<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
REGISTRATION NO. 333-04375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CHEVY CHASE BANK, F.S.B.
(Originator of the Trust Described Herein)
(Exact name of Registrant as Specified in its Charter)
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
(Issuer of the Certificates)
<TABLE>
<S> <C>
UNITED STATES 52-0897004
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION
ORGANIZATION) NO.)
</TABLE>
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
(301) 986-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
STEPHEN R. HALPIN, JR.
EXECUTIVE VICE PRESIDENT
CHEVY CHASE BANK, F.S.B.
8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
(301) 986-7000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------
COPIES TO:
M. David Krohn, Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
(202) 663-8000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities 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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED BE REGISTERED UNIT (1) PRICE (1) FEE (2)
<S> <C> <C> <C> <C>
Auto Receivable Backed
Certificates........................ $227,697,669.92 100% $227,697,669.92 $78,517.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Of this amount, $345 was paid previously.
--------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
--------------
CROSS REFERENCE SHEET TO FORM S-3
<TABLE>
<CAPTION>
ITEM NO. ITEM PROSPECTUS CAPTION OR PAGE
- ----------- ---------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Forepart of the Registration Statement and Front
Cover Page of Prospectus;
2. Inside Front and Outside Back Cover Pages of the
Prospectus......................................... Inside Front Cover Page of Prospectus; Available
Information; Incorporation of Certain Documents By
Reference; Reports to Certificateholders; Table of
Contents
3. Summary Information; Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Summary of Terms and Special Considerations
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... *
6. Dilution............................................ *
7. Selling Security Holders............................ *
8. Plan of Distribution................................ Underwriting
9. Description of Securities to be Registered.......... Summary of Terms; Formation of the Trust; The
Certificates
10. Interest of Named Experts and Counsel............... *
11. Material Changes.................................... *
12. Incorporation of Certain Information by Reference... Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
</TABLE>
- ------------------------
*Not applicable or answer is negative.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 18, 1996
PRELIMINARY PROSPECTUS
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
$227,697,669.92
% AUTO RECEIVABLES BACKED CERTIFICATES
CHEVY CHASE BANK, F.S.B.
SELLER AND SERVICER
Principal, and interest to the extent of the Pass-Through Rate of % per
annum, will be distributed to Certificateholders on the 15th day of each month
(or, if such 15th day is not a Business Day, the next following Business Day),
beginning July 15, 1996. The aggregate principal balance of the Receivables as
of the Cut-Off Date is $227,697,669.92. The final scheduled distribution date of
the Certificates will be the Distribution Date in December, 2002 (the "Final
Scheduled Distribution Date").
The % Auto Receivables Backed Certificates (the "Certificates") represent
fractional undivided interests in the assets of the Chevy Chase Auto Receivables
Trust 1996-1 (the "Trust") to be formed pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement"), dated as of June 1, 1996, among Chevy Chase
Bank, F.S.B. (the "Bank"), as seller and as servicer of the receivables (the
"Seller" and the "Servicer," respectively), and First Bank National Association,
as trustee (the "Trustee"). The assets of the Trust will primarily consist of
simple interest retail installment sales contracts and installment loans (the
"Receivables") secured by new and used automobiles, light duty trucks and vans
financed thereby (the "Vehicles"), certain payments made thereunder on or after
June 1, 1996 (the "Cut-Off Date"), security interests in the Vehicles and the
proceeds thereof received by the Trust from the Seller on or prior to the date
of the issuance of the Certificates, all as more fully described herein.
(COVER CONTINUED ON NEXT PAGE)
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH IN "SPECIAL CONSIDERATIONS" HEREIN.
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE BANK OR ANY AFFILIATES OF THE BANK.
NEITHER THE CERTIFICATES NOR THE UNDERLYING RECEIVABLES OR ANY COLLECTIONS
THEREON ARE INSURED OR GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC (1) COMMISSIONS SELLER (1)(2)
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<S> <C> <C> <C>
Per Certificate % % %
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Total $ $ $
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</TABLE>
(1) Plus accrued interest at the Pass-Through Rate from June 15, 1996.
(2) Before deduction of expenses payable by the Bank estimated at $550,000.
The Certificates are offered by the several Underwriters when, as and if issued
by the Trust, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that the Certificates
will be offered globally and delivered in book-entry form on or about
, 1996 through the facilities of The Depository Trust Company, Cedel
Bank, societe anonyme and Euroclear System, against payment in immediately
available funds.
J.P. MORGAN & CO.
CS FIRST BOSTON
June , 1996. SMITH BARNEY INC.
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The assets of the Trust also will include a financial guaranty insurance
policy (the "Certificate Insurance Policy") from MBIA Insurance Corporation (the
"Certificate Insurer"), which will unconditionally and irrevocably guarantee
payment of amounts due to the holders of the Certificates (the
"Certificateholders") to the extent described herein. The Trustee will also have
access to a Reserve Account and a Yield Maintenance Account to be established
for the benefit of the Certificateholders and the Certificate Insurer.
There currently is no secondary market for the Certificates. The
Underwriters intend to make a secondary market in the Certificates but have no
obligation to do so.
[MBIA LOGO]
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Certificates offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement which may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Servicer, on behalf of the Trust, will also file or cause to be filed with the
Commission such periodic reports as may be required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Servicer with the Registration
Statement, either on its own behalf or on behalf of the Trust, relating to the
Certificates, with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, after the date of this Prospectus and prior to the
termination of the offering of the Certificates offered hereby, shall be deemed
to be incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or replaces such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Servicer will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Written requests for such copies should be directed to: Chevy
Chase Bank, F.S.B., 8401 Connecticut Avenue, Chevy Chase, Maryland 20815,
Attention: Chief Financial Officer. Telephone requests for such copies should be
directed to Chevy Chase Bank, F.S.B. at (301) 986-7000.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, periodic and annual
unaudited reports containing information concerning the Receivables will be
prepared by the Servicer and sent on behalf of the Trust only to Cede & Co.
("Cede"), as nominee of The Depository Trust Company ("DTC") and registered
holder of the Certificates. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
The Servicer will file with the Commission such periodic reports as are required
under the Exchange Act, and the rules and regulations thereunder and as are
otherwise agreed to by the Commission. Copies of such periodic reports may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Bank or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein is correct as of any time subsequent
to the date hereof or that there has been no change in the affairs of the Bank
since such date or that the information contained or incorporated by reference
herein is correct as of any time subsequent to its date.
Until , 1996 (90 days after the commencement of the offering),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information........................................................................................... 2
Incorporation of Certain Documents by Reference................................................................. 2
Reports to the Certificateholders............................................................................... 2
Summary of Terms................................................................................................ 4
Special Considerations.......................................................................................... 10
Formation of the Trust.......................................................................................... 11
The Trust Property.............................................................................................. 12
Use of Proceeds................................................................................................. 12
Prepayment and Yield Considerations............................................................................. 12
Pool Factor and Other Information............................................................................... 13
The Receivables Pool............................................................................................ 13
The Seller and the Servicer..................................................................................... 17
The Certificates................................................................................................ 20
The Certificate Insurer......................................................................................... 33
The Certificate Insurance Policy................................................................................ 35
Certain Legal Aspects of the Receivables........................................................................ 37
Certain Federal Income Tax Consequences......................................................................... 40
ERISA Considerations............................................................................................ 42
Ratings......................................................................................................... 45
Underwriting.................................................................................................... 45
Report of Experts............................................................................................... 46
Legal Matters................................................................................................... 46
Annex I......................................................................................................... 47
Appendix A...................................................................................................... A-1
Appendix B...................................................................................................... B-1
</TABLE>
3
<PAGE>
SUMMARY OF TERMS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN CAPITALIZED
TERMS USED IN THIS SUMMARY OF TERMS ARE DEFINED ELSEWHERE IN THIS PROSPECTUS ON
THE PAGES INDICATED IN THE INDEX OF PRINCIPAL TERMS.
<TABLE>
<S> <C>
Issuer............................ Chevy Chase Auto Receivables Trust 1996-1 (the "Trust"
or the "Issuer").
Seller/Servicer................... Chevy Chase Bank, F.S.B., a federally chartered stock
savings bank (the "Bank"). The principal executive
offices of the Seller and the Servicer are located at
8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Trustee........................... First Bank National Association, a national banking
association. The corporate trust offices of the Trustee
are located at 180 East 5th Street, St. Paul, Minnesota
55101, and the telephone number of the Trustee is (612)
973-6700 (bond holder services).
Cut-Off Date...................... June 1, 1996.
Securities Offered................ The % Auto Receivables Backed Certificates (the
"Certificates"). The Certificates will evidence
fractional undivided ownership interests in the assets
of the Trust. The Certificates will be offered for
purchase in denominations of $1,000 and integral
multiples thereof. See "The Certificates -- General."
Each Certificateholder will also purchase the right to
receive a pro rata share of amounts payable under the
Yield Maintenance Account established pursuant to the
Pooling Agreement ("Yield Maintenance Payments").
The Trust......................... The Trust will be a trust established under the laws of
the State of New York. The activities of the Trust are
limited by the terms of the Pooling Agreement to
purchasing, owning and managing the Receivables, issuing
and making payments on the Certificates and other
activities related thereto.
Trust Property.................... The assets of the Trust (the "Trust Property") include
(i) the Receivables, (ii) all monies (including accrued
interest) due or received on or after the Cut-Off Date,
(iii) the Collection Account and the Certificate Account
and such amounts as from time to time may be held in one
or more accounts established and maintained by the
Servicer and the Trustee pursuant to the Pooling
Agreement, as described below, (iv) the security
interests in the Vehicles, (v) the rights to proceeds
from claims on physical damage, credit life and
disability insurance policies, if any, covering Vehicles
or Obligors, as the case may be, (vi) any proceeds from
the sale of repossessed Vehicles, (vii) all rights to
receive payments under certain circumstances from the
Reserve Account, (viii) the Certificate Insurance Policy
and (ix) certain other property, as more fully described
herein. See "The Trust Property."
The Receivables................... The Receivables consist of simple interest retail
installment sales contracts between dealers and retail
purchasers and installment loans which are secured by
the new and used automobiles, light duty trucks and vans
financed thereby. Each Obligor's obligation
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
under its Receivable is a full recourse obligation. The
"Obligor" is the obligor under each Receivable including
any guarantor. The Receivables contain provisions which
unconditionally obligate the Obligor to make all
payments under the related Receivable. Approximately
77.27% of the Receivables (by aggregate principal
balance of the Receivables as of the Cut-Off Date) were
purchased or originated by the Bank and the other 22.73%
of the Receivables were purchased by the Bank's
wholly-owned subsidiary, Consumer Finance Corporation
("CFC"). The Receivables purchased or originated by CFC
are referred to herein as the "CFC Receivables." See
"The Receivables Pool."
Registration of Certificates...... The Certificates will be represented initially by
physical certificates registered in the name of Cede, as
nominee of DTC. Persons acquiring beneficial ownership
interests in such Certificates ("Beneficial Owners") may
elect to hold their interests through DTC, in the United
States of America, or Cedel Bank, societe anonyme
("CEDEL") or the Euroclear System ("Euroclear"), in
Europe. A Beneficial Owner will not be entitled to
receive a Definitive Certificate representing such
person's interest in the Trust except in certain limited
circumstances. Under the terms of the Pooling Agreement,
Beneficial Owners will not be recognized as
Certificateholders and will be permitted to exercise the
rights of the Certificateholders only indirectly through
DTC. See "The Certificates -- Book-Entry Registration."
Pass-Through Rate................. % per annum, calculated on the basis of a 360-day year
consisting of twelve 30-day months (the "Pass-Through
Rate").
Distribution Date................. The 15th day of each month (or, if such 15th day is not
a day on which banks located in New York, New York, St.
Paul, Minnesota or Chevy Chase, Maryland are open for
the purpose of conducting commercial banking business (a
"Business Day"), the next following Business Day) (each
a "Distribution Date") beginning July 15, 1996.
