence for any distribution date is
greater than the weighted average of the Net Loan Rates for the loans for the
preceding collection period, the certificate rate for that distribution date
will be equal to the weighted average of the Net Loan Rates. The Net Loan Rate
for a loan is its loan rate less 0.__% per annum. Interest payable on any
distribution date will accrue on the certificates during the related Interest
Period, which is the period from the preceding distribution date -- or, in the
case of the first distribution date, from the closing date -- through the day
preceding that distribution date. 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 (1) the original principal
amount of the certificates less (2) all amounts previously distributed to
certificateholders under "--Distributions of Principal" above, less (3) 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 commencing on
the second London Business Day prior to the previous distribution date, which
appear on the Reuters Screen LIBO Page as of approximately 11:00 A.M., London
Time, on the date of calculation. If at least two 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 those offered
rates. If fewer than two quotations appear, LIBOR with respect to the
distribution date will be determined at approximately 11:00 A.M., London time,
on the determination date on the basis of the rate at which deposits in United
States dollars having a maturity of one month 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 that market at that time. The trustee will request the principal London
office of those major banks to provide a quotation of its rate. If at least
two quotations are provided, LIBOR will be the arithmetic mean, rounded
upwards as aforesaid, of those quotations. If fewer than two quotations are
provided, LIBOR with respect to that 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 the 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 a maturity of one month 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; provided,
however, that if the major 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. "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, for distribution to certificateholders 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 [Letter of Credit] [Surety Bond] Amount, or the amount available
under the [Letter of Credit] [Surety Bond] for the initial distribution date
will be $ . For each distribution date thereafter, the [Letter of Credit]
[Surety Bond] Amount will equal the lesser of (1) __% 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 loans on the distribution
date occurring in that preceding collection period and (2) 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 that preceding collection period, plus any amounts paid to the [Letter
of Credit] [Surety Bond] Issuer on the distribution date occurring in that
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
(1) to make any payment or deposit on the date required under the
pooling and servicing agreement within five business days after
such payment or deposit is required to be made,
(2) to observe or perform in any material respect certain covenants
of the servicer or the depositor or
(3) to observe or perform in any material respect any other
covenants or agreements of the servicer or the depositor set
forth in the pooling and servicing agreement, which failure, in
each case, materially and adversely affects the interests of
the certificateholders and which, in the case of clause (3),
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 pooling and servicing 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 that period; provided, however, that an Early
Amortization Event shall not be deemed to occur if the depositor has accepted
retransfer of the related loan or all affected loans, if applicable, during
that period, or a 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 seller fails to transfer to the trust Eligible Additional
Mortgage Loans by the required time;
(e) an event of default under the trust agreement occurs;
(f) the [Letter of Credit] [Surety Bond] Amount is less than ____% of the
outstanding 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 (1) through (7)
under "Distributions on the Certificates--Distributions of Interest
Collections and Required Amounts" above for the three distribution dates
relating to those 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
in the trust 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
pooling and servicing agreement, which may shorten the final maturity of the
certificates.]
OPTIONAL TERMINATION
If the certificate principal balance is reduced to less than 5% of the
original certificate principal balance, the depositor may effect a retransfer
of the certificateholders' interest in each loan, and all property acquired in
respect of any loan, remaining in the trust for an amount equal to the sum of
the outstanding certificate principal balance plus accrued and unpaid interest
thereon at the applicable certificate rate through the day preceding the final
distribution date. The purchase price will be distributed to the
certificateholders in lieu of the amount that would otherwise be distributed
if the options were not exercised and will be applied as provided in the
Agreement.
[REGISTRATION OF CERTIFICATES
The certificates will initially be registered in the name of Cede & Co.,
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 and facilities the clearance and settlement of
securities transactions between DTC participants in those securities through
electronic book-entry changes in accounts of DTC participants, thereby
eliminating the need for physical movement of certificates. DTC 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
DTC participant, either directly or indirectly.
Certificate owners who are not DTC participants but desire to purchase,
sell or otherwise transfer ownership of the certificates may do so only
through DTC participants, 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 DTC 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.
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
pooling and servicing agreement. Certificate owners are only permitted to
exercise the rights of certificateholders indirectly through DTC participants.
Except under the circumstances described below, while the certificates
are outstanding, under the rules, regulations and procedures creating and
affecting DTC and its operations, DTC is required to make book-entry transfers
among its 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. DTC 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.
Until definitive certificates are issued, certificate owners who are not
DTC participants may transfer ownership of certificates only through DTC
participants by instructing those participants to transfer certificates, by
book-entry transfer, through DTC for the account of the purchasers of those
certificates, which account is maintained with their respective participants.
Under the DTC 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 DTC participants at DTC will be debited and credited.
Similarly, the respective DTC 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 its participants, who in turn act
on behalf of their 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 those
certificates, may be limited due to the lack of a physical certificate for
those certificates.
Definitive certificates will be issued in registered form to certificate
owners, or their nominees, rather than to DTC, 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 least 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 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, until definitive
certificates are issued, DTC will take any action permitted to be taken by a
certificateholder under the pooling and servicing agreement only at the
direction of one or more DTC 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 those DTC participants with respect to
the percentage interests of the certificates. DTC may take actions, at the
direction of the related participants, with respect to those 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 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 SMMEA,
because most of the mortgages securing the 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 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 (1) 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 (2) 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 pooling and servicing
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 ____________, between the Depositor and Lehman Brothers
Inc., 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.
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 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 loans. The rating takes into
consideration the characteristics of the 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 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.
<PAGE>
INDEX OF DEFINED TERMS
Bank................................................9
Certificate Principal Balance......................29
Defaulted Mortgage Loan............................26
Defective Mortgage Loan............................24
Early Amortization Event...........................30
Investor Percentage................................26
LIBOR..............................................29
London Business Day................................30
Plans..............................................34
Similar Law........................................34
<PAGE>
$__,___,___,___
LEHMAN HOME EQUITY
LOAN TRUST ____-_
$_________
ASSET-BACKED CERTIFICATES
SERIES ____-_
LEHMAN ABS CORPORATION
(DEPOSITOR)
_________________
PROSPECTUS SUPPLEMENT
[ , ____]
_________________
LEHMAN BROTHERS
<PAGE>
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 SEC is effective. This propsectus 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 AUGUST 10, 1999
Version #2
Prospectus Supplement dated __________ __, ____ To Prospectus dated
_____________ __, ____
$-------------
Lehman Home Equity Loan Trust ____-_
$________ Home Equity Loan Asset-Backed Certificates, Series ____-_
$_______ Home Equity Loan Asset-Backed Notes, Series ____-_
<TABLE>
<CAPTION>
[Seller], Lehman ABS Corporation,
as Seller as Depositor
[Certificates] Principal [Certificate][Note] Underwriting Proceeds to the
[Notes] Balance Rate Price to Public Discount Depositor
- - ---------------------- ----------------- --------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ % % % %
Total $ $ $ $
</TABLE>
Lehman Brothers Inc. will purchase the offered certificates from
the depositor at the price specified in the table above. Please see the
information under the heading "Underwriting" in this Prospectus Supplement.
<PAGE>
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
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 SEC 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
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.
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.........................................................10
The [Letter of Credit][Surety Bond] Issuer........................11
The Home Equity Lending Program...................................11
Servicing of the Mortgage Loans...................................15
Description of the Mortgage Loans.................................16
[Tabular Information].............................................17
Description of the Servicing Agreement............................19
Description of the Securities.....................................22
The Indenture.....................................................28
The Trust Agreement...............................................32
Administration Agreement..........................................35
The Indenture Trustee.............................................35
The Owner Trustee.................................................35
Use Of Proceeds...................................................35
Federal Income Tax Consequences...................................35
State Tax Consequences............................................36
ERISA Considerations..............................................36
Legal Investment Considerations...................................37
Underwriting......................................................38
Legal Matters.....................................................38
Rating............................................................38
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
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 this entire document and the accompanying
prospectus carefully.
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 Last Scheduled
Class date only) Interest Rate Principal Balance Distribution Date
<S> <C> <C> <C> <C>
_________% [LIBOR+ __%][%]
_________% [LIBOR+ __%][%]
</TABLE>
We expect the actual last distribution date for each certificate will
be significantly earlier its last scheduled 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.]
Offered Securities
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 Securities
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 home equity revolving credit line loans made or to be made
in the future under home equity revolving credit line loan
agreements, secured primarily by second [deeds of trust] [mortgages]
on residential properties that are primarily one- to four-family
properties
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 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 benefits 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,
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 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).
The seller's underwriting standards are less stringent than those of
Fannie Mae or Freddie Mac. Therefore, the mortgage loans may experience higher
rates of delinquencies, defaults and foreclosures than those underwritten
according to more traditional standards.
We refer you to "Risk Factors--Possibility of Higher Rates of
Delinquencies, Defaults and Foreclosures Resulting from Seller's
Underwriting Standards"; "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 Compensation
The servicer will receive a monthly servicing fee equal to ___% per annum
of the pool balance prior to interest being distributed to the holders.
We refer you to "Servicing Of Mortgage Loans--Servicing Compensation and
Payment of Expenses."
Collections
All collections on the mortgage loans will be allocated by the servicer
between interest and 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.
The distribution date will be the ___ day of each month or the next
business day if the __ is not a business day. The first distribution date
will be _____ __, ____.
On each distribution date, collections on the mortgage loans will be
applied in the following order of priority:
(1) as payment to the servicer of the servicing fee;
(2) as payment on the securities of accrued interest due and any
overdue accrued interest with interest thereon;
(3) as principal on the securities in the amounts as described in
this prospectus supplement;
(4) as principal of the securities, for any amounts unrecoverable
as losses on the mortgage loans;
(5) as payment of the premium on the [surety bond]; (6) as
reimbursement of prior draws made on the [surety bond]; and (7)
any remaining amounts to the depositor.
Interest
Interest will accrue on the outstanding 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.]
[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 are
insufficient to provide for the payment of the amount required to be
distributed to you and the servicer on a 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 that distribution date, in an
amount equal to the 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 after the initial distribution date, the
amount available will equal the lesser of (a) a percentage of the pool
balance and (b) 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
(1) _________________________ and
(2) the final payment or other liquidation of the last mortgage loan in
the trust.
On any distribution date after the principal balance is reduced to an
amount less than or equal to $ ________, the servicer will have the
option of repurchasing the mortgage loans. The repurchase price will be
equal to the sum of the outstanding principal balance and accrued and
unpaid interest on the mortgage loans 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.]
Federal Income Tax Consequences
In the opinion of Brown & Wood LLP, for federal income tax purposes, the
notes 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 note, will agree to treat
the note as indebtedness and the trust as an owner trust for federal,
state and local income and franchise tax purposes.
We refer you to "Federal Income Tax Consequences" and "State Tax
Consequences" in this prospectus supplement and "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 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 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 address credit risk. When evaluating credit risk, the rating
agencies evaluate the likelihood of your receipt of your interest and
principal entitlements. Credit risk does not relate to the likelihood of
prepayments on the mortgage loans. Prepayments affect the timing of
payments to you, which may cause your actual return to differ
substantially from your anticipated return on your investment.
We refer you to "Ratings" for more detail.
Risk Factors
Book-Entry Securities may be Illiquid.
Issuance of the securities in book-entry form may reduce the
liquidity of those securities in the secondary trading market since investors
may be unwilling to purchase securities for which they cannot obtain physical
securities. Because of this illiquidity 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."
You may not be able to be Pledge Book-Entry Securities.
Since transactions in the securities can be effected only through
DTC, Cedelbank, Euroclear, participating organizations, indirect participants
and particular 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 your 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
distributions will be forwarded by the trustee to DTC. DTC will then credit
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 credit line
agreements, borrowers are not required to make monthly payments of principal.
As a result, collections on the 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 of the mortgage loans generally is required until
after either a five- or ten-year interest-only period. Minimum monthly
payments are required to equal or exceed accrued interest on the mortgage
loans.
[Liquidations could result in Delays and Losses.]
Even if 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 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 a mortgage loan, 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 the mortgage loans. Generally, home
equity loans are not viewed by borrowers as permanent financing. Accordingly,
the mortgage loans may experience a higher rate of prepayment than traditional
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 that
the servicer intends to enforce, unless (1) the 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, the
assumption will not release the original borrower from its mortgage loan
obligations. Enforcement of a due-on-sale provision would result in repayment
in full of the mortgage loan which will be distributed to holders of
securities 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 the mortgage loan. Mortgage loans secured by second
mortgages are entitled to proceeds that remain from the sale of the related
mortgaged property after any related senior mortgage loan and prior statutory
liens have been satisfied. In the event that the proceeds from the sale of the
mortgaged property are insufficient to satisfy the 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 a deficiency judgment cannot be obtained or
is not realized upon.
We refer you to "Legal Aspects of the Mortgage Loans" in the
prospectus.
Insolvency of Seller; Reclassification of Sale of Mortgage Loans as a
Secured 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 the
transfer is either a sale of its interest in the mortgage loans or a grant of
a first priority perfected security interest. 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 the depositor's interest. 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 that transfer, delays in payments of the securities and possible
reductions in the amount payable under the mortgage loans could occur. 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 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. In that event, an event of default
under the 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 securities.
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 the changes (1) do not adversely affect the interest
of the holders, and (2) are consistent with prudent business practice. There
can be no assurance that changes in applicable law, the marketplace for home
equity loans or prudent business practice will not result in changes in the
terms of the mortgage loans.
Delinquent Mortgage Loans included in the Trust may be More Likely to Default
than Non-Delinquent Mortgage Loans.
The trust will include mortgage loans which are 89 or fewer days
delinquent. The cut-off date principal balance of the delinquent mortgage
loans was $______________. If there are not sufficient funds from certain
interest collections to cover the liquidation loss amounts for any
distribution date and the [letter of credit] [surety bond] amount has been
reduced to zero or the [letter of credit] [surety bond] provider does not
perform its obligations, the aggregate amount of principal returned to the
holders may be less than the principal balance on the day the securities are
issued.
Mortgage loans that are delinquent may be more likely to experience
losses.
Possibility of Higher Rates of Delinquencies, Defaults and Foreclosures
Resulting from Seller's Underwriting Standards
The seller's underwriting standards are less stringent than those of
Fannie Mae or Freddie Mac. Therefore, the mortgage loans may experience higher
rates of delinquencies, defaults and foreclosures than those underwritten
according to more traditional standards.
[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 from the trust,
(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:
(1) each of the mortgage loans that are __________________;
(2) collections on the mortgage loans received after the Cut-Off
Date;
(3) mortgaged properties that are acquired by foreclosure or deed
in lieu of foreclosure;
(4) the collection account and the distribution account, excluding
net earnings thereon;
(5) the [letter of credit] [surety bond]; and
(6) 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
has made no independent verification of the accuracy or completeness of the
following information.
General
All of the mortgage loans were originated by
[_____________________________] under its home equity lending program. The
seller first offered adjustable rate home equity revolving credit line loans
or 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.
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 both the applicant's ability to assume and repay those home equity
loans and the adequacy of the real property that secures the 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 listing 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 or for all home equity
loans originated as of __________, a satisfactory appraisal completed on forms
approved by Fannie Mae, and if that information met the seller's underwriting
standards, the seller issued a commitment subject to satisfaction of certain
other conditions. These conditions included:
(1) obtaining and reviewing pay stubs, income tax returns or a
verification of employment from the applicant's employer;
(2) obtaining and reviewing a verification of deposit; and
(3) 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 previously
approved 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 needs a combined loan-to-value ratio of
___% for loans which the seller obtained full documentary support and ___% for
loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the seller determines whether sufficient unencumbered equity in
the property exists and whether a prospective borrower has sufficient monthly
income to support the payments of interest at the current prime rate plus the
margin, based on the credit limit in addition to any senior mortgage loan
payments 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) the borrower's debt obligations which include:
(1) the monthly first mortgage payment plus taxes;
(2) monthly installment debt payments with a term of more than ten
months;
(3) five percent of the total revolving obligations;
(4) monthly alimony and child support obligations; and
(5) the payment on the home equity loan calculated at the credit
limit and current prime rate plus the margin to (b) the
borrower's verifiable gross monthly income. The debt-to-gross
income ratio generally did not exceed [_____%].
When the commitment conditions have been satisfied, the home equity
loan is completed by signing a credit line agreement, rescission statement,
and mortgage which secures the repayment of principal of and interest on the
home equity loan. The original mortgage is 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 of ____% and in all cases, are
subject to applicable usury limitations. We refer you to "Legal Aspects of the
Mortgage Loans--Applicability of Usury Laws" in the prospectus. The loan rate
is the sum of the index rate plus a spread which generally ranges between
____% and ____%, divided by 365 days or 366 days.
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 that 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 average of that
range will be used.] There are no limitations on increases or decreases,
except for 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 loan rate are provided by the seller to
the borrower with the billing 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 for the
home equity loans will be changed upon notification in accordance with the
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:
(1) the borrower fails to make any required payment by the due
date,
(2) the total outstanding principal balance including all charges
payable exceeds the credit limit,
(3) the borrower made any statement or signature on any document
which is fraudulent or contained a material misrepresentation,
(4) the borrower dies or becomes incompetent,
(5) the borrower becomes bankrupt or insolvent,
(6) the borrower becomes subject to any judgment, lien, attachment
or execution is issued against the mortgaged property,
(7) the borrower fails to obtain and maintain required property
insurance, or
(8) 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:
(1) the value of the mortgaged property decreases for any reason to
less than 80% of the original appraised value,
(2) the borrower is in default under the home equity loan,
(3) government action impairs the seller's lien priority or
(4) 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. There is no assurance that the delinquency and loss
experience of the mortgage loans in the trust 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.............................. %
Loss Experience
(Dollars in Thousands)
For the Year
Ending ________
----------------------------
Average Amount
Outstanding.............................................. $
Gross Charge-Offs.......................................... $
Recoveries................................................. $
Net Losses as a Percentage
of Average Amount Outstanding............................
</TABLE>
Management's Discussion and Analysis of the Delinquency and Loss Experience
[to be completed in connection with actual transaction]
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 has not
made any independent verification as to the accuracy or completeness of the
following 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 in the
following circumstances:
(1) after the loan is 90 days or more delinquent;
(2) if a notice of default on a senior lien is received by the
servicer; or
(3) 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, 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 the law and with a view to maximizing the
recovery of payments under the 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 mortgaged property will pass to the servicer or a
wholly-owned subsidiary of the servicer. The servicer or its subsidiary 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 that lien at the time of foreclosure sale or take other action
as deemed necessary to protect its 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, the servicer generally will
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.
Servicing Compensation and Payment of Expenses
With respect to each collection period, other than the first
collection period, the servicing fee will be paid to the servicer from
interest collections on the mortgage loans and will be equal to the servicing
fee rate, which is ____% per annum, on the aggregate principal balances of the
mortgage loans as of the first day of the related Collection Period. With
respect to the first collection period, the servicer will receive from
interest 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 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 expenses incurred by it in connection with defaulted
mortgage loans and in connection with the restoration of mortgaged properties
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, or credit line agreements, and are secured by mortgages
or deeds of trust, most of which are second mortgages or second deeds of
trust, on mortgaged 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 original pool balance as of ____ (the "Cut-Off Date") is
$___________, which is equal to the aggregate principal balances of the
mortgage loans as of the Cut-Off Date. As of the Cut-Off Date, no mortgage
loan was more than 89 days delinquent. Each mortgage loan had a loan rate of
at least ____% per annum. The average Cut-Off Date principal balance was
$_______, the minimum 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 specified in the 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 Seller has compiled the following additional information as of
the Cut-Off Date with respect to the mortgage loans to be included in the
trust. On the closing date, no more than 5% of the mortgage loans (by
aggregate principal balance as of the cut-off date) will have characteristics
that deviate from the description of the mortgage loans in this prospectus
supplement.
[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 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 the transfer, will
deliver the securities. Each mortgage loan transferred to the owner trustee
will be identified on a mortgage loan schedule delivered to the owner trustee
pursuant to the purchase agreement. The schedule will include the Cut-Off Date
principal balance of each mortgage loan, as well as information about the loan
rate.
The purchase agreement will require the seller deliver to the owner
trustee the mortgage loans endorsed in blank and the related documents within
___ days after the closing date. In lieu of delivery of original mortgages,
the seller may deliver true and correct copies of the mortgage which have been
certified as to its authenticity by the appropriate county recording office
where the 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 in favor of the owner trustee.
However, no recordation of assignments will be necessary if 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 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. If any mortgage loan or related
document is found to be defective in any material respect and this defect is
not cured within 90 days following notification 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 a retransfer, the principal balance of the mortgage loan will be deducted
from the pool balance. In lieu of repurchase, the seller may substitute an
eligible substitute mortgage loan. Any repurchase or substitution will be
considered a payment in full of the 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
its principal balance at the time of any transfer described above, plus
accrued and unpaid interest on the mortgage loan 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
substitution:
(1) 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 of the defective mortgage loan;
(2) 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 the defective mortgage loan;
(3) have a loan rate based on the same index with adjustments to
the loan rate made on the same interest rate adjustment date as
the defective mortgage loan;
(4) 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;
(5) have a mortgage of the same or higher level of priority as the
mortgage for the defective mortgage loan;
(6) 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;
(7) comply with each representation and warranty for the mortgage
loans set forth in the purchase agreement, which shall be
deemed to be made as of the date of substitution; and
(8) satisfy the 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 of the
substitution adjustment amount which is equal to that difference.
The seller will make 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. 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 permissible 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 a collection account for the benefit of the holders. The collection
account will be an eligible account. 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 these amounts
in the collection account. Amounts deposited may be invested in eligible
investments which mature no later than one business day prior to the date on
which the amount on deposit is required to be deposited in the distribution
account or on the distribution date if approved by the rating agencies.
Eligible investments are described in detail in the servicing agreement. Not
later than the determination date, which is the fifth business day prior to
each distribution 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 distribution accounts 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 in the
distribution account 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
(1) maintained with a depository institution whose debt obligations
at the time of any deposit have the highest short-term debt
rating by the rating agencies,
(2) 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 FDIC
established by such fund with a minimum long-term unsecured
debt rating of _____,
(3) a segregated trust account maintained with the owner trustee or
an affiliate of the owner trustee in its fiduciary capacity or
(4) otherwise acceptable to the rating agencies 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 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 allocated to
interest pursuant to the terms of the credit line agreements.
For any distribution date, "Principal Collections" will be equal to
the sum of (1) the amounts collected during the related collection period,
including Net liquidation proceeds allocated to principal pursuant to the
terms of the credit line agreements and (2) 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 a mortgage loan,
including, without limitation, insurance proceeds reduced by related expenses,
but not including any portion of the amount that exceeds the principal balance
of the mortgage loan at the end of the collection period immediately prior to
the collection period in which the mortgage loan became a liquidated mortgage
loan, plus accrued and unpaid interest 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 that date. The
principal balance of a mortgage loan, other than a Liquidated Mortgage Loan,
on any day is equal to its Cut-Off Date principal balance, plus (1) any
additional balances for that mortgage loan minus (2) all collections credited
against the principal balance of that mortgage loan in accordance with the
related credit line agreement. The principal balance of a liquidated mortgage
loan after final recovery of the liquidation proceeds shall be zero.
Hazard Insurance
The servicing agreement provides that the servicer will maintain
hazard insurance on the mortgaged properties in the trust. Even though the
credit line agreements generally require borrowers to maintain certain hazard
insurance, the servicer will not monitor its maintenance.
The servicing agreement requires the servicer to maintain for any
mortgaged property acquired upon foreclosure of a mortgage loan, or by deed in
lieu of foreclosure, hazard insurance with extended coverage in an amount
equal to the lesser of (1) the maximum insurable value or (2) the outstanding
balance of the mortgage loan plus the outstanding balance on any mortgage loan
senior to that 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 liquidation expenses that may be incurred. 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
the mortgaged properties. If the blanket policy contains a deductible clause,
the servicer will be obligated to deposit in the collection account the sums
which would have been deposited in the collection account but for that 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 will be underwritten by different insurers
and therefore will not contain identical terms and conditions, the basic terms
are dictated by state laws and most 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 as come into default when in accordance with
the servicing procedures under the servicing agreement and no satisfactory
arrangements can be made for the collection of delinquent payments. During a
foreclosure or conversion of a mortgaged property, the servicer will follow
practices as it deems necessary or advisable and in keeping with its general
subordinate mortgage servicing activities, but the servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a senior mortgage loan or restoration of
any property unless, in its sole judgment, the 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 seller.
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 the
material provisions of the securities, indenture and trust agreements. As used
in this prospectus supplement, "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 offered securities will be book-entry securities. Persons
acquiring beneficial ownership interests in the offered securities, or
security owners, will hold their offered securities through the DTC in the
United States, or Cedelbank or Euroclear in Europe if they are participants of
those systems, or indirectly through organizations which are participants in
those systems. The book-entry securities will be issued in one or more
securities which equal the aggregate principal balance of the offered
securities and will initially be registered in the name of Cede, 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 The Chase Manhattan Bank will act as depositary for Euroclear.
Investors may hold such beneficial interests in the book-entry securities in
minimum denominations representing class principal balances of $1,000 and in
multiples of $1 in excess thereof. Except as described below, no person
acquiring a book-entry security will be entitled to receive a physical,
definitive security. Unless and until definitive securities are issued, it is
anticipated that the only securityholder of the offered securities will be
Cede, as nominee of DTC. Security owners will not be securityholders as that
term is used in the pooling and servicing 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 that maintains the beneficial owner's account for
such purpose. In turn, the financial intermediary's ownership of that
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 offered securities from the trustee through DTC and DTC
participants. While the offered securities are outstanding, except under the
circumstances described below, under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make
book-entry transfers among DTC participants on whose behalf it acts with
respect to the offered securities and is required to receive and transmit
distributions of principal of, and interest on, the offered securities.
Participants and indirect participants with whom security owners have accounts
with respect to offered securities are similarly required to make book-entry
transfers and receive and transmit the distributions on behalf of their
respective security owners. Accordingly, although security owners will not
possess securities, the DTC 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 offered 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 offered securities only through DTC participants and indirect
participants by instructing the DTC participants and indirect participants to
transfer offered securities, by book-entry transfer, through DTC for the
account of the purchasers of such offered securities, which account is
maintained with their respective DTC participants. Under the DTC rules and in
accordance with DTC's normal procedures, transfers of ownership of offered
securities will be executed through DTC and the accounts of the respective DTC
participants at DTC will be debited and credited. Similarly, the DTC
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 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 the processing will be reported
to the relevant Euroclear or Cedelbank participants on the business day. Cash
received in Cedelbank or Euroclear as a result of sales of securities by or
through a Cedelbank participant or Euroclear participant to a DTC participant
will be received with value on the DTC settlement date but will be available
in the relevant 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, see "Federal Income Tax
Consequences--Foreign Investors" and "--Backup Withholding" herein and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between DTC 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, cross market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that 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 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 securities. Transactions may be settled in Cedelbank
in any of 28 currencies, including United States dollars. Cedelbank provides
to its Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic
markets in several countries. As a professional depository, Cedelbank is
subject to regulation by the Luxembourg Monetary Institute. Cedelbank
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedelbank
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its 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 securities and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing
and interfaces with domestic markets in several countries generally similar to
the arrangements for cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
Company of New York, under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation, the cooperative. All operations are conducted
by the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not the
cooperative. The cooperative establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks, including
central banks, securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear system and applicable
Belgian law, collectively, the terms and conditions. The terms and conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities 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 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 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 be credited to the cash
accounts of Cedelbank participants or Euroclear participants in accordance
with the relevant system's rules and procedures, to the extent received by the
relevant depositary. Those distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--Foreign Investors" and "--Backup Withholding" herein.
Because DTC can only act on behalf of financial intermediaries, the ability of
a beneficial owner to pledge book-entry 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 securities for such book-entry securities.
Monthly and annual reports on the trust fund will be provided to
Cede, as nominee of DTC, and may be made available by Cede 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 the beneficial owners are
credited.
DTC has advised the trustee that, unless and until definitive
securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry securities under the pooling and servicing 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 actions
are taken on behalf of financial intermediaries whose holdings include those
book-entry securities. Cedelbank or the Euroclear operator, as the case may
be, will take any other action permitted to be taken by a securityholder under
the pooling and servicing agreement on behalf of a Cedelbank participant or
Euroclear participant only in accordance with its relevant rules and
procedures and subject to the ability of the relevant depositary to effect
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 depositor 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 depositor or the trustee is unable to locate a
qualified successor,
(b) the depositor, at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC or
(c) after the occurrence of an event of servicing termination,
beneficial owners having percentage interests aggregating not less than
51% of the aggregate class A 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 security or
securities 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
securityholders under the pooling and servicing 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.
Neither the depositor, the seller, the master servicer nor the
trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the
book-entry securities held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Distributions
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 on the security balance of the
notes and the certificates;
(3) as principal on the securities, the excess of principal
collections over additional balances created during the
preceding collection period, allocated between the notes and
certificates pro rata, based on their security balances;
(4) as principal on the securities, as payment for any liquidation
loss amounts on the mortgage loans;
(5) as payment for the premium for the policy;
(6) to reimburse prior draws made on the policy; and
(7) any remaining amounts to the depositor.
For any distribution date, the collection period is the calendar
month preceding the month of that distribution date.
Liquidation loss amount means the unrecovered principal balance on a
liquidated mortgage loan at the end of the Collection Period in which the
mortgage loan became a liquidated mortgage loan after giving effect to the net
liquidation proceeds.
Interest
Note Rate. Interest will accrue on the unpaid principal balance of
the notes at the note rate, which is equal to ___% per annum from the closing
date to the first distribution date and thereafter, interest will accrue on
the notes during the interest accrual period - i.e., from and including the
preceding distribution date to but excluding such current distribution date --
at [a floating rate equal to LIBOR plus ___%]. [Interest will be calculated on
the basis of the actual number of days in each interest accrual period divided
by 360.] A failure to pay interest on any notes on any distribution date that
continues for five days constitutes an event of default under the indenture.
Pass-Through Rate. Interest will accrue on the unpaid principal
balance of the certificates at 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 (1) _________________________ and (2) 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
$____________. The repurchase price will be equal to the sum of the
outstanding principal balance of the mortgage loans and accrued and unpaid
interest on the securities at the weighted average of the loan rates through
the day preceding the final distribution date.
The Indenture
The following summary describes material provisions of the indenture.
Reports to Noteholders
The indenture trustee will mail to each noteholder, at the
noteholder's request 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:
(1) a default for five days or more in the payment of any interest
on any note;
(2) a default in the payment of the principal of or any installment
of the principal of any note when it becomes due and payable;
(3) a default in the observance or performance of any covenant or
agreement of the trust made in the indenture and its
continuation for a period of 30 days after notice 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;
(4) any representation or warranty made by the trust in the
indenture or in any certificate having been incorrect in a
material respect as of the time made, and not having been cured
within 30 days after notice 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
(5) 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 the notes.] If there is an event of
default due to late payment or nonpayment of interest due on a note,
additional interest will accrue on that unpaid interest at the Note Rate until
the interest is paid. The additional interest on unpaid interest shall be due
at the time that 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 that principal at the interest rate on the note until the 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 the notes to be
immediately due and payable. This 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, 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 that 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 this default, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the indenture that cannot be modified without the waiver or consent of all 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
(1) the holder previously has given the indenture trustee written
notice of a continuing event of default,
(2) the holders of not less than 25% in principal amount of the
outstanding notes have made written request to the indenture
trustee to institute a proceeding in its own name as indenture
trustee,
(3) the holder or holders have offered the indenture trustee
reasonable indemnity,
(4) the indenture trustee has for 60 days failed to institute a
proceeding and (5) no direction inconsistent with the written
request has been given to the indenture trustee during the
60-day period by the holders of a majority in principal amount
of the notes. In addition, the indenture trustee and the
noteholders 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
(1) 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,
(2) the entity created 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,
(3) no event of default shall have occurred and be continuing
immediately after the merger or consolidation,
(4) 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
(5) the trust has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequence to the trust or to any noteholder or
certificateholder.
The trust will not
(1) except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the
trust,
(2) 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,
(3) dissolve or liquidate in whole or in part,
(4) permit the validity or effectiveness of the indenture to be
impaired or permit any person to be released from any covenants
or obligations under the indenture except as may be expressly
permitted or
(5) 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
interest therein or the proceeds thereof. The trust may not
engage in any activity other than as specified under "The
Trust" in this prospectus supplement. 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 and any action taken by it that materially
affects the notes and that has not been previously reported. 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 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 by the modification, however, no supplemental
indenture will:
(1) change the due date of any installment of principal of or
interest on any note or reduce the principal amount of the
notes, the interest rate specified or the redemption price or
change any place of payment where or the coin or currency in
which any note or any interest is payable;
(2) impair the right to institute suit for the enforcement of
certain provisions of the indenture regarding payment;
(3) 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
under the indenture and their consequences as provided for in
the indenture;
(4) 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;
(5) 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
(6) permit the creation of any lien ranking prior to or on a parity
with the lien of the indenture with respect to any of the
collateral for the notes or, except as otherwise permitted or
contemplated in the indenture, terminate the lien of the
indenture on any collateral of the trust 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 the indenture
trustee, the depositor and any director, officer or employee thereof will not
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 the indenture or by reason of reckless
disregard of its obligations and duties under the indenture. The
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 the material terms of the trust
agreement. We refer you to "Description of the Securities" for a summary of
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
the holders a statement setting forth:
(1) the amount of interest included in the distribution and the
note rate and the certificate rate;
(2) any amount of overdue accrued interest included in the
distribution (and the amount of interest thereon);
(3) any amount of the remaining overdue accrued interest after
giving effect to the distribution;
(4) any amount of principal included in the distribution;
(5) any amount of the reimbursement of previous liquidation loss
amounts included in the distribution;
(6) any amount of the aggregate unreimbursed liquidation loss
amounts after giving effect to the distribution;
(7) the servicing fee for the distribution date;
(8) the pool balance as of the end of the preceding collection
period;
(9) 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
(10) 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 (3), (4) and
(5) 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 (3) and (8) above aggregated for that 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 or modifying in
any manner the rights of the holders; provided, however, that the 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 the notes evidencing at least a majority in
principal amount of then outstanding notes and holders owning voting interests
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 that person and certain actions by that 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 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, 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 that 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 the 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 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 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. 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 or by reason of reckless disregard of its obligations and duties.
Any 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.
The Administrator will agree, to the extent provided in the 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 the sale and the purchase of the mortgage loans and other corporate
purposes.
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 "Federal Income Tax Consequences-Taxation of
Debt Securities" in the prospectus applies with respect to the final OID
regulations.
Prospective purchasers should refer to "Federal Income Tax
Considerations" in the prospectus for a discussion of the application of
federal income tax laws to the trust and the securities.
State Tax Consequences
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences" above, potential investors should consider
the state income tax consequences of the acquisition, ownership, and
disposition of the securities. State income tax law may differ substantially
from the corresponding federal tax law, and this discussion does not 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.
ERISA Considerations
Section 406 of the 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 (1) will serve as a primary basis
for investment decisions with respect to such Plan assets and (2) 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
(1) 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 (2) 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 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., and
Lehman Brothers Inc. has agreed to purchase from the depositor, the
securities. Lehman Brothers Inc. is obligated to purchase all the securities
offered hereby if any are purchased. The depositor has been advised by Lehman
Brothers Inc. that it presently intends to make a market in the securities;
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
Lehman Brothers Inc. 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, Lehman Brothers Inc. 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
Lehman Brothers Inc. against certain liabilities, including liabilities under
the Securities Act of 1933, or contribute payments Lehman Brothers Inc. may be
required to make. [The depositor, which is a wholly owned subsidiary of Lehman
Brothers Inc., will own at least ___% of the outstanding principal amount of
the notes at all times prior to their payment in full.]
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 Lehman
Brothers Inc. 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.
Index of Defined Terms
<PAGE>
Cedelbank Participants, 24
Cooperative, 24
Definitive Security, 22
Euroclear Operator, 24
Euroclear Participants, 24
Financial Intermediary, 22
Holder, 22
Interest Collections, 20
OID, 35
Principal Collections, 20
Rules, 23
Security Owners, 22
Similar Law, 36
Terms and Conditions, 25
$--,---,---,---
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
The information is 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 August 10, 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 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
(1) closed-end and/or revolving home equity loans or
specified 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,
(2) 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;
(3) private securities evidencing ownership interests in or
secured by loans similar to the types of loans described in
clauses (1) and (2) above,
(b) all monies due under the above assets (which may be net of
amounts payable to the servicer), and
(c) funds or accounts established for the related trust fund, or
one or more forms of enhancement.
The prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES, SEE
RISK FACTORS ON PAGE 2.
Neither the SEC nor any state securities commission has approved or
disapproved the offered securities or determined if this prospectus is
accurate or complete. Making any contrary representation is a criminal
offense.
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 ABILITY TO SELL SECURITIES OR LOWER
RETURNS
There will be no market for the securities of any series prior to their
issuance, and there can be no assurance that a secondary market will develop.
If a secondary market does develop, there can be no assurance that it will
provide holders with liquidity of investment or that the market will continue
for the life of the securities of such series. Lehman Brothers, through one or
more of its affiliates, and any other 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 you would
receive for a comparable liquid security.
LIMITED ASSETS FOR PAYMENTS - NO RECOURSE TO DEPOSITOR, SELLER OR SERVICER
The depositor does not have, nor is it expected to have, any significant
assets. The securities of a series will be payable solely from the assets of
the trust fund for that series. 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 or custody receipt.
Further, as described in the related prospectus supplement, at the times
set forth in the related prospectus supplement, some primary assets and/or any
amount remaining in the collection account or distribution account for a
series and other amounts described 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 the holders of the
securities. 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 that series,
for the payment of principal of and interest on the securities of that series.
If there is a default with respect to payments on a series of notes,
holders of those notes will be required under the indenture to proceed only
against the primary assets and other assets constituting the related trust
fund 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 those notes, no other assets
would be available for payment of the deficiency and holders of those notes
may experience a loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to 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. If the depositor does not have sufficient assets and no other
party is obligated to repurchase defective primary assets, you may experience
a loss.
WE REFER YOU TO "THE AGREEMENTS - ASSIGNMENT OF PRIMARY ASSETS."
LIMITS ON ENHANCEMENT MAY RESULT IN LOSSES TO HOLDERS
Although enhancement for the securities is intended to reduce the risk of
delinquent payments or losses to holders of a series 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 prior to the payment in full of the related
series of securities, and losses on the primary assets could result in losses
to holders of those securities.
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 and timing of payment of principal of the loans or of the
underlying loans relating to the private securities. The rate and timing of
principal payments of the securities of a series will be affected by a number
of factors, including the following:
(1) the extent of prepayments, which may be influenced by a variety
of factors,
(2) the manner of allocating principal payments among the classes of
securities of a series as specified in the related prospectus
supplement, and
(3) the exercise 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
representations or 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."
STATUS OF LOANS AS JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE
PROCEEDINGS
The mortgages may be junior liens subordinate to the rights of the
mortgagee under the senior mortgage or mortgages on the same mortgaged
property. The proceeds from any liquidation, insurance or condemnation
proceedings in connection with a junior mortgage will be available to satisfy
the outstanding balance of that mortgage only to the extent that the claims of
the 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. If a junior mortgagee forecloses on the mortgaged property, 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. The trust fund will not have any source of funds to satisfy the
senior mortgages or make payments due to the senior mortgagees. As a result,
the servicer may not be able to foreclose on a mortgaged property or may
realize lower proceeds in a foreclosure relating to a defaulted loan and you
may experience a corresponding loss.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR
LIENHOLDERS
There are several factors that could adversely affect the value of
properties and the outstanding balance of the related loan, together with any
senior financing, 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 decline in the value of a property could
extinguish the value of a junior interest in that property before having any
effect on the related senior interest therein. If a decline in the value of
the properties 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.
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF ENVIRONMENTAL LAWS
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some 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 other lien against the related property. In addition,
under the laws of some states and under CERCLA, a lender may be liable, as an
"owner" or "operator," for costs of addressing releases or threatened releases
of hazardous substances that require remedy at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower, regardless of whether or not the environmental damage or threat
was caused by a prior owner. A lender also risks liability under CERCLA on
foreclosure of the mortgaged property securing a mortgage. Failure to comply
with environmental laws may result in fines and penalties that could be
assessed against the trust fund as owner of the related property. If a trust
fund is considered an owner or an operator of a contaminated property, the
trust fund will suffer losses for any liability imposed for environmental
hazards on the property. These losses may result in reductions in the amounts
distributed to the holders of the related securities.
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS
Applicable state laws generally regulate interest rates and other charges
and require particular 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
particular disclosures to borrowers, that prohibit discrimination and that
regulate the use and reporting of information relating to the borrower's
credit experience. Violations of 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 as
the owner of the loan to damages and administrative enforcement.
WE REFER YOU TO "LEGAL ASPECTS OF LOANS."
The home improvement contracts are also subject to the regulations of the
Federal Trade Commission and other similar federal and state statutes and
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.
Losses on loans from violation of these lending laws that are not
otherwise covered by the enhancement for a series will be borne by the holders
of one or more classes of securities for the related series.
RATING OF THE SECURITIES RELATES TO CREDIT RISK ONLY AND DOES NOT ASSURE
PAYMENT ON THE SECURITIES
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 those securities. A 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
rating will remain in effect for any given period of time or that the rating
will 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 the related enhancer's financial
strength. 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 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 generally
will be entitled to receive the proceeds of any such sale to the extent of
their unpaid fees and other amounts prior to distributions to holders of
securities. Upon a sale, the proceeds may be insufficient to pay in full the
principal of and interest on the securities of a series.
The amount of liquidation expenses incurred 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 net realizations in the case of a typical pool of first
mortgage loans. The payment of liquidation 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
A series of securities issued under this registration statement may
consist of any combination of notes, certificates or custody receipts. If
notes are issued, they will be issued in series pursuant to an indenture
between the related trust fund and the entity named in the related prospectus
supplement as trustee with respect to that series. A form of indenture has
been filed as an exhibit to the registration statement of which this
prospectus forms a part. If certificates are issued, they will also be issued
in series pursuant to separate agreements - either 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 and trust agreement have been filed as exhibits to the registration
statement of which this prospectus forms a part. If custody receipts are
issued, they will be issued in series pursuant to a custody agreement among
the depositor and the entity named in the related prospectus supplement as
custodian. A form of custody agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
The depositor will acquire the primary assets for any series of
securities from one or more sellers. The seller will agree to reimburse the
depositor for fees and expenses of the depositor incurred in connection with
the issuance and offering of the securities.
The following summaries describe 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 of securities to payments that are made on
classes of notes held by the custodian. Accordingly, to the extent the
following descriptions apply to notes, including the effect that payments on
the loans may have on notes that are secured by those loans, those
descriptions also apply to custody receipts.
Each series of securities will consist of one or more classes of
securities, 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 the registration of transfer or exchange. One or
more classes of a series may be available in book-entry form only.
Payments of principal of and interest on a series of securities will be
made on the distribution date to the extent and in the manner specified in the
prospectus supplement relating to that series. Payment to holders of
securities may be made by check mailed to those holders, registered at the
close of business on the related record date specified in the related
prospectus supplement at their addresses appearing on the security register,
or by wire transfer which may be at the expense of the holder requesting
payment by wire transfer. Final payments of principal in retirement of each
security will be made only upon presentation and surrender of that 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 that security
before the distribution date on which the final principal payment on any
security is expected to be made to the holder of that 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. As described in the related
prospectus supplement, 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 collection account established by the trustee or the
servicer. If and as provided in the related prospectus supplement, the deposit
to the collection account may be net of amounts payable to the related
servicer and any other person specified in the prospectus supplement. Amounts
deposited in the collection account will thereafter be deposited into the
distribution account so that they are available to make payments on securities
of that 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. As described in the related prospectus
supplement, 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 of amounts payable as expenses described in the prospectus
supplement, together with income earned on each 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 that series over periods equal to the interval between
payments on the notes, and (b) the then principal balance of the primary
assets. 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 or another amount described in the related prospectus
supplement.
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
insured, the related prospectus supplement will set forth the terms of that
arrangement.
PAYMENTS OF INTEREST
Those securities entitled by their terms to receive interest will bear
interest from the date and at the rate per annum specified, or calculated in
the method described, in the related prospectus supplement. Interest on
interest bearing 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, as applicable, included in the
related trust fund and/or as prepayments occur with respect to the related
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 that distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made
to the related holders to which principal is then payable, to the extent set
forth in the related prospectus supplement. Principal 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 some specified
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 for the
calculation of interest and for 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 the date on which its principal
will be fully paid. The final scheduled distribution date with respect to each
class of certificates will be the date on which the entire aggregate principal
balance of that class is expected to be reduced to zero. The final scheduled
distribution date for each class of securities will be calculated on the basis
of the assumptions applicable to the related 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 be the maturity date of the primary
asset in the related trust fund which has the latest stated maturity or will
be determined as described 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 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 distribution dates less frequently than monthly, one or more
classes of securities of that series may be subject to special redemption, in
whole or in part, on the day specified in the related prospectus supplement. A
special redemption may occur if, as a consequence of prepayments on the loans
or underlying loans, as applicable, relating to a series of 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 is
less than the amount of interest that will have accrued on those securities
through the designated interest accrual date specified in the related
prospectus supplement. In that event and as further described in the related
prospectus supplement, the trustee will redeem, prior to the designated
interest accrual date, a sufficient principal amount of outstanding securities
of that series to cause the available to pay interest to equal the amount of
interest that will have accrued on the principal amount that remains
outstanding through the designated interest accrual date for the series of
securities outstanding immediately after that 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 that 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 that 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 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 a 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 must 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. Generally, 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 that series and the percentage of the original
principal amount of each class of securities of that series that would be
outstanding on specified distribution dates for that 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 a group of assets
specified in the related prospectus supplement. As described under "Custody
Receipts; Custody Agreements", custody receipts entitle the related holders of
securities to payments that are made on classes of notes held by the
custodian. Accordingly, to the extent the following descriptions apply to
notes, including the descriptions of loans that may be primary assets that
secure notes, those descriptions also apply to custody receipts. The trust
fund of each series will include assets purchased from the seller composed of:
(1) the Primary Assets;
(2) amounts available from the reinvestment of payments
on such primary assets at the assumed reinvestment rate, if
any, specified in the related prospectus supplement;
(3) any Enhancement for that series;
(4) any property that secured a loan but which is
acquired by foreclosure or deed in lieu of foreclosure or
repossession; and
(5) 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, will serve as collateral only for that
series of securities, unless the related prospectus supplement sets forth the
other series of securities for which those assets serve as collateral. Holders
of a series of notes may only proceed against the collateral securing that
series of notes in the case of a default with respect to that series of notes
and may not proceed against any assets of the depositor, any of its affiliates
or assets of the related trust fund not pledged to secure those 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 of the issuer, 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 between the trust fund and servicer, with respect to a
series of notes.
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 between the depositor and the trustee of that trust fund
specified in the related prospectus supplement.
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.
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 to the
securities and 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. On the closing date, no more than 5% of the
primary assets (by aggregate principal balance as of the cut-off date) will
have characteristics that deviate from the description of those primary assets
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 balances thereof and/or loans the proceeds of which have been applied to
the purchase of the related mortgaged property 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, may be computed and payable monthly on the
average daily outstanding principal balance of the 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 the balances on the revolving credit line loans. The
amounts of draws and payments on the revolving credit line loans will usually
differ each day. 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 the 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 the loan multiplied by its loan rate and further multiplied by a
fraction described in the related prospectus supplement. The original terms to
stated maturity of the loans generally will not exceed 360 months, but may be
greater than 360 months if so specified in the related prospectus supplement.
If described in the related prospectus supplement, 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 properties,
one- to four-family residential housing, including condominium units and
cooperative dwellings. The mortgaged properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row
houses, individual units in planned unit developments and other attached
dwelling units. Each single family property will be located on land owned in
fee simple by the borrower or on land leased by the borrower. 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 may be owner-occupied or investor properties
and the loan purpose may be a refinancing or a purchase.
Mortgages on cooperative dwellings generally consist of a lien on the
shares issued by the cooperative dwelling and the proprietary lease or
occupancy agreement relating to that cooperative dwelling.
The aggregate principal balance of loans secured by mortgaged properties
that are owner-occupied will be disclosed in the related 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:
(1) the making of a representation by the borrower at origination of the
loan either that the underlying mortgaged property will be used by the
borrower 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
(2) a finding that the address of the underlying mortgaged property is
the borrower'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 also may
consist, in whole or part, of home improvement installment sales contracts and
installment loan agreements 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 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 home improvement contracts may be fully
amortizing or provide for a balloon payment, 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.
The home improvements securing the home improvement contracts may include
among other things, 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 as specified in the related prospectus
supplement. Loans may be originated by or acquired from an affiliate of the
depositor. 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 specified asset value tests are met, as described
in the related prospectus supplement.
A trust fund 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 may provide information
with respect to the Loans that are primary assets as of the cut-off date
specified in such prospectus supplement 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 outstanding 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 outstanding 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 will be filed with the SEC within 15
days after the initial issuance of the 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 loans that are of the type that would otherwise be eligible to be
loans; or
(b) collateralized obligations secured by underlying loans; or
While the underlying loans will be of a type that would otherwise be
eligible to be loans since they will have been part of a prior unrelated
securitization they may include underlying loans that are more delinquent or
that have been foreclosed.
The pass-through certificates or collateralized obligations will have
previously been (1) offered and distributed to the public pursuant to an
effective registration statement or (2) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of the private 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 of the United States, they need not be. Private securities
will not be insured or guaranteed by the United States or any agency or
instrumentality of the United States.
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 the private securities or any affiliate thereof. As a result, no 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 that Agreement (the "PS
Trustee"). The PS Trustee, its agent, or a custodian, will possess the
underlying loans. The 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
those trusts, and selling beneficial interests in those 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
representations and warranties with respect to the assets conveyed by it to
the related trust. The PS Sponsor generally will not have guaranteed any of
the assets conveyed to the related trust or any of the private securities
issued under the PS Agreement but may guarantee those assets if specified in
the prospectus supplement.
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. Payments on the private securities generally 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 specified 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.
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 the
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 on an approximate
basis, to the extent relevant and to the extent the information is reasonably
available to the depositor and the depositor reasonably believes the
information to be reliable:
(1) the aggregate approximate principal amount and type of the
private securities to be included in the trust fund for such series;
(2) characteristics of the underlying loans including:
(A) the payment features of the 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 the
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 the underlying
loans at origination,
(E) the lien priority and credit utilization rates, if any, of the
underlying loans, and
(F) the delinquency status and year of origination of the
underlying loans;
(3) the maximum original term-to-stated maturity of the private
securities;
(4) the weighted average term-to-stated maturity of the private
securities;
(5) the pass-through or certificate rate or ranges thereof for the
private securities;
(6) the PS Sponsor, the PS Servicer and the PS Trustee for the
private securities;
(7) the characteristics of enhancement, if any, including reserve
funds, insurance policies, letters of credit or guarantees relating
to the underlying loans or to the private securities themselves;
(8) 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
(9) the terms on which additional loans may be substituted for
those underlying loans 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 SEC within 15 days the initial issuance of the
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. The trustee may be required to apply a portion of the amount in
the collection account, together with reinvestment earnings from eligible
investments to the extent they are not to be included in payments to the
holders to the payment of 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 that
series, each in the manner and at the times established in the related
prospectus supplement. Amounts available pursuant to any Enhancement, as
provided in the related prospectus supplement, will also be deposited in the
related distribution account.
Amounts deposited in the distribution account may be available for the
following purposes:
(1) application to the payment of principal of and interest on the
series of securities on the next distribution date,
(2) the making of adequate provision for future payments on
specified classes of securities and
(3) 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 the
Series or any other person entitled to those amounts in the manner and at the
times described in the related prospectus supplement. As described in the
related prospectus supplement, the trustee may invest the funds in the
collection and distribution accounts in eligible investments maturing, with
permissible 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, not later than the day preceding the next
distribution date for the related series of securities. Eligible investments
may include, among other investments, obligations of the United States and
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, repurchase agreements of
United States government securities and 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 or the seller will obtain Enhancement in
favor of the trustee on behalf of holders of the related series or designated
classes of the series. Enhancement may take the form of an irrevocable letter
of credit, surety bond or insurance policy, reserve funds, subordinate
securities, overcollateralization or any other form of enhancement or
combination thereof. The Enhancement will support the payment of principal and
interest on the securities, and may be applied for other purposes to the
extent and under the conditions set forth in such prospectus supplement. If so
specified in the related prospectus supplement, any 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 to 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 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 pool insurance policies, 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 or the seller may obtain a
pool insurance policy for the loans in the related trust fund. A pool
insurance policy would cover, subject to the limitations described in a
related prospectus supplement, any loss sustained by reason of default, but
would 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 the policies vary
to some degree, a special hazard insurance policy typically provides coverage,
where there has been damage to property securing a defaulted or foreclosed
loan to which title has been acquired by the insured and to the extent the
damage is not covered by the standard hazard insurance policy or any flood
insurance policy, if applicable, required to be maintained with respect to the
property, or in connection with partial loss resulting from the application of
the coinsurance clause in a standard hazard insurance policy. Typically, the
special hazard insurer will pay the lesser of (1) the cost of repair or
replacement of such property or (2) upon transfer of the property to the
special hazard insurer, the unpaid principal balance of the loan at the time
of acquisition of the property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and expenses incurred by
the servicer with respect to the property. If the unpaid principal balance
plus accrued interest and expenses is paid by the special hazard insurer, the
amount of further coverage under the special hazard insurance policy will be
reduced by that amount less any net proceeds from the sale of the property.
Any amount paid as the cost of repair of the property will reduce coverage by
that amount. Special hazard insurance policies typically do not cover losses
occasioned by, among other risks, war, civil insurrection, governmental
actions, errors in design, faulty workmanship or materials, nuclear reaction,
flood, if the mortgaged property is in a federally designated flood area and
chemical contamination.
Restoration of the property with the proceeds described under (1) above
is expected to satisfy the condition under any pool insurance policy that the
property be restored before a claim under the pool insurance policy may be
validly presented with respect to the defaulted loan secured by the property.
The payment described under (2) above will render unnecessary presentation of
a claim in respect of the loan under any pool insurance policy. Therefore, so
long as the 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 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 the
loan. The amount of the secured debt could be reduced to the value established
by the bankruptcy court, and the holder of the loan thus would become an
unsecured creditor to the extent the outstanding principal balance of the loan
exceeds that value. In addition, other modifications of the terms of a loan
can result from a bankruptcy proceeding. See "Legal Aspects of Loans." If so
provided in the related prospectus supplement, the depositor, the seller or
other entity specified in the related prospectus supplement will obtain a
bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the Bankruptcy Code. The
bankruptcy bond will cover a portion of losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a loan
or a reduction by that court of the principal amount of a loan and will cover
a portion of unpaid interest on the amount of that 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 that series. The amount of coverage will be reduced by payments made under
the bankruptcy bond in respect of the loans, and may or may not be restored,
as described in the related prospectus supplement.
RESERVE FUNDS
If so specified in the related prospectus supplement, the depositor or
the seller will deposit into one or more funds to be established with the
trustee as part of the trust fund for the series or for the benefit of any
enhancer with respect to that series 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 the related prospectus supplement. In the alternative or
in addition to that deposit, a reserve fund for a series may be funded over
time through the application of all or a portion of the excess cash flow from
the primary assets for the 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 or the seller will enter into a minimum principal
payment agreement with an entity meeting the criteria of the rating agency
pursuant to which that entity will provide payments on the securities of the
series in the event that aggregate scheduled principal payments and/or
prepayments on the primary assets for that series are not sufficient to make
payments on the securities of that series, all as provided in the prospectus
supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the depositor or the seller and
the trustee for a series of securities will enter into a guaranteed investment
contract or an investment agreement with the entity specified in such
prospectus supplement on or before the sale of that 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 the 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
If specified in the related prospectus supplement, the depositor or the
seller may establish one or more derivative products to provide enhancement
for the related series of securities. 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.