Monthly Interest.................. On each Distribution Date, the Trustee will distribute
pro rata to the Certificateholders of record as of the
close of business on the day (whether or not a Business
Day) immediately preceding such Distribution Date (or,
if Definitive Certificates are issued, the close of
business on the last day of the calendar month immedi-
ately preceding the month of such Distribution Date)
(the "Record Date") interest at one-twelfth of the
Pass-Through Rate on the Certificate Principal Balance
immediately prior to such Distribution Date. To the
extent interest collections received by the Trust are
insufficient to pay such interest as a result of the
APRs on certain of the Receivables, the
Certificateholders will be entitled to amounts payable
from the Yield Maintenance Account. The "Certificate
Principal Balance" shall equal, initially,
$227,697,669.92 (the "Original Certificate Principal
Balance") and thereafter, the Original Certificate
Principal Balance, reduced by all amounts previously
distributed to Certificateholders and allocable to
principal. A "Collection Period" with respect to a
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Distribution Date will be the calendar month preceding
the month in which such Distribution Date occurs. See
"The Certificates -- Flow of Funds."
Monthly Principal................. On each Distribution Date, the Trustee will distribute
to Certificateholders, as of the related Record Date,
the Monthly Principal relating to such Distribution
Date. See "The Certificates -- Flow of Funds."
Accounts.......................... The Pooling Agreement will require that the Trustee
establish an account (the "Collection Account") and that
the Servicer deposit into the Collection Account all
collections received by the Servicer on the Receivables
within two Business Days following receipt of such
amounts. With respect to any Distribution Date and on
the related Determination Date, the Servicer shall
instruct the holder of the Collection Account to deposit
into an account established by the Trustee (the
"Certificate Account") all funds collected on the
Receivables during the most recently completed
Collection Period.
Credit Enhancement................ The credit enhancement available for the benefit of the
Certificateholders will consist of the Reserve Account
and the Certificate Insurance Policy.
A. Reserve Account............... The Trustee will hold a Reserve Account (the "Reserve
Account") for the benefit of the Certificateholders and
the Certificate Insurer. The Reserve Account will be
created with an initial deposit by the Seller of cash in
an amount required by the Pooling Agreement (the
"Reserve Initial Deposit"). The Reserve Initial Deposit
will be augmented on each Distribution Date by the
deposit in the Reserve Account of amounts otherwise
distributable to the Seller from Excess Interest until
the amount in the Reserve Account reaches an amount
equal to the Specified Reserve Balance. Thereafter,
amounts otherwise distributable to the Seller will be
deposited in the Reserve Account to the extent necessary
to maintain the amount in the Reserve Account at an
amount equal to the Specified Reserve Balance. Amounts
in the Reserve Account (including any investment
earnings thereon) on any Distribution Date (after giving
effect to all distributions made on such Distribution
Date) in excess of the Specified Reserve Balance for
such Distribution Date generally will be released to the
Seller. With respect to any Distribution Date, "Excess
Interest" shall mean funds on deposit in the Certificate
Account after distribution of the Required Payments to
the Certificateholders on such Distribution Date and
payment of the fee due the Trustee, the premium then due
to the Certificate Insurer and the Reimbursement Amount.
The "Specified Reserve Balance" with respect to any
Distribution Date means the amount so specified in the
Pooling Agreement. The Reserve Account will be
maintained with the Trustee as an Eligible Deposit
Account, and will not be part of the Trust. See "The
Reserve Account."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
The Certificate Insurer may, at its option and without
notice to, or the consent of, the Certificateholders,
reduce the Specified Reserve Balance.
B. The Certificate Insurance
Policy........................... On or before the Closing Date, the Seller will obtain
the Certificate Insurance Policy (the "Certificate
Insurance Policy") which is noncancelable, in favor of
the Trustee on behalf of the Certificateholders. On each
Distribution Date, the Certificate Insurer will be
required to make available to the Trustee the amount, if
any, by which the Required Payments on the Certificates
exceed the sum of (x) Available Funds as of such
Distribution Date and (y) the amount, if any, then on
deposit in the Reserve Account. The Certificate
Insurance Policy does not guarantee to the Cer-
tificateholders any specified rate of prepayments. A
payment by the Certificate Insurer under the Certificate
Insurance Policy is referred to herein as an "Insured
Payment." See "The Certificate Insurance Policy " and
"The Certificate Insurer" herein.
The Trustee will (i) receive as attorney-in-fact of each
Certificateholder, any Insured Payment from the
Certificate Insurer and (ii) disburse such Insured
Payment to each Certificateholder in accordance with the
Pooling Agreement. The Pooling Agreement will provide
that to the extent the Certificate Insurer makes In-
sured Payments, either directly or indirectly (as by
paying through the Trustee), to the Certificateholders,
the Certificate Insurer will be subrogated to the rights
of such Certificateholders with respect to such Insured
Payments. The Certificate Insurer will receive
reimbursement for such Insured Payments, but only from
the sources and in the manner provided in the Pooling
Agreement. Such subrogation and reimbursement will have
no effect on the Certificate Insurer's obligations under
the Certificate Insurance Policy.
Yield Maintenance Account......... Certain of the Receivables have annual percentage rates
of interest ("APRs") which are less than the sum of the
Pass-Through Rate, the Servicing Fee Rate and the rates
at which the Certificate Insurer's premium and the
Trustee's fee are calculated (the sum of such rates, the
"Required Rate"). The Yield Maintenance Account is a
segregated trust account which will not be part of the
Trust into which the Seller will make a single deposit
on the Closing Date in an amount (the "Initial Yield
Maintenance Amount") necessary to fund any shortfall on
interest collections which results from Receivables
having an APR of less than the Required Rate. After the
Closing Date no additional amounts will be deposited in
the Yield Maintenance Account. The Initial Yield
Maintenance Amount has been calculated using a zero
prepayment rate on the Receivables. On each
Determination Date, the Servicer is permitted to
recalculate the amount required to be on deposit in the
Yield Maintenance Account (the "Yield Maintenance
Amount"), which may decline as Receivables having less
than the Required Rate prepay or are otherwise removed
from the Trust. Any amounts in excess of the Yield
Maintenance Amount will be released to the Seller.
Amounts may be withdrawn from the Yield Maintenance
Account only
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
with respect to the interest shortfalls described above.
Any excess funds in the Yield Maintenance Account will
be released to the Seller.
Certificate Insurer............... MBIA Insurance Corporation and any successor thereto.
Servicing......................... The Servicer will be responsible for servicing,
managing, arranging, making collections on and otherwise
enforcing the Receivables. The Servicer will be required
to exercise the degree of skill and care in performing
these functions that it customarily exercises with
respect to similar receivables owned by the Servicer.
The Servicer will be entitled to retain from collections
on the Receivables a monthly fee (the "Servicing Fee")
equal to one-twelfth the product of (i) 1.40% (the
"Servicing Fee Rate") and (ii) the Pool Balance as of
the beginning of the immediately preceding Collection
Period. The Servicer may designate CFC to act as
sub-servicer with respect to the CFC Receivables.
Optional Termination.............. The Seller will have the option, subject to certain
conditions set forth in the Pooling Agreement, including
the deposit of the sum specified in the Pooling
Agreement, to remove all, but not less than all, of the
property in the Trust, and thereby cause early
retirement of the Certificates as of any Distribution
Date following a Record Date on which the Pool Balance
is 5% or less of the Original Certificate Principal
Balance (such option, the "Optional Termination"). In
the event of such a removal, the entire outstanding
Certificate Principal Balance, together with accrued
interest thereon at the Pass-Through Rate, will be
required to be paid to the Certificateholders on such
Distribution Date. The Certificate Insurance Policy will
not insure payments to Certificateholders resulting from
an Optional Termination. See "The Certificates --
Optional Termination."
Certain Legal Aspects of the
Receivables...................... Because of the administrative burden and expense that
would be entailed in doing so, the certificates of title
for the Vehicles will not be amended to identify the
Trustee as the secured party. If there are any Vehicles
as to which the Bank failed to obtain a perfected
security interest, its security interest would be
subordinate to, among others, subsequent purchasers of
the Vehicles and holders of perfected security
interests. Pursuant to the Pooling Agreement, the Seller
will assign its security interests in the Vehicles to
the Trustee. Under the laws of Virginia and North
Carolina, such an assignment of security interests may
not be, and under the laws of Maryland will not be,
sufficient to convey to the Trustee perfected security
interests in the Vehicles. The Seller will covenant in
the Pooling Agreement to repurchase any Receivable if,
on the Closing Date, a valid, subsisting and enforceable
first priority security interest in the related Vehicle,
which will have been assigned to the Trust, has not been
perfected (or is not in the process of being perfected)
in favor of the applicable Lender. The Seller will also
covenant in the Pooling Agreement to repurchase any
Receivable if, after the Closing Date, a valid,
subsisting and enforceable first priority security
interest in the name of the
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
applicable Lender is not maintained on behalf of the
Trust in the related Vehicle. See "Special
Considerations -- Certain Legal Aspects" and "Certain
Legal Aspects of the Receivables."
Certain Federal Tax
Considerations................... In the opinion of Shaw, Pittman, Potts & Trowbridge,
counsel to the Seller, the Trust will constitute a
grantor trust for federal income tax purposes and will
not be subject to federal income tax. Beneficial Owners
of the Certificates must report their respective
allocable shares of all income earned on the Trust
Property (other than amounts treated as "stripped
coupons") and may deduct their respective allocable
shares of reasonable servicing fees. See "Certain
Federal Income Tax Consequences -- Tax Status of the
Trust." Prospective investors should note that no
rulings have been or will be sought from the Internal
Revenue Service (the "Service") with respect to any of
the federal income tax consequences discussed herein,
and no assurance can be given that the Service will not
take contrary positions. See "Certain Federal Income Tax
Consequences."
ERISA Considerations.............. Certificates may be purchased by or with the assets of
an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), and the provisions of Section 4975 of the
Code. An acquisition of Certificates by such an employee
benefit plan is subject to the general fiduciary stan-
dards of ERISA and satisfaction of the conditions
imposed under the terms of certain prohibited
transaction exemptions granted to the Underwriters. See
"ERISA Considerations."
Ratings........................... It is a condition of the original issuance of the
Certificates that the Certificates be rated in the
highest rating category by at least one of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services, a division of The McGraw-Hill Compa-
nies, Inc. ("S&P") or Fitch Investors Service, Inc.
("Fitch") (Moody's, S&P or Fitch, collectively, the
"Rating Agencies"). The rating of the Certificates will
depend primarily on an assessment by the Rating Agencies
of the claims-paying ability of the Certificate Insurer.
Any reduction in the rating assigned to the
claims-paying ability of the Certificate Insurer below
the rating initially given to the Certificates would
likely result in a reduction of the rating of the
Certificates. A security 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
entity. See "Ratings."
Special Considerations............ For a discussion of certain factors that should be
considered by prospective investors in the Certificates,
see "Special Considerations" herein.
Certain Legal Matters............. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the
Seller and the Underwriters by Shaw, Pittman, Potts &
Trowbridge, Washington, D.C.
</TABLE>
9
<PAGE>
SPECIAL CONSIDERATIONS
Prospective Certificateholders should consider, among other things, the
following factors in connection with the purchase of the Certificates:
LIMITED LIQUIDITY. There currently is no secondary market for the
Certificates, and there is no assurance that one will develop or, if one does
develop, that it will continue until the Certificates are paid in full. The
Underwriters intend to make a market in the Certificates but have no obligation
to do so.
CERTAIN LEGAL ASPECTS. Because of the administrative burden and expense
that would be entailed in doing so, the certificates of title for the Vehicles
will not be amended to identify the Trustee as the secured party. If there are
any Vehicles as to which the Bank failed to obtain a perfected security
interest, its security interest would be subordinate to, among others,
subsequent purchasers of the Vehicles and holders of perfected security
interests. Pursuant to the Pooling Agreement, the Seller will assign its
security interests in the Vehicles to the Trustee. Under the laws of Virginia
and North Carolina, such an assignment of security interests may not be, and
under the laws of Maryland will not be, sufficient to convey to the Trustee
perfected security interests in the Vehicles. The Seller will covenant in the
Pooling Agreement to repurchase any Receivable if, on the Closing Date, a valid,
subsisting and enforceable first priority security interest in the related
Vehicle, which will have been assigned to the Trust, has not been perfected (or
is not in the process of being perfected) in favor of the applicable Lender. The
Seller will also covenant in the Pooling Agreement to repurchase any Receivable
if, after the Closing Date, a valid, subsisting and enforceable first priority
security interest in the name of the applicable Lender is not maintained on
behalf of the Trust in the related Vehicle. See "Certain Legal Aspects of the
Receivables."
YIELD AND PREPAYMENT CONSIDERATIONS. The weighted average life of the
Certificates will be reduced by full or partial prepayments on the Receivables.
The Receivables will generally be prepayable at any time without penalty.
Prepayments (or, for this purpose, equivalent payments to the Trust) may result
from payments by Obligors, liquidations due to default, the receipt of proceeds
from physical damage or credit life and/or credit disability insurance,
repurchases by the Seller as a result of certain uncured breaches of
representations and warranties made with respect to the Receivables, purchases
by the Servicer as a result of certain uncured breaches of the covenants made by
it with respect to the Receivables, or the exercise by the Seller of its
Optional Termination.
The Seller has served or is serving as the seller/servicer with respect to
three prior auto loan securitization transactions, Chevy Chase Auto Receivables
Trust 1995-2, Chevy Chase Auto Receivables Trust 1995-1 and Chevy Chase
Automobile Loan Trust 1991-1 and, accordingly, has limited historical experience
with respect to prepayments. The Seller has not as of the date hereof prepared
data on prepayment rates and is not aware of publicly available industry
statistics that set forth principal prepayment experience for retail installment
sales contracts similar to the Receivables. The Seller can make no prediction as
to the actual prepayment rates that will be experienced on the Receivables. The
Seller, however, believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the Receivables.
BOOK-ENTRY REGISTRATION. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain definitive physical securities representing such Certificateholders'
interests, except in certain circumstances described herein.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC, CEDEL or
Euroclear and, in such case, DTC, CEDEL or Euroclear, as the case may be, will
be required to credit such distributions to the accounts of its participating
organization which thereafter will be required to credit them to the accounts of
the Certificateholders either directly or indirectly through indirect
participants. See "The Certificates -- Book-Entry Registration."
CONSUMER PROTECTION LAWS. The Receivables are subject to federal and state
consumer protection laws which impose requirements with respect to the making,
transfer, acquisition, enforcement and collection of
10
<PAGE>
consumer loans. Such laws, as well as any new laws or rules which may be
adopted, may adversely affect the Servicer's ability to collect on the
Receivables. In addition, failure by the Seller to have complied, or the
Servicer to comply, with such requirements could adversely affect the
enforceability of the Receivables. The Seller will make representations and
warranties relating to the validity and enforceability of the Receivables and
its compliance with applicable law in connection with its performance of the
transactions contemplated by the Pooling Agreement. Pursuant to the Pooling
Agreement, if the Trust's interest in a Receivable is materially and adversely
affected by the failure of such Receivable to comply with applicable
requirements of consumer protection law, such Receivable will be repurchased by
the Seller. The sole remedy if any such representation or warranty is not
complied with and such noncompliance continues beyond the applicable cure period
is that the Receivables affected thereby will be repurchased by the Seller.
RATING OF THE CERTIFICATES. It is a condition to the issuance of the
Certificates that they be rated in the highest rating category by at least one
of the Rating Agencies. The rating of the Certificates will depend primarily on
an assessment by the Rating Agencies of the claims-paying ability of the
Certificate Insurer. Any reduction in the rating assigned to the claims-paying
ability of the Certificate Insurer below the rating initially given to the
Certificates would likely result in a reduction of the rating of the
Certificates. The rating by a Rating Agency of the Certificates is not a
recommendation to purchase, hold or sell the Certificates, inasmuch as such
rating does not comment as to market price or suitability for a particular
investor but addresses the likelihood of the payment of principal and interest
on the Certificates pursuant to their terms. There is no assurance that a rating
will remain in effect for any given period of time or that ratings will not be
reduced, suspended or withdrawn by the Rating Agencies.
LIMITED ASSETS. The Trust does not have, nor is it permitted or expected to
have, any significant assets or sources of funds other than the Receivables,
amounts on deposit in the Collection Account and the Certificate Account, the
Certificate Insurance Policy and the right to receive payments under certain
circumstances from the Reserve Account. The Certificates represent interests
solely in the Trust and are not obligations of, and will not be insured or
guaranteed by, the Seller, the Trustee or any other person or entity other than
the Certificate Insurer in accordance with the terms of the Certificate
Insurance Policy. Consequently, the Certificateholders must rely upon payments
on the Receivables, Insured Payments and, if and to the extent available,
amounts on deposit in the Reserve Account and the Yield Maintenance Account.
GEOGRAPHIC CONCENTRATION. As of the Cut-Off Date, based upon billing
address information provided to the Seller, the Obligors resided in 31 states
and the District of Columbia, three of which, Maryland, Virginia and North
Carolina, account for 24.33%, 47.94% and 12.33%, respectively, of the aggregate
principal balance of the Receivables in the Trust. Adverse economic conditions
in Maryland, Virginia or North Carolina could adversely affect the delinquency,
loan loss or repossession experience of the Trust with respect to the
Receivables.
FORMATION OF THE TRUST
The Seller will establish the Trust by selling and assigning the Receivables
and certain other Trust Property to the Trustee in exchange for the
Certificates. Prior to such sale and assignment, the Trust will have no assets
or obligations or any operating history. The Trust will not engage in any
business other than acquiring and holding the Trust Property, issuing the
Certificates and distributing payments on the Certificates.
The Seller, immediately prior to its transfer of the Receivables to the
Trust, will acquire the CFC Receivables from CFC.
The Servicer will hold the Receivables and the certificates of title or
ownership relating to the Vehicles as custodian for the Trustee. However, the
Receivables will not be marked or stamped to indicate that they have been sold
to the Trust, and the certificates of title or ownership for the Vehicles will
not be endorsed or otherwise amended to identify the Trust as the new secured
party. Under such circumstances and in certain jurisdictions, the Trust's
interest in the Receivables and the Vehicles may be defeated. See "Certain Legal
Aspects of the Receivables."
11
<PAGE>
The Trust will not acquire any assets other than the Trust Property, and it
is not anticipated that the Trust will have any need for additional capital
resources. Because the Trust will have no operating history upon its
establishment and will not engage in any business other than acquiring and
holding the Trust Property, issuing the Certificates and distributing payments
on the Certificates, no historical or PRO FORMA financial statements or ratios
of earnings to fixed charges with respect to the Trust have been included
herein.
If the protection provided to the Certificateholders by the Certificate
Insurance Policy, the Reserve Account and the Yield Maintenance Account is
insufficient, the Certificateholders would have to look principally to the
Obligors on the Receivables and to the proceeds from the repossession and sale
of Vehicles which secure Defaulted Receivables. In such event, certain factors,
such as the Trustee's failure to have perfected security interests in the
Vehicles in all states, may affect the Trust's ability to repossess and sell the
Vehicles securing the Receivables, and thus may reduce the proceeds to be
distributed to Certificateholders. See "The Certificates -- Flow of Funds," "The
Certificate Insurance Policy" and "Certain Legal Aspects of the Receivables."
THE TRUST PROPERTY
Each Certificate will represent a fractional undivided interest in the
Trust. The Trust Property will include (i) the Receivables, (ii) all monies
(including accrued interest) due or received thereon on or after the Cut-Off
Date, (iii) all amounts and property from time to time held in or credited to
the Collection Account and the Certificate Account, (iv) all of the Seller's
security interests in the Vehicles, (v) all rights to receive payments under
certain circumstances from the Reserve Account, (vi) the Certificate Insurance
Policy, (vii) all of the Seller's rights to receive proceeds from claims on
physical damage, credit life and disability insurance policies covering the
Vehicles or the Obligors, as the case may be, to the extent that such insurance
policies relate to the Receivables, (viii) all of the Seller's right to all
documents contained in the Receivable Files, (ix) all of the Seller's rights of
recourse against Dealers relating to the Receivables, (x) all property
(including the right to receive future Liquidation Proceeds and Recoveries) that
secures a Receivable and that shall have been acquired by or on behalf of the
Trustee and (xi) all proceeds (within the meaning of Section 9-306 of the UCC)
of the foregoing. The Pooling Agreement does not permit the Trust to acquire any
additional assets. The Yield Maintenance Account will hold certain amounts
relating to the provision of the Yield Maintenance Payments. The Trustee will
hold the Certificate Insurance Policy.
USE OF PROCEEDS
A portion of the net proceeds to be received by the Seller from the sale of
the Certificates will be used by the Seller to purchase the CFC Receivables from
CFC; the remainder of such net proceeds will be used by the Seller for general
corporate purposes.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Certificates will be directly related
to the scheduled rate of principal payments on the underlying Receivables. If
the Certificates are purchased at a price of other than par, the yield to
maturity on the Certificates also will be affected by the rate of principal
payments. The principal payments on such Receivables may be in the form of
scheduled principal payments or liquidations due to default, casualty and the
like. Any such payments will result in distributions to the Certificateholders
of amounts which would otherwise have been distributed over the remaining term
of the Receivables. In general, the rate of such payments may be influenced by a
number of other factors, including general economic conditions.
The effective yield to the Certificateholders will depend upon, among other
things, the price at which such Certificates are purchased, the amount of
principal, including both scheduled and nonscheduled payments thereof, which is
paid to the Certificateholders and the rate at which such principal is paid.
Interest on the Receivables will be passed through to Certificateholders on
each Distribution Date to the extent of the Pass-Through Rate applied to the
Certificate Principal Balance immediately prior to such
12
<PAGE>
Distribution Date. In the event of prepayments on a Receivable,
Certificateholders will receive thirty (30) days' interest on such Receivable to
the extent that amounts are available from Available Funds, the Reserve Account,
the Yield Maintenance Account and the Certificate Insurance Policy and are
sufficient for such purpose. See "The Certificates -- Flow of Funds."
POOL FACTOR AND OTHER INFORMATION
The "Pool Factor" will be a number (calculated to seven decimal places)
which the Servicer will compute each month equal to the Certificate Principal
Balance as of the close of business on the Distribution Date in that month,
divided by the Original Certificate Principal Balance. The Pool Factor will be
1.0000000 as of the date of the Closing Date, and thereafter will decline to
reflect reductions in the Certificate Principal Balance. A Certificateholder's
portion of the Certificate Principal Balance for a given month is the product of
(i) the original denomination of the holder's Certificate and (ii) the Pool
Factor.
Pursuant to the Pooling Agreement, the Certificateholders will receive from
the Trustee monthly reports concerning the payments received on the Receivables,
the Pool Balance, the Pool Factor and various other items of information.
Certificateholders of record during any calendar year will be furnished
information by the Trustee for tax reporting purposes not later than the latest
date permitted by law. See "The Certificates -- Reports to Certificateholders."
THE RECEIVABLES POOL
GENERAL
The Receivables in the pool were purchased or originated by Chevy Chase Bank
F.S.B. (the "Bank") or its wholly-owned subsidiary, CFC ("CFC," together with
the Bank, the "Lenders"). Of the aggregate principal balance of the Receivables
as of the Cut-off Date, 77.27% were purchased or originated by the Bank (the
"Bank Receivables") and 22.73% were purchased by CFC (the "CFC Receivables").
Of the Bank Receivables as of the Cut-Off Date, 97.89%, by aggregate
principal balance, were purchased by the Bank from dealers in new and used
automobiles, light duty trucks and vans ("Dealers") in the ordinary course of
business and 2.11% were originated directly by the Bank at or through its
deposit branches. Approximately 62.62% of the aggregate principal balance of the
Bank Receivables represents financing of new automobiles, light duty trucks and
vans, and approximately 37.38% represents financing of used automobiles, light
duty trucks and vans.