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:
(1) maintaining timely payments to holders of securities or
providing additional protection against losses on the assets
included in such trust fund,
(2) paying administrative expenses or
(3) establishing a minimum reinvestment rate on the payments made
in respect of the assets or principal payment rate on the
assets.
These 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 a 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. As described herein under "Custody Receipts;
Custody Agreements", custody receipts entitle the related holders of
securities to payments that are made on classes of notes held by the related
custodian. Those classes of notes may be secured by loans. Accordingly, the
following descriptions of servicing are relevant to holders of securities
which are 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 those
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, (1) waive any assumption fee, late payment charge, or other charge
in connection with a loan or (2) to the extent provided in the related
agreement, arrange with an obligor a schedule for curing delinquencies by
modifying the due dates of scheduled payments on that loan.
If specified in the related prospectus supplement, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound
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 escrow payments under the
related loan documents, in which case the servicer would not be required to
establish any escrow account with respect to those 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 the escrow account. The
servicer will be responsible for the administration of the escrow accounts and
generally will make advances to that account when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The trustee or the servicer will establish a collection account in the
name of the trustee. Typically, the collection account will be an account
maintained (1) 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 that series at levels satisfactory to
each rating agency or (2) 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.
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.
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 the time-period specified in the related
prospectus supplement after the date of receipt thereof, the following
payments and collections received or made by it to the extent required to be
deposited in to the Collection Account:
(1) All payments on account of principal, including
prepayments, on the primary assets;
(2) All payments on account of interest on the 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
those primary assets;
(3) 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 the 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,
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;
(4) All proceeds under any title insurance, hazard
insurance or other insurance policy covering any 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;
(5) All amounts required to be deposited therein from any
applicable reserve fund for that series pursuant to the related
agreement;
(6) All advances of delinquent payments of principal of
and interest on a loan or other payments specified in the
agreement made by the servicer as required pursuant to the
related agreement; and
(7) All repurchase prices of any such primary assets
repurchased by the depositor, the servicer or the seller, as
appropriate, pursuant to the related agreement.
The servicer generally is permitted, from time to time, to make
withdrawals from the collection account for each series for the following
purposes:
(1) to reimburse itself for advances for that series made
by it pursuant to the related agreement to the extent of
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, late recoveries of scheduled payments with
respect to which any Advance was made;
(2) to the extent provided in the related agreement, to
reimburse itself for any advances for that series that the
servicer determines in good faith it will be unable to recover
from the related primary asset;
(3) 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 that reimbursement exceed the outstanding
principal balance of the related loan, together with accrued
and unpaid interest thereon to the due date for that loan next
succeeding the date of its receipt of the liquidation proceeds,
to pay to itself out of the excess the amount of any unpaid
servicing fee and any assumption fees, late payment charges, or
other charges on the related loan;
(4) 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 the 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 scheduled payment, late payment or other
recovery, to the extent permitted by the related agreement;
(5) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related
agreement;
(6) 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;
(7) to make payments to the trustee of the series for
deposit into the distribution account, if any, or for
remittance to the holders of the series in the amounts and in
the manner provided for in the related agreement; and
(8) 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 that amount from the 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 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 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. The related prospectus
supplement will state whether or not 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 other hazards as is customary in the state in which the related
property is located. If such insurance is required, generally it would 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, these 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 standard hazard
insurance 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 some cases, vandalism. The foregoing list is merely indicative 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 that 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, the coinsurance 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 the 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.
Coverage typically 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. Coverage may also be in a lesser amount if so described in the
related prospectus supplement. The servicer typically 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 the REO Property. However, if so specified in the related prospectus
supplement, the servicer may not maintain insurance policies for acquired 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 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 that 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 the
policy absent the deductible clause, deposit in the collection account the
amount of the deductible.
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 the practices and procedures it deems necessary or advisable and
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:
(1) 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
(2) 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 that 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 that loan to the extent provided in the related prospectus
supplement. 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.
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 the prospective conveyance and prior
to the time of the consummation of that 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 the "due-on-sale" clause is
not enforceable under applicable law or if the enforcement of that clause
would result in loss of coverage under any primary mortgage insurance policy.
In that event, the servicer is authorized to accept from or enter into an
assumption agreement with the person to whom the property has been or is about
to be conveyed, pursuant to which that person becomes liable under the loan
and pursuant to which the original obligor is released from liability and that
person is substituted as the obligor 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
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. To the extent provided in
the related prospectus supplement, 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 prepayment interest shortfalls in a month exceeds the
servicing fee for that month, a shortfall to holders may occur.
To the extent permitted by the related agreement, the servicer will be
entitled to reimbursement for expenses incurred by it in connection with the
liquidation of defaulted loans. The related holders will suffer no loss by
reason of liquidation expenses to the extent expenses are covered under
related insurance policies or from excess liquidation proceeds. If claims are
either not made or not 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, 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 generally is also entitled to reimbursement
from the collection account for advances in respect of loans.
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 the series.
EVIDENCE AS TO COMPLIANCE
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 documents and records relating to
the servicing of the loans by the servicer and that, on the basis of such
examination, that firm is of the opinion that the servicing has been conducted
in compliance with the agreement, except for (1) those exceptions as such firm
believes to be immaterial and (2) such other exceptions as are set forth in
the 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 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 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. Events of Default and the rights of the trustee upon
a default under the agreement for the related series will be described in the
related prospectus supplement substantially similar to those described under
"The Agreements--Events of Default; Rights Upon Events of DefaulT--Pooling and
Servicing Agreement; Servicing Agreement."
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:
(1) services similar loans in the ordinary course of its business,
(2) is reasonably satisfactory to the trustee for the related
series,
(3) has a net worth of not less than the amount specified in the
related prospectus supplement,
(4) would not cause any Rating Agency's rating of the securities
for that series in effect immediately prior to the assignment, sale
or transfer to be qualified, downgraded or withdrawn as a result of
the assignment, sale or transfer and
(5) executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, which contains an
assumption by the 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 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 that 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 the 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 person will be
protected against any breach of warranty or representations made under the
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 the 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 that event, the legal
expenses and costs of the 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 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 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
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. The 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 trustee will, concurrently with the assignment, execute
and deliver the securities.
ASSIGNMENT OF LOANS. If required by 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 an asset custodian on behalf of the trustee,
o the mortgage note endorsed without recourse to the order of the
trustee or in blank,
o 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 that mortgage will be delivered,
together with a certificate that the original of that mortgage was
delivered to the recording office) and
o an assignment of the mortgage in recordable form.
The trustee, or the asset custodian, will hold the documents in trust for
the benefit of the holders of securities.
If required by 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 the 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 or the seller 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. Typically, 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 the assignment, the interest of holders of
securities in the home improvement contracts could be defeated. If specified
by the related prospectus supplement, however, the home improvement contracts
may be stamped or otherwise marked to reflect their assignment to the trust.
See "Legal Aspects of Loans--The Home Improvement Contracts."
With respect to loans secured by mortgages, if so specified in the
related prospectus supplement, the depositor or the seller 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 assignments of
mortgage to be recorded within the time after issuance of the securities as is
specified in the related prospectus supplement. If the assignments of mortgage
are not so recorded as required, the agreement may, as specified in the
related prospectus supplement, require the depositor or the seller to
repurchase from the trustee any loan the related mortgage of which is not
recorded within the required time, at the price described below with respect
to repurchases by reason of defective documentation. The enforcement of the
repurchase obligation typically will constitute the sole remedy available to
the holders or the trustee for the failure of a mortgage to be recorded. If
the agreement for a series does not require that assignments be recorded at
closing, the related prospectus supplement will describe the circumstances, if
any, under which recordation would be required in the future.
Each loan will be identified in a loan schedule appearing as an exhibit
to the related agreement. The 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. Generally, 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 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:
(1) that the information contained in the private
security schedule is true and correct in all material respects;
(2) that, immediately prior to the conveyance of the
private securities, the depositor had good title thereto to the
extent good title was conveyed to it, and was the sole owner
thereof subject to any retained interest of the depositor or
the seller;
(3) that there has been no other sale by it of the
private securities; and
(4) that there is no existing lien, charge, security
interest or other encumbrance other than any retained interest
of the depositor or the seller on the 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 during its examination to
be defective in any material respect for which the depositor or seller does
not cure the defect within the required time period, the depositor or seller
will within the required period, 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.
The repurchase shall be at a price equal to, unless otherwise specified in the
related prospectus supplement, (a) the lesser of (1) the outstanding principal
balance of such primary asset and (2) 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 the primary asset at the rate set forth in the
related agreement, (less any unreimbursed advances respecting the primary
asset,) provided, however, the purchase price shall not be limited in (1)
above to the trust fund's federal income tax basis if the repurchase at a
price equal to the outstanding principal balance of the 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 the primary asset from the trust fund and substitute
in its place one or more other primary assets provided, however, that (1) with
respect to a trust fund for which no REMIC election is made, the substitution
must be effected within 120 days of the date of initial issuance of the
securities and (2) 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 the 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.
Generally, any qualifying substitute primary asset will have, on the date
of substitution, the following characteristics:
(1) 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
with the amount of any shortfall to be deposited to the collection
account or distribution account in the month of substitution for
distribution to holders,
(2) an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
(3) a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset,
and
(4) will comply with all of the representations and warranties set
forth in the applicable agreement as of the date of substitution.
The depositor, the seller or another entity will make representations and
warranties with respect to primary assets for a series. If the depositor, the
seller or the other entity cannot cure a breach of its representations and
warranties in all material respects within the time period specified in the
related prospectus supplement after notification by the trustee of the breach,
and if the breach is of a nature that materially and adversely affects the
value of the primary asset, the depositor, the seller or the other 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 the primary assets. See "Risk
Factors--Limited Assets."
The above-described cure, repurchase or substitution obligations
generally 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 that holder's
status as a holder, will have any right under the applicable agreement for a
series to institute any proceeding with respect to the agreement, unless the
holder previously has given to the trustee for that 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 that series have made
written request upon the trustee to institute a 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 that
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 specified in the
related prospectus supplement into a pre-funding account. In no event shall
the pre-funded amount exceed 50% of the initial aggregate principal amount of
the securities of the related series. The pre-funded amount will be used to
purchase subsequent loans during the funding period which is the period from
the related closing date to a date not more than one year after the closing
date. The pre-funding account will be maintained with the trustee for the
related series of securities and will be designed solely to hold funds to be
applied by the 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 a prepayment will be borne
entirely by the classes of the related series of securities entitled to
receive the corresponding principal payment. 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
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 a capitalized interest
account cash in an amount sufficient to cover shortfalls in interest on the
related series of securities that may arise as a result of the use of funds in
the pre-funding account to purchase subsequent loans. 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. If monies on deposit in the capitalized interest account have 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 or the seller.
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:
(1) the amount of principal distributed to holders of the
related securities and the outstanding principal balance of the
securities following the distribution;
(2) the amount of interest distributed to holders of the
related securities and the current interest on the securities;
(3) the amounts of (a) any overdue accrued interest
included in the distribution, (b) any remaining overdue accrued
interest with respect to the securities or (c) any current
shortfall in amounts to be distributed as accrued interest to
holders of the securities;
(4) the amounts of (a) any overdue payments of scheduled
principal included in the distribution, (b) any remaining
overdue principal amounts with respect to the 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 the securities;
(5) the amount received under any related Enhancement,
and the remaining amount available under the Enhancement;
(6) the amount of any delinquencies with respect to
payments on the related primary assets;
(7) the book value of any REO Property acquired by the
related trust fund; and
(8) any other information specified in the related
Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the trustee or other entity will furnish to each holder of
record at any time during the calendar year: (a) the aggregate of amounts
reported pursuant to (1), (2), and (4)(d) above for such calendar year and (b)
the 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. Events of Default
under a pooling and servicing agreement or a servicing agreement for each
series of certificates relating to loans include, among other things:
(1) any failure by the servicer to deposit amounts in the
collection account and distribution account to enable the trustee to
distribute to holders of that 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
the failure to the servicer by the trustee for that series, or to
the servicer and the trustee by the holders of the series evidencing
not less than 25% of the aggregate voting rights of the holders for
that series,
(2) 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 that failure to the servicer by the trustee, or
to the servicer and the trustee by the holders of the series
evidencing not less than 25% of the aggregate voting rights of the
holders of that series, and
(3) specified events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and
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 that series or holders of securities of that series evidencing not less
than 51% of the aggregate voting rights of the securities for that 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 that agreement which rights the
servicer will retain under all circumstances. Upon the termination of the
servicer, 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 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 the agreement.
During the continuance of any Event of Default of a servicer under an
agreement for a series of securities, the trustee for that 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 that series, and holders of
securities evidencing not less than 51% of the aggregate voting rights of the
securities for that series may, if so specified in the related prospectus
supplement, 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 remedy or to exercise any of the trusts or powers unless the
holders have offered the trustee reasonable security or indemnity against the
cost, expenses and liabilities which may be incurred by the trustee in
connection with a servicer termination. Also, the trustee may decline to
follow any direction if the trustee determines that the action or proceeding
so directed may not lawfully be taken or would involve the trustee in personal
liability or be unjustly prejudicial to the nonassenting holders.
INDENTURE. Events of Default under the indenture for each series of notes
may include, among other things:
(1) 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 any note's maturity;
(2) 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;
(3) 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;
(4) specified events of bankruptcy, insolvency, receivership or
liquidation of the depositor or the trust fund; or
(5) 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 occurs and
is continuing, either the trustee or the holders of a majority of the then
aggregate outstanding amount of the notes of that series may declare the
principal amount, or, if the notes of that series are Zero Coupon Securities,
that 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
that series to be due and payable immediately. The declaration described above
may, under specified circumstances, be rescinded and annulled by the holders
of a majority in aggregate outstanding amount of the notes of the series.
If, following an Event of Default with respect to any series of notes,
the notes of that series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding any acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration
of acceleration if the collateral continues to provide sufficient funds for
the payment of principal of and interest on the notes of that series as they
would have become due if there had not been a declaration of acceleration. 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 the series consent to the sale,
(b) the proceeds of the sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid, on
the outstanding notes of that series at the date of the sale or
(c) the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
those payments would have become due if the 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 that series. In the event that one or more classes of a
series have the benefit of a security insurance policy, the issuer
of the 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 liquidation for unpaid fees and expenses. As
a result, upon the occurrence of 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 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 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 that 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 a series, unless the 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 the provisions for indemnification
and limitations contained in the indenture, the holders of a majority of the
then aggregate outstanding amount of the notes of a 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 that series, and the holders of a
majority of the then aggregate outstanding amount of the notes of that series
may 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 that 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 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 an appointment, all rights, powers, duties and
obligations conferred or imposed upon the trustee by the agreement relating to
the related series will be conferred or imposed upon the trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform acts, singly upon the
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 that 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 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 of the
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 the funds
or adequate indemnity against that 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 or the seller 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:
(1) if the trustee ceases to be eligible to continue as such under
the agreement,
(2) if the trustee becomes insolvent, or
(3) 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
The agreement for each series of securities may be amended by the
depositor, the servicer, if any, the trustee and any other party specified in
the agreement, without notice to or consent of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or supplement
any provision in the agreement,
(3) to add to the duties of the depositor, the trust fund or
servicer,
(4) to add any other provisions with respect to matters or
questions arising under the agreement or related Enhancement,
(5) to add or amend any provisions of the agreement as required by
a rating agency in order to maintain or improve the rating of the
securities, or
(6) to comply with any requirements imposed by the Code;
provided that any such amendment except pursuant to clause (6) above will not
adversely affect in any material respect the interests of any holders of that
series, as evidenced by an opinion of counsel or by written confirmation from
each rating agency rating the securities that the amendment will not cause a
reduction, qualification or withdrawal of the then current rating of the
securities. The agreement for each series may also be amended by the trustee,
the servicer, if applicable, the depositor and any other party specified in
the agreement with respect to that series with the consent of the holders
possessing not less than 662/3% of the aggregate outstanding principal amount
of the securities of that series or, if only some classes of that series are
affected by the amendment, 662/3% of the aggregate outstanding principal
amount of the securities of each class of that series affected thereby, for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the agreement or modifying in any manner
the rights of holders of the series; provided, however, that no amendment may
(a) reduce the amount or delay the timing of payments on any security without
the consent of the holder of that 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 amendment without
the consent of the holders of 100% of the aggregate outstanding principal
amount of each class of securities affected by that amendment.
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 the holders propose to transmit, the trustee will afford
the 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 required reports and other administrative duties with respect
to the trust fund may be performed by a REMIC administrator, who may be an
affiliate of the depositor, the servicer or the seller.
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 that agreement after the earlier of:
(1) the later of (a) the final payment or other liquidation of the
last primary asset remaining in the trust fund for that 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
(2) the repurchase, as described below, by the servicer or other
entity specified in the related prospectus supplement from the
trustee for 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 related prospectus supplement to purchase from
the trust fund for that series all remaining primary assets at a price equal
to the price specified in the related prospectus supplement. The exercise of
the right to purchase the primary assets will effect early retirement of the
securities of that series, but the entity's right to so purchase is subject to
the aggregate principal balance of the primary assets or the securities 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 or the securities on the closing 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 the 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, the servicer 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 continuing rights, upon the delivery to the
trustee for cancellation of all the notes of that series or, with limitations,
upon deposit with the trustee of funds sufficient for the payment in full of
all of the notes of that series.
In addition to the discharge with 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 that series, except for obligations relating to temporary notes and
exchange of notes, to register the transfer of or exchange notes of that
series, to replace stolen, lost or mutilated notes of that 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 the series on the last scheduled
distribution date for the notes and any installment of interest on the notes
in accordance with the terms of the indenture and the notes of the series. In
the event of any defeasance and discharge of notes of the series, holders of
notes of the series would be able to look only to the 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
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
those 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 the 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 that 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 that notice by mail to the holders
of the related custody receipts. For that purpose, the holders shall consider
the date of the receipt by the custodian of any notice as the record date for
the purpose of determining the holders of record to whom notices shall be
transmitted. In the event notice requests or requires any vote, action or
consent by the holders of a note, the custodian shall within the time period
specified in the related prospectus supplement following receipt of that
notice, deliver to the holders of the custody receipts of a letter of
direction with respect to the vote, action or consent, returnable to the
custodian, and the custodian shall vote the notes in accordance with that
letter of direction. Any record date established by the notice for purposes
specified in the notice shall be the record date for the purpose of
determining the holders of record for those purposes. If no record date is
established by the related trustee, the date the notice is received by the
custodian shall be the record date.
Notwithstanding the above, without the consent of the holders of all of
the 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. The
custodian also 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, 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 the holder by directing the custodian
to take specific actions on behalf of the 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 those 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 its
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 that 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 funds or
adequate indemnity against the 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 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
As set forth in the applicable agreement, the custody agreement for each
series of custody receipts may be amended by the depositor, the servicer, if
any, and the custodian with respect to that series, without notice to or
consent of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or
supplement any provision in the custody agreement,
(3) to add to the duties of the depositor or the
custodian, or
(4) to add any other provisions with respect to matters
or questions arising under the 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 or by
written confirmation from each rating agency that the
amendment will not cause a reduction, qualification or
withdrawal of the then current rating thereof.
In addition, the custody agreement for each series may also be amended by the
custodian and the depositor with respect to that 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 that series affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the custody agreement or modifying in
any manner the rights of holders of such series; provided, however, that no
amendment may (a) reduce the amount or delay the timing of payments on any
custody receipt without the consent of the holder of those 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 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.
LEGAL ASPECTS OF LOANS
The following discussion contains summaries of the material legal aspects
of mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
some 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 home improvement contracts for a series
may, be secured by either mortgages or deeds of trust or deeds to secure debt,
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 those 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, 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 some states,
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 the 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 that would warrant a
court of equity to refuse affirmative relief to the mortgagee. In some
circumstances, a court of equity may relieve the mortgagor from an entirely
technical default where that 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 that the 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.
Alternatively, 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 a deficiency 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 those 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 some 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 a lien for the costs of clean-up has
priority over the lien of an existing mortgage against such property. In
addition, under CERCLA, the 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 those 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. 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 clean-up may be substantial. It is
conceivable that clean-up 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
other than heating oil tanks. The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that 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 clean-up 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 a 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 the 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 those proceeds and awards to any
indebtedness secured by the mortgage, in the order 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 those amounts 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 all taxes
and assessments on the property before delinquency 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 some 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 those 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
Some 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 other states, the lender may have the option of bringing a
personal action against the borrower on the debt without first exhausting the
security; however, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower. 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 of 1940, 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 permissible 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 particular 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, RESPA, 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 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
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 (1) 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 (2) originated by lenders other than national banks, federal savings
institutions and federal credit unions. Freddie Mac 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
some 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 be eliminated in any modified
mortgage resulting from a 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 some states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Some 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 provides that state usury limitations shall not apply to all
types of residential first mortgage loans originated by particular 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 generally
are "chattel paper" or constitute "purchase money security interests" each as
defined in 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. Generally, 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.
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 Holder-in-Due-Course rule of the FTC is intended to defeat the
ability of the transferor of a consumer credit contract which is the seller of
the goods that gave rise to the transaction and related lenders and assignees
to transfer that contract free of notice of claims by the debtor under that
contract. 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 particular kinds of consumer goods. The contracts would be covered if they
satisfy specified 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 the seller, or lender, retains legal title to the property and enters
into an agreement with the purchaser, or borrower, for the payment of the
purchase price, plus interest, over the term of the 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. In that
situation, the lender 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 those 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:
(1) are entitled to have interest rates reduced and capped at 6% per
annum, on obligations incurred prior to the commencement of military service
for the duration of military service,
(2) 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
(3) 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 (1), (2), or (3) 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 those amounts, and any loss in respect
thereof may reduce the amounts available to be paid to the holders of the
certificates of that series. Typically, 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 that series that
is entitled to receive interest in respect of those loans or underlying loans
in proportion to the interest that each class of securities would have
otherwise been entitled to receive in respect of those loans or underlying
loans had the 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, RESPA 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
particular 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. Provisions of these laws impose
specific statutory liabilities upon lenders who fail to comply with them. 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, or HOEPA, which amended the Truth in Lending Act as it applies to
mortgages subject to HOEPA. HOEPA requires additional disclosures, specifies
the timing of such disclosures and limits or prohibits inclusion of particular
provisions in mortgages subject to HOEPA. HOEPA also provides that any
purchaser or assignee of a mortgage covered by HOEPA, 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 HOEPA 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 HOEPA, it will be subject to
all of the claims and defenses which the borrower could assert against the
seller. Any violation of HOEPA 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 the following:
(1) the sale or lease of automobiles, trucks or other motor vehicles,
equipment, merchandise and other personal property,
(2) credit card purchases or cash advances,
(3) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles,
(4) trade financings,
(5) loans secured by certain first or junior mortgages on real estate,
(6) loans to employee stock ownership plans and
(7) 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
those 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 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:
(1) to purchase the related primary assets,
(2) to repay indebtedness which has been incurred to obtain funds
to acquire the primary assets,
(3) to establish any reserve funds described in the related
prospectus supplement and
(4) to pay costs of structuring and issuing the 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.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of the material 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:
(1) the securities of a series are classified as indebtedness;
(2) an election is made to treat the trust fund relating to a particular
series of securities as a REMIC under the Code;
(3) the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or
(4) 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:
(1) 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);
(2) 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
(3) 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".
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. Some Debt Securities may provide
for default remedies in the event of late payment or nonpayment of interest.
The interest on those 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 those 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 the 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, (1) such interest
is unconditionally payable at least annually, (2) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (3)
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: (1) 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), (2) events which have occurred before the end of the accrual
period and (3) 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 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 those 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 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 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 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 that 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. That 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 (1) the yield to maturity of such Debt
Securities and (2) 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 those 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. The 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 (1) on the basis of a constant yield, in the case of a
Pay-Through Security, taking into account a prepayment assumption, or (2) 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 that 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 that 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 that 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 that 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, (1) 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"); (2) 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 (3) 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 (1), (2) or (3) above, then a security will qualify for the tax
treatment described in (1), (2) or (3) 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, those expenses will be deductible only to the extent that
those expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of that 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 (1) 3% of the excess of adjusted gross income over
the applicable amount, or (2) 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 a holder. In general terms, a single class REMIC is one
that either (1) 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 (2) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. In most cases, 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 (1) 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 (2)
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, which is 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:
(1) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
(2) subject to a limited exception, the sale or other disposition of a
cash flow investment;
(3) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
(4) 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 the 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 the 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
that 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 the 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 the 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 that 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
the 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, the holder's excess inclusion income will
be treated as unrelated business taxable income of the 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, or 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 (1) 120% of the long term applicable federal rate on the Startup Day
multiplied by (2) 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 (1) 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 (2) 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 those 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, 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 fees to the trustee and the servicer. 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 the fees to the trustee and the servicer under Section 162
or Section 212 of the Code to the extent that those 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, fees to the trustee
and the servicer, to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation, will be deductible in computing that holder's
regular tax liability only to the extent that those 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 (1) 3% of the excess of adjusted
gross income over the applicable amount or (2) 80% of the amount of itemized
deductions otherwise allowable for that 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, 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
Pass-Through Security, 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 the principal payment
is made. This 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 specified payments of
both interest and principal. Some 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 the stripped interest.
Servicing fees in excess of reasonable servicing fees 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 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
those 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 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 IRS could
contend that (1) 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; (2) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (3) 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 loan's 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. 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 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
(1) fails to furnish the trustee with its taxpayer identification number
("TIN");
(2) furnishes the trustee an incorrect TIN;
(3) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
(4) 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 (1) the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer,
or (2) 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. Those 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 that 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. 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 that note. Any gain or loss will
be capital gain or loss if the Note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. 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 (1) 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 (2) 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 the 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 (1) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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 depositor, 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 securities are denominated in U.S. dollars, none of the
certificates are Indexed Securities or Strip Securities, and that a series of
securities includes a single class of securities. 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
(1) 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;
(2) 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;
(3) prepayment premium payable to the certificateholders for such month;
and
(4) 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 depositor or the seller. 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 that 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 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 the 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 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 loans 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 holder 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. The 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. That information includes (1)
the name, address and taxpayer identification number of the nominee and (2) as
to each beneficial owner (x) the name, address and identification number of
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 depositor 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 that 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 31, 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 (1) a FASIT election is in effect, (2) 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 (3) 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
(1) cash or cash equivalents,
(2) 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,
(3) foreclosure property,
(4) 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,
(5) contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
(6) FASIT regular interests, and
(7) 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: (1) one or more classes of
regular interests or (2) 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
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its stated
principal amount,
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and
(6) 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 "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 (3), (4), or (5), 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 (6), 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
those 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 holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "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
those 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 "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 the 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 the
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
(1) the receipt of income derived from assets that are not permitted
assets,
(2) certain dispositions of permitted assets,
(3) the receipt of any income derived from any loan originated by a
FASIT, and
(4) 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 "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 "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
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, and on persons who are parties in interest or disqualified
persons with respect to those 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.
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; the
plan assets would include an undivided interest in the primary assets and any
other assets held by the trust fund. In that 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: (1) "widely held"
(held by 100 or more investors who are independent of the Depositor and each
other); (2) freely transferable; and (3) 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:
(1) 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;
(2) The rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the trust;
(3) The certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Duff & Phelps Inc.
or Fitch IBCA, Inc.;
(4) 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;
(5) The trustee must not be an affiliate of any other member of
the Restricted Group (as defined below); and
(6) The Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange SEC 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 Additional Obligations to the trust during
the 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 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 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:
(a) the characteristics of the Additional Obligations must
be monitored by an insurer or other enhancement provider that
is independent of the depositor; or
(b) 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 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 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:
(a) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(b) the duration of the funding period;
(c) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
(d) that the amounts remaining in the pre-funding account
at the end of the funding period will be remitted to
certificateholders as repayments of principal.