All of the CFC Receivables as of the Cut-Off Date were purchased from
Dealers. Approximately 37.76% of the aggregate principal balance of the CFC
Receivables represents financing of new automobiles, light duty trucks and vans,
and approximately 62.24% represents financing of used automobiles, light duty
trucks and vans.
UNDERWRITING PROCEDURES
Each Receivable was originated or purchased by the Lenders after a review by
the Lenders in accordance with their established underwriting procedures. Each
Lender has its own underwriting procedures.
The underwriting procedures of each Lender are designed to provide a basis
for assessing the Obligor's ability and willingness to repay the loan. In
conducting this assessment, the Lenders consider the Obligor's ratio of debt to
income and evaluate the Obligor's credit history through a review of a written
credit report compiled by a recognized consumer credit reporting bureau. The
Obligor's equity in the collateral and the terms of the loan are of secondary
importance in the Lenders' analysis. For the Obligor's purchase of an
automobile, the Bank's guidelines provide for financing up to 115% of the dealer
cost for new vehicles and of the Trade-In Value (as published by the National
Automobile Dealers Association, a standard reference source for dealers in used
vehicles) for used vehicles. CFC has two sets of guidelines which vary based on
the obligor's credit history. For new vehicles, CFC will finance up to 105% of
dealer cost, plus sales taxes, license fees and a maximum of $2,000 of rebatable
warranties and insurance, or 130% of dealer cost, inclusive of all additional
expenses. For used vehicles, CFC will finance up to 110% of the Trade-in Value,
plus sales taxes, license fees and a maximum of $2,000 of rebatable warranties
and insurance, or 130% of the Trade-in Value,
13
<PAGE>
inclusive of all additional expenses. The Lenders' guidelines are intended only
to provide a basis for lending decisions, and exceptions to such guidelines may,
within certain limits, be made based upon the credit judgment of the lending
officer. The Lenders periodically conduct quality audits to ensure compliance
with their established policies and procedures.
CFC's underwriting guidelines relate to a category of lending in which loans
may be made to applicants who have experienced certain adverse credit events
(and therefore would not necessarily meet all of the Bank's guidelines for its
traditional loan program) but who meet certain other creditworthiness tests.
Such loans may experience higher rates of delinquencies, repossessions and
losses, especially under adverse economic conditions, as compared with loans
originated pursuant to the Bank's traditional lending program.
SELECTION CRITERIA
The Receivables were selected from the Lenders' portfolios on the basis of a
number of criteria, including the following: each Receivable (i) has an original
term to maturity of 12 to 72 months, (ii) has a maturity of not later than May
2002, (iii) except with respect to the Balloon Receivables, provides for level
monthly payments that fully amortize the amount financed over the original term,
(iv) was not more than 59 days past due as of the Cut-Off Date and (v) has an
unpaid principal balance of not less than $1,000 as of the Cut-Off Date. The
weighted average remaining term (number of payments) of the Receivables was
55.06 months as of the Cut-Off Date.
All the Receivables are prepayable at any time. Neither Lender maintains
records of the historical prepayment experience of its automobile receivables
portfolio, and the Seller makes no prediction as to the actual prepayment
experience on the Receivables. See also "The Certificates -- Optional
Termination" regarding the Seller's option to purchase the Receivables when the
Pool Balance is 5% or less of the Original Certificate Principal Balance.
The Receivables are simple interest installment sales contracts and
installment loans which provide for equal monthly payments, except for 0.55% of
the Receivables (as a percentage of the initial Pool Balance) with respect to
which the last scheduled monthly payment of each such Receivable is
significantly larger than any prior scheduled monthly payment (each such
Receivable, a "Balloon Receivable"). As payments are received under a simple
interest receivable, interest accrued to date is paid first and the remaining
payment is applied to reduce the unpaid principal balance. Accordingly, if an
obligor pays a fixed monthly installment before its due date, the portion of the
payment allocable to interest for the period since the preceding payment will be
less than it would have been had the payment been made on the due date, and the
portion of the payment applied to reduce the principal balance will be
correspondingly greater. Conversely, if an obligor pays a fixed monthly
installment after its due date, the portion of the payment allocable to interest
for the period since the preceding payment will be greater than it would have
been had the payment been made on the due date, and the portion of the payment
applied to reduce the principal balance will be correspondingly less, in which
case a larger portion of the principal balance will be due on the final
scheduled payment date. In the case of a liquidation or repossession, amounts
recovered are applied first to the expenses of repossession, then to unpaid
interest and finally to unpaid principal.
The composition, distribution by APR and geographical distribution of the
Receivables as of the Cut-Off Date are as set forth in the following tables.
14
<PAGE>
COMPOSITION OF THE RECEIVABLES
<TABLE>
<S> <C>
Initial Aggregate Principal Balance......................... $227,697,669.92
Number of Receivables....................................... 16,062
Average Original Principal Balance.......................... $14,606.41
Range of Original Principal Balances...................... $1,990.66 to 39,789.82
Average Remaining Principal Balance......................... $14,176.17
Range of Remaining Principal Balances..................... $1,051.50 to 39,353.94
Weighted Average APR (1).................................... 11.81%
Range of APRs............................................. 5.50% to 29.00%
Weighted Average Original Term to Maturity (1).............. 57.25 months
Range of Original Terms to Maturity....................... 12 months to 72 months
Weighted Average Remaining Term to Maturity (1)............. 55.06 months
Range of Remaining Terms of Maturity...................... 12 months to 72 months
</TABLE>
- ------------------------
(1) Weighted by current balance.
DISTRIBUTION OF THE RECEIVABLES BY APR AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
RANGE OF APRS RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
5.0000% to 5.9999%............................. 1 0.01% $ 2,535.37 0.00%
6.0000% to 6.9999%............................. 130 0.81% 1,877,007.93 0.83%
7.0000% to 7.9999%............................. 2,015 12.54% 32,292,022.78 14.18%
8.0000% to 8.9999%............................. 2,900 18.05% 45,147,958.47 19.83%
9.0000% to 9.9999%............................. 2,491 15.51% 37,588,350.62 16.51%
10.0000% to 10.9999%............................ 1,770 11.02% 26,322,738.71 11.56%
11.0000% to 11.9999%............................ 1,139 7.09% 15,935,215.47 7.00%
12.0000% to 12.9999%............................ 765 4.76% 10,113,071.88 4.44%
13.0000% to 13.9999%............................ 335 2.09% 4,194,853.28 1.84%
14.0000% to 14.9999%............................ 145 0.90% 1,784,711.98 0.79%
15.0000% to 15.9999%............................ 247 1.54% 3,251,792.94 1.43%
16.0000% to 16.9999%............................ 560 3.49% 6,949,608.76 3.05%
17.0000% to 17.9999%............................ 863 5.37% 12,385,597.12 5.44%
18.0000% to 18.9999%............................ 1,157 7.20% 13,713,300.34 6.02%
19.0000% to 19.9999%............................ 360 2.24% 4,632,613.11 2.03%
20.0000% to 20.9999%............................ 67 0.42% 636,925.73 0.28%
21.0000% to 21.9999%............................ 298 1.86% 2,613,225.78 1.15%
22.0000% to 22.9999%............................ 81 0.50% 753,387.82 0.33%
23.0000% to 23.9999%............................ 664 4.13% 6,746,276.30 2.96%
24.0000% to 24.9999%............................ 59 0.37% 642,539.69 0.28%
25.0000% to 25.9999%............................ 1 0.01% 15,857.29 0.01%
29.0000% to 29.9999%............................ 14 0.09% 98,078.55 0.04%
----------- ------ ----------------- ------
Total....................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
15
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
STATE (1) RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
District of Columbia............................ 342 2.13% $ 4,782,851.57 2.10%
Georgia......................................... 1,179 7.34% 17,342,322.53 7.62%
Maryland........................................ 3,953 24.61% 55,411,445.00 24.33%
North Carolina.................................. 2,057 12.81% 28,074,935.97 12.33%
Pennsylvania.................................... 572 3.56% 8,689,753.57 3.82%
Virginia........................................ 7,681 47.82% 109,155,229.64 47.94%
Other........................................... 278 1.73 4,241,131.64 1.86%
----------- ------ ----------------- ------
Total....................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
- ------------------------
(1) Based upon the billing addresses of the Obligors.
DISTRIBUTION OF THE RECEIVABLES BY REMAINING PRINCIPAL BALANCE AS OF THE CUT-OFF
DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING PRINCIPAL BALANCES RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
$0.00 to $4,999.99......................... 247 1.54% $ 963,756.28 0.42%
$5,000.00 to $9,999.99........................ 2,933 18.26% 24,014,117.90 10.55%
$10,000.00 to $14,999.99........................ 6,895 42.93% 86,673,945.31 38.07%
$15,000.00 to $19,999.99........................ 3,982 24.79% 67,856,015.75 29.80%
$20,000.00 to $24,999.99........................ 1,390 8.65% 30,727,709.04 13.50%
$25,000.00 to $29,999.99........................ 468 2.91% 12,664,822.75 5.56%
$30,000.00 to $34,999.99........................ 127 0.79% 4,060,750.26 1.78%
$35,000.00 to $39,999.99........................ 20 0.13% 736,552.63 0.32%
----------- ------ ----------------- ------
Total....................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
DISTRIBUTION OF THE RECEIVABLES BY REMAINING TERMS TO MATURITY AS OF THE CUT-OFF
DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING TERMS TO MATURITY RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1 to 12........................................ 5 0.03% $ 30,419.64 0.01%
13 to 24........................................ 158 0.98% 923,510.89 0.41%
25 to 36........................................ 988 6.15% 8,588,232.81 3.77%
37 to 48........................................ 3,209 19.98% 35,601,607.76 15.64%
49 to 60........................................ 10,801 67.25% 163,464,671.22 71.79%
61 to 72........................................ 901 5.61% 19,089,227.60 8.38%
----------- ------ ----------------- ------
Total......................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
16
<PAGE>
THE SELLER AND THE SERVICER
GENERAL
The Seller, which is one of the Lenders, is a federally chartered stock
savings bank. The Seller's executive offices are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815, and the Seller's telephone number is (301)
986-7000. The Seller is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS") within the
Department of the Treasury and the Federal Deposit Insurance Corporation (the
"FDIC"). Deposits at the Seller are fully insured up to $100,000 per insured
depositor by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC.
At March 31, 1996, the Bank had consolidated assets of approximately $5.1
billion, deposits of approximately $4.3 billion, and stockholders' equity of
approximately $344.5 million. As a savings bank chartered under the laws of the
United States, the Bank is subject to certain minimum regulatory capital
requirements imposed under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, as amended ("FIRREA"). At March 31, 1996, the Bank was
in compliance with all such regulatory capital requirements in effect at that
date. In addition, the Bank's capital ratios at March 31, 1996 were sufficient
for the bank to meet the ratios established for "well capitalized" institutions
pursuant to "prompt corrective action" regulations promulgated by the OTS
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991.
On the basis of its balance sheet at March 31, 1996, the Bank also met the
FIRREA-mandated fully phased-in capital requirements (which take into account
the phase-out of certain assets from regulatory capital over a period ending
June 30, 1996) and, on a fully phased-in basis, met the capital standards
established for "well-capitalized" institutions under the prompt corrective
action regulations.
Because of the continued improvement in the financial condition of the Bank,
on March 29, 1996, the OTS released the Bank from certain restrictions and
requirements contained in an agreement with the OTS, which had been amended in
October 1993. In connection with the termination of the written agreement at the
request of the OTS, the Board of Directors of the Bank has adopted a resolution
that addresses certain issues previously addressed by the written agreement. The
resolution also provides that the Bank will present a plan annually to the OTS
detailing anticipated consumer loan securitization activity.