(9) The related 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:
(1) the corpus of the trust must consist solely of assets
of the type which have been included in other investment pools;
(2) 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
(3) 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:
(1) 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;
(2) 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;
(3) a Plan's investment in securities does not exceed twenty-five
(25) percent of all of the securities outstanding after the
acquisition; and
(4) 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 depositor, 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 SMMEA.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and
to what extent the securities constitute legal investments for them.
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 the series.
PLAN OF DISTRIBUTION
The depositor may offer each series of securities through Lehman Brothers
Inc. or one or more other firms that may be designated at the time of each
offering of the 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
the series of securities and of each class within the 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 dealers. The place and time of delivery of
each series of securities will also be set forth in the prospectus supplement
relating to that series. Lehman Brothers is an affiliate of the depositor.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, 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 SEC in
Washington, D.C. Copies may be obtained at rates prescribed by the SEC upon
request to the SEC, and may be inspected, without charge, at the offices of
the SEC, 450 Fifth Street, N.W., Washington, D.C.
A trust fund formed to issue securities under this prospectus will be
subject to the informational requirements of the Securities Exchange Act of
1934 and in accordance therewith files, for the required period of time,
reports and other information with the SEC. Those reports and other
information can be inspected and copied at the public reference facilities
maintained by the SEC 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 that material can also be obtained from the Public
Reference Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the SEC 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 SEC.
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Additional Obligations.............................95 Permitted Investments..............................96
Assumed Reinvestment Rate...........................8 Pre-Funding Limit..................................95
Cash Flow Bond Method..............................76 Pre-Funding Period.................................95
Code...............................................61 Prepayment Assumption..............................65
Depositor Securities...............................60 PS Agreement.......................................17
Eligible Corporations..............................89 PS Servicer........................................17
Enhancement.........................................8 PS Sponsor.........................................17
Exemption..........................................94 PS Trustee.........................................17
FASIT Qualification Test...........................87 PTE................................................93
Interest Weighted Securities.......................66 RCRA...............................................51
IO.................................................88 Regular Interest Securities........................63
Obligations........................................95 Restricted Group...................................97
OID Regulations....................................63 Short-Term Note....................................80
Pay-Through Security...............................65 U.S. Person........................................62
</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 SEC 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 August 10, 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 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
(1) 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,
(2) manufactured housing installment sales contracts and
installment loan agreements secured by either security
interests in the manufactured homes or by mortgages on real
estate on which the related manufactured homes are located, and
(3) private securities evidencing ownership interests in or secured
by loans similar to the types of loans described in clauses (1)
and (2) above,
(b) all monies due under the above assets, which may be net of amounts
payable to the servicer, and
(c) funds or accounts established for the related trust fund, or one or
more forms of credit enhancement.
The prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES, SEE
RISK FACTORS ON PAGE 2.
Neither the SEC nor any state securities commission has approved or
disapproved the offered securities or determined if this prospectus is
accurate or complete. Making any contrary representation is a criminal
offense.
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 ABILITY TO SELL SECURITIES OR LOWER
RETURNS
There will be no market for the securities of any series prior to their
issuance, and there can be no assurance that a secondary market will develop.
If a secondary market does develop, there can be no assurance that it will
provide holders with liquidity of investment or that the market will continue
for the life of the securities of any series. Lehman Brothers, through one or
more of its affiliates, and any other underwriters what you would receive
specified in the 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 what you would receive for a comparable
liquid security.
LIMITED ASSETS FOR PAYMENTS - NO RECOURSE TO DEPOSITOR, SELLER OR SERVICER
The depositor does not have, nor is it expected to have, any significant
assets. The securities of a series will be payable solely from the assets of
the trust fund for that series. 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 or custody receipts.
Further, as described in the related prospectus supplement, at the times
set forth in the related prospectus supplement, some primary assets and/or any
amount remaining in the collection account or distribution account for a
series and other amounts described in the related prospectus supplement, may
be released or remitted to the depositor, the servicer, the provider of any
enhancement or any other person entitled to any remaining assets and will no
longer be available for making payments to the holders of the securities.
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 that series, for the payment
of principal of and interest on the securities of that series.
If there is a default with respect to payments on a series of notes,
holders of those notes will be required under the indenture to proceed only
against the primary assets and other assets constituting the related trust
fund 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 those notes, no other assets
would be available for payment of the deficiency and holders of those notes
may experience a loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to 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 a 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. If the depositor does not have sufficient assets and no other
party is obligated to repurchase defective primary assets, you may experience
a loss.
We refer you to "The Agreements - Assignment of Primary Assets."
LIMITS ON ENHANCEMENT MAY RESULT IN LOSSES TO HOLDERS
Although enhancement for the securities is intended to reduce the risk of
delinquent payments or losses to holders of a series of securities, 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 prior to the payment in full of the related series of securities, and
losses on the primary assets could result in losses to holders of those
securities.
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 and timing of payment of principal of the contracts or of
the underlying contracts relating to the private securities. The rate and
timing of principal payments of the securities of a series will be affected by
a number of factors, including the following:
(1) the extent of prepayments which may be influenced by a variety
of factors,
(2) the manner of allocating principal payments among the classes
of securities of a series as specified in the related
prospectus supplement, and
(3) the exercise 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."
STATUS OF LOANS AS JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS
The mortgages may be junior liens subordinate to the rights of the
mortgagee under the senior mortgage or mortgages on the same mortgaged
property. The proceeds from any liquidation, insurance or condemnation
proceedings in connection with a junior mortgage will be available to satisfy
the outstanding balance of that junior mortgage only to the extent that the
claims of the senior mortgagees have been satisfied in full, including any
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. If a junior mortgagee forecloses on the mortgaged property, 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. As a result, the servicer may not be able to foreclose on a mortgaged
property or may realize lower proceeds in a foreclosure relating to a
defaulted loan and you may experience a corresponding loss.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR
LIENHOLDERS
There are several factors that could adversely affect the value of
properties so 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 decline in the value
of a property could extinguish the value of a junior interest in that property
before having any effect on the related senior interest. If a decline in the
value of the properties 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.
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF ENVIRONMENTAL LAWS
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a
property may give rise to a lien on the property to assure the costs of
clean-up. In several states, this type of a lien has priority over the lien of
an existing mortgage or other interest against the property. In addition,
under the laws of some states and under the federal CERCLA, a lender may be
liable as an "owner" or "operator," for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks liability
under CERCLA on foreclosure of the mortgaged property securing a mortgage.
Failure to comply with environmental laws may result in fines and penalties
that could be assessed against the trust fund as owner of the related
property. If a trust fund is considered an owner or an operator of a
contaminated property, the trust fund will suffer losses for any liability
imposed for environmental hazards on the property. These losses may result in
reductions in the amounts distributed to the holders of the related
securities.
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS
Applicable state laws generally regulate interest rates and other charges
and require particular 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
particular disclosures to borrowers, that prohibit discrimination and that
regulate the use and reporting of information relating to the borrower's
credit experience. Violations of 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 as the
owner of the to damages and administrative enforcement.
We refer you to "Legal Aspects of the Contracts."
The home improvement contracts are also subject to the regulations of the
Federal Trade Commission and other similar federal and state statutes and
regulations and 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.
Losses on loans in violation of these lending laws that are not otherwise
covered by the enhancement for a series will be borne by the holders of one or
more classes of securities for the related series.
We refer you to "Legal Aspects of the Contracts."
RATING OF THE SECURITIES RELATE TO CREDIT RISK ONLY AND DOES NOT ASSURE
PAYMENT ON THE SECURITIES
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 those securities. A 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
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, the rating on the securities 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 then outstanding, plus accrued
interest on the securities. 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
generally will be entitled to receive the proceeds of any sale of the assets
to the extent of their unpaid fees and other amounts prior to distributions to
holders of securities. Upon a sale, the proceeds thereof may be insufficient
to pay in full the principal of and interest on the securities of a series.
The amount of liquidation expenses incurred 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 net
realizations in the case of a typical pool of first mortgage loans. The
payment of liquidation 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
A series of securities issued under this registration statement may
consist of any combination of notes, certificates or custody receipts. If
notes are issued, they will be issued in series pursuant to an indenture
between the related trust fund and the entity named in the related prospectus
supplement as trustee with respect to that series. A form of indenture has
been filed as an exhibit to the registration statement of which this
prospectus forms a part. If certificates are issued, they will also be issued
in series pursuant to separate agreements -- either 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. If certificates are issued, they will be issued
in series pursuant to a custody agreement among the depositor and the entity
named in the related prospectus supplement as 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 which are also collectively referred
to as securities.
The depositor will acquire the primary assets from one or more sellers.
The seller will agree to reimburse the depositor for fees and expenses of
the depositor incurred in connection with the issuance and offering of the
securities.
The following summaries describe 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 into this prospectus by reference as part of such
summaries. As described under "Custody Receipts; custody agreements," custody
receipts entitle the holder of securities to payments that are made on classes
of notes held by the custodian. Accordingly, to the extent the following
descriptions apply to notes, including the effect that payments on the
contracts may have on notes that are secured by those contracts, those
descriptions also apply to custody receipts.
Each series of securities will consist of one or more classes of
securities, 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 any conditions 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 the 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.
Payments of principal of and interest on a series of securities will be
made on the distribution dates to the extent and in the manner specified in
the prospectus supplement relating to that series. Payments may be made by
check mailed to holders of securities, registered as such at the close of
business on the related record date specified in the related prospectus
supplement 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 some 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 that 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 that security before the distribution date on which the final
principal payment on any security is expected to be made to the holder of that
security.
Payments of principal of and interest on a series of securities will be
made by the trustee, by a paying agent on behalf of the trustee or by a
custodian, to the extent and in the manner specified in the related prospectus
supplement. As described in the related prospectus supplement, all payments
with respect to the primary assets for a series, together with reinvestment
income, amounts withdrawn from any reserve fund, and amounts available
pursuant to any other enhancement will be deposited directly into the
collection account and, net of specified amounts payable to the related
servicer and any other person specified in the prospectus supplement.
Thereafter these amounts will be deposited into the distribution account and
will be available to make payments on series of securities 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. As described in the related prospectus
supplement, 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 of amounts payable as expenses as described in the prospectus
supplement, together with income earned on each 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 that series over periods equal to the interval between
payments on the notes, and (b) the then principal balance of the primary
assets. 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 or another amount described in the related prospectus supplement.
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
insured, the related prospectus supplement will set forth the terms of that
arrangement.
PAYMENTS OF INTEREST
Those securities entitled by their terms to receive interest will bear
interest from the date and at the rate per annum specified, or calculated in
the method described, in the related prospectus supplement. Interest on
interest bearing 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, as applicable,
included in the related trust fund and/or as prepayments occur with respect to
the 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 that 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 that distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made
to the related holders to which principal is then payable, to the extent set
forth in the related prospectus supplement. Principal 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 some specified
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 for the
calculation of interest and for 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 the date on which its principal
will be fully paid. The final scheduled distribution date with respect to each
class of certificates will be the date on which the entire aggregate principal
balance of that class is expected to be reduced to zero. 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 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 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 distribution dates less frequently than each month, one or
more classes of securities of that series may be subject to special
redemption, in whole or in part, on the day specified in the related
prospectus supplement. A special redemption may occur if, as a consequence of
prepayments on the contracts or underlying contracts, as applicable, relating
to a series of 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 is less than the amount of interest that will have
accrued on those securities through the designated interest accrual date
specified in the related prospectus supplement. In that event, prior to the
designated interest accrual date, and as further described in the related
prospectus supplement, the trustee will redeem a principal amount of
outstanding securities of that series to cause the amount available for the
payment of interest to equal the amount of interest that will have accrued on
the principal amount that remains outstanding through the designated interest
accrual date for the series of securities outstanding immediately after that
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 that 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 that trust fund on or after a date specified in the related prospectus
supplement, or on or after the 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 must
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. Generally, 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 that series and the percentage of the original
principal amount of each class of securities of that series that would be
outstanding on specified distribution dates for that 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 for a series, those contracts are likely
to prepay at rates higher than if prevailing interest rates remain at or above
the interest rates borne by those loans. In this regard, it should be noted
that the contracts or underlying contracts for a series may have different
interest rates. In addition, the weighted average life of the securities may
be affected by the varying maturities of the contracts or underlying
contracts, as applicable. If any contracts or underlying contracts for a
series have actual terms-to-stated maturity of less than those assumed in
calculating the final scheduled distribution date of the related securities,
one or more classes of the series may be fully paid prior to their respective
final scheduled distribution dates, even in the absence of prepayments and a
reinvestment return higher than the assumed reinvestment rate.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of
the related trust fund, and the certificates of each series will represent
interests in the assets of the related trust fund, or in a group of assets
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 effect payments on the contracts may have on notes
that are secured by those contracts, those descriptions also apply to custody
receipts. The trust fund of each series will include assets purchased from the
Seller composed of:
(1) the primary assets;
(2) amounts available from the reinvestment of payments on the primary
assets at the assumed reinvestment rate, if any, specified in the
related prospectus supplement;
(3) any enhancement for that series;
(4) any property that secured a contract but which is acquired by
foreclosure or deed in lieu of foreclosure or repossession; and
(5) 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 the
collateral securing that series of notes in the case of a default with respect
to that 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 those 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 those 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 between the trust fund and
servicer, with respect to a series of notes.
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 between the depositor and the trustee of that trust fund
specified in the related prospectus supplement.
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.
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 primary assets and other assets
contemplated herein and in the related prospectus supplement and the proceeds
thereof, issuing securities and making payments and distributions to the
securities and 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. On the closing date, no more
than 5% of the primary assets (by aggregate principal balance as of the
cut-off date) will have characteristics that deviate from the description of
those primary assets in the related prospectus supplement.
THE CONTRACTS
Contracts. The primary assets for a series may consist, in whole or part,
of (1) conventional manufactured housing installment sales contracts and
installment loan agreements, originated by a manufactured housing dealer in
the ordinary course of business and (2) home improvement installment sales
contracts and installment loan agreements 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 by the mortgaged property. The
contracts will be conventional contracts or contracts insured by the FHA or
partially guaranteed by the VA. 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 to the extent and in the
manner specified in the related prospectus supplement.
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 properties. 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 greater than the term of the related contract as specified in the
related prospectus supplement. 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, which are 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.
Mortgages on cooperative dwellings consist of a lien on the shares issued
by the cooperative dwelling and the proprietary lease or occupancy agreement
relating to the cooperative dwelling to the extent and in the manner specified
in the related prospectus supplement.
The aggregate principal balance of contracts secured by properties that
are owner-occupied will be disclosed in the related prospectus supplement.
Generally, 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:
(1) 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
(2) a finding that the address of the underlying mortgaged property is
the mortgagor's mailing address as reflected in the servicer's
records.
In addition, 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, 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 which are generally subordinate to other
mortgages on the same mortgaged property or by purchase money security
interest in the home improvements financed by the related mortgaged property.
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.
Generally, 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, 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 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 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, 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 for 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 will be filed with the SEC 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 that are of the type that would otherwise be
eligible to be loans or
(b) collateralized obligations secured by underlying contracts.
While the underlying contracts will be of a type that would otherwise be
eligible to be contracts since they will have been part of a prior unrelated
securitization they may include underlying contracts that are more delinquent
or that have been foreclosed.
The pass-through certificates or collateralized obligations will have
previously been: (1) offered and distributed to the public pursuant to an
effective registration statement or (2) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of the securities at the time of sale nor an affiliate of the depositor
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 of the issuer.
Although individual underlying contracts may be insured or guaranteed by
the United States or an agency or instrumentality of the United States, they
need not be. Private securities will not be insured or guaranteed by the
United States or any agency or instrumentality of the United States.
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 the private securities or any affiliate of that issuer. As a result, no
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 the 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 that PS Agreement. 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
those trusts, and selling beneficial interests in those trusts. The PS Sponsor
may be an affiliate of the depositor. The obligations of the PS Sponsor will
generally be limited to representations and warranties with respect to the
assets conveyed by it to the related trust. The PS Sponsor generally will not
have guaranteed any of the assets conveyed to the related trust or any of the
private securities issued under the PS Agreement but may guarantee those
assets if specific in the related prospectus supplement.
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. Payments on the private securities will generally 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 specified 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.
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 the 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, to the extent
relevant and to the extent the information is reasonably available to the
depositor and the depositor reasonably believes the 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) characteristics of the underlying contracts, including:
(A) the payment features of the 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
the 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 the underlying
contracts at origination,
(E) the lien priority of any underlying contracts, and
(F) the delinquency status and year of origination of the
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 the private securities;
(vii) the characteristics of credit support, if any, including 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 will be filed with the SEC within 15 days the initial issuance of
the 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 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. The trustee may be
required to apply a portion of the amount in the collection account, together
with reinvestment earnings from eligible investments to the extent they are
not to be included in payments to the holders to the payment of a portion of
the 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 the distribution account to be
established by the trustee for the series, each in the manner and at the times
established in the related prospectus supplement. Amounts available pursuant
to any enhancement, as provided in the related prospectus supplement, will
also be deposited in a related distribution account.
Amounts deposited in the distribution account may be available for:
(1) application to the payment of principal of and interest on the
series of securities on the next distribution date,
(2) the making of adequate provision for future payments on specified
classes of securities, and
(3) 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 the
series or any other person entitled to those amounts in the manner and at the
times established in the related prospectus supplement. As described in the
related prospectus supplement, the trustee will invest the funds in the
collection and distribution accounts in eligible investments maturing, with
permissible 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 security. Eligible investments include, among other
investments, obligations of the United States and agencies thereof, federal
funds, certificates of deposit, commercial paper, demand and time deposits and
banker's acceptances, repurchase agreements of United States government
securities and 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
the series. enhancement may take the form of an irrevocable letter of credit,
surety bond or insurance policy, reserve funds, subordinate securities,
overcollateralization or any other form of enhancement or combination thereof.
The enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions set forth in the related prospectus supplement. If so specified in
the related prospectus supplement, any 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 to 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
Enhancement for a series may consist of one or more classes of
subordinate securities. The rights of holders of 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
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 or the seller may obtain a
pool insurance policy for the contracts in the related trust fund. A pool
insurance policy would cover any loss, subject to the limitations described in
a related prospectus supplement, any loss sustained by reason of default, but
would 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 the 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
the damage is not covered by the standard hazard insurance policy or any flood
insurance policy, if applicable, required to be maintained with respect to the
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 (1) the cost of repair or replacement of
the property or (2) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of the contract at the time of
acquisition of the property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and a portion of the
expenses incurred by the servicer with respect to the property. If the unpaid
principal balance plus accrued interest and a portion of the 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 the property. Any amount paid as the cost of repair
of the property will reduce coverage by that amount. Special hazard insurance
policies typically do not cover losses occasioned by among other risks war,
civil insurrection, governmental actions, errors in design, faulty workmanship
or materials, nuclear reaction, flood and chemical contamination.
Restoration of the property with the proceeds described under (1) above
is expected to satisfy the condition under any pool insurance policy that the
property be restored before a claim under the pool insurance policy may be
validly presented with respect to the defaulted contract secured by the
property. The payment described under (2) above will render unnecessary
presentation of a claim in respect of the contract under any pool insurance
policy. Therefore, so long as the 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 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 the
contract. The amount of the secured debt could be reduced to the value
established by the bankruptcy court, and the holder of the contract thus would
become an unsecured creditor to the extent the outstanding principal balance
of the contract exceeds that value. In addition, other modifications of the
terms of a contract can result from a bankruptcy proceeding. See "Legal
Aspects of the Contracts." If so provided in the related prospectus
supplement, the depositor, the seller or other entity specified in the related
prospectus supplement will obtain a bankruptcy bond or similar insurance
contract covering losses resulting from proceedings with respect to borrowers
under the Bankruptcy Code. The bankruptcy bond will cover a portion of losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a contract or a reduction by such court of the
principal amount of a contract and will cover a portion of unpaid interest on
the amount of that 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 that series. The amount will be reduced by payments made under the
bankruptcy bond in respect of the contracts, and may or may not be restored,
as described in the related prospectus supplement.
RESERVE FUNDS
If so specified in the prospectus supplement, the depositor or the seller
will deposit into one or more funds to be established with the trustee as part
of the trust fund for the series or for the benefit of any enhancer with
respect to that series 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 the related prospectus supplement. In the alternative or in addition to a
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 that 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 or the seller will enter into a minimum principal
payment agreement with an entity meeting the criteria of the rating agency
pursuant to which that entity will provide payments on the securities of the
series in the event that aggregate scheduled principal payments and/or
prepayments on the primary assets for that series are not sufficient to make
payments on the securities of that series, as provided in the prospectus
supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the depositor or the seller and
the trustee for a series of securities will enter into a guaranteed investment
contract or an investment agreement with the entity specified in the
prospectus supplement on or before the sale of that 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 the 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 the deposit agreement.
DERIVATIVE PRODUCTS
If specified in the related prospectus supplement, the depositor or the
seller may establish one or more derivative products to provide enhancement
for a series of securities. 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.
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:
(1) maintaining timely payments to holders of securities or providing
additional protection against losses on the assets included in the
trust fund,
(2) paying administrative expenses, or
(3) establishing a minimum reinvestment rate on the payments made in
respect of the assets or principal payment rate on the assets.
These 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 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. As described under "Custody Receipts; Custody
Agreements," custody receipts entitle the related holders of securities to
payments that are made on classes of notes held by the related custodian.
These classes of notes may be secured by contracts.
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 contracts 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 contracts 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
those 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:
(1) waive any assumption fee, late payment charge, or other charge in
connection with a contract or
(2) to the extent provided in the related agreement, arrange with an
obligor a schedule for curing delinquencies by modifying the due
dates for scheduled payments on that contract.
If specified in the related prospectus supplement, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound
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 escrow payments under the
loan related documents, in which case the servicer would not be required to
establish any escrow account with respect to these 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 the
escrow account. The servicer will be responsible for the administration of the
escrow accounts and generally will make advances to that account when a
deficiency exists in the escrow account.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The trustee or the servicer will establish a collection account in the
name of the trustee. Typically, the collection account will be an account
maintained
(1) 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 that series at levels
satisfactory to each rating agency or
(2) 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.
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.
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 the time-period specified in the related
prospectus supplement, the following payments and collections received or made
by it to the extent required to be deposited into the collection account:
(1) all payments on account of principal, including prepayments, on
the primary assets;
(2) all payments on account of interest on the primary assets after
deducting, 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 those primary assets;
(3) 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 the 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, 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;
(4) all proceeds under any title insurance, hazard insurance or
other insurance policy covering any 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;
(5) all amounts required to be deposited in the collection account
from any applicable reserve fund for that series pursuant to the related
agreement;
(6) all advances of delinquent payments of principal of and interest
on a contract or other payments specified in the agreement made by the
servicer required pursuant to the related agreement; and
(7) all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related agreement.
The servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
(1) to reimburse itself for advances for that series made by it
pursuant to the related agreement to the extent of 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, late recoveries of scheduled
payments with respect to which any advance was made;
(2) to the extent provided in the related agreement, to reimburse
itself for any advances for that series that the servicer determines in
good faith it will be unable to recover from the related primary asset;
(3) 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 that reimbursement exceed the outstanding
principal balance of the related contract, together with accrued and
unpaid interest thereon to the due date for that contract next succeeding
the date of its receipt of liquidation proceeds, to pay to itself out of
the excess the amount of any unpaid servicing fee and any assumption
fees, late payment charges, or other charges on the related contract;
(4) 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 any 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 the scheduled payment, late payment or such other
recovery, to the extent permitted by the related agreement;
(5) to reimburse itself for expenses incurred by and recoverable by
or reimbursable to it pursuant to the related agreement;
(6) to pay to the applicable person with respect to each primary
asset or 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;
(7) to make payments to the trustee of the series for deposit into
the distribution account, if any, or for remittance to the holders of
that series in the amounts and in the manner provided for in the related
agreement; and
(8) 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 into that account, it may, at
any time, withdraw that amount from the collection account.
ADVANCES AND ITS LIMITATIONS
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 these obligations may be
limited in amount, or may not be activated until a 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 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. The related prospectus
supplement will state whether or not 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 other hazards as is customary in the state in which
the related property is located. If insurance is required, generally it 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, the 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 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 some cases,
vandalism. The foregoing list is merely indicative 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 that 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, the coinsurance 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 any improvements damaged or destroyed or (2) the
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of the property and improvements. Since the amount of hazard insurance to
be maintained on the improvements securing the contracts declines as the
principal balances owed decreases, 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.
Coverage typically 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 contract. The servicer typically 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
the REO property. However, if so specified in the related prospectus
supplement, the servicer may not maintain insurance policies for acquired 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 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 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 that 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
the policy absent the deductible clause, deposit in the collection account the
amount of the deductible.
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 the foreclosure or other conversion, the servicer will
follow the 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:
(1) the restoration or foreclosure will increase the liquidation
proceeds in respect of the related contract available to the holders
after reimbursement to itself for the related expenses and
(2) the related 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 that 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 that contract to the extent provided in the related prospectus
supplement. Modifications may only be entered into if they meet the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Typically, when any property is about to be conveyed by the obligor, the
servicer will, to the extent it has knowledge of a 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 the
"due-on-sale" clause is not enforceable under applicable law or if the
enforcement of "due-on-sale" clause would result in loss of coverage under any
primary mortgage insurance policy. In that event, the servicer is authorized
to accept from or enter into an assumption agreement with the person to whom
that property has been or is about to be conveyed, pursuant to which that
person becomes liable under the contract and pursuant to which the original
obligor is released from liability and that 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
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. To the extent provided
in the related prospectus supplement, 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 prepayment 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 expenses incurred by it in connection with the
liquidation of defaulted contracts. The related holders will suffer no loss by
reason of liquidation 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
under the policies have 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, 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.
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 the series.
EVIDENCE AS TO COMPLIANCE
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 documents and records relating to
the servicing of the contracts by the servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted
in compliance with the agreement, except for (1) these exceptions as the firm
believes to be immaterial and (2) any other exceptions as are set forth in the
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.
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.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee
or a successor servicer. Events of default and the rights of the trustee upon
a default under the agreement for the related series will be described in the
related prospectus supplement substantially similar to those described under
"The Agreements--Events of Default; Rights Upon Events of Default--Pooling and
Servicing Agreement; Servicing Agreement."
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:
(1) services similar loans in the ordinary course of its business,
(2) is reasonably satisfactory to the trustee for the related series,
(3) has a net worth of not less than the amount specified in the related
prospectus supplement,
(4) would not cause any rating agency's rating of the securities for the
series in effect immediately prior to that assignment, sale or
transfer to be qualified, downgraded or withdrawn as a result of the
assignment, sale or transfer, and
(5) executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, which contains an
assumption by the 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 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, the subsidiary or affiliate need not
satisfy the criteria set forth above; however, in that 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 the 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 person will be
protected against any breach of warranty or representations made under the
agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in the 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 the agreement which, in its opinion, may
involve it in any expense or liability. The servicer may, in its discretion,
undertake any 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 that event, the legal expenses and
costs of the 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 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 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
holders 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 supplements (except for the
amount or percentage thereof which is not included in the trust fund for the
related series. The trustee will, concurrently with the assignment, execute
and deliver the securities.
Assignment of Contracts. If required by 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, an asset custodian on behalf of the trustee, 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 the contracts. 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.
Typically, 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. If specified by the related prospectus
supplement, however, the contracts may be stamped or otherwise marked to
reflect their assignment to the trust. See "Legal Aspects of the
Contracts--The Contracts."
With respect to contracts secured by mortgages, if so specified in the
related prospectus supplement, the depositor or seller 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 or seller will cause the
assignments to be so recorded within the time after issuance of the securities
as is specified in the related prospectus supplement. If the assignments of
the contracts are not so recorded as required, 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. The enforcement of the repurchase obligation
typically will constitute the sole remedy available to the holders or the
trustee for the failure of contracts to be recorded. The depositor or seller
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 if required by the related prospectus supplement.