Institutions insured by the SAIF, including the Bank, pay higher deposit
insurance premiums than similarly-situated institutions insured by the Bank
Insurance Fund ("BIF"). Legislation designed to reduce or eliminate the
disparity between BIF and SAIF insurance premiums by, among other things,
imposing on thrift institutions, including the Bank, a one-time assessment
estimated to be up to 85 basis points on their SAIF-insured deposits to
capitalize the SAIF was included in budget legislation which passed Congress in
November 1995 and was vetoed for other reasons by President Clinton in December
1995. Congress is also considering legislation which would eliminate a provision
of the Internal Revenue Code that permits thrifts that meet certain
requirements, including the Bank, to establish reserves for bad debts and to
deduct each year reasonable additions to those reserves in lieu of taking a
deduction for bad debts actually sustained during the taxable year. Congress is
also considering legislation which would, among other things: (i) abolish the
OTS and transfer its functions to other agencies, and (ii) require federally
chartered thrifts, including the Bank, to convert to national bank or state bank
charters or thrift charters. It cannot be determined whether, or in what form,
such legislation will eventually be enacted.
The other Lender, CFC, is a wholly-owned subsidiary of the Seller, formed in
December 1994 for the purpose of providing automobile financing to applicants
who may have experienced certain adverse credit events. See "The Receivables
Pool."
DELINQUENCY AND DEFAULT EXPERIENCE
There can be no assurance that the levels of delinquency and loss experience
reflected in the tables below, are indicative of the performance of the
Receivables included in the Trust.
17
<PAGE>
CHEVY CHASE BANK, F.S.B.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------
1992 1993 1994 1995
---------------------------- -------------------------- -------------------------- ---------
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF DOLLAR
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
(000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES (000)
----------- --------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(1)................... $ 84,533 $ 166,307 $ 299,096 $ 431,351
DELINQUENCIES:(2)(3)
30-59 Days........................ $ 1,469 1.74% $ 1,210 0.73% $ 4,074 1.36% $ 2,491
60-89 Days........................ 237 0.28% 223 0.13% 729 0.24% 742
90 days or more................... 328 0.39% 226 0.14% 1,209 0.40% 1,667
----------- --- --------- --- --------- --- ---------
Total Delinquencies............... $ 2,034 2.41% $ 1,659 1.00% $ 6,012 2.00% $ 4,900
----------- --- --------- --- --------- --- ---------
----------- --- --------- --- --------- --- ---------
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
PERCENTAGE OF DOLLAR PERCENTAGE OF
TOTAL AMOUNT TOTAL
RECEIVABLES (000) RECEIVABLES
--------------- --------- ---------------
<S> <C> <C> <C>
Receivables
Outstanding(1)................... $ 470,690
DELINQUENCIES:(2)(3)
30-59 Days........................ 0.58% $ 2,540 0.54%
60-89 Days........................ 0.17% 784 0.17%
90 days or more................... 0.39% 1,744 0.37%
--- --------- ---
Total Delinquencies............... 1.14% $ 5,068 1.08%
--- --------- ---
--- --------- ---
</TABLE>
- ------------------------------
(1) Total Seller Portfolio is the net remaining principal balance.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Includes repossessions in inventory.
CHEVY CHASE BANK, F.S.B.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1992 1993 1994 1995
---------------------------- -------------------------- -------------------------- ---------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
DOLLAR AVERAGE DOLLAR AVERAGE DOLLAR AVERAGE DOLLAR
AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT
(000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING (000)
----------- --------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding(1)............... $ 90,271 $ 116,475 $ 245,295 $ 363,845
----------- --------- --------- ---------
Gross Charge-offs(2).......... $ 811 0.90% $ 627 0.54% $ 766 0.31% $ 2,120
Recoveries(4)................. 103 0.12% 115 0.10% 219 0.09% 275
----------- --- --------- --- --------- --- ---------
Net Losses.................... $ 708 0.78% $ 512 0.44% $ 547 0.22% $ 1,845
----------- --- --------- --- --------- --- ---------
----------- --- --------- --- --------- --- ---------
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1996
--------------------------
PERCENTAGE OF PERCENTAGE OF
AVERAGE DOLLAR AVERAGE
RECEIVABLES AMOUNT RECEIVABLES
OUTSTANDING (000) OUTSTANDING
--------------- --------- ---------------
<S> <C> <C> <C>
Average Receivables
Outstanding(1)............... $ 451,303
---------
Gross Charge-offs(2).......... 0.58% $ 655 0.58%(3)
Recoveries(4)................. 0.07% 53 0.05%(3)
--- --------- ---
Net Losses.................... 0.51% $ 602 0.53%(3)
--- --------- ---
--- --------- ---
</TABLE>
- ------------------------------
(1) Equals the arithmetic average of the month-end balances.
(2) Gross Charge-offs represent the excess of the outstanding loan balance over
net liquidation proceeds, where net liquidation proceeds are the excess of
liquidation proceeds over the sum of repossession, liquidation and other
related expenses.
(3) Annualized.
(4) Includes current post-disposition recoveries on receivables previously
charged off.
18
<PAGE>
CONSUMER FINANCE CORPORATION
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31,
DECEMBER 31, 1995 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF
AMOUNT TOTAL AMOUNT TOTAL
(000) RECEIVABLES (000) RECEIVABLES
--------- ------------- --------- -------------
Receivables
Outstanding(1)......................................................... $ 49,375 $ 71,857
Delinquencies(2)(3):
30 - 59 Days............................................................ $ 2,528 5.12 % $ 2,398 3.34 %
60 - 89 Days............................................................ $ 609 1.23 % $ 956 1.33 %
90 days or more......................................................... $ 871 1.76 % $ 1,523 2.12 %
--------- --- --------- ---
Total Delinquencies..................................................... $ 4,008 8.11 % $ 4,877 6.79 %
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
- ------------------------
(1) Receivables Outstanding consists of all amounts due from obligors as posted
to the related accounts.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Includes repossessions in inventory.
CONSUMER FINANCE CORPORATION
LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED MARCH 31,
DECEMBER 31, 1995 1996
------------------------ --------------------------------
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF
AMOUNT TOTAL AMOUNT AVERAGE RECEIVABLES
(000) RECEIVABLES (000) OUTSTANDING
--------- ------------- --------- ---------------------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding(1).................................................. $ 21,383 $ 62,575
Gross Charge-offs(2)............................................. $ 144 0.67 % $ 199 1.27%(3)
Recoveries(4).................................................... $ 0 0.00 % $ 8 0.05%(3)
Net Losses....................................................... $ 144 0.67 % $ 191 1.22%(3)
</TABLE>
- ------------------------
(1) Equals the arithmetic average of the month-end balances.
(2) Gross Charge-offs represent the excess of the outstanding loan balance over
net liquidation proceeds, where net liquidation proceeds are the excess of
liquidation proceeds over the sum of repossession, liquidation and other
related expenses.
(3) Annualized.
(4) Includes current post-disposition recoveries on receivables previously
charged off.
19
<PAGE>
LITIGATION
The Seller is not involved in any legal proceedings, and is not aware of any
pending or threatened legal proceedings, that would have a material adverse
effect upon its financial condition or results of operations.
THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling Agreement to be
entered into by the Servicer, the Seller and the Trustee. The Trustee will
provide a copy of the Pooling Agreement to Certificateholders without charge on
written request addressed to its Corporate Trust Department at 180 East 5th
Street, St. Paul, Minnesota 55101, Att: Structured Finance.
The following summary describes certain terms of the Pooling Agreement, does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Pooling Agreement. Wherever provisions of the Pooling Agreement
are referred to, such provisions are hereby incorporated herein by reference.
GENERAL
The Certificates will be offered for purchase in denominations of $1,000 and
integral multiples thereof and will be represented initially by physical
certificates registered in the name of Cede as nominee of DTC. No Certificate
Owner will be entitled to receive a definitive certificate representing such
person's interest in the Trust except in the event that Definitive Certificates
are issued under the limited circumstances described herein. Unless and until
Definitive Certificates are issued, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants and all references to distributions, notices, reports, and
statements to Certificateholders shall refer to distributions, notices, reports,
and statements to DTC. See "-- Book-Entry Registration" and "-- Definitive
Certificates."
In general, it is intended that Certificateholders receive, on each
Distribution Date, an amount of principal equal to the decrease in the Pool
Balance from the beginning to the end of the related Collection Period, plus
interest at one-twelfth of the Pass-Through Rate on the Certificate Principal
Balance immediately prior to such Distribution Date. See "-- Flow of Funds."
Principal and interest to be distributed to Certificateholders may be provided
by payments made by or on behalf of Obligors, the payment of Purchase Amounts by
the Seller or the Servicer, amounts, if any, from the Reserve Account and the
Yield Maintenance Account, proceeds from physical damage insurance, Liquidation
Proceeds (net of certain Servicer expenses) upon the repossession and sale of
Vehicles or Recoveries (net of certain Servicer expenses) after the repossession
and sale of Vehicles and any Insured Payments remitted by the Certificate
Insurer under the Certificate Insurance Policy. See "The Certificate Insurance
Policy."
Distribution of principal and interest on the Certificates with respect to
each Collection Period will be made on the Distribution Date immediately
succeeding such Collection Period, commencing on July 15, 1996. Each Collection
Period will be one calendar month.
BOOK-ENTRY REGISTRATION
The Certificates will be book-entry certificates (the "Book-Entry
Certificates"). The Beneficial Owners may elect to hold their Certificates
through DTC (in the United States), or CEDEL or Euroclear (in Europe) if they
are participants of such systems ("Participants"), or indirectly through
organizations which are Participants in such systems. The Book-Entry
Certificates will initially be registered in the name of Cede, the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A. ("Citibank") will act as depositary for CEDEL and
Chemical Bank, New York will act as depositary for Euroclear (in such
capacities, individually, the "Relevant Depositary" and collectively the
"European Depositaries"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Certificateholder" of the Certificates will be
Cede, as nominee of DTC. Beneficial Owners will not be the Certificateholders as
that term is used in the Pooling Agreement. Beneficial Owners are only permitted
to exercise their rights indirectly through Participants and DTC.
20
<PAGE>
A Beneficial Owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant, and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC Participants.
While such Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
such Certificates and is required to receive and transmit distributions of
principal of, and interest on, such Certificates. Participants and indirect
participants with whom Beneficial 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 Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates, the Rules
provide a mechanism by which Beneficial Owners will receive distributions and
will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Beneficial Owners who are not Participants may transfer ownership of
Certificates only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer such Certificates, by
book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Certificates will be executed through DTC and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Beneficial
Owners.
Because of time zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Federal Income Tax Consequences --
Foreign Investors" and "-- Backup Withholding" herein and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to this Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or
21
<PAGE>
receiving securities in DTC, and making or receiving payment in accordance with
normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the European Depositaries.
DTC 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 Section 17A of the Exchange Act. DTC was created to hold securities
for its participating organization ("DTC Participants") and to facilitate the
clearance and settlement of securities transactions between DTC Participants
through electronic book-entries, thereby eliminating the need for physical
movement of notes or certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations. 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 custodial relationship with
a DTC Participant, either directly or indirectly ("Indirect DTC Participants").
In general, Beneficial Owners will be subject to the Rules, as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guarantee Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible
22
<PAGE>
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing funds
to the Beneficial Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates, to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede, as
nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the Rules, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling Agreement only at the direction of one
or more DTC Participants to whose DTC accounts the Book-Entry Certificates are
credited. CEDEL or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by a Certificateholder under the Pooling Agreement
on behalf of a CEDEL Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of certificates among Participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
The Certificates will be issued in fully registered, certificated form
("Definitive Certificates") to the Beneficial Owners or their nominees, rather
than to DTC or its nominee, only if (i) the Trustee advises the Beneficial
Owners in writing that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to such securities and such
Trustee is unable to locate a qualified successor, (ii) such Trustee, at its
option, elects to terminate the book-entry-system through DTC or (iii) after the
occurrence of a Servicer Default, the Beneficial Owners representing at least a
majority of the outstanding principal amount of such Certificates advise the
Trustee through DTC 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
Beneficial Owners.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate or the certificates representing the Certificates and
receipt by the Trustee of instructions for re-registration, the Trustee will
reissue the Certificates as Definitive Certificates to the Beneficial Owners,
and thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling Agreement ("Holders").