The trustee, or if so specified in the related prospectus supplement, the
asset custodian, will hold these 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 schedule will specify with respect to each
contract, to the extent available:
o the original principal amount and unpaid principal balance as of the
cut-off date;
o the current interest rate;
o the current scheduled payment of principal and interest;
o the maturity date, if any, of the related mortgage note;
o 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. Generally, 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:
(1) that the information contained in the private security schedule
is true and correct in all material respects;
(2) that, immediately prior to the conveyance of the private
securities, the depositor had good title to the private securities to the
extent conveyed to the depositor, and was the sole owner thereof subject
to any retained interest of the depositor or seller;
(3) that there has been no other sale by it of such private
securities; and
(4) that there is no existing lien, charge, security interest or
other encumbrance, other than any retained interest of the depositor or
seller on the 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 during its examination to
be defective in any material respect and the depositor or seller does not cure
the defect within the time period specified in the related prospectus
supplement, the depositor or seller will, not later than the day 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.
The repurchase price shall be at a price equal to, unless otherwise specified
in the related prospectus supplement, (a) the lesser of (1) the outstanding
principal balance of such primary asset and (2) 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 the
primary asset,) provided, however, the purchase price shall not be limited in
(1) 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 the primary asset from the trust fund and substitute
in its place one or more other primary assets, provided, however, that (1)
with respect to a trust fund for which no REMIC election is made, the
substitution must be effected within 120 days of the date of initial issuance
of the securities and (2) 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 the 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.
Generally, any qualifying substitute primary asset will have, on the date
of substitution:
(1) 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,
(2) an interest rate not less than and not more than 2% greater than the
interest rate of the deleted primary asset,
(3) a remaining term-to-stated maturity not greater than and not more
than two years less than that of the deleted primary asset, and
(4) will comply with all of the representations and warranties set forth
in the applicable agreement as of the date of substitution.
The depositor, the seller or another entity will make representations and
warranties with respect to primary assets for a series. If the depositor, the
seller or another entity cannot cure a breach of its representations and
warranties in all material respects within the time period specified in the
related prospectus supplement after notification by the trustee of the breach,
and if the breach is of a nature that materially and adversely affects the
value of the primary asset, the depositor, the seller or the other 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 for Payments--No Recourse to Depositor, Seller or
Servicer."
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 that holder's
status as a holder, will have any right under the applicable agreement for a
series to institute any proceeding with respect to the agreement, unless the
holder previously has given to the trustee for that 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 that series have made
written request upon the trustee to institute a 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 that 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 specified in the
related prospectus supplement into a 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 subsequent contracts in a period
from the related closing date to a date not more than one year after the
closing date. 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 a 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 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 to purchase subsequent contracts. 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. If monies on deposit in the capitalized interest account have 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 or the seller.
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:
(1) the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
(2) the amount of interest distributed to holders of the related
securities and the current interest on the securities;
(3) the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with respect to
the securities or (c) any current shortfall in amounts to be distributed
as accrued interest to holders of the securities;
(4) 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 the securities;
(5) the amount received under any related enhancement, and the
remaining amount available under that enhancement;
(6) the amount of any delinquencies with respect to payments on the
related primary assets;
(7) 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
(8) 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
(1), (2), and (4)(d) above for such calendar year and (b) the 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. Events of Default
under the pooling and servicing agreement for each series of certificates
relating to contracts include among other things:
(1) any failure by the servicer to deposit amounts in the collection
account and distribution account to enable the trustee to distribute to
holders of the 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 the failure to the servicer by the trustee for
that series, or to the servicer and the trustee by the holders of the series
evidencing not less than 25% of the aggregate voting rights of the holders for
that series;
(2) 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 the
failure to the servicer by the trustee, or to the servicer and the trustee by
the holders of the series evidencing not less than 25% of the aggregate voting
rights of the holders; and
(3) specified 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 that 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 the 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 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 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 that 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 that series, and holders of
securities evidencing not less than 51% of the aggregate voting rights of the
securities for that 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 the trusts or
powers unless the 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
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. Events of default under the indenture for each series of notes
may include:
(1) a default for a specified number of 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;
(2) failure to perform any other covenant of the depositor or the
trust fund in the indenture which continues for a specified number of
days after notice of failure is given in accordance with the procedures
described in the related prospectus supplement;
(3) 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 the specified period
after notice of incorrection is given in accordance with the procedures
described in the related prospectus supplement;
(4) events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the trust fund; or
(5) 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 that
series may declare the principal amount, or, if the notes of that series are
zero coupon securities, the 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 that series to be due and payable immediately.
The declaration described above may, under some circumstances, be rescinded
and annulled by the holders of a majority in aggregate outstanding amount of
the notes of the series.
If, following an event of default with respect to any series of notes,
the notes of the series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding any acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration
of acceleration if the collateral continues to provide sufficient funds for
the payment of principal of and interest on the notes of 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 the series
consent to the sale, (b) the proceeds of the sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding notes of the series at the date of the sale or (c)
the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as those payments would have
become due if the 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 that series. In the event that one or more
classes of a series have the benefit of a security insurance policy, the
issuer of the 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 liquidation for unpaid fees and expenses. As
a result, upon the occurrence of 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 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 the provisions for indemnification
and 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 some 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 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 the appointment, all rights, powers, duties and
obligations conferred or imposed upon the trustee by the agreement relating to
the related series will be conferred or imposed upon the trustee and each
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 separate trustee or co-trustee who shall exercise and perform 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 that 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 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 of the
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 the funds
or adequate indemnity against that 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 a 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:
(1) if the trustee ceases to be eligible to continue as such under
the agreement,
(2) if the trustee becomes insolvent or
(3) 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
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 and any other party specified in the agreement, without notice to
or consent of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or supplement
any provision in the agreement,
(3) to add to the duties of the depositor, the trust fund or
servicer,
(4) to add any other provisions with respect to matters or questions
arising under the agreement or related enhancement,
(5) 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
(6) to comply with any requirements imposed by the Code;
provided that any amendment except pursuant to clause (6) above will not
adversely affect in any material respect the interests of any holders of that
series, as evidenced by an opinion of counsel. Any such amendment except
pursuant to clause (6) 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 those
securities that the amendment will not cause rating agency to reduce the then
current rating of the securities. The agreement for each series may also be
amended by the trustee, the servicer, if applicable, and the depositor and any
other party specified in the agreement with respect to that series with the
consent of the holders possessing not less than 66-2/3% of the aggregate
outstanding principal amount of the securities of that series or, if only
certain classes of that series are affected by such amendment, 66-2/3% of the
aggregate outstanding principal amount of the securities of each class of that
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 that
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 by that amendment.
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 the holders propose to transmit, the trustee will afford
the 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 reports and 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 that agreement after the earlier of (1) 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 (2) the repurchase, as described below, by the
servicer or other entity specified in the related prospectus supplement from
the trustee for 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 related prospectus supplement to
purchase from the trust fund for that series all remaining primary assets at a
price equal to, unless otherwise specified in the related prospectus
supplement. The exercise of the right to purchase the primary assets will
effect early retirement of the securities of such series, but the entity's
right to purchase is subject to the aggregate principal balance of the primary
assets or the securities 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 or
the closing 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 the 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 continuing rights specified in the indenture,
upon the delivery to the trustee for cancellation of all the notes of that
series or, with limitations, upon deposit with the trustee of funds sufficient
for the payment in full of all of the notes of that series.
In addition to the discharge with 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 that series, except for obligations relating to temporary notes and
exchange of notes, to register the transfer of or exchange notes of that
series, to replace stolen, lost or mutilated notes of that 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 that series on the last scheduled
distribution date for the notes and any installment of interest on the notes
in accordance with the terms of the indenture and the notes of that series. In
the event of any defeasance and discharge of notes of the series, holders of
notes of that series would be able to look only to the 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
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 those 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. Those 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 that 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 the notice by mail to the holders
of the related custody receipts. For that purpose, the holders shall consider
the date of the receipt by the custodian of any notice as the record date for
the purpose of determining the holders of record to whom notices shall be
transmitted. In the event notice requests or requires any vote, action or
consent by the holders of the note, the custodian shall within the time period
specified in the related prospectus supplement following receipt of the
notice, deliver to the holders of the custody receipts of a letter of
direction with respect to the vote, action or consent, returnable to the
custodian, and the custodian shall vote the notes in accordance with that
letter of direction. Any record date established by the notice for purposes
specified in the notice shall be the record date for the purpose of
determining the holders of record for those purposes. If no record date is
established by the related trustee, the date the 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 the 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 those holders for resulting costs and
liabilities.
THE CUSTODIAN
Under the custody 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 funds or
adequate indemnity against the 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 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
As set forth in the applicable agreement, the custody agreement for each
series of custody receipts may be amended by the depositor, the servicer with
respect to that series, without notice to or consent of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or supplement
any provision in the custody agreement,
(3) to add to the duties of the depositor or the custodian,
(4) to add any other provisions with respect to matters or questions
arising under the 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 or by written confirmation from each rating agency that the
amendment will not cause a reduction, qualification or withdrawal of the then
current rating thereof.
In addition, 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 the 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 amendment may (a) reduce
the amount or delay the timing of payments on any custody receipt without the
consent of the holder of those 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 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.
LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of the material legal aspects
of manufactured housing and home improvement installment sales contracts and
installment loan agreements which are general in nature. Because some 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.
MORTGAGES
The contracts for a series may be secured by either mortgages or deeds of
trust or deeds to secure debt, 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 those 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, 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 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 some states,
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 the 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 that would warrant a
court of equity to refuse affirmative relief to the mortgagee. In some
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where that 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 that the sale occurred while the
mortgagor was insolvent and within one year 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.
Alternatively, 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 a deficiency 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 those 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 some 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 a lien for the cost of clean up has
priority over the lien of an existing mortgage against such property. In
addition, under CERCLA, the 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 those 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. 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 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 clean-up 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
other than heating oil tanks. The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that 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 clean-up 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 a 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, 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 the
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 those proceeds and awards to any
indebtedness secured by the mortgage, in the 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 those amounts 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 all taxes
and assessments on the property before delinquency 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 such 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 those 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
Some 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 other states, the lender may have the option of bringing a
personal action against the borrower on the debt without first exhausting the
security; however, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower. 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 of 1940, 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 permissible 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 particular 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, RESPA, 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 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
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 (1) 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 (2) originated by lenders other than national banks, federal savings
institutions and federal credit unions. Freddie Mac 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
some 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 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 some states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Some 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, provides that state usury limitations shall not apply to all
types of residential first mortgage loans originated by particular 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 generally are "chattel paper" or constitute
"purchase money security interests" each as defined in 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. Generally, 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 some circumstances, may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the 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 the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after the relocation and
thereafter only if and after the owner re-registers the manufactured home in
the state to which the owner moved. If the owner were to relocate a
manufactured home to another state and not re-register the manufactured home
in that state, and if steps are not taken to re-perfect a security interest in
that 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 the
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 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.
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 Holder-in-Due-Course rule of the FTC is intended to defeat the
ability of the transferor of a consumer credit contract which is the seller of
the goods which gave rise to the transaction and related lenders and assignees
to transfer that contract free of notice of claims by the debtor thereunder.
The effect of this rule is to subject the assignee of that 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 the
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related contract.
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 particular 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 the seller or lender "lender")
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retains legal title to the property and enters into an agreement with the
purchaser or borrower for the payment of the purchase price, plus interest,
over the term of the 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.
In that situation, the lender 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 those 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:
(1) are entitled to have interest rates reduced and capped at 6% per
annum, on obligations incurred prior to the commencement of military service
for the duration of military service,
(2) may be entitled to a stay of proceedings on any kind of foreclosure
or repossession action in the case of defaults on obligations entered into
prior to military service for the duration of military service and
(3) may have the maturity of 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 (1), (2), or (3) 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 those amounts, and any resulting loss
may reduce the amounts available to be paid to the holders of the certificates
of that series. Typically, 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 that series that is
entitled to receive interest in respect of those contracts or underlying
contracts in proportion to the interest that each class of securities would
have otherwise been entitled to receive in respect of those contracts or
underlying contracts had the 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 some types of residential properties.
Theses laws include the federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, RESPA 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
particular 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. Provisions of these laws impose
specific statutory liabilities upon lenders who fail to comply with them. 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, or HOEPA, which amended the Truth-in-Lending Act as it applies to
mortgages subject to the HOEPA. HOEPA requires additional disclosures,
specifies the timing of disclosures and limits or prohibits inclusion of
particular provisions in mortgages subject to the HOEPA. HOEPA also provides
that any purchaser or assignee of a mortgage covered by the HOEPA, 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 HOEPA 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
HOEPA, it will be subject to all of the claims and defenses which the borrower
could assert against the seller. Any violation of HOEPA 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 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 following:
(1) the sale or lease of automobiles, trucks or other motor vehicles,
equipment, merchandise and other personal property,
(2) credit card purchases or cash advances,
(3) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles,
(4) trade financings,
(5) loans secured by certain first or junior mortgages on real estate,
(6) loans to employee stock ownership plans, and
(7) 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 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:
(1) to purchase the related primary assets,
(2) to repay indebtedness which has been incurred to obtain funds to
acquire the primary assets,
(3) to establish any reserve funds described in the related prospectus
supplement, and
(4) to pay costs of structuring and issuing the 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 the primary assets.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of material 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 (1) the securities of a series are classified as
indebtedness; (2) an election is made to treat the trust fund relating to a
particular series of securities as a REMIC under the Code; (3) 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: (1) 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); (2) 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 (3)
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.
Interest other than original issue discount 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".
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. Some Debt securities may provide
for default remedies in the event of late payment or nonpayment of interest.
The interest on those 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 those 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 the 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, (1) the interest
is unconditionally payable at least annually, (2) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (3)
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: (1) 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, (2) events which have occurred before the end of the accrual
period and (3) 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 those 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 uncorrectable. 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 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 that 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. That 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 (1) the yield to maturity of such Debt
securities and (2) 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 those 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. The 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 (1) on the basis of a constant yield, in the case of a
Pay-Through Security, taking into account a prepayment assumption, or (2) 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 that 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 that
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 that 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, (1) 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"); (2) 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 (3) 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 (1), (2) or (3) above, then a Security will qualify for the tax
treatment described in (1), (2) or (3) 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, those expenses will be deductible only to the extent that
those expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of that 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 (1) 3% of the excess of adjusted gross income over
the applicable amount, or (2) 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 (1) 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 (2) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. In most cases, 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 (1) 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 (2)
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:
(1) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
(2) subject to a limited exception, the sale or other disposition of a
cash flow investment;
(3) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
(4) 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 the 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 the 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
that 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 the 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 the 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.
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
the 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, the holder's excess inclusion income will
be treated as unrelated business taxable income of the 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 (1) 120% of the long term applicable federal rate on the Startup
Date multiplied by (2) 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 (1) 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 (2) 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 those 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, 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 the fees to the trustee and the servicer under Section 162 or
Section 212 of the Code to the extent that those 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, fees to the trustee and the servicer,
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 those fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing that 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 (1) 3% of the excess of adjusted
gross income over the applicable amount or (2) 80% of the amount of itemized
deductions otherwise allowable for that 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. This 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. Some 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 the stripped interest.
Servicing fees in excess of reasonable servicing fees 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 those 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 IRS could
contend that (1) in some 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; (2) the
non-Interest Weighted securities are subject to the contingent payment
provisions of the Proposed Regulations; or (3) 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. 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 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:
(1) fails to furnish the trustee with its taxpayer identification number
("TIN");
(2) furnishes the trustee an incorrect TIN;
(3) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
(4) under certain circumstances, fails to provide the trustee or the
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. 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, except for 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 (1) the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer,
or (2) 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. Those 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 that 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. 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 that note. Any gain or loss will
be capital gain or loss if the note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. 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 (1) 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 (2) 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 (1) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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 Depositor, 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 (1) the interest
that accrues on the certificates in accordance with their terms for such
month, including interest accruing at the Pass Through Rate for that month and
interest on amounts previously due on the certificates but not yet
distributed; (2) 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; (3) prepayment premium payable to
the certificateholders for that month; and (4) any other amounts of income
payable to the certificateholders for that month. This 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 depositor or the seller. 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 that 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 fund 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 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 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. The 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 (1)
the name, address and taxpayer identification number of the nominee and (2) as
to each beneficial owner (x) the name, address and identification number of
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 depositor 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 fund 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 that 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 31, 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 (1) a FASIT election is in effect, (2) 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 (3)
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:
(1) cash or cash equivalents,
(2) 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,
(3) foreclosure property,
(4) 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,
(5) contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
(6) FASIT regular interests, and
(7) 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: (1) one or more classes of
regular interests or (2) 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:
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its stated
principal amount,
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and
(6) 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 "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 (3), (4), or (5), 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 (6), 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 "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
those 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 "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 (1) the receipt of income
derived from assets that are not permitted assets, (2) certain dispositions of
permitted assets, (3) the receipt of any income derived from any loan
originated by a FASIT, and (4) 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 "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 "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 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, and on persons who are parties in interest or disqualified
persons with respect to those Plans. Some types of employee benefit plans,
like 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 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.
DOL has issued a final regulation (29 C.F.R. Section 2510.3-101) (the
"Plan Asset 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; the
plan assets would include an undivided interest in the primary assets and any
other assets held by the trust fund. In that 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: (1) "widely held"
(held by 100 or more investors who are independent of the depositor and each
other); (2) freely transferable; and (3) 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:
(1) 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;
(2) The rights and interests evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) The certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps Inc. or Fitch IBCA Inc.;
(4) 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;
(5) The trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(6) The Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC 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 fund 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 fund:
(a) the characteristics of the Additional Obligations must
be monitored by an insurer or other credit support provider
that is independent of the depositor; or
(b) 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:
(a) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(b) the duration of the Pre-funding period;
(c) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
(d) that the amounts remaining in the pre-funding account
at the end of the Pre-funding period will be remitted to
certificateholders as repayments of principal.
(9) The related 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 fund also must meet the following requirements:
(1) the corpus of the trust must consist solely of assets of the
type which have been included in other investment pools;
(2) 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
(3) 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: (1) 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; (2)
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; (3) a Plan's investment in securities does not exceed twenty-five (25)
percent of all of the securities outstanding after the acquisition; and (4)
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
If the securities of a series constitute "mortgage-related securities"
within the meaning of SMMEA, the related prospectus supplement will state that
fact. Otherwise, the securities will not constitute "mortgage-related
securities" for SMMEA. Accordingly, investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether and to what extent the securities constitute legal
investments for them.
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 that 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 dealers. The place and time of
delivery of each series of securities will also be set forth in the prospectus
supplement relating to that series. Lehman Brothers is an affiliate of the
depositor.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, 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 SEC in Washington, D.C.
The trust funds acting as issuers of securities under this prospectus are
subject to the informational requirements of the securities Exchange Act of
1934, as amended, and, for the required period of time, files reports and
other information with the SEC. Those reports and information on file with the
SEC, including the registration statement and filings made by the depositor
can be inspected without charge at the public reference facilities maintained
by the SEC or may be copied at rates prescribed by the SEC. 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 SEC
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 SEC.
<PAGE>
INDEX OF DEFINED TERMS
Additional Obligations.............................93
assumed reinvestment rate...........................8
Code...............................................60
Exemption..........................................92
Obligations........................................93
OID Regulations....................................61
Pay-Through Security...............................63
Plan Assets Regulation.............................91
Pre-Funding Limit..................................93
Pre-funding period.................................93
Prepayment Assumption..............................63
PS Agreement.......................................16
PS Servicer........................................16
PS Sponsor.........................................16
PTE................................................90
Publicly Offered securities........................91
RCRA...............................................49
Regular Interest securities........................61
Residual Interests.................................66
Restricted Group...................................95
U.S. Person........................................60
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Risk Factors......................................................................................................2
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN ABILITY TO SELL SECURITIES OR LOWER RETURNS..........................2
LIMITED ASSETS FOR PAYMENTS - NO RECOURSE TO DEPOSITOR, SELLER OR SERVICER.....................................2
LIMITS ON ENHANCEMENT MAY RESULT IN LOSSES TO HOLDERS..........................................................3
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD.......................................................3
STATUS OF LOANS AS JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS................................4
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR LIENHOLDERS.....................4
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF ENVIRONMENTAL LAWS............................................4
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS............................................5
RATING OF THE SECURITIES RELATE TO CREDIT RISK ONLY AND DOES NOT ASSURE PAYMENT ON THE
SECURITIES.....................................................................................................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..........................................................................................9
FINAL SCHEDULED DISTRIBUTION DATE..............................................................................9
SPECIAL REDEMPTION.............................................................................................9
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................10
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................10
The Trust Funds..................................................................................................11
GENERAL.......................................................................................................11
THE CONTRACTS.................................................................................................12
PRIVATE SECURITIES............................................................................................16
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................18
Enhancement......................................................................................................19
SUBORDINATE SECURITIES........................................................................................20
INSURANCE.....................................................................................................20
RESERVE FUNDS.................................................................................................21
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................21
DEPOSIT AGREEMENT.............................................................................................22
DERIVATIVE PRODUCTS...........................................................................................22
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR AGREEMENTS............22
Servicing of Contracts...........................................................................................23
GENERAL.......................................................................................................23
COLLECTION PROCEDURES; ESCROW ACCOUNTS........................................................................23
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................23
ADVANCES AND ITS LIMITATIONS..................................................................................26
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................26
REALIZATION UPON DEFAULTED LOANS..............................................................................27
ENFORCEMENT OF DUE-ON-SALE CLAUSES............................................................................28
SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................................28
EVIDENCE AS TO COMPLIANCE.....................................................................................29
MATTERS REGARDING THE SERVICER................................................................................29
The Agreements...................................................................................................31
ASSIGNMENT OF PRIMARY ASSETS..................................................................................31
PRE-FUNDING ACCOUNT...........................................................................................34
REPORTS TO HOLDERS............................................................................................35
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................36
THE TRUSTEE...................................................................................................39
DUTIES OF THE TRUSTEE.........................................................................................39
RESIGNATION OF TRUSTEE........................................................................................39
AMENDMENT OF AGREEMENT........................................................................................40
VOTING RIGHTS.................................................................................................41
LIST OF HOLDERS...............................................................................................41
REMIC ADMINISTRATOR...........................................................................................41
TERMINATION...................................................................................................41
Custody Receipts; Custody Agreements.............................................................................42
NOTICES; VOTING...............................................................................................43
DEFAULTS......................................................................................................43
THE CUSTODIAN.................................................................................................44
DUTIES OF THE CUSTODIAN.......................................................................................44
RESIGNATION OF CUSTODIAN......................................................................................44
AMENDMENT OF CUSTODY AGREEMENT................................................................................45
VOTING RIGHTS.................................................................................................45
TERMINATION OF CUSTODY AGREEMENT..............................................................................45
Legal Aspects Of The Contracts...................................................................................45
MORTGAGES.....................................................................................................46
FORECLOSURE ON MORTGAGES......................................................................................46
ENVIRONMENTAL RISKS...........................................................................................48
RIGHTS OF REDEMPTION..........................................................................................49
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES..................................................................49
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS..................................................51
DUE-ON-SALE CLAUSES...........................................................................................52
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES............................................................53
EQUITABLE LIMITATIONS ON REMEDIES.............................................................................53
APPLICABILITY OF USURY LAWS...................................................................................53
CONTRACTS NOT SECURED BY MORTGAGES............................................................................54
INSTALLMENT SALES CONTRACTS...................................................................................57
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940.................................................................57
CONSUMER PROTECTION LAWS......................................................................................58
The Depositor....................................................................................................59
GENERAL.......................................................................................................59
Use of Proceeds..................................................................................................60
Federal Income Tax Considerations................................................................................60
GENERAL.......................................................................................................60
TAXATION OF DEBT SECURITIES...................................................................................61
TAXATION OF THE REMIC AND ITS HOLDERS.........................................................................66
REMIC EXPENSES; SINGLE CLASS REMICS...........................................................................67
TAXATION OF THE REMIC.........................................................................................67
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES...........................................................69
ADMINISTRATIVE MATTERS........................................................................................72
TAX STATUS AS A GRANTOR TRUST.................................................................................72
SALE OR EXCHANGE..............................................................................................76
MISCELLANEOUS TAX ASPECTS.....................................................................................76
TAX TREATMENT OF FOREIGN INVESTORS............................................................................77
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP............................................................78
TAX CONSEQUENCES TO HOLDERS OF THE NOTES......................................................................78
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES...............................................................80
FASIT SECURITIES..............................................................................................85
State Tax Considerations.........................................................................................90
ERISA Considerations.............................................................................................90
Legal Investment.................................................................................................95
Ratings..........................................................................................................95
Plan of Distribution.............................................................................................96
Legal Matters....................................................................................................96
Available Information............................................................................................96
</TABLE>
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 SEC is effective. This propsectus 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 AUGUST 10, 1999
Prospectus Supplement
(To Prospectus dated __________)
Lehman Card Account Master Trust
[Variable Rate] [ __%] Asset Backed
[Senior/Subordinate] Certificates, Series ___
<TABLE>
<CAPTION>
[Seller], Lehman ABS Corporation,
as Seller as Depositor
Certificate Principal Certificate Price to Underwriting Proceeds to
Class Balance Rate Public Discount the Depositor
----------------- -------------- ---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Class ______ $ % % %
Total $ $ $
</TABLE>
[The [class __ ] certificates will receive distributions of a portion
of the interest on the underlying assets and will not receive any principal].
The price to public will be plus accrued interest, if any, at the
[certificate] rate from -----------------, -----, -----
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 other properties
o currently have no trading market
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]]
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.
Review the information in Risk Factors on page S-_ of this prospectus
supplement and on page 2 of the prospectus.
Neither the SEC 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 Inc. will purchase the offered certificates from the depositor
at the price specified in the table above. Please see the information under the
heading "Underwriting" in this prospectus supplement.
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 certificates in any state where the offer is not
permitted.
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
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
Prospectus
Summary......................................................... S-4
Risk Factors.................................................... S-9
The Seller......................................................S-11
The Seller's [ ] Card Activities.....................S-11
[The Servicer]..................................................S-12
The Receivables.................................................S-12
Maturity Assumptions............................................S-14
[Pool Factor and Related Information]...........................S-15
Description of the Certificates.................................S-16
Federal Income Tax Consequences.................................S-23
Underwriting....................................................S-23
Certificate Rating..............................................S-24
Legal Matters...................................................S-24
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 this entire document and the accompanying prospectus
carefully.
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>
Interest Rate
(First Distribution Last Scheduled
Class 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.
We expect that the actual last distribution date for each certificate
will be significantly earlier than the last scheduled distribution date listed
in the table.
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
On the closing date, _______ __, ___, the trust will issue the certificates.
Each certificate represents an undivided ownership interest in the trust.
Trust Property
The property of the trust will consist of:
o [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
o 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, the depositor.
The depositor will deposit the receivables with the trust.
We refer you to "Description of the Receivables" in this prospectus
supplement.
On [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 after the closing date, pursuant to the pooling and servicing agreement,
the depositor will sell, if available, and the trust will purchase, additional
receivables from time to time during the funding period specified in this
prospectus supplement.
The amount of additional receivables to be purchased with moneys in the
pre-funding account will have an aggregate principal balance equal to
approximately $________.
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
in this prospectus supplement.
After 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.
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)
_________).
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.]
Trustee
[ ] will act as trustee under the pooling and servicing
agreement.
Collections
All collections on the receivables will generally be allocated to interest
collections or principal collections.
The master servicer will deposit amounts received on the receivables in a
collection account. The trustee will deposit amounts received from the
collection account in a distribution account, as required 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, the next business day if the ____ day is not a
business day], starting on _________.
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 from the closing date in the case of the first
payment date, through the day preceding the current payment date on the basis
of the actual number of days in the interest period and a 360-day year.
We refer you to "Description of the Certificates" in this prospectus
supplement.
[Controlled Amortization Period
Unless a rapid amortization period begins, the certificates will have a
controlled amortization period. During a controlled amortization period,
collections of principal receivables that are allocable to the percentage
interest of a series of certificates will be used to make principal
distributions in scheduled amounts to the certificateholders entitled to those
distributions. The amount to be distributed on any payment date during the
controlled amortization period will be limited to:
(1) an amount equal to ________, plus
(2) any existing deficit controlled amortization amount arising from prior
payment dates.
The controlled amortization 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].
[Principal Amortization Period
Unless a rapid amortization period begins, 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 entitled to distributions. The principal amortization 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].
[Accumulation Period
Unless a rapid amortization period begins, the certificates will have an
accumulation period. During an accumulation period, 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. The principal funding account is established for
the benefit of the holders of the certificates. Amounts on deposit in the
principal funding account will be 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 earlier 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 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.
Special Considerations for Class [__] Certificates
[We are offering the [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 lose a portion
or all of your initial investment.
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 ___% per annum [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.
Under 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 after [the later of (a) payment
in full of all amounts owing to the credit enhancement provider and (b)] the
earliest of:
(1) the payment date on which the principal balance of the certificates has
been reduced to zero; or
(2) the final payment or other liquidation of the last receivable in the
trust; and
(3) 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.
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.
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 "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 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 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 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 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. There is no assurance that once a rating is
given that it will continue or that it will not be revised or withdrawn. 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.
Risk Factors
Limited Liquidity May Result in Delays in Ability to Sell Certificates
or Lower Returns
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. If
there is not a liquid market for the certificates, you may experience a delay
in your ability to sell them or you may receive a lower return for them upon
sale than you anticipated.
[The Receivables and the Pre-Funding Account
On the closing date, we will transfer to the trust approximately $_______ of
initial receivables and approximately $________ of the 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 deposited on the closing
date, we will have insufficient receivables to sell to the trust on the
subsequent transfer dates. This will result in a prepayment of principal to
you.
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 May Affect Our Ability to Acquire
Subsequent Receivables
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 is Limited
We are [not] generally obligated to make any payments in respect of
the certificates or the receivables.
Principal Prepayment, Including Prepayments, May Adversely Affect the Yield on
Certificates
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 the [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 lose a portion or all of your initial investment.
We refer you to ["Yield on the Series _____ Certificates and
Prepayments of the Receivables".]]
[The Enhancement for the Certificates Will be Limited
Although the certificates will have the benefit of an enhancement,
the amount available under the enhancement
o is limited;
o is expected to decline;
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 ownership 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 their
liquidity in the secondary trading market because 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
Because transactions in the certificates can be effected only through
DTC, Cedelbank, Euroclear, participating organizations, indirect participants
and some 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 those certificates, may be limited.
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 of a certificate, you may experience some delay
in your receipt of principal and interest payments on your certificates
because the trustee will forward payments to DTC, DTC will then credit those
payments to the accounts of its participants, and the participants will then
credit payments 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."
Ratings of the Certificates are Limited in Scope and Could be Reduced
or Withdrawn
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 a 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
its rating. 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
Management's Discussion and Analysis of Delinquency and Loss Experience
Revenue and Yield Experience
Interchange
Competition
[The Servicer]
[General description of the servicer, if separate from seller]
The Receivables
Receivables will be conveyed to the trust on the initial closing
date, [ ] which arose in accounts that were selected from the receivables in
the [seller] portfolio satisfying the criteria set forth in the master pooling
and servicing agreement, as applied on the initial cut-off date, [ ]. Those
accounts are referred to in this prospectus supplement as the Trust Portfolio.
The initial cut-off date, is sometimes referred to herein as the relevant
cut-off date. On the closing date, no more than 5% of the receivables (by
aggregate principal balance as of the cut-off date) will have characteristics
that deviate from the description of the receivables in this prospectus
supplement. In order to meet the criteria, each account must, on the relevant
cut-off date, among other things:
(1) [have been in existence and maintained by the [seller] for at
least [ ] consecutive months,
(2) not be [______ or more] days contractually delinquent,
(3) have a cardholder with a billing address in [[the United States]
[Mexico] [Canada] [Europe], its territories or possessions],
(4) have a credit limit of not more than $[ ] and
(5) 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] [_________]. Under the pooling and
servicing agreement, the depositor may be obligated to designate additional
accounts to be included as accounts and to convey to the trust all receivables
of those additional accounts, whether receivables are then existing or created
later. These accounts must meet the criteria set forth above as of the date
the depositor designates the 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 pooling and
servicing agreement. See "Description of the Certificates - --
Representations, Warranties and Covenants" in the prospectus.
[Pre-Funding Account. The receivables will include the 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 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 [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 that
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.]
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 pooling and servicing 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
__________, [___], in which is 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.
The occurrence of some events may trigger 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 the 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 is 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 the 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, because 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 some 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 the record date to the initial Investor
Amount. The initial Pool Factor will be [1.00000000] and the factor will
remain unchanged during the Revolving Period, except in limited circumstances.
See "Description of the Certificates -- Charged-Off Receivables; Rebates and
Fraudulent Charges" in the prospectus. After the end of the Revolving Period,
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 pooling and servicing 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 pooling and servicing
agreement. The form of the pooling and servicing agreement has been filed as
an exhibit to the registration statement of which this prospectus supplement
and the prospectus are a part]. Pursuant to the pooling and servicing
agreement, the depositor may execute further supplements thereof between the
depositor and the trustee in order to issue additional series. Upon written
request by certificateholders, the [trustee] [depositor] [seller] [servicer]
will provide a copy of the pooling and servicing agreement[, without exhibits
or schedules], including any supplements, to certificateholders without
charge. The following summary describes material terms of the pooling and
servicing 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 pooling and servicing agreement.] Wherever particular
sections or defined terms of the pooling and servicing agreement are referred
to, such sections or defined terms are hereby incorporated herein by
reference.
General
The certificates will represent undivided ownership 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".]
[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. [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.]
[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-funding 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
some 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 those other series).]
The transferor [seller] holds [as of the closing date] 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 ownership
interest in the trust (the "Transferor's Interest"), including the right to
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. After the initial payment date, interest with respect to any
payment date will accrue on the certificates from the previous payment date
through the day preceding the current 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 as of
the closing date in the case of the first payment 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 during the period from the closing date
through the last day of the interest period preceding the initial payment
date, and at the [fixed] [adjustable] [variable] rate of ____% per annum
[above] [below] [equal to] [adjustable] [variable] [floating] rate index
[determined as set forth below, during each subsequent interest period,][;
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 pooling and servicing 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 for any due period will be calculated as
follows:
(a) 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 that day; and
(b) 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:
(1) 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
(2) 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.]
The transferor's percentage for any due period 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 any payment collected by the servicer on the receivables,
no later than the [ [ ] business day following the date the payments are
identified as being related to the receivables.
On the day any 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 the amounts or pay the 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 the 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 which date is 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 some 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 pooling and servicing agreement described below.
[to follow]]
[Pre-Funding Account
During the funding period, 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:
(1) 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;
(2) the close of business on the payment date.
The pre-funded amount will initially equal approximately $__________.
During the funding period, the pre-funded amount will be reduced by amounts
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
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 purchase on that 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 or below $_____________, which is [______]% of the
initial Investor Amount, or less, the [depositor] [seller] will have the
option, to be exercised in its sole discretion, 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 that 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 pooling and servicing
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 pooling and
servicing agreement, which continues unremedied for a period of [ ] days after
written notice, or immediately upon the creation thereof with respect to a
failure arising out of the creation of certain liens, 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 pooling and servicing 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 receivables of the applicable account, if applicable,
during such period in accordance with the provisions of the pooling and
servicing 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 that day, the failure of the
depositor to convey additional accounts to the trust so 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 the 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 that 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 is any of the following events, which are
applicable to the certificates and other series:
(a) certain events of insolvency, conservatorship or receivership
relating to the seller or the depositor;
(b) The trust becomes an "investment company" within the meaning of
the Investment Company Act of 1940, as amended; or
(c) 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
that 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").
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 pooling and servicing agreement and other relevant documents, Brown & Wood
LLP has advised the depositor that the certificates will be treated as
indebtedness for Federal, state and local income and franchise tax purposes.
See "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, and Lehman
Brothers has agreed to purchase from the depositor, the series [ ]
certificates.
Lehman Brothers is obligated to purchase all the series [ ]
certificates offered hereby if any are purchased.
Distribution of the series [ ] certificates will be made by Lehman
Brothers 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, before deducting expenses expected to be
$________. In connection with the purchase and sale of the series [ ]
certificates, Lehman Brothers may be deemed to have received compensation from
the depositor in the form of underwriting discounts.
Lehman Brothers is an affiliate of the depositor, and the
participation by Lehman Brothers 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 Lehman Brothers against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or contribute to
payments Lehman Brothers 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 or rating agencies rating any other series are
collectively referred to herein as the "rating agencies" or individually as
a "rating agency".
Legal Matters
Legal matters relating to the issuance of the certificates will be
passed upon for the depositor by Brown & Wood LLP and, for Lehman Brothers by
Brown & Wood LLP.
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 propectus supplement is not complete and may be
changed. We may not sell these securities until the registration filed with
the SEC 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 AUGUST 10, 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 Underwriting Beneficial Proceeds to the
Class Balance Rate Price to Public Discount Interest Depositor
--------------- --------------- --------------- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Class $ % % % %
-------
Total $ $ $ $
</TABLE>
[The [class__ ] certificates will receive distributions of a portion of
the interest on the underlying assets and will not receive any principal].
The price to the public will be plus accrued interest, if any, at the
[certificate] rate from
-----------------, -----, -----
The proceeds to the depositor listed above are before deducting expenses,
payable by the depositor, estimated to be $ .
--------
Lehman Brothers Inc. will purchase the offered certificates from the
depositor at the price specified in the table above. Please see the information
under the heading "Underwriting" in this prospectus supplement.
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 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]]
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.
REVIEW THE INFORMATION IN RISK FACTORS ON PAGE S-_ OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 OF THE PROSPECTUS.
Neither the SEC 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.
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..............................................9
Use of Proceeds.............................................................19
Federal Income Tax Consequences.............................................19
Underwriting................................................................19
Legal Matters...............................................................20
Rating......................................................................20
The Seller..................................................................23
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
Legal Aspects of the Receivables............................................37
The Depositor...............................................................41
Use of Proceeds.............................................................41
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 read this entire document and the accompanying
prospectus carefully.
This summary provides an overview of 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>
INTEREST RATE
[CERTIFICATE] (FIRST DISTRIBUTION LAST SCHEDULED
CLASS 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 expect that the actual last distribution date for each certificate
will be significantly earlier than its last scheduled 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 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 that date, over the aggregate amount of any reimbursements of
investor charge-offs for all payment dates preceding that 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 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 asset backed certificates or notes,
which we call "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 principal balance of the CABS on any day is the principal balance reported
in the most recent monthly report received by the trustee from the CABS
trustee.
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 that 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 specified 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 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, subject to the satisfaction of several
conditions, the depositor will sell additional CABS to the trust 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 $ which amount will equal the deposit in the
--------
pre-funding account on the closing date. The depositor will designate as a
cutoff date the date on which particular subsequent CABS are conveyed to the
trust. It is expected that some 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.
On the closing date, no more than 5% of the CABS will have characteristics that
deviate from the description of the CABS in this prospectus supplement.
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.
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.
TRUSTEE
[ ] will act as trustee under the pooling and servicing
agreement.
COLLECTIONS
All collections on the CABS will generally be allocated as either interest
collections or principal collections.
[The master servicer will deposit amounts 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.
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 from the closing date, through the day
preceding the current 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 commences, the certificates will have a
controlled amortization period. During the controlled amortization period,
principal collections on the CABS will be paid as principal on the
certificates according to a specified percentage. 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 from prior payment dates. The controlled amortization
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].
[PRINCIPAL AMORTIZATION PERIOD
Unless a rapid amortization period commences, the certificates will have an
amortization period. During the principal amortization period, principal
collections on the CABS will be allocated and paid as principal on the
certificates according to a specified percentage. 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 commences, the certificates will have an
accumulation period during which principal collections receivables will be
deposited in a principal funding account established for the benefit of the
holders of the certificates and will be 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 begins on 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.
SPECIAL CONSIDERATIONS FOR CLASS [__] CERTIFICATES
[We are offering the [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 lose a portion
or all of your initial investment.
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 % per annum [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 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--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:
(1) the payment date on which the principal balance of the certificates has
been reduced to zero; or
(2) the final payment or other liquidation of the last CABS in the trust; and
(3) 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 specific 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 representations and warranties in the pooling and
servicing agreement with respect to the CABS. If the depositor breaches these
representations and warranties and that 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. 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, 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:
(1) the date on which:
(a) the amount on deposit in such pre-funding account is
less than $ ;
--
(b) an amortization event occurs or;
(c) specified events of insolvency occur with respect to
the depositor or;
(2) the close of business on the payment date.
------
The pre-funded amount will initially equal approximately $ . During
----------
the funding period, the pre-funded amount will be reduced by the amount used
to purchase subsequent CABS in accordance with the pooling and servicing
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
On the payment date on or immediately after the last day of the funding
period, the certificates will be prepaid, in part, if 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 that 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 "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 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 is conveyed 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.
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 MAY AFFECT OUR ABILITY TO ACQUIRE
SUBSEQUENT RECEIVABLES
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 IS LIMITED
Lehman ABS is [not] generally obligated to make any payments in respect
of the certificates or the CABS.
PRINCIPAL PAYMENTS, INCLUDING PREPAYMENTS, ON THE CABS WILL AFFECT THE YIELDS
ON THE CERTIFICATES
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, which
repurchase may affect the rate of payment of principal of your class [ ]
-----
certificates. If the issuer of the CABS exercises its right to repurchase the
CABS, the repurchase price will be passed through to you as a payment of
principal.]
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 material additional considerations relating to the CABS. 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 that 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 SEC.
Copies of the reports and other information may be inspected and copied at the
SEC at the addresses listed under "Available Information" in the prospectus
relating to the CABS.]
[Description of any other recent material developments that may exist
from 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 an 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 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 because 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
Because transactions in the certificates can be effected only through
DTC, Cedelbank, Euroclear, participating organizations, indirect participants
and some 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 those 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 and principal on your certificates because the
trustee will first forward distributions to DTC and DTC will then credit the
distributions to the accounts of its participants and participants will
subsequently credit distributions 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 purchase, hold or sell certificates, inasmuch as a
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 pooling and servicing
agreement. The form of the pooling and servicing agreement has been filed as
an exhibit to the registration statement of which this prospectus supplement
and the prospectus are a part. The following summaries describe material
provisions of the pooling and servicing 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 pooling and servicing agreement.
Wherever particular sections or defined terms of the pooling and servicing
agreement are referred to, those sections or defined terms are incorporated in
this prospectus supplement by reference.
GENERAL
The certificates will be issued in denominations of $1,000 and integral
multiples of $1,000, 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 pooling and servicing agreement: (1)
each of the CABS that from time to time are subject to the pooling and
servicing agreement; (2) collections on the CABS received after the Cut-off
Date; (3) the collection account, the distribution account [, pre-funding
account or any other account in the trust]; 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 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 that payment date, over the aggregate amount of
any reimbursements of Investor Charge-Offs for all Payment Dates preceding
that 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 CABS subsequent
to the Cut-off Date. The trustee, concurrently with the transfer, will deliver
the CABS Certificates to the depositor. Each of the CABS transferred to the
trust will be identified on a schedule delivered to the trustee pursuant to
the pooling and servicing agreement. The 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 pooling and servicing agreement will require the depositor to deliver
to the trustee (or a custodian, as the trustee's agent) the CABS on or prior
to the closing date.
The depositor will make representations and warranties as to the accuracy
in all material respects of specified 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 these
representations and warranties 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 pooling and servicing agreement that
materially and adversely affects the interests of the certificateholders.
Pursuant to the pooling and servicing 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 collection
account for the benefit of the certificateholders. The collection account will
be an Eligible Account, as specified in the pooling and servicing agreement.
Upon receipt by the master servicer of amounts in respect of the CABS, the
master servicer will deposit these amounts in the Collection Account as
specified in the pooling and servicing agreement. Amounts deposited will be
invested in Permitted Investments 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 another 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 master servicer will notify the trustee of the
amount of the deposit to be included in funds available for the related
Payment Date.
The trustee will establish and maintain a 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 pooling and
servicing agreement. The distribution account will be an Eligible Account.
Amounts on deposit 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 pooling and 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 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 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 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 that 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 the certificates are
registered at the close of business on the last day of the month preceding
that payment date. The term payment date means the [ day of each
----------
[month] [quarter] [semi-annual period]] [or, if that date is not the next
succeeding business day following a CABS payment date, then the next
succeeding business day following the 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 in this prospectus supplement 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 a final
distribution. For purposes of the pooling and servicing 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:
(1) 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;
---
(2) to pay the master servicing fee;
[(3) as payment for any amounts due for enhancement;]
(4) to pay certificateholders the product of the certificateholders'
percentage interest and any overdue principal for that payment date;
[(5) to reimburse prior draws made from the enhancement, with
interest thereon at ;]
------------------------------
(6) to pay principal on the certificates;
[(7) any other amounts required to be deposited in an account for
the benefit of the enhancer or owed to the enhancer pursuant to
]; and
--------------------------
(8) any other amounts required to be paid pursuant to the pooling
and servicing agreement.
Payments to certificateholders pursuant to clause (1) will be interest
payments on the certificates. Payments to certificateholders pursuant to
clauses (4), (5) and (6) 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 a payment date, or
with respect to the first payment date, the Cut-off Date, through the due date
in the month of a payment date.
Interest will be distributed on each payment date at the certificate rate
for the related interest period. 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 a 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:
(a) payment of amounts specified in amounts due under (1) through
(4) 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 to 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 (1) to make a payment or
deposit required under the pooling and servicing agreement within
----
business days after the date a payment or deposit is required to be made,
(2) to record assignments when required or (3) to observe or perform in
any material respect any other covenants or agreements of the depositor
set forth in the pooling and servicing agreement, which failure continues
unremedied for a period of days after written notice;
--
(b) any representation or warranty made by the depositor in the
pooling and servicing 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
that period, or within an additional days with the consent of the
--
trustee, in accordance with the provisions of the pooling and servicing
agreement;
(c) the occurrence of specific events of bankruptcy, insolvency or
receivership relating to the depositor;
(d) the trust becomes subject to regulation by the SEC 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 pooling and
servicing agreement; 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 those 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 the 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 bankruptcy filing or appointment the depositor
will promptly give notice to the trustee of that 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 the proceeds are received.
If the portion of the proceeds allocable to the certificateholders is 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 this loss.]
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the depositor and no Amortization Event
exists other than the 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
pooling and servicing 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 interest collections as a [monthly] [quarterly]
[semi-annual] servicing fee in the amount of % per annum [on the aggregate
---
principal balance of the CABS].
The master servicer will pay some ongoing expenses associated with the
trust and incurred by it in connection with its responsibilities under the
pooling and servicing 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 pooling and servicing 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 pooling and
servicing agreement throughout the preceding calendar year, except as
specified in that 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 the auditors have examined specified documents and the records relating
to servicing of the CABS under the pooling and servicing agreement and that,
on the basis of the examination, the auditors believe that the servicing was
conducted in compliance with the pooling and servicing agreement except for
(a) exceptions that the auditors believe to be immaterial and (b) other
exceptions that shall be set forth in the report. The 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 the report based on a
review conducted in accordance with standards established by the American
Institute of Certified Public Accountants.
MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The pooling and servicing agreement provides that the master servicer may
not resign from its obligations and duties thereunder, except in connection
with a permitted transfer of servicing, unless (1) the master servicer's
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 (2) upon
the satisfaction of the following conditions: (a) the master servicer has
proposed a successor servicer to the trustee in writing and the proposed
successor servicer is reasonably acceptable to the trustee; (b) the rating
agencies have confirmed to the trustee that the appointment of the 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) the
proposed successor servicer is reasonably acceptable to the enhancer.] No
resignation of the master servicer will become effective until the trustee or
a successor servicer has assumed the master servicer's obligations and duties
under the pooling and servicing agreement.
The master servicer may perform any of its duties and obligations under
the pooling and servicing agreement through one or more subservicers or
delegates, which may be affiliates of the master servicer. Notwithstanding
this 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 pooling and servicing agreement, without any diminution
of its duties and obligations and as if the master servicer itself were
performing its duties and obligations.
The pooling and servicing 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 pooling and servicing agreement. Under the pooling and servicing
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
pooling and servicing 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 pooling
and servicing 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 pooling and servicing 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 pooling and servicing agreement or by reason of reckless disregard of its
obligations thereunder. In addition, the pooling and servicing agreement
provides that the master servicer will not be under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the pooling and servicing agreement and which
in its opinion may expose it to any expense or liability. The master servicer
may, in its sole discretion, undertake any legal action which it may deem
necessary or desirable with respect to the pooling and servicing agreement and
the rights and duties of the parties to the pooling and servicing agreement
and the interest of the certificateholders under the pooling and servicing
agreement.
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, without the execution or filing of any paper
or any further act on the part of any of the parties to the merger or
consolidation, anything in the pooling and servicing agreement to the contrary
notwithstanding.
EVENTS OF SERVICING TERMINATION
Events of Servicing Termination will consist of: (1) any failure by the
master servicer to make any deposit required under the pooling and servicing
agreement, which failure continues unremedied for [ ] business days after
---
the giving of written notice of the 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; (2) any failure by the master servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the pooling and servicing agreement which materially and
adversely affects the interests of the certificateholders and continues
unremedied for [ ] days after the giving of written notice of the 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; (3) the occurrence of
---
an insolvency event with respect to the master servicer or (4) 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 the ownership not
being rated investment grade by the rating agencies. Under some 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 pooling and servicing
agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (1) above for a period of [ ] business days or
---
referred to under clause (2) above for a period of [ ] business days, shall
---
not constitute an Event of Servicing Termination if the delay or failure could
not be prevented by the exercise of reasonable diligence by the master
servicer and the delay or failure was caused by an act of God or other similar
occurrence. Upon the occurrence of these events 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 pooling and servicing agreement and
the master servicer shall provide the trustee, the depositor[, the enhancer]
and the certificateholders prompt notice of its failure or delay, together
with a description of its efforts to 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 pooling and servicing agreement, whereupon the trustee will
succeed to all the responsibilities, duties and liabilities of the master
servicer under the pooling and servicing 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 pooling and servicing 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 pooling and servicing agreement.
Pending the appointment, the trustee will be obligated to act as master
servicer unless prohibited by law. The successor will be entitled to receive
the same compensation that the master servicer would otherwise have received,
or a lesser compensation as the trustee and the 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 pooling and servicing 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 pooling and servicing agreement,
to add to the duties of the depositor or the master servicer or to add or
amend any provisions of the pooling and servicing 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 rating, or to add
any other provisions with respect to matters or questions arising under the
pooling and servicing agreement which shall not be inconsistent with the
provisions of the pooling and servicing agreement, provided that this action
will not, as evidenced by an opinion of counsel, materially and adversely
affect the interests of any certificateholder [or the enhancer]; provided,
that the 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 the amendment would not result in a
downgrading of the certificates. The pooling and servicing 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 pooling and
servicing agreement or of modifying in any manner the rights of the
certificateholders, provided that the amendment will not (1) 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 that certificate or (2) reduce the percentage
required to consent to any amendment, without the consent of the holders of
all certificates then outstanding or (3) adversely affect the interests of any
certificateholder [or the enhancer].
MANDATORY REPURCHASE
Cash distributions to certificateholders will be made 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 purchase on that
date. 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
(1) the payment date on which the Certificate Principal Balance of each class
of certificates of each Series has been reduced to zero, (2) the final payment
or other liquidation of the last security in the trust [and (3) 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 at the
certificate rate through the day preceding the final payment date.] In no
event, however, will the trust created by the pooling and servicing agreement
continue after the death of a specified individual named in the pooling and
servicing agreement. Written notice of termination of the pooling and
servicing 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 specific 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
under the pooling and servicing agreement or if the trustee becomes insolvent.
Upon becoming aware of these 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 pooling and
servicing agreement to institute any proceeding with respect to the pooling
and servicing agreement unless that 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 a 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 a proceeding. The trustee will be under no obligation
to exercise any of the trusts or powers vested in it by the pooling and
servicing agreement or to make any investigation of matters arising thereunder
or to institute, conduct or defend any litigation thereunder or in relation
thereto at the request, order or direction of any of the certificateholders,
unless the certificateholders have offered to the trustee reasonable security
or indemnity against the cost, expenses and liabilities which may be incurred
therein or thereby. LIMITED ACTIVITIES OF THE TRUST
Except as otherwise provided in the pooling and servicing agreement, the
trust will not (1) borrow money; (2) make loans; (3) invest in securities for
the purpose of exercising control; (4) underwrite securities; (5) except as
provided in the pooling and servicing agreement, engage in the purchase and
sale or turnover of investments; (6) offer securities in exchange for
property, except certificates for the CABS; or (7) 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 pooling and servicing 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 in privately negotiated
-------
transactions.]
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
pooling and servicing 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 that series will be treated as indebtedness for Federal, state
and local income and franchise tax purposes. See " 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 some liabilities, including liabilities
under the Securities Act, or contribute to payments the Underwriter may be
required to make in respect thereof.
LEGAL MATTERS
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>
<TABLE>
<CAPTION>
[monthly] [quarterly] [semi-annual]
Interest Payment on Single Aggregate Interest Payment on Single
Interest Payment Dates Class Class
---------------------- ----------------------------------- -------------------------------------
<S> <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>
<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]
[Management's Discussion and Analysis of the Delinquencies and Loss Experience]
[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..................................................
Alternative Principal Payment........................................
Amortization Event...................................................
BIF..................................................................
CABS.................................................................
CABS Index...........................................................
(CABS) Payment Date..................................................
CABS Trustee.........................................................
Cede.................................................................
Certificateholders...................................................
Certificate Interest Collections.....................................
Certificate Owner....................................................
Certificate Principal Balance........................................
Certificate Rate.....................................................
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.
"Alternative Principal Payment" means
-----------------------------------
- - -----------------------------------------------------------------------.
"Amortization 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 pooling and servicing agreement within
business days after the date that 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 pooling and servicing agreement, which failure continues
unremedied for a period of days after written notice;
(b) any representation or warranty made by the Company in the
pooling and servicing 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
that period (or within an additional days with the consent of the
trustee) in accordance with the provisions of the pooling and servicing
agreement;
(c) the occurrence of specific 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 pooling and
servicing 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 asset backed certificates or notes included in the trust.
"CABS Index" is the rate of interest on CABS equaling [Adjustable Rate]
[Variable Rate] [ %] per annum.
"(CABS) Payment Date" is the [ ] day of each [month] [quarter] [semi-annual]
period or if that [ ] 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.
"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 that payment date (or, with respect to the
first payment date, the Cut-off Date) through the Due Date in the month of
that 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 the 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 FDIC established by these funds 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 the 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
pooling and servicing 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 pooling and servicing agreement, which
failure continues unremedied for three business days after the giving of
written notice of the 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 Pooling
and servicing agreement which materially and adversely affects the interests
of the certificateholders and continues unremedied for 60 days after the
giving of written notice of the 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 the 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 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 that 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 the 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 equaling the product of the
certificateholders' percentage interest and Principal Collections for that
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 equaling $ of principal.
"Paying Agent" shall initially be the trustee, together with any successor
thereto in that 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.
"Pooling and Servicing Agreement" means the Master Pooling and Servicing
agreement dated as of [ ].
"Principal Collections" is the amount equal to the sum of the amounts
collected during the related Collection Period and allocated to principal and
identified on the monthly report.
"Principal Funding Accounts" are trust accounts where collections of Principal
Receivables and 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 that 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 SEC 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 AUGUST 10, 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 Discount Interest the Depositor
Class
- - ------------------ --------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Class ______ $ % % % %
Total $ $ $ $
</TABLE>
[The [class__ ] [certificates] [notes] will receive distributions of a
portion of the interest on the underlying assets and will not receive any
principal].