23
<PAGE>
Distributions of principal of, and interest on, Definitive Certificates will
be made by the Trustee in accordance with the procedures set forth in the
Pooling Agreement directly to Holders in whose names the Definitive Certificates
were registered at the close of business on the applicable Record Date. Such
distributions will be made by check mailed to the address of such Holder as it
appears on the register maintained by the Trustee. The final payment on any
Definitive Certificate, however, will be made only upon presentation and
surrender of such Definitive Certificate at the office or agency specified in
the notice of final distribution to the applicable Certificateholders.
Definitive Certificates will be transferable and exchangeable at the offices
of the Trustee. No service charge will be imposed for any registration of
transfer or exchange, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
CONVEYANCE OF RECEIVABLES
On the Closing Date, the Seller will sell, transfer, assign, set over and
otherwise convey to the Trustee, without recourse (except as expressly set forth
in the Pooling Agreement), all of its right, title and interest in and to the
Receivables, including its security interests in the Vehicles. CFC will convey
the CFC Receivables to the Seller prior to such sale and assignment. The Trustee
will, concurrently with such sale and assignment, execute, authenticate and
deliver the definitive certificates representing the Certificates to the
Underwriters against payment to the Seller of the net purchase price of the sale
of the Certificates.
In the Pooling Agreement, the Seller will represent and warrant to the
Trustee, among other things, that (i) the information provided with respect to
Receivables is correct in all material respects; (ii) the Obligor on each
Receivable is required to obtain physical damage and theft insurance in
accordance with Seller's normal requirements; (iii) at the date of issuance of
the Certificates, the Receivables are free and clear of all security interests,
liens, charges, and encumbrances and no setoffs, defenses, or counterclaims
against the Seller have been asserted or threatened (other than the interest of
the Trustee); (iv) on the Closing Date, each of the Receivables is or will be
secured by a first priority perfected security interest in the Vehicle in favor
of the applicable Lender; and (v) each Receivable, at the time it was
originated, complied, and on the Closing Date complies, in all material
respects, with applicable federal and state laws, including consumer credit,
truth in lending, equal credit opportunity, and disclosure laws. The only
recourse the Trustee and the Certificateholders will have against the Seller for
breach or failure to be true of any of the representations and warranties
contained in the Pooling Agreement with respect to a Receivable will be to
require the Seller to repurchase the Receivable. See "-- Mandatory Repurchase of
Receivables."
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Trustee will appoint the Servicer as initial custodian
of the Receivables. The Servicer, in its capacity as custodian, will hold the
Receivables and all electronic entries, documents, instruments and writings
relating thereto (each, a "Receivable File"), either directly or through
sub-servicers, on behalf of the Trustee for the benefit of Certificateholders
and the Certificate Insurer. The Receivables will not be stamped or otherwise
marked to reflect the sale and assignment of the Receivables to the Trust and
will not be segregated from other receivables held by the Servicer or the
subservicers. However, Uniform Commercial Code (the "UCC") financing statements
reflecting the sale and assignment of the Receivables by the Seller to the
Trustee will be filed, and the Servicer's accounting records and computer
systems will be marked to reflect such sale and assignment. See "Formation of
the Trust" and "Certain Legal Aspects of the Receivables." Pursuant to the terms
of the Pooling Agreement, the Servicer will be required to file continuation
statements relating to such UCC financing statements in order to maintain the
perfected security interest of the Trust in the Receivables. The Servicer may
designate CFC to act as Custodian with respect to Receivables Files relating to
the CFC Receivables.
SERVICING PROCEDURES
The Receivables will be serviced by the Servicer pursuant to the Pooling
Agreement. The Servicer may designate CFC to act as sub-servicer with respect to
the CFC Receivables, although such designation will not relieve the Servicer
from its servicing obligations with respect to such CFC Receivables. The Pooling
Agreement requires that servicing of the Receivables by the Servicer shall
generally be carried out in the same manner in which it services receivables and
vehicles held for its own account. In performing its duties
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hereunder, the Servicer will act on behalf and for the benefit of the Trustee
and the Holders and the Certificate Insurer, subject at all times to the
provisions of the Pooling Agreement, without regard to any relationship which
the Servicer or any affiliate of the Servicer may otherwise have with an
Obligor.
CFC's collection procedures differ in certain respects from those employed
by the Bank. On an obligor's fifth day of delinquency, CFC sends a late payment
notice and begins the collection process, while the Bank initiates these steps
on the obligor's tenth day of delinquency. CFC's collections department is
staffed to have approximately one collector for every 800 loans outstanding,
compared to the Bank's ratio of approximately one collector for every 3,000
loans outstanding. In general, CFC initiates the repossession process by the
30th day of delinquency, while the Bank begins this process by the 40th day of
delinquency.
The Servicer, as an independent contractor on behalf of the Trust and for
the benefit of the Certificateholders and the Certificate Insurer, will be
responsible for managing, servicing and administering the Receivables and
enforcing and making collections on the Receivables and any Insurance Policies
and for enforcing any security interest in any of the Vehicles, all as set forth
in the Pooling Agreement. The Servicer's responsibilities will include
collecting and posting of all payments, responding to inquiries of Obligors,
investigating delinquencies, accounting for collections, furnishing monthly and
annual statements to the Trustee and the Certificate Insurer, with respect to
distributions, providing appropriate federal income tax information for use in
providing information to Certificateholders, collecting and remitting sales and
property taxes on behalf of taxing authorities and maintaining the perfected
security interest of the Seller in the Vehicles.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For its servicing of the Receivables, the Servicer will be entitled to
retain from collections on the Receivables a Servicing Fee equal to one-twelfth
of the product of (i) 1.40% and (ii) the Pool Balance of all Receivables as of
the first day of the immediately preceding Collection Period. A portion of such
Servicing Fee may be paid over by the Servicer to CFC with respect to its
sub-servicing of the CFC Receivables.
All costs of servicing each Receivable in the manner required by the Pooling
Agreement shall be borne by the Servicer, but the Servicer shall be entitled to
retain, out of any amounts actually recovered with respect to any Defaulted
Receivable or the Vehicles subject thereto, the Servicer's actual out-of-pocket
expenses reasonably incurred with respect to such Defaulted Receivable or
Vehicle.
MANDATORY REPURCHASE OF RECEIVABLES
In the event of a breach or failure to be true of any representation or
warranty with respect to the Receivables described in "-- Conveyance of
Receivables," which breach or failure materially and adversely affects a
Receivable or the interests of the Trust, the Certificateholders or the
Certificate Insurer in such Receivable, the Seller, unless such breach or
failure has been cured by the last day of the Collection Period following the
Collection Period during which the Seller becomes aware of, or receives written
notice from the Trustee or the Servicer of, such breach or failure, will be
required to repurchase, as of such day (or, at Seller's option, as of the last
day of the month in which such breach was discovered), the Receivable from the
Trustee for the Purchase Amount. The Purchase Amount is payable on the
Determination Date in such subsequent Collection Period. The repurchase
obligation will constitute the sole remedy available to the Certificateholders
or the Trustee against the Seller for any such uncured breach or failure.
The "Purchase Amount" of any Receivable means, with respect to any
Distribution Date an amount equal to the sum of (a) the outstanding principal
balance of such Receivable as of the last day of the preceding Collection Period
and (b) the amount of accrued interest on such principal balance at the related
APR from the date a payment was last made by or on behalf of the Obligor through
the Determination Date immediately preceding such Distribution Date, and after
giving effect to the receipt of monies collected on such Receivable in such
preceding Collection Period.
ACCOUNTS
On the Closing Date, the Trustee will establish the Collection Account, into
which all payments (other than amounts representing the Servicing Fee and other
amounts payable to the Servicer as additional servicing compensation) made on or
with respect to the Receivables will be deposited, and the Certificate
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Account, from which all distributions with respect to the Receivables and the
Certificates will be made. The Seller will establish the Reserve Account and the
Yield Maintenance Account with the Trustee. The Collection Account, the
Certificate Account, the Reserve Account and the Yield Maintenance Account are
collectively referred to as the "Accounts." Each Account will be established in
the name of the Trustee on behalf of the Trust, the Certificateholders and the
Certificate Insurer. The Reserve Account and the Yield Maintenance Account will
not be assets of the Trust, although such accounts will be pledged to the Trust.
Any net investment earnings on the Yield Maintenance Account will be released to
the Seller on each Distribution Date.
On each Distribution Date, as described under "Flow of Funds," certain
amounts are required to be deposited in the Reserve Account. No later than the
Claim Date, amounts, if any, on deposit in the Reserve Account will be deposited
in the Certificate Account to the extent that Required Payments for the
following Distribution Date exceed Available Funds. Amounts on deposit in the
Reserve Account that are in excess of the Specified Reserve Balance will be
released to the Seller. The Certificate Insurer may, at its option and without
notice to, or the consent of, the Certificateholders, reduce the Specified
Reserve Balance.
Each Account will be maintained at all times in an Eligible Deposit Account.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Bank or (b) a segregated trust account with the corporate trust
department of a depository institution with corporate trust powers organized
under the laws of the United States of America or any state thereof or the
District of Columbia (or any United States branch or agency of a foreign bank)
and whose deposits are insured by the FDIC, provided that such institution must
have a net worth in excess of $50,000,000 and must have a rating of Baa3 or
higher from Moody's and a rating of BBB- or higher from S&P with respect to
long-term deposit obligations.
"Eligible Bank" means any depository institution (which shall initially be
the Trustee), organized under the laws of the United States of America or any
one of the states thereof or the District of Columbia (or any United States
branch or agency of a foreign bank), which is subject to supervision and
examination by federal or state banking authorities and which at all times (a)
has a net worth in excess of $50,000,000 and (b) has either (i) a rating of P-1
from Moody's and A-1+ from S&P with respect to short-term deposit obligations,
or (ii) if such institution has issued long-term unsecured debt obligations, a
rating of A2 or higher from Moody's and AA from S&P with respect to long-term
unsecured debt obligations.
Funds in the Accounts will be invested as provided in the Pooling Agreement
in Eligible Investments at the direction of the Servicer. "Eligible Investments"
are generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of the Certificates and acceptable to the Certificate
Insurer. Eligible Investments must mature not later than the Business Day before
the date on which the funds invested in such Eligible Investments are required
to be withdrawn from the Accounts. Any earnings (net of losses and investment
expenses) on amounts on deposit in the Collection Account will be deposited into
the Collection Account and shall be available for distribution to the
Certificateholders.
The Servicer may deduct from amounts otherwise payable to the Collection
Account with respect to a Collection Period an amount equal to amounts
previously deposited by the Servicer into the Collection Account but later
determined to have resulted from mistaken deposits.
INDEMNIFICATION
The Pooling Agreement will provide that the Servicer will defend, indemnify
and hold harmless the Trustee, the Trust, the Certificateholders, and the
Certificate Insurer against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and expenses
of litigation, reasonably incurred, arising out of or resulting from the use,
repossession or operation by the Servicer or any affiliate thereof of any
Vehicles; PROVIDED, HOWEVER, that the Servicer will have no obligation to
indemnify any person or entity against any credit loss on any Receivable
serviced by the Servicer in accordance with the requirements of the Pooling
Agreement. The Servicer will also indemnify, defend and hold harmless the Trust,
the Trustee and its officers, directors, employees and agents, and the
Certificate Insurer from and against any loss, liability, expense, damage or
injury, including any judgement, award, settlement, reasonable attorneys' fees
and other costs or expenses incurred in connection with the defense of
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any action, proceeding or claim, to the extent such loss, liability, expense,
damage or injury arises out of, or is imposed upon such persons through, the
willful misfeasance, bad faith or negligence of the Servicer in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties as Servicer under the Pooling Agreement. The Seller's obligations, as
Servicer, to indemnify the Trust and the Certificateholders for acts or
omissions of the Seller as Servicer will survive the removal of the Servicer but
will not apply to any acts or omissions of a successor Servicer.
FLOW OF FUNDS
On or before the earlier of the eighth Business Day or the eleventh calendar
day of each month (each, a "Determination Date"), the Servicer will (x) instruct
the Trustee to withdraw from the Collection Account and deposit into the
Certificate Account the amount deposited to the Collection Account with respect
to the Receivables during or otherwise with respect to the related Collection
Period, including Liquidation Proceeds, and (y) deliver to the Trustee, the
Rating Agencies and the Certificate Insurer a certificate (the "Servicer's
Certificate") setting forth the information needed to make payments and other
distributions and transfers on the upcoming Distribution Date.
If, in preparing the Servicer's Certificate, the Servicer determines that
the Required Payments exceed Available Funds, the Servicer will calculate the
Insufficiency Amount and notify the Trustee and the Certificate Insurer thereof.
Pursuant to the Pooling Agreement, the Trustee will withdraw from the Reserve
Account and deposit in the Certificate Account an amount equal to the lesser of
(x) such Insufficiency Amount and (y) the amount then on deposit in the Reserve
Account. Unless the Certificate Insurer has otherwise caused the remaining
Insufficiency Amount (after any deposits from the Reserve Account) to be
deposited in the Certificate Account not later than 12:00 p.m. St. Paul,
Minnesota time on the Claim Date preceding any Distribution Date, the Trustee
will deliver on such Claim Date a completed Notice of Nonpayment to the
Certificate Insurer (with the Insufficiency Amount as of such Claim Date, the
amount withdrawn from the Reserve Account, the amount of the Insured Payment,
and any other data appropriately completed). The Certificate Insurer will then
pay such Insured Payment as of such Claim Date as provided under the terms of
the Certificate Insurance Policy.
On each Distribution Date, the Trustee is required to pay the entire amount
of money then on deposit in the Certificate Account, other than amounts
deposited into the Certificate Account in error and Liquidation Proceeds from
Receivables purchased by the Seller or the Servicer, as the case may be, in the
following order of priority:
(a) to itself, the Trustee fee;
(b) to the Certificate Insurer, an amount equal to any premium owed to
it for such Distribution Date;
(c) to the Certificateholders, pro rata, the Monthly Interest, including
any overdue Monthly Interest;
(d) to the Certificateholders, pro rata, the Monthly Principal,
including any overdue Monthly Principal;
(e) to the Certificate Insurer, by wire transfer of immediately
available funds to the account designated in writing by the Certificate
Insurer, the Reimbursement Amount, if any, then owed to the Certificate
Insurer;
(f) to the Reserve Account, by wire transfer of immediately available
funds, the lesser of (i) the difference, if any, between (x) the Specified
Reserve Balance as of such Distribution Date and (y) the amount on deposit
in the Reserve Account and (ii) the aggregate amount remaining in the
Certificate Account;
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(g) to the Servicer, the Trustee and the Certificate Insurer, certain
indemnification amounts to which they may be entitled; and
(h) to the Seller, the aggregate amount remaining in the Certificate
Account.
As used in this Prospectus, the following terms have the following meanings:
"Available Funds" means, with respect to a Distribution Date, for the
related Determination Date, any and all amounts then held in the Collection
Account and deposited thereto with respect to the Receivables during or
otherwise with respect to the related Collection Period, together with amounts
to be transferred from the Yield Maintenance Account to the Certificate Account
with respect to such Distribution Date, less the amount described in clauses (a)
and (b) above for such Distribution Date. "Available Funds" does not include
amounts, if any, on deposit in the Reserve Account or any amounts paid by the
Certificate Insurer under the Certificate Insurance Policy.
"Claim Date" means, with respect to a Distribution Date, the third Business
Day immediately preceding such Distribution Date.
"Defaulted Receivable" means, with respect to any Distribution Date, a
Receivable with respect to which the earlier of the following has occurred: (i)
the related Obligor is contractually delinquent for 180 days as of the end of
the most recently completed Collection Period or (ii) as to which the Servicer
has determined in accordance with its customary servicing practices that
eventual payment of the scheduled payments is unlikely.
"Insufficiency Amount" means, with respect to any Distribution Date, the
excess, if any, of (x) the Required Payments over (y) Available Funds.
"Late Payment Rate" means, for any Distribution Date, the rate of interest
as it is publicly announced by Citibank, N.A. at its principal office in New
York, New York as its "Prime Rate" (any change in such Prime Rate of interest to
be effective on the date such change is announced by Citibank, N.A.) plus 2%.
The Late Payment Rate shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.
"Liquidated Receivable" means a Defaulted Receivable with respect to which
the Servicer has determined that eventual payment in full is unlikely or has
repossessed and disposed of the related Vehicle.
"Liquidation Proceeds" means, with respect to any Liquidated Receivable and
Collection Period, the monies collected with respect to such Liquidated
Receivable during such Collection Period from whatever source (other than claims
under the Certificate Insurance Policy or withdrawals from the Reserve Account
or the Yield Maintenance Account), net of the sum of (i) any amounts expended by
the Servicer for the account of the Obligor and (ii) any amount required by law
to be remitted to the Obligor.
"Monthly Interest" for any Distribution Date will equal one-twelfth of the
product of the Pass-Through Rate on the Certificate Principal Balance
immediately prior to such Distribution Date.
"Monthly Principal" for any Distribution Date will equal the excess of (x)
the aggregate unpaid principal balances of the Receivables on the last day of
the second preceding Collection Period (or, in the case of the first
Distribution Date, the Original Certificate Principal Balance) over (y) the
aggregate unpaid principal balances of the Receivables on the last day of the
preceding Collection Period; PROVIDED, HOWEVER, that Monthly Principal on the
Final Scheduled Distribution Date will equal the Certificate Principal Balance
on such date. For the purpose of determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a Purchased Receivable is deemed
to be zero on and after the last day of the Collection Period in which such
Receivable became a Defaulted Receivable or a Purchased Receivable. In no event
shall the Monthly Principal to be distributed exceed the Certificate Principal
Balance.
"Pool Balance" means, with respect to any date of determination, the
aggregate outstanding principal balance of all the Receivables as of the close
of business on such date.
"Purchased Receivable" means, with respect to a Distribution Date, a
Receivable purchased by the Seller or the Servicer on or prior to the
Determination Date immediately preceding such Distribution Date.
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"Recoveries" means all amounts collected as judgments against an Obligor or
others related to the failure of such Obligor to pay any required amounts under
the related Receivable or to return the Vehicles, in each case as reduced by any
out-of-pocket expenses reasonably incurred by the Servicer in enforcing such
Receivable or in liquidating such Vehicles.
"Reimbursement Amount" means, with respect to any Distribution Date, the
aggregate of unreimbursed Insured Payments paid by the Certificate Insurer under
the Certificate Insurance Policy as of such Distribution Date, plus the amount
of any unpaid premium owed to the Certificate Insurer, plus accrued interest on
each at the Late Payment Rate.
"Required Payments" means, with respect to any Distribution Date, the sum of
the Monthly Principal and Monthly Interest.
WITHHOLDING
The Trustee is required to comply with all federal income tax withholding
requirements respecting payments to Certificateholders of interest or original
issue discount with respect to the Certificates that the Trustee reasonably
believes are applicable under the Code. Foreign Owners will be subject to U.S.
income and withholding tax unless they provide certain certifications as
described under "Certain Federal Income Tax Consequences -- Foreign Owners." The
consent of neither the Certificateholders nor the Beneficial Owners will be
required for such withholding. In the event that the Trustee does withhold or
causes to be withheld any amount from interest or original issue discount
payments or advances thereof to any Certificateholders pursuant to federal
income tax withholding requirements, the Trustee is required to indicate the
amount withheld in its monthly report to such Certificateholders. If any
withholding or other tax is imposed by any jurisdiction, neither the
Certificateholders nor the Owners have any right to receive additional interest
or other amounts in consequence thereof.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will furnish or cause to be furnished
with each payment to Certificateholders, a statement (a "Monthly Report"), based
on information in the Servicer's Certificate, setting forth the following
information for such Distribution Date:
(a) the amount of the distribution allocable to principal, including any
overdue principal;
(b) the amount of the distribution allocable to interest, including any
overdue interest;
(c) the aggregate amount of fees and compensation received by the
Servicer and the Trustee for the Collection Period;
(d) the amount, if any, of Insured Payments with respect to such
Distribution Date;
(e) the amount, if any, withdrawn from the Reserve Account and the Yield
Maintenance Account with respect to such Distribution Date;
(f) the aggregate net losses on the Receivables for the related
Collection Period;
(g) the Pool Balance and the Pool Factor as of the end of the related
Collection Period;
(h) the aggregate principal balance of all Receivables which were
delinquent 30 days or more as of the last day of the related Collection
Period; and
(i) the Certificate Principal Balance as of such Distribution Date
(after giving effect to the distributions on such Distribution Date).
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EVIDENCE AS TO COMPLIANCE
The Pooling Agreement requires that on or before December 31 of each year,
beginning December 31, 1997, the Servicer will deliver an officers' certificate
to the Trustee and the Certificate Insurer stating (i) a review of the
activities of the Servicer during the preceding 12-month period ended September
30 of such year (or such longer or shorter period since the date of this
Agreement) and of its performance under this Agreement has been made under such
officers' supervision and (ii) to the best of such officers' knowledge, based on
such review, the Servicer has fulfilled all of its obligations under the Pooling
Agreement throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officers and the nature and status thereof.
The Servicer shall cause a firm of independent certified public accountants
(who may also render other services to the Servicer) to deliver to the Trustee,
with a copy to the Rating Agencies and the Certificate Insurer and each holder
of the Certificates, within 90 days following the end of each fiscal year of the
Servicer, beginning with the Servicer's fiscal year ending September 30, 1997, a
written statement to the effect that such firm has read the monthly Servicer's
Certificates delivered pursuant to the Pooling Agreement with respect to each
Collection Period during such one-year or (longer or shorter) period and
reviewed the servicing of the Receivables by the Servicer and that such review
(1) included tests relating to automobile, light duty truck and van loans
serviced for others in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, to the extent the procedures in such
program are applicable to the servicing obligations set forth in the Pooling
Agreement, and (2) except as described in the report, disclosed no exceptions or
errors in the records relating to automobile, light duty truck and van loans
serviced for others that, in the firm's opinion, paragraph four of such program
requires such firm to report.
OTHER SERVICING PROCEDURES
The Servicer will covenant in the Pooling Agreement that: (A) the Vehicle
securing each Receivable will not be released from the security interest granted
by the Receivable in whole or in part, except as contemplated by the Pooling
Agreement; (B) the Servicer will not impair in any material respect the rights
of the Trustee or the Certificateholders in the Receivables, certain rights
under agreements with Dealers related to breach of representations and
warranties of Dealers with respect to the Receivables, or any physical damage or
other insurance policy; and (C) the Servicer will not increase or decrease the
amount of payments or the amount financed under a Receivable, or change the APR
of a Receivable; PROVIDED, HOWEVER, that the Servicer may extend any Receivable
for credit-related reasons that would be acceptable to the Servicer with respect
to retail installment sales contracts and installment loans serviced by it for
its own account in accordance with its customary standards. However, if the
cumulative extensions with respect to any Receivable shall cause the term of any
such Receivable to extend beyond the last day of the Collection Period
immediately preceding the Final Scheduled Distribution Date, then the Servicer
shall be obligated to purchase such Receivable as of the last day of the
Collection Period following the Collection Period in which the extension was
made (or, at the Servicer's election, as of the last day of the Collection
Period or earlier under certain circumstances).