The price to the public will be plus accrued interest, if any, at the
[certificate] [note] rate from _________________, _____, _____
The proceeds to the depositor will be before deducting expenses, payable
by the depositor, estimated to be $________.
<TABLE>
<CAPTION>
THE [CERTIFICATES][NOTES] CREDIT ENHANCEMENT
<S> <C>
o represent the entire beneficial interest in a o will be provided in the form of [reserve
trust, whose assets are a pool of asset backed funds] [subordination of the class[ ]
certificates or notes which evidence interests [certificates] [notes]] [guarantees] [letters
in one or more portfolios of [consumer] of credit] [cash collateral accounts] [deposit
[revolving] [credit card] [charge card] [debit monies in a trust account]
card] receivables generated from time to time [overcollateralization] [an irrevocable and
in a portfolio of [consumer] [revolving] unconditional certificate or note guaranty
[credit card] [charge card] [debit card] insurance policy issued by [insurer]]
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
other properties
o currently have no trading market
</TABLE>
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].
REVIEW THE INFORMATION IN RISK FACTORS ON PAGE S-__ OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 OF THE PROSPECTUS.
Neither the SEC nor 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 Inc. will purchase the offered certificates from the depositor.
Please see the information under the heading "Underwriting" in this prospectus
supplement.
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.
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
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
Legal Aspects of the Receivables............................................37
The Depositor...............................................................41
Use of Proceeds.............................................................41
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
<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 read this entire document and the
accompanying prospectus carefully.
This summary provides an overview of 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
<S> <C> <C> <C> <C>
% [LIBOR+%][%]
% [LIBOR+%][%]
</TABLE>
(1) For each distribution date after the first distribution date.
We expect that the actual last distribution date for each [certificate][note]
will be significantly earlier than its last scheduled distribution date.
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 the
[certificates][notes]. [Each certificate represents an undivided ownership
interest in the trust. Lehman ABS Corporation will hold the remaining
undivided ownership 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:
o [Class __: [represents] $__________ principal amount of CABS which
will be paid to you on each payment date beginning _________, or
sooner under limited circumstances, plus interest at [an adjustable
rate] [a variable rate] of [ %] per annum payable [monthly]
[quarterly] [semi-annually] on each payment date.]
o [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 other rights of holders of [class ]
[certificates][notes] and does not represent any interest in or
right to receive principal payments.]
o [Class __: [represents] $ ___ aggregate principal amount of CABS and
entitles the holders of the [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:
o asset backed certificates or notes, which we call "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
o 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 seller will sell the CABS to Lehman ABS Corporation. Lehman will deposit
the CABS with the trust.
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 the next business day
if the ___ day is not a 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 conditions following the CABS payment
date in _________.]
[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] dated as of, [ ] between the trust
and the depositor. On and following the closing date, subject to the
satisfaction of several conditions, the depositor will sell additional CABS to
the trust 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 $ _________, which amount will equal the amount on
deposit in the pre-funding account on the closing date. The depositor will
designate a cutoff date as the date on which particular subsequent CABS are
conveyed to the trust. It is expected that some 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.
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.]
[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 as either interest
collections or principal collections.
[The master servicer will deposit amounts in a collection account and the
[trustee][owner trustee][indenture trustee] will deposit amounts in a
distribution account as required 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 in this prospectus
supplement [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 _________, 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.
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 from the closing date in the case
of the first payment date, through the day preceding the current 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].
SPECIAL CONSIDERATIONS FOR CLASS [__] CERTIFICATES
[We are offering the [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 lose a portion
or all of your initial investment.
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. As a holder of the class ______ [certificates][notes], you
are entitled only to distributions of a portion of the interest received on
the CABS. Holders of class __ [certificates] [notes] 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, 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.
[COMBINATION OF [CERTIFICATES][NOTES]
During any combination period and upon payment of a combination fee, a holder
of notes may surrender to the [trustee] [owner trustee][indenture trustee]]
those [certificates][notes] in the relative proportions, by principal amount,
specified in this prospectus supplement. Upon a 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 on the [certificates] [notes] on the
following payment date. The procedure for exchanging [certificates][notes]
will differ slightly if the beneficial owner of the [certificates][notes] is
an employee benefit plan subject to ERISA. A holder may exchange
[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
On the payment date on or immediately after the last day of the funding
period, the [certificates] [notes] will be prepaid, in part if any amount
remains on deposit in the pre-funding account after giving effect to the
purchase of all subsequent CABS, including any purchase on that 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:
(1) the date on which:
(a) the amount on deposit in the pre-funding account is less than
$____________;
(b) an Amortization Event occurs; or
(c) events of insolvency occur with respect to the depositor; or
(2) the close of business on the ______ payment date.
The pre-funded amount will initially equal approximately $ __________. During
the funding period, the pre-funded amount 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 "Federal Income Tax Consequences" 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 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 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 it will
continue or that it will not be revised or withdrawn. 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 MAY RESULT IN DELAYS IN ABILITY TO SELL SECURITIES OR LOWER
RETURNS
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 approximately $ _______ of the pre-funded amount.
The trustee will deposit these amounts in the pre-funding account. If the
principal amount of eligible CABS that is conveyed 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 receiving a prepayment of principal to the holders of the
[certificates][notes].
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 MAY AFFECT OUR ABILITY TO ACQUIRE
SUBSEQUENT RECEIVABLES]
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 IS LIMITED
Lehman ABS is [not] generally obligated to make any payments in respect
of the [certificates][notes] or the CABS.
PRINCIPAL PAYMENTS, INCLUDING PREPAYMENTS, ON THE CABS WILL AFFECT THE YIELDS
ON THE [CERTIFICATES] [NOTES]
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, which
repurchase may affect the rate of payment of principal of your class
[certificates][notes]. If the issuer of the CABS exercises its right to
repurchase the CABS, the repurchase price 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 lose a portion or all of 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. 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 that prospectus or in the publicly available
documents filed by or on behalf of the CABS trust. Furthermore, you should not
construe that 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 SEC.
Copies of the reports and other information may be inspected and copied at the
offices of the SEC at the addresses listed under "Available Information" in
the prospectus relating to the CABS.]
[Description of any other recent material developments that may exist
from publicly available information.]
BOOK-ENTRY CERTIFICATES MAY BE ILLIQUID
Issuance of the [certificates][notes] in book-entry form may reduce the
liquidity of the securities in the secondary trading market because 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
Because transactions in the [certificates][notes] can be effected only
through DTC, Cedelbank, Euroclear, participating organizations, indirect
participants and some 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 those securities, may be limited.
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 and principal on your
[certificates] [notes] because the trustee will first forward
[distributions][payments] to DTC and DTC will then credit the
[distributions][payments] to the accounts of its participants and participants
will subsequently credit [distributions] [payments] 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 the [certificates][notes]
that at least one nationally recognized rating agency rates the
[certificates][notes] in [one of the four highest] rating categories. A rating
is not a recommendation to purchase, hold or sell [certificates][notes],
inasmuch as a rating does not comment as to market price or suitability for a
particular investor. 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 its rating in the future.
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 material 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, those
defined terms are incorporated in this prospectus supplement by reference. See
"The [Trust Agreement][Indenture]" in this prospectus supplement 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 ownership 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] 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 the holder as of the preceding
record date or in any other manner as may be agreed to by the [trustee][owner
trustee][indenture trustee] and the 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 specified in the notice to [certificateholders][noteholders] of the
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 that class of
class __ or class __ [certificate][note], as applicable, in proportion to the
respective percentage interests represented by that 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] on that interest payment date, the difference will be allocated pro
rata among all the [certificates][notes] based on their respective percentage
interests. Principal distributions on the CABS will 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
the unpaid 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 the 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 the
[certificates][notes]. Interest distributions on the CABS will 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 that time.
As more fully described in this prospectus supplement, 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]] the
[certificates][notes] (the "Combined [Certificates][Notes]") in the following
proportions, by principal amount:
[Description to follow.]
COMBINED [CERTIFICATES][NOTES] PROPORTION
Upon a surrender, a [certificateholder][noteholder] will be entitled to
receive, in exchange, a like principal amount of CABS. The 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 the related 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]. The Combination Fee will equal
____% of the unpaid principal amount of the 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 the
Combination Period. This notice will become irrevocable on the [______]
business day preceding the exchange date, except as provided below. The
address of the [trustee][owner trustee][indenture trustee] is
_________________, and the telefax is ___________. Promptly after receipt of
the 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 the notice contains an
affirmative statement by the [certificateholder][noteholder] that the
beneficial owner of the Combined [Certificates][Notes] is an employee benefit
plan subject to ERISA, the beneficial owner will be conclusively presumed by
Lehman Brothers and the [trustee][owner trustee][indenture trustee] not to be
an employee benefit plan, and the surrender of Combined [Certificates][Notes]
by the [certificateholder][note-holder] will constitute a representation and
warranty to Lehman Brothers and the [trustee][owner trustee][indenture
trustee] that the beneficial owner is not an employee benefit 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 the
Combined [Certificates][Notes] is an employee benefit plan subject to ERISA,
Lehman Brothers will notify the [certificateholder][noteholder] no later than
the [___] business day preceding the exchange date of the identity of the CABS
proposed to be issued to the [certificateholder][noteholder] in exchange for
those Combined [Certificates][Notes]. Unless Lehman Brothers is notified by
the [certificateholder][noteholder] within [____] business days thereafter
that the [certificateholder][noteholder] has decided not to effectuate the
exchange, the [certificateholder][noteholder] will be deemed to have elected
to accept the CABS, and the exchange will occur as set forth above.
Payments of principal and interest on Combined [Certificates][Notes],
including the [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 the Combined [Certificates][Notes] had not been
exchanged.
DISTRIBUTIONS ON THE CABS; CERTIFICATE ACCOUNT
All distributions on the CABS will be remitted directly to 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 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 relevant terms with respect to the
CABS. It does not purport to summarize the securities or to provide complete
or updated information with respect to the issuer or the receivables relating
to the CABS. [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 Lehman Brothers 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 in
the CABS prospectus. See "Risk Factors--Considerations Regarding CABS; Recent
Developments" above and "-- 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 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
Cut-off Date and will include any subsequent CABS 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 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 that subsequent transfer
date, meeting the following criteria: [Description 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. On the closing date, no more
than 5% of the CABS (by aggregate principal balance as of the cut-off date)
will have characteristics that deviate from the description of the CABS in
this prospectus supplement.
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 SEC. A summary of some material information included in
the most recent monthly servicer reports filed with the SEC is included as
Appendix [____] to this prospectus supplement. Copies of the reports and other
information may be inspected and copies at offices of the SEC 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 Lehman Brothers participated in the preparation
of the servicer reports, and the information provided in the reports 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 Lehman Brothers. In particular, information set forth in the
servicer reports speaks only as of the date of the 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 the 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., which is
itself a wholly owned subsidiary of Lehman Brothers Inc., which is a wholly
owned subsidiary of Lehman Brothers Holdings Inc. None of Lehman Brothers
Inc., Lehman Commercial Paper Inc., Lehman Brothers Holdings Inc. or the
depositor, nor any of their affiliates, 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 by this prospectus supplement and the 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 material 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, these sections or
defined terms are incorporated in this prospectus supplement by reference. See
"Description of the [Certificates][Notes]" in this prospectus supplement for a
summary of 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 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 the
distribution was due and payable pursuant to the terms of the 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 with the
terms of the CABS. 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 an 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 to [certificateholders][noteholders]. Distributions on the
[certificates][notes] will be reduced by an aggregate amount equal to the 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 the proceeds. In the event that the
[trustee][owner trustee][indenture trustee] has reason to believe that the
proceeds of any 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 the 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] a report stating:
(1) the amounts of principal and interest, respectively, distributed
$[____] in face amount of [certificates][notes] with a denomination of
$[____] and
(2) the aggregate principal balance of the underlying CABS.
The [trustee][owner trustee][indenture trustee] will 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
the 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 which may be inconsistent
with any other provision or to amend any provision with respect to matters or
questions arising under the [trust agreement][indenture]; provided, however,
that the 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 amendment may:
(a) 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
(b) reduce the percentage of [certificates][notes] the
[certificateholders][noteholders] of which are required to consent to any
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 after the last day
of the funding period if any amount remains on deposit in the Pre-Funding
Account after giving effect to the purchase of all subsequent CABS, including
any purchase on that 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 the class' pro rata interests in the
trust. [The [certificateholders][noteholders] of the class __
[certificates][notes] will be allocated ___% of the 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].
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 wilful 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 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] will 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 wilful misfeasance, bad faith or gross
negligence in the performance of its duties under the [trust agreement]
[indenture] or by reason of reckless disregard of its obligations and duties
under the [trust agreement][indenture]. Any 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 a 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 the sale and the purchase of the CABS
and other corporate purposes.
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, like 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 [note] [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 [note]
[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 (a) the present value of
all remaining payments to be received on the CABS and (b) any payments
received during the accrual period, and subtracting from that total the
"adjusted issue price" of the CABS at the beginning of the 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 the 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 [note] [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 (a) such "daily portion" and
(b) a fraction, the numerator of which is the amount by which the 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 [note]
[certificates] are purchased.
The tax 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]. The
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. The gain or loss will be
capital gain or loss to an Owner for which the [certificates] are a "capital
asset" within the meaning of tax 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, which is 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
[note] [certificate] on behalf of an Owner at any time during that year, the
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 tax code Sections 1441 or
1442 to an Owner that is a non-U.S. Person with respect to the [note]
[certificate] will generally not be subject to federal income or withholding
tax if:
(a) the 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
[notes] [certificates], which may include the Depositor;
(b) the Owner is not a controlled foreign corporation within the
meaning of Code Section 957 related to the trust; and
(c) the Owner complies with certification procedures requiring the
delivery of a statement under penalty of perjury identifying that 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 on
the notes will be taxable to a noteholder as ordinary interest income when
received or accrued in accordance with the noteholder's method of tax
accounting. Under the OID regulations, a holder of a note 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 the noteholder in income with respect to the note and
decreased by the amount of bond premium, if any, previously amortized and by
the amount of principal payments previously received by the noteholder with
respect to the note. Any gain or loss will be capital gain or loss if the note
was held as a capital asset, except for gain representing accrued 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 the 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"), that interest will normally qualify as
portfolio interest, except where (a) 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 (b) 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 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 the 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 that year, information that 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 the 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 "Federal
Income Tax Consequences" in this prospectus supplement, potential investors
should consider the state income tax consequences of the acquisition,
ownership, and disposition of the [certificates][notes] offered in this
prospectus supplement. State income tax law may differ substantially from the
corresponding federal tax law, and this discussion does not 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 in this
prospectus supplement.
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., and
Lehman Brothers as agreed to purchase from the depositor, the series [____]
[certificates][notes].
Lehman Brothers is obligated to purchase all the series [_____]
[certificates][notes] offered by this prospectus supplement if any are
purchased.
Lehman Brothers 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
Lehman Brothers 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 Cut-Off 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], Lehman Brothers may be deemed to have received
compensation from the depositor in the form of underwriting discounts.
Lehman Brothers is an affiliate of the depositor, and the participation
by Lehman Brothers 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
Legal matters with respect to the [certificates][notes] will be passed
upon for the depositor and for Lehman Brothers 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 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.
</TABLE>
<TABLE>
<CAPTION>
Class ___
CUSIP #________ Rating:________
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>
<TABLE>
<CAPTION>
[Monthly] [Quarterly] [Semi-Annual]
Monthly Interest Payment on Single Aggregate Interest Payment
Interest Payment Dates Class on Single Class
- - ----------------------------------- ----------------------------------------- --------------------------
<S> <C> <C>
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.
</TABLE>
<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 SEC is effective. This propsectus 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 August 10, 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 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 acquired. The assets may include:
(a) one or more pools of:
(1) 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;
(2) certificates or notes backed by credit card and similar
receivables;
(b) all monies due under the above assets (which may be net of
amounts payable to the servicer); and
(c) funds, enhancements 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.
For a discussion of material risks associated with an investment in the
securities, see Risk Factors on page 2.
Neither the SEC nor any state securities commission has approved or
disapproved the offered securities or determined if this prospectus is
accurate or complete. Making any contrary representation is a criminal
offense.
LEHMAN BROTHERS
Risk Factors
You should carefully consider the following risk factors prior to any
purchase of the securities.
Limited Liquidity May Result in Delays in Ability to Sell Securities
or Lower Returns
There will be no market for the securities of any series prior to their
issuance, and there can be no assurance that a secondary market will develop.
If a secondary market does develop, there can be no assurance that it will
provide holders with liquidity of investment or that the market will continue
for the life of the securities of such series. Lehman Brothers, through one or
more of its affiliates, and any other 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 you would
receive for a comparable liquid security.
Limited Assets for Payments - No Recourse to Depositor, Seller or Servicer
The depositor does not have, nor is it expected to have, any
significant assets. The securities of a series will be payable solely from the
assets of the trust for that 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, as described in the related prospectus supplement, at the
times set forth in the related prospectus supplement, some 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 the holders of the securities. 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 that series, for the payment of principal of
and interest on the securities of that series.
If there is a default with respect to payments on a series of notes,
holders of those notes will be required under the indenture to proceed only
against the primary assets and other assets constituting the related trust and
may not proceed against any assets of the depositor. If payments with respect
to the primary assets and the other assets securing a series of notes,
including any enhancement, were to become insufficient to make payments on
those notes, no other assets would be available for payment of the deficiency
and holders of those notes may experience a loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to 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 the 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 those
repurchases. If the depositor does not have sufficient assets and no other
party is obligated to repurchase defective primary assets, you may experience
a loss.
We refer you to "The Agreements - Assignment of Primary Assets."
Limits on Enhancement May Result in Losses to Holders
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 prior to the payment in full of the related
series of securities, and losses on the primary assets could result in losses
to holders of those securities.
We refer you to "Enhancement."
Prior Liens May Have Priority Over the Trust's Interest in the Receivables
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
(1) a valid transfer and assignment of all right, title and
interest in the receivables and all proceeds thereof to the
trust or
(2) the grant to the trust of a security interest in the
receivables.
The seller has taken and will take 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 in the receivables. If the transfer of the receivables and
all proceeds of the transfer to the trust is deemed to create a security
interest in the trust, 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 those receivables.
We refer you to "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,
(1) to the extent that a seller grants a security interest in the
receivables to the trust, and
(2) that security interest is validly perfected before any
insolvency of the seller, and
(3) that security interest is not granted or taken in contemplation
of insolvency or with the intent to hinder, delay or defraud
the seller or its creditors,
then 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, which is commonly referred to as "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
the 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 "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 series has more than one class, the investor amount of
each class of such series, instruct otherwise. This would result in the early
termination of the trust, and could result in a loss to the holders of the
securities if the net proceeds of the sale of the receivables were
insufficient to pay securities in full.
We refer you to "Legal Aspects of the Receivables -Matters Relating
to Receivership."
Servicer Default May Prevent Transfer of Servicing to a Successor Servicer
If a conservator or receiver is appointed for the servicer, and no
servicer default other than the 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 "Legal Aspects of the Receivables - Matters Relating
to Receivership."
Legislation on the Collection and Transfer of Receivables Could Have Possible
Negative Effects on Securities
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. Those 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. Failure by the seller or the servicer to
comply with the requirements of federal and state consumer protection laws
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 the 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 the account are not
available to the trust. The depositor also makes 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 to the receivables for the purpose of
establishing the presence or absence of defects, compliance with those
representations and warranties, or for any other purpose. The sole remedy for
a breach of a representation or warranty, which 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 some of the 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 those laws result in any receivables being written off as
uncollectible.
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, the 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 the bill would
be signed by the President.
The potential effect of any legislation that 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 the net portfolio yield for a series
is reduced, a liquidation event may occur and the rapid amortization period
for the series could commence prior to the scheduled amortization date for the
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 federally insured
state-chartered banks and federally insured national banks that issue cards.
These lawsuits and administrative actions challenge various fees and charges,
such as late fees, over-the-limit fees, returned payment check fees and annual
membership fees, that are assessed against residents of the states in which
the lawsuits and actions were filed. The suits and actions are based on
restrictions or prohibitions under states' laws, that are alleged to be
applicable to the out-of-state card issuers. In December 1994, the Superior
Court of Pennsylvania reinstated a class-action law suit, stating that not all
of Pennsylvania's consumer protection laws that 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 those 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.
There can be no assurance that one of the sellers will not be named as
a defendant in similar lawsuits or other administrative actions.
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 a result of this
competition, some 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.
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
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 of those
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 particular 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 those 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.
A Decline in the Interest Rates or Indices for the Accounts in a Trust May Not
be Accompanied by a Decline in the Interests Rates or Indices for the
Securities
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 that 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 those accounts may be reduced. However, the
amounts payable as monthly interest on the related series of securities and
other amounts required to be funded out of finance charge receivables with
respect to that series may not be similarly reduced. This could result in an
insufficiency of amounts payable in respect of interest on the securities of a
series.
Social, Geographic and Economic Factors May Adversely Affect Credit Card Usage
and Payment Patterns or the Rate of Cardholder Defaults
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 changes 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. The use of
incentive or affinity programs, such as gift awards for card usage, by new
credit card issuers that are entering the market or by issuers that are
seeking to expand market share may also affect card usage patterns.
A Seller's Ability to Change Terms of the Receivables Could Result in a
Reduction in Finance Charges or Fees or Other Changes to the Material Terms of
the Accounts
Any seller may have the right to determine the finance charges and
other fees and charges that 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 other fees and charges
assessed on the accounts would decrease the effective yield on the accounts. A
decrease in effective yield could result in the occurrence of a liquidation
event for one or more series and the commencement of the rapid amortization
period for each of those series. Under an agreement a seller may agree that,
unless it is required by law or necessary in its good faith judgment in order
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 a reduction, the net portfolio yield for any series as of that date
would be less than the base rate for that 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, an 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, in the marketplace or in 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 to take
actions which would otherwise change the terms of the accounts.
Ratings or Securities of a Series are Limited in Scope and Could be Reduced or
Withdrawn
Any rating assigned by a rating agency to the securities of a series or
a class of a series will solely reflect the rating agency's assessment of the
likelihood that the holders of the securities will receive the payments of
interest and principal required to be made under the agreement. A rating
agency's assessment will be based primarily on the value of the primary assets
in the trust and the availability of any enhancement with respect to the
related series or class of the series. The rating will not be a recommendation
to purchase, hold or sell securities of the series or class of the series. A
rating will not comment as to the marketability of securities, any market
price for the securities or suitability of the securities 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 the rating agency's judgment, circumstances so warrant.
The value of the securities may be reduced if their credit rating is lowered
or withdrawn.
Book-Entry Securities May be Illiquid and Unable to be Pledged by
Securityholders
Issuance of the securities in book-entry form may reduce the liquidity
of the securities in the secondary trading market because 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 some banks, a security owner's ability 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 the securities, may be limited.
Security owners may experience some delay in their receipt of principal
and interest payments because the trustee will, first, forward payments to
DTC, and DTC will then credit those payments to the accounts of its
participants and the participants will subsequently credit payments 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
A series of securities issued under the registration statement of
which this prospectus forms a part, may consist of any combination of notes,
certificates or custody receipts. If notes are issued, they will be issued in
series pursuant to an indenture between the related trust and the entity named
in the related prospectus supplement as trustee for that series. A form of
indenture has been filed as an exhibit to the registration statement of which
this prospectus forms a part. If certificates are issued, they will also be
issued in series pursuant to either a pooling and servicing 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 and
trust agreement have been filed as an exhibit to the registration statement of
which this prospectus forms a part. If custody receipts are issued, they will
be issued in series pursuant to a custody agreement among the depositor and
the entity named in the related prospectus supplement as custodian. A form of
custody agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part.
As described in the related prospectus supplement, the seller may
agree to reimburse the depositor for fees and expenses of the depositor
incurred in connection with the offering of the securities.
The following summaries describe 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 in this prospectus by reference as part of such
summaries. As described in this prospectus under "Custody Receipts; Custody
Agreements", custody receipts entitle the related holders of securities to
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 that payments on the receivables may have on notes that
are secured by those receivables, those descriptions also apply to custody
receipts.
Each series of securities will consist of one or more classes of
securities, 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 the 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.
Payments of principal of and interest on a series of securities will
be made on the payment date to the extent and in the manner specified in the
prospectus supplement relating to that series. Payment to holders of
securities will be made by check mailed to those holders, registered as such
at the close of business on the related record date specified in the related
prospectus supplement at their addresses appearing on the security register or
by wire transfer which may be at the expense of the holder requesting payment
by wire transfer. Final payments of principal in retirement of each security
will be made only upon presentation and surrender of the 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 the security
before the payment date on which the final principal payment on any security
is expected to be made to the holder of the 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. As described in the related
prospectus supplement, 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 collection account established by the trustee or the
servicer. If and as provided in the related prospectus supplement, the deposit
to the collection account may be net of amounts payable to the related
servicer and any other person specified in the prospectus supplement. If
specified in the related prospectus supplement, amounts deposited in the
collection account will thereafter be deposited into the distribution account
so that they are available to make payments on securities of that series on
the next payment date, as the case may be. See "The Trust Assets--Collection
and Distribution Accounts."
Payments of Interest
Those securities entitled by their terms to receive interest will bear
interest from the date and at the rate per annum specified, or calculated in
the method described in the related prospectus supplement. Interest on
interest bearing 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 fixed or variable. 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 that 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 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 that payment date.
Payments of Principal
On each payment date for a series, principal payments will be made to
the related holders to which principal is then payable, to the extent set
forth in the related prospectus supplement. Principal 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 some 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 for
the calculation of interest and for 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 notes and custody
receipts is the date no later than the date on which its principal will be
fully paid. The final scheduled payment date of each class of certificates is
the date on which the entire aggregate principal balance of that class is
expected to be reduced to zero. The final scheduled payment date of each class
will be calculated on the basis of the assumptions applicable to the related
series described in the related prospectus supplement. The final scheduled
payment date will be specified in the related prospectus supplement. 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 a companion series issued by the related trust
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 holders of securities 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 that 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, holders of
securities may hold their securities through DTC, in the United States, or
Cedelbank or Euroclear, in Europe, if they are participants of those systems,
or indirectly through organizations which are participants in such systems.
Cede & Co., 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 the prospectus supplement to actions by
securityholders shall refer to actions taken by DTC upon instructions from its
participating organizations 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 those 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.
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, cross-market transactions will require
delivery of instructions to the relevant European international clearing
system by the counterparty in that system in accordance with its rules and
procedures and within its established deadlines, in 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. Credits or any transactions in
securities settled during processing will be reported to the relevant
Euroclear or Cedelbank participant on that 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 "Description of the
Securities--Book-Entry Registration--Global Clearance, Settlement and Tax
Documentation Procedures" below.
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 Securities and
Exchange Act of 1934, as amended. 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 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. These entities are called 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, 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 is incorporated under the laws of Luxembourg as a
professional depositary. Cedelbank holds securities for its participating
organizations 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 some 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 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. 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 "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.
Global Clearance, Settlement and Tax Documentation Procedures
Except in some limited circumstances, the globally offered securities
will be available only in book-entry form. Investors in global securities may
hold those global securities through any of DTC, Cedelbank or Euroclear. The
global securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding global securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice, i.e., seven calendar day settlement.
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
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. and Morgan Guaranty
Trust Company of New York 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 particular requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
1. 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 the
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.
2. 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, 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,
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.
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 which is the form for 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 which
is the form for 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 which is the
form for 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, which
is 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.
Definitive Securities
The securities of any series will be issued in definitive, fully
registered, certificated form to securityholders or their respective nominees,
rather than to DTC or its nominee only if
(1) 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,
(2) the depositor, at its option, elects to terminate the
book-entry system through DTC or
(3) 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 the securities in the form of
definitive securities, and thereafter the trustee will recognize the holders
of the definitive securities as securityholders, under the agreement and the
series supplement.
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 the definitive security on the date for the final payment at the
office or agency as is specified in the notice of final distribution to
holders. The trustee will provide the 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 assets
delivered, assigned and transferred to the trustee by the depositor, in each
case consisting, unless otherwise specified in the related prospectus
supplement, of:
(1) the primary assets;
(2) any Enhancement for that series; and
(3) 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 the 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 SEC 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 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. 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 new accounts and the receivables in
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 those receivables are then existing or
thereafter created. The addition to the trust of receivables in Additional
Accounts or participations will be subject to specified 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.
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 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, some 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 specified conditions, some 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 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 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 that will 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 SEC within 15 days after the initial issuance of such
securities. On the closing date, no more than 5% of the receivables (by
aggregate principal balance as of the cut-off date) will have characteristics
that deviate from the description of those receivables in the related
prospectus supplement.
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. Those
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 the
securities at the time of sale, nor an affiliate thereof at any
time during the three preceding months; provided that 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 which
will be referred to as a "CABS agreement". The seller/servicer of the
underlying receivables will have entered into the CABS agreement with the
trustee under such CABS agreement which will be referred to as the "CABS
trustee". Receivables underlying a CABS security will be serviced by 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 the CABS securities or any affiliate thereof. As a result, no 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 the CABS securities.
The issuer of the CABS securities, which will be referred to as the
"CABS issuer", will be:
(1) a financial institution, corporation, or other entity engaged
generally in the business of issuing credit or charge cards;
(2) any form of store or merchandiser that issues credit or charge
cards;
(3) a limited purpose corporation organized for the purpose of,
among other things, establishing trusts and acquiring and
selling receivables to the trusts, and selling beneficial
interests in such trusts; or
(4) one of the trusts referred to in clause (3).
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 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 specified 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 that information is reasonably available to
the depositor and the depositor reasonably believes the information to be
reliable:
(1) the aggregate approximate principal amount and type of the
CABS securities to be included in the primary assets;
(2) certain characteristics of the receivables which comprise
the underlying assets for the CABS securities including:
(a) whether the receivables are credit card receivables
or charge card receivables;
(b) the fees and charges associated with the receivables;
and
(c) the servicing fee or range of servicing fees with
respect to the receivables;
(3) the expected and final maturity of the CABS securities;
(4) the interest rate of the CABS securities;
(5) the CABS issuer, the CABS servicer, if other than the CABS
issuer, and the CABS trustee for the CABS securities;
(6) characteristics of the Enhancement, if any, such as
reserve funds, insurance policies, letters of credit or
guarantees relating to the receivables underlying the CABS
securities or to the CABS securities themselves;
(7) the terms on which the underlying receivables for the CABS
securities may, or are required to, be purchased prior to
their stated maturity or the stated maturity of the CABS
securities; and
(8) 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.
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 SEC within 15 days of the initial issuance of
the 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. Some amounts on deposit in the collection account and amounts
available pursuant to any Enhancement, as provided in the related prospectus
supplement, will be deposited in a distribution account established by the
trustee for each 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 some limited
exceptions, not later, in the case of funds in the collection account, than
the day preceding the date that 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 specified agencies thereof,
federal funds, certificates of deposit, commercial paper, demand and time
deposits and banker's acceptances, specified repurchase agreements of United
States government securities and specified 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 of the series. Enhancement may be in the form of the subordination of
one or more classes of the securities of a 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 in that prospectus supplement.
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 on the securities. 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 the Enhancement;
(b) any conditions to payment under the Enhancement not otherwise
described in this prospectus;
(c) the conditions, if any, under which the amount payable under
the Enhancement may be reduced and under which the Enhancement
may be terminated or replaced; and
(d) any material provisions of any agreement relating to the
Enhancement.
Additionally, the related prospectus supplement may set forth
information with respect to the issuer of any third-party Enhancement,
including:
(a) any material provisions of any agreement relating to the
Enhancement;
(b) a brief description of its principal business activities;
(c) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business;
(d) if applicable the identity of regulatory agencies which
exercise primary jurisdiction over the conduct of its business;
and
(e) 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 the
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.
Under the letter of credit, the issuing bank will be obligated to honor
drawings on the letter of credit 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 will instruct the trustee for the series to draw
an amount equal to the deficiency from the cash collateral guaranty or the
cash collateral account, up to the maximum amount available under the guaranty
or account.
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 reserve
funds to be established with the trustee as part of the trust for the series
or for the benefit of any Enhancer with respect to the series, 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 a 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 the 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. The 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 a series
to assure distributions of interest or principal with respect to the 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 available excess cash flow from the trust assets into a spread
account intended to assure the subsequent distribution of interest and
principal on the securities of a 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. A 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 collection account in the name of the trustee. As
provided in the related prospectus supplement, the collection account will be
an account maintained
(1) at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit therein
are rated as described in the related prospectus
supplement and as specified by each rating agency rating
the securities of a series, or
(2) 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:
(1) all payments on account of principal, including
prepayments, on the primary assets;
(2) all payments on account of interest or finance charges on
the 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 the primary
assets;
(3) 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;
(4) all amounts required to be deposited in the collection
account from any applicable Enhancement for a series
pursuant to the related trust agreement;
(5) all repurchase prices of any such Primary Assets
repurchased by the depositor, the seller or the servicer
pursuant to the related agreement;
(6) 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 in respect of the repurchased or removed
asset and not distributed as of the date on which the
related repurchase price was determined;
(7) all amounts payable to the trustee of a series for deposit
into the distribution account, if any, or for remittance
to the securityholders of the series as provided for in
the related trust agreement; and
(8) 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
As 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 the 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 documents and records relating to the
servicing of the receivables by the servicer and that, on the basis of the
examination, the firm is of the opinion that the servicing has been conducted
in compliance with the Agreement, except for the exceptions as that the firm
believes to be immaterial and any other exceptions that are set forth in the
statement.
The agreement for each series will provide for delivery to the trustee
for the 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.
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 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:
(a) upon determination that:
(1) the performance of its duties under the agreement is no
longer permissible under applicable law; and
(2) 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:
(1) 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;
(2) 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;
(3) the written consent of any provider of Enhancement, which
consent will not to be unreasonably withheld; and
(4) the proposed successor servicer being an eligible
servicer.
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 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 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:
(1) is an established financial institution having capital or
a net worth of not less than $100,000,000;
(2) is servicing a portfolio of consumer credit card or charge
card accounts;
(3) is legally qualified and has the capacity to service the
accounts;
(4) 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
(5) 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 the
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 will not indemnify:
(a) the trust or the trustee if the acts, omissions or alleged acts or
omissions constitute fraud, gross negligence, breach of fiduciary
duty or misconduct by the trustee;
(b) 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
(c) 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 the write-off is caused
by a breach of the agreement by the servicer. Subject to
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 material 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, the
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 seller
will transfer and assign to the applicable trustee, without recourse, its
entire interest in the Initial Receivables of the related receivables pool.
Each receivable will be identified at such time of transfer. The applicable
trustee will, concurrently with the 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 an account or the receivables. The records and agreements relating
to the 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 "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 the
CABS 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 CABS security conveyed to the trustee.
In the agreement, the depositor will represent and warrant to the
trustee regarding the CABS securities:
(1) that the information contained in the CABS schedule is true and
correct in all material respects;
(2) that, immediately prior to the conveyance of the CABS securities,
the depositor had good title thereto, and was the sole owner
thereof;
(3) that there has been no other sale by it of such CABS securities; and
(4) that there is no existing lien, charge, security interest or other
encumbrance on such CABS securities.
As described 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
Subsequent Transfer Date.
Repurchase and Substitution of Non-Conforming Primary Assets. As
described 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 the defect within 90 days, or within any other
period specified in the related prospectus supplement, the depositor will, not
later than 90 days or within the 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 the primary asset and
(b) accrued and unpaid interest to the date of the next scheduled
payment on the 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 the
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"). As described in the related prospectus supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution,
(1) 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,
(2) an interest rate not less than the interest rate of the Deleted
Primary Asset,
(3) a remaining term-to-stated maturity not greater than, and not
more than two years less than, that of the Deleted Primary
Asset, and
(4) 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 the breach, and if
the breach is of a nature that materially and adversely affects the value of
the primary asset, the depositor or the 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".
As described 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 the 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 the 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 the 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 a 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 a 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
will 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:
(1) with respect to a series, the amount of such distribution
allocable to interest or finance charges on the primary
assets;
(2) with respect to a series the amount of the distribution
allocable to principal on the primary assets;
(3) the amount of servicing compensation with respect to the
primary assets paid during the period commencing on the
due date to which the distribution relates and the amount
of servicing compensation during the period attributable
to penalties and fees;
(4) 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 (1) above;
(5) the aggregate outstanding principal amount of the
securities of the series as of the due date after giving
effect to distributions allocated to principal reported
under (2) above;
(6) with respect to securities that are compound interest
securities or zero coupon securities, the amount of
interest accrued on the securities during the related
interest accrual period and added to the compound value
thereof;
(7) in the case of securities that are variable interest
securities, the rate applicable to the distribution being
made;
(8) if applicable, the amount of any shortfall, which equals
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;
(9) 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;
(10) in the case of any Enhancement described in the related
prospectus supplement, the amount of coverage of the
Enhancement as of the close of business on the applicable
payment date;
(11) 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;
(12) 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 the payment date, after giving effect to
distributions made on that date;
(13) for each date during the Funding Period, if any, the
remaining Pre-Funded Amount;
(14) for the first 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
(15) 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, or other entity as described in the related
prospectus supplement, will furnish to each holder of record at any time
during the calendar year:
(a) the aggregate of amounts reported pursuant to (1) through (4),
(6) and (8) above for such calendar year, and
(b) the 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. As described in the related prospectus
supplement, events of default under the pooling and servicing agreement for
each series of certificates include:
(1) any failure by the servicer to deposit amounts in the
collection account and distribution account to enable the
trustee to distribute to certificateholders of the 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 the failure to the servicer by the
trustee for the series, or to the servicer and the trustee by
the holders of certificates of the series evidencing not less
than 25% of the aggregate voting rights of the certificates for
the series;
(2) 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 the series evidencing not less than 25% of the
aggregate voting rights of the certificates; and
(3) events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and 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 the series or, as specified in the prospectus
supplement, holders of securities of the series evidencing not less than 51%
of the aggregate voting rights of the securities for the 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
the 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 the 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 the series, and, as specified
in the prospectus supplement, holders of securities evidencing not less than
51% of the aggregate voting rights of the securities for the 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
remedy or to exercise any of the 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 that holder's status
as a securityholder, will have any right under the agreement for the series to
institute any proceeding with respect to the agreement, unless the holder
previously has given to the trustee for that 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 that 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. As described in the related prospectus supplement, events of
default under the indenture for each series of notes include:
(a) a default for five (5) days or more in the payment of any
interest on any note of a series or the default in the payment
of the principal of any note at the note's maturity;
(b) 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;
(c) 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 the 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;
(d) events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust; or
(e) 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 the
series may declare the principal amount (or, if the notes of that series are
Zero Coupon securities, the 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 the series to be due and payable immediately.
Such declaration may, under some 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 the series have been declared to be due and payable, the
trustee may, in its discretion, notwithstanding the acceleration, elect to
maintain possession of the collateral securing the notes of the series and to
continue to apply distributions on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes of the series
as they would have become due if there had not been 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 the series consent to the sale,
(b) the proceeds of the sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid,
on the outstanding notes of the series at the date of the sale
or
(c) the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the
notes as such payments would have become due if the 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 the 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 the 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 the event of default.
As described 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 the 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 the 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 the request or direction. Subject to provisions for indemnification and
limitations contained in the indenture, the holders of a majority of the then
aggregate outstanding amount of the notes of the 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 the series, and the holders of a
majority of the then aggregate outstanding amount of the notes of the series
may, in some 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 the 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 some 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
the series will be conferred or imposed upon the trustee and each specified
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform specified 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 the funds or
adequate indemnity against 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 the giving of the 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:
(a) by the depositor, if the trustee ceases to be eligible to
continue as such under the agreement;
(b) if the trustee becomes insolvent; or
(c) 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
As described 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:
(a) to cure any ambiguity;
(b) to correct any defective provisions or to correct or supplement
any provision therein which may be inconsistent with any other
provision therein;
(c) to add to the duties of the depositor or servicer;
(d) to add any other provisions with respect to matters or
questions arising under the agreement or related Enhancement;
(e) to add or amend any provisions of the agreement as required by
a rating agency in order to maintain or improve the rating of
the securities; or
(f) to comply with any requirements imposed by the tax code;
provided that any such amendment pursuant to clause (d) above will not
adversely affect in any material respect the interests of any securityholders
of a series, as evidenced by an opinion of counsel. Any such amendment, except
pursuant to clause (f) 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 the securities that the
amendment will not cause the rating agency to reduce the then current rating
of the securities.
As 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 the 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 the series affected thereby, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of the agreement or modifying in any manner the rights of 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 that 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 the series,
which request is accompanied by a copy of the communication which the
securityholders propose to transmit, the trustee will afford the
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:
(1) the final payment or other liquidation of the last primary
asset remaining in the trust for the series or
(2) the repurchase, as described below, by the servicer or other
entity specified in the prospectus supplement from the trustee
for the 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 the 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 the repurchase occurs. The exercise of
such right will effect early retirement of the securities of the 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 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 the 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 those continuing rights specified in the
indenture, upon the delivery to the trustee for cancellation of all the notes
of the series or, with certain limitations, upon deposit with the trustee of
funds sufficient for the payment in full of all of the notes of the series.
In addition to the discharge, with some limitation, 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 the series (except for obligations relating to
temporary notes and exchange of notes, to register the transfer of or exchange
notes of the series, to replace stolen, lost or mutilated notes of the 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 the series on the final scheduled
payment 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 a series, holders
of notes of the 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 payments
made on notes that are held by a custodian. Those 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. The 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 the 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 the 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 the notice by mail to the holders
of the related custody receipts. For that purpose, the holders shall consider
the date of the receipt by the custodian of the notice as the record date for
the purpose of determining the holders of record to whom the notices shall be
transmitted. In the event the 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 the
notice, deliver to the holders of the custody receipts of a letter of
direction with respect to the vote, action or consent, returnable to the
custodian. The custodian shall vote the notes in accordance with the letter of
direction. Any record date established by the notice for purposes specified in
the notice shall be the record date for the purpose of determining the holders
of record for those purposes. If no record date is established by the related
trustee, the date on which 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
its 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 that 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
As described 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
the series, without notice to or consent of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or supplement
any provision therein,
(3) to add to the duties of the depositor or the custodian or
(4) to add any other provisions with respect to matters or
questions arising under the custody agreement;
provided, that, the amendment will not adversely affect in any material
respect the interests of any holders of the series, as evidenced by an opinion
of counsel. An amendment will 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 the amendment will not cause the
rating agency to reduce the then current rating thereof.
As specified in the prospectus supplement, the custody agreement for
each series may also be amended by the custodian and the depositor with
respect to the 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 the 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
the series; provided, however, that no amendment may
(a) reduce the amount or delay the timing of payments on any
custody receipt without the consent of the holder of the
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 the 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.
Legal Aspects of the Receivables
The following discussion contains summaries of the material legal
aspects of credit, charge and debit card receivables which are general in
nature. Because some 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:
(1) 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
(2) 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 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 specified liens
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 limited circumstances under the UCC in which a prior or
subsequent transferee of receivables coming into existence after the date on
which the receivables are transferred to the depositor could have an interest
in those 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 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, administrative expenses of the receiver may also have priority over the
interest of the depositor in the 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.
Matters Relating to Receivership
It is likely that many of the sellers will be banking institutions.
FIRREA, which became effective August 9, 1989, sets forth 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 the 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 a series has more than one class, of
each class of the 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 the
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 the 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. In addition, these statutes limit cardholder liability for unauthorized
use, prohibit some discriminatory practices in extending credit, and impose
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 some state and local legislatures that, if enacted,
would further regulate the credit card industry. Some of those proposed laws
would, among other things, impose a cap on the rate at which a financial
institution may assess finance charges on credit card accounts which cap 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. 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 the Net Portfolio
Yield of a series is reduced, a Liquidation Event for the series may occur,
and the Rapid Amortization Period for the 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
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 those
charges to their costs. Those actions and similar actions which may be brought
in other states as a result of those actions, if resolved adversely to card
issuers, could have the effect of limiting charges, other than periodic
finance charges, that could be assessed on accounts of residents of those
states and could require card issuers to pay refunds and civil penalties with
respect to charges previously imposed on cardholders in those states.
The depositor may be liable for 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 those violations by way of
set-off against its 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 an account has not been created
in compliance with the requirements of the consumer protection laws.
Application of Federal and state bankruptcy and debtor relief laws
would adversely affect the interests of the securityholders if those 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 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) 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 following:
(1) the sale or lease of automobiles, trucks or other motor
vehicles, equipment, merchandise and other personal
property,
(2) credit card purchases or cash advances,
(3) the sale, licensing or other commercial provision of
services, rights, intellectual properties and other
intangibles,
(4) trade financings,
(5) loans secured by some types of first or junior mortgages
on real estate,
(6) loans to employee stock ownership plans and
(7) 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 those 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 related activities, such as
credit enhancement with respect to 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:
(1) to purchase the related primary assets;
(2) to repay indebtedness which has been incurred to obtain
funds to acquire the primary assets;
(3) to establish a Pre-Funding Account for such series;
(4) to establish any reserve funds or cash collateral accounts
described in the related prospectus supplement;
(5) to provide enhancement for any other series or for
securities issued by another issuer; and
(6) 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 those primary assets.
Federal Income Tax Considerations
The following is a discussion of material 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 holders subject to special treatment
under the United States federal income tax laws, such as 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 IRS.
The securities of a series may be classified for United States federal
income tax purposes:
(1) as indebtedness,
(2) as an ownership interest in some or all of the assets
included in the trust for a series, or
(3) as 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,
which is 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 the
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 that
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:
(1) multiplying the "adjusted issue price" 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
(2) 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 the 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:
(1) 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,
(2) 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
(3) 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:
(1) such gain is not effectively connected to a trade or
business carried on by the holder in the United States,
(2) 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
(3) 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,
(1) the individual did not actually or constructively own 10%
or more of the voting stock of the depositor, and
(2) 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 some 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 some 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 some 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 some
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 those circumstances, a holder 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 holder 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, 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
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 holder
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 that holder's regular tax
liability only to the extent that those 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
(a) 3% of the excess of adjusted gross income over the applicable
amount or
(b) 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 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 specified 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 (1) the present value of all
remaining payments to be received on the Stripped Security and (2) 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 holder'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 (1) 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 (2) 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 holders. 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
(1) a FASIT election is in effect,
(2) 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
(3) 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
(1) cash or cash equivalents,
(2) 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),
(3) foreclosure property,
(4) some hedging instruments such as, 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,
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
(6) FASIT regular interest, and
(7) 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 specified requirements. All of the
interests in a FASIT must belong to either of the following: (1) one or more
classes of regular interests or (2) 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
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of
its stated principal amount,
(5) the yield to maturity of the interest is less than the
applicable Treasure rate published by the Service plus 5%,
and
(6) 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., qualified
floating rates and weighted average rates).
Interest will be considered to be based on a permissible variable rate
if, generally,
(1) the interest is unconditionally payable at least annually,
(2) the issue price of the debt instrument does not exceed the
total noncontingent principal payments, and
(3) the 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 (3), (4), or (5) 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 (6), 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 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 those 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 those
securities in the same manner described for notes. See "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 some 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 holder will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the holder'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 "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
holder of a FASIT Regular Security 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", which is 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
"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:
(1) the receipt of income derived from assets that are not
permitted assets,
(2) certain dispositions of permitted assets,
(3) the receipt of any income derived from any loan originated by a
FASIT, and
(4) ________________ in some 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 "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
"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
ERISA imposes restrictions on employee benefit plans subject to ERISA
and persons who have specified relationships to those plans. ERISA also
imposes duties on persons who are fiduciaries of plans subject to ERISA and
prohibits some transactions between a plan and parties in interest with
respect to those plans. 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 that plan. Similar restrictions also apply to
plans that are subject to the tax 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. or one or more other firms that may be designated at the
time of each offering of 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 that series, the names of the underwriters, the purchase price of
the certificates or notes, the proceeds to the depositor from the 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
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 the
series.
Legal Matters
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 trust funds formed to issue under this securities prospectus is
subject to the informational requirements of the Securities Exchange Act of
1934 and in accordance therewith files, for the required time period, reports
and other information with the SEC. Those reports and other information can be
inspected and copied at the public reference facilities maintained by the SEC
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 the
materials 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 SEC maintains a Web site at
http://www.sec.gov containing reports, proxy and information regarding
registrants, including the depositor, that file electronically with the SEC.
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 SEC in Washington,
D.C. Copies of the information and the exhibits are on file at the offices of
the SEC and may be obtained, upon payment of the fee prescribed by the SEC, or
may be examined without charge at the offices of the SEC.
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.
GLOSSARY OF TERMS
The following are abbreviated definitions of certain 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 some of the terms.
Reference should be made to the related agreement for a series for a more
complete definition of such terms.
"Accounts" means with respect to the primary assets of a series,
portfolios of revolving credit, charge and debit card accounts.
"Accrual Termination Date" means, with respect to a class of compound
interest securities, the payment date specified in the related prospectus
supplement.
"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.
"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.
"Certificate Schedule" means a schedule appearing as an exhibit to the
related agreement identifying each CABS security.
"Citibank" means Citibank, N.A.
"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.
"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.
"Debt Securities" means certificates or notes characterized as
indebtedness for federal income tax purposes.
"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 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.
"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 Servicer" means the trustee or an entity which, at the time
of its appointment as servicer, (a) is an established financial institution
having capital or a net worth of not less than $100,000,000, (b) is servicing
a portfolio of consumer credit card or charge card accounts, (c) is legally
qualified and has the capacity to service the accounts, (d) 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 (e) 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.
"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 any 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.
"Initial Accounts" means receivables existing on the cut-off date in
certain consumer, corporate, revolving credit card, charge card or debit card
accounts.
"Investor Interest" means a specific undivided interest in the assets
of the trust allocated to the securities.
"IRS" means the Internal Revenue Service.
"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.
"Pass-Through securities" means classified certificates of a grantor
trust under Subpart E, Part 1 of Subchapter J of the Code.
"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.
"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 the 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 the principal amount, reduced by (1) all
payments, both scheduled or otherwise, received on that primary asset prior to
that due date and applied to principal in accordance with the terms of the
primary asset, (2) the principal portion of the purchase price of any primary
asset removed from the trust Fund and (3) the principal portion of any
liquidation proceeds.
"Principal Receivables" means all amounts charged by cardholders for
merchandise and services, amounts advanced and specified other fees billed to
cardholders on the accounts.
"Prohibited Transactions" means the transactions between a plan and
parties in interest with respect to those plans prohibited by ERISA.
"Proposed OID Regulations" means proposed income tax regulations.
"Qualifying Substitute Primary Asset" means primary assets substituted
for a deleted primary asset.
"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 accounts from the
trust.
"Revolving Period" means the period during which primary assets will be
continuously purchased and no principal will be paid to the securityholders.
"Section 1286 Treasury Regulations" means Treasury Regulations issued
on December 28, 1992.
"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.
"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.
"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.
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.................................. $834,000.00
Legal Fees and Expenses.......................... 200,000.00
Accounting Fees and Expenses..................... 40,000.00
Blue Sky Fees and Expenses....................... 12,500.00
Trustee's Fees and Expenses...................... 12,000.00
Rating Agency Fees............................... 100,000.00
Printing and Engraving Fees...................... 60,000.00
Miscellaneous.................................... 20,000.00
Total..................................... $1,278,500.00
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)
1.2 Form of Underwriting Agreement.(2)
3.1 Restated Certificate of Incorporation of Lehman ABS
Corporation.(3)
3.2- Form of By-Laws of Lehman ABS Corporation.(4)
4.1- Form of Pooling and Servicing Agreement.(1)
4.2- Form of Pooling Agreement.(5)
4.3- Form of Trust Agreement.(2)
4.4- Form of Master Pooling and Servicing Agreement.(2)
4.5- Form of Sale Agreement.(2)
4.6- Form of Indenture.(2)
4.7- Form of Trust Agreement.(6)
4.8- Form of Custody Agreement.(7)
5.1- Opinion of Brown & Wood LLP as to legality.(7)
8.1- Opinion of Brown & Wood LLP as to tax matters.
10.1- Form of Mortgage Loan Purchase Agreement.(6)
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.
- - ------------------
* 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.
(1) Previously filed in Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the SEC by the
Registrant on August 17, 1993.
(2) Previously filed in Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-69720), filed with the SEC by the
Registrant on November 16, 1993.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-67542), filed with
the SEC by the Registrant on August 17, 1993.
(4) Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-20084), filed with
the SEC by the Registrant on January 13, 1993.
(5) Previously filed in Post-Effective Amendment No. 5 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the SEC by the
Registrant on February 28, 1994.
(6) 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 SEC by the
Registrant on November 3, 1994.
(7) Previously filed in Registration Statement on Form S-3 (Reg. No.
333-76627), filed with the SEC by the Registrant on April 20, 1999.
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 (1) it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and (2) it reasonably
believes that the security rating requirement of Transaction Requirement B.5
of Form S-3 will be met by the time of sale of each series of securities to
which this Amendment No. 2 relates 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 5th day of
August, 1999.
LEHMAN ABS CORPORATION
By /s/Martin P. Harding
-------------------------
Martin P. Harding
Managing Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
* Chairman of the Board August 5, 1999
- - --------------------- (Principal Executive Officer)
Mark L Zusy Director and Managing Director
* Director and Managing Director August 5, 1999
- - ---------------------
Neal B. Leonard
* Controller (Principal August 5, 1999
- - --------------------- Accounting Officer)
David Goldfarb
* Director August 5, 1999
- - ---------------------
James J. Sullivan
</TABLE>
*By: /s/Samir Tabet
--------------------
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- - ----------- ----------------------
<S> <C> <C>
1.1 - Form of Underwriting Agreement.(1)
1.2 - Form of Underwriting Agreement.(2)
3.1 - Restated Certificate of Incorporation of Lehman ABS Corporation.(3)
3.2 - Form of By-Laws of Lehman ABS Corporation.(4)
4.1 - Form of Pooling and Servicing Agreement.(1)
4.2 - Form of Pooling Agreement.(5)
4.3 - Form of Trust Agreement.(2)
4.4 - Form of Master Pooling and Servicing Agreement.(2)
4.5 - Form of Sale Agreement.(2)
4.6 - Form of Indenture.(2)
4.7 - Form of Trust Agreement.(6)
4.8 - Form of Custody Agreement.(7)
5.1 - Opinion of Brown & Wood LLP as to legality.(7)
8.1 - Opinion of Brown & Wood LLP as to tax matters.
10.1 - Form of Mortgage Loan Purchase Agreement.(6)
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.
</TABLE>
- - ------------------------
(1) Previously filed in Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the SEC by the
Registrant on August 17, 1993.
(2) Previously filed in Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-69720), filed with the SEC by the
Registrant on November 16, 1993.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-67542), filed with
the SEC by the Registrant on August 17, 1993.
(4) Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-20084), filed with
the SEC by the Registrant on January 13, 1993.
(5) Previously filed in Post-Effective Amendment No. 5 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the SEC by the
Registrant on February 28, 1994.
(6) 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 SEC by the
Registrant on November 3, 1994.
(7) Previously filed in Registration Statement on Form S-3 (Reg. No.
333-76627), filed with the SEC by the Registrant on April 20, 1999.
(Exhibit 8.1)
Brown & Wood LLP
One World Trade Center
New York, New York 10048
August 10, 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 $3,000,000,000
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 the material 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
"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. The description under the heading "Federal Income Tax
Considerations"" in each Prospectus forming a part of the Registration
Statement contains the material federal income tax consequences for holders of
the Securities as described in each such Prospectus and, in our opinion, is
accurate in all material respects. We hereby confirm and adopt each of our
opinions stated under the heading "Federal Income Tax Considerations" in each
Prospectus forming a part of the Registration Statement.
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
"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