In the event of a breach by the Servicer of any covenant described above
that materially and adversely affects a Receivable or the interests of the
Trust, the Certificateholders or the Certificate Insurer in such Receivable, the
Servicer, unless such breach has been cured by the last day of the Collection
Period following the Collection Period during which the Servicer became aware
of, or received written notice of, such breach, will be required to purchase as
of such day (or, at the Servicer's election, as of the last day of the
Collection Period during which such breach was discovered) the Receivable from
the Trustee for the Purchase Amount which shall be paid on the Determination
Date in such subsequent Collection Period or earlier under certain
circumstances. The purchase obligation will constitute the sole remedy available
to the Certificateholders or the Trustee against the Servicer for any such
uncured breach, except with respect to certain indemnities of the Servicer under
the Pooling Agreement related thereto. Payment of the Purchase Amounts is not
covered by the Certificate Insurance Policy.
The Pooling Agreement will also require the Servicer to charge off a
Receivable as a Defaulted Receivable in accordance with its customary standards
and to follow such of its normal collection practices
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and procedures as it deems necessary or advisable, and that are consistent with
the standard of care required by the Pooling Agreement, to realize upon any
Receivable. The Servicer may sell the Vehicle securing such Receivable at a
judicial sale or take any other action permitted by applicable law. See "Certain
Legal Aspects of the Receivables." The net proceeds of such realization will be
deposited into the Collection Account at the time and in the manner described
above.
CERTAIN MATTERS REGARDING THE SERVICER
The Pooling Agreement will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder, except upon determination that
the performance by such Servicer of such duties is no longer permissible under
applicable law. No such resignation will become effective until the Trustee or a
successor servicer acceptable to the Certificate Insurer has assumed such
Servicer's servicing obligations and duties under the Pooling Agreement.
The Pooling Agreement will further provide that neither the Servicer nor any
of its respective directors, officers, employees, or agents shall be under any
liability to the Trust or the Certificateholders for taking any action or for
refraining from taking any action pursuant to the Pooling Agreement, or for
errors in judgment; PROVIDED, HOWEVER, that neither the Servicer nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties thereunder.
In addition, the Pooling Agreement will provide that the Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under the Pooling Agreement and
that, in its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Pooling Agreement, any entity into
which the Servicer may be merged or consolidated, or any entity resulting from
any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor to the Servicer
under the Pooling Agreement.
SERVICER DEFAULT
Any of the following events will constitute a "Servicer Default" under the
Pooling Agreement: (i) any failure by the Servicer to deliver to the Trustee on
or before the Determination Date the Servicer's Certificate or to deliver to the
Trustee for distribution to the Certificateholders any required payment, which
failure continues unremedied for more than three Business Days after written
notice from (x) the Trustee, the Holders of Certificates evidencing not less
than 25% of the Certificate Principal Balance and the Certificate Insurer or (y)
the Certificate Insurer is received by the Servicer; (ii) any failure by the
Servicer or the Seller duly to observe or perform in any material respect any
other covenant or agreement of the Servicer or the Seller, as the case may be,
in the Pooling Agreement, which failure materially and adversely affects the
rights of the Certificateholders and which continues unremedied for more than 30
days after the giving of written notice of such failure (x) to the Servicer or
the Seller, as the case may be, by the Trustee and by the Certificate Insurer,
(y) to the Servicer or the Seller, as the case may be, and to the Trustee by the
Certificateholders evidencing not less than 25% of the Certificate Principal
Balance and by the Certificate Insurer or (z) to the Servicer or the Seller, as
the case may be, by the Certificate Insurer; and (iii) any Insolvency Event. An
"Insolvency Event" shall mean financial insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to
the Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations.
REMOVAL OF THE SERVICER
The Servicer can only be removed pursuant to a Servicer Default. If a
Servicer Default shall have occurred and be continuing, (x) with the consent of
the Certificate Insurer, either the Trustee or the Certificateholders evidencing
not less than 51% of the Certificate Principal Balance or (y) the Certificate
Insurer shall give written notice to the Servicer of the termination of all of
the rights and obligations of the Servicer under the Pooling Agreement. On and
after the time the Servicer receives a notice of termination, the Trustee shall
be the successor in all respects to the Servicer in its capacity as servicer of
the Receivables under the Pooling Agreement. The Trustee may, if it shall be
unwilling to so act, or shall, if it is unable to so
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act, appoint, or petition a court of competent jurisdiction for the appointment
of, a successor Servicer acceptable to the Certificate Insurer to act as
successor to the outgoing Servicer under the Pooling Agreement.
WAIVER OF PAST DEFAULTS
The Holders of Certificates evidencing at least 51% of the Certificate
Principal Balance (with the consent of the Certificate Insurer), or the
Certificate Insurer, may waive certain defaults by the Servicer in the
performance of its obligations under the Pooling Agreement. No such waiver shall
impair the Certificate Insurer's or the Certificateholders' rights with respect
to subsequent defaults.
OPTIONAL TERMINATION
The Pooling Agreement will provide that on any Distribution Date following
the Record Date on which the Pool Balance is 5% or less of the Original
Certificate Principal Balance, the Seller will have the option to acquire all
rights, title and interest in all, but not less than all, Receivables held in
the Trust, by paying into the Trust for retirement of the Certificates an amount
equal to the aggregate Purchase Amounts for the Receivables, together with any
Reimbursement Amounts then owed to the Certificate Insurer.
AMENDMENT
The Pooling Agreement may be amended by agreement of the Trustee, the Seller
and the Servicer at any time, without the consent of the Certificateholders but
with the consent of the Certificate Insurer, to cure any ambiguity or defect, to
correct or supplement any provisions therein, to correct any typographical error
or to add any other provisions with respect to matters or questions arising
thereunder, upon receipt of an opinion of counsel to the Trustee that such
amendment will not adversely affect in any material respect the interests of any
Certificateholder or the Certificate Insurer.
The Pooling Agreement may also be amended from time to time by the Trustee,
the Seller and the Servicer with the consent of the Certificate Insurer and
Holders of Certificates evidencing not less than 51% of the Certificate
Principal Balance for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling Agreement or of
modifying in any manner the rights of the Certificateholders; PROVIDED, HOWEVER,
that no such amendment shall (a) increase or reduce in any manner the amount of,
or accelerate or delay the timing of, collections of payments on the Receivables
or distributions which are required to be made on any Certificate without the
consent of the Holder of such Certificate or (b) reduce the aforesaid percentage
of Certificateholders required to consent to any amendment, without unanimous
consent of the Certificateholders.
The Trustee is required under the Pooling Agreement to furnish
Certificateholders, the Certificate Insurer and the Rating Agencies with written
notice of the substance of any such amendment to the Pooling Agreement promptly
upon execution of such amendment.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Pooling Agreement, the Certificates (other than the authentication
thereof) or of any Receivable or related document and will not be accountable
for the use or application by the Seller of any funds paid to the Seller in
consideration of the sale of the Certificates. If no Servicing Default has
occurred, then the Trustee will be required to perform only those duties
specifically required of it under the Pooling Agreement. However, upon receipt
of the various resolutions, certificates, statement, opinions, reports,
documents, orders or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform as to
form to the requirements of the Pooling Agreement.
No recourse is available based on any provision of the Pooling Agreement,
the Certificates or any Receivable or assignment thereof against First Bank
National Association, in its individual capacity, and First Bank National
Association shall not have any personal obligation, liability or duty whatsoever
to any Certificateholder or any other person with respect to any such claim and
such claim shall be asserted solely against the Trust Property or any
indemnitor, except for such liability as is determined to have resulted from the
Trustee's own negligence or willful misconduct. No Certificateholder will have
any right under the
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Pooling Agreement to institute any proceeding with respect to the Pooling
Agreement, unless such Certificateholder previously received the consent of the
Certificate Insurer and has given to the Trustee written notice of default and
further, unless the holders of Certificates evidencing not less than 25% of the
Certificate Principal Balance 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 30 days has neglected or
refused to institute any such proceedings.
The Trustee may resign, subject to the conditions set forth below, at any
time upon written notice to the Servicer, in which event the Servicer, with the
consent of the Certificate Insurer, will be obligated to appoint a successor
Trustee. If no successor Trustee shall have been so appointed and have accepted
such appointment within 30 days after the giving of such notice of resignation,
the resigning Trustee may petition a court of competent jurisdiction for the
appointment of a successor Trustee. Any successor Trustee shall meet the
financial and other standards for qualifying as a successor Trustee under the
Pooling Agreement. The Servicer may also remove the Trustee if the Trustee
ceases to be eligible to continue as such under the Pooling Agreement, or is
legally unable to act, or if the Trustee is adjudicated to be insolvent. In such
circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective without the written consent of the
Certificate Insurer and until acceptance of the appointment by the successor
Trustee.
The Pooling Agreement provides that the Trustee shall prepare or shall cause
to be prepared any tax returns required to be filed by the Trust and shall
promptly sign and file such returns. In addition, the Pooling Agreement provides
that in no event shall the Trustee be liable for any liabilities, costs or
expenses of the Trust or the Certificateholders under any tax law, including
without limitation federal, state or local income or excise taxes or any other
tax imposed on or measured by income (or any interest or penalty with respect
thereto or arising from a failure to comply therewith).
The Servicer will indemnify, defend and hold harmless the Trustee, its
officers, directors, employees and agents and the Certificate Insurer from and
against any loss, liability or expense incurred without negligence or bad faith
on the part of the Trustee or its officers, directors, employees or agents and
arising out of or in connection with the acceptance or administration by the
Trustee of the trust created pursuant to the Pooling Agreement, as applicable,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of the Trustee's
powers or duties under the Pooling Agreement.
THE CERTIFICATE INSURER
The Certificate Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in all 50 states,
the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of
the Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Certificate Insurer has one European branch in the
Republic of France.
All information regarding the Certificate Insurer, a wholly owned subsidiary
of MBIA Inc., including the financial statements of the Certificate Insurer for
the year ended December 31, 1995, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of MBIA Inc.
for the year ended December 31, 1995, is hereby incorporated by reference into
this Prospectus and shall be deemed to be a part hereof. Any statement contained
in a document incorporated by reference herein shall be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
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The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-----------------------------------
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets......................... $ 3,814 $ 3,989
Liabilities............................. 2,540 2,672
Capital and Surplus..................... 1,274 1,317
</TABLE>
<TABLE>
<CAPTION>
GAAP
-----------------------------------
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets.................................. $ 4,463 $ 4,548
Liabilities............................. 1,937 2,006
Shareholder's Equity.................... 2,526 2,542
</TABLE>
Audited financial statements of the Certificate Insurer as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 are included herein as Appendix A. Unaudited financial statements of the
Certificate Insurer for the three-month period ended March 31, 1996 are included
herein as Appendix B. Such financial statements have been prepared on the basis
of generally accepted accounting principles. Copies of the Certificate Insurer's
1995 year-end audited financial statements prepared in accordance with statutory
accounting practices are available from the Certificate Insurer. The address of
the Certificate Insurer is 113 King Street, Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from the
Certificate Insurer or the Securities and Exchange Commission. The address of
the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of the
information regarding the Certificate Insurance Policy and Certificate Insurer
set forth under the headings "THE CERTIFICATE INSURER" and "THE CERTIFICATE
INSURANCE POLICY" and in Appendices A and B.
Moody's rates the claims paying ability of the Certificate Insurer "Aaa."
S&P rates the claims paying ability of the Certificate Insurer "AAA."
Fitch rates the claims paying ability of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold Certificates,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Certificates. The
Certificate Insurer does not guaranty the market price of the Certificates nor
does it guaranty that the ratings on the Certificates will not be reversed or
withdrawn.
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THE CERTIFICATE INSURANCE POLICY
The following information has been supplied by MBIA Insurance Corporation
(the "Certificate Insurer") for inclusion in this Prospectus.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the time
set forth in the Certificate Insurance Policy and no accelerated Insurance
Payments shall be made regardless of any acceleration of the Certificates,
unless such acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust or
the Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Certificates against the debtor which
made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding related to
such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments shall be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Certificates to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Distribution Date on which the related Deficiency Amount is due or
the third Business Day following receipt in New York, New York on a Business Day
by State Street Bank and Trust Company, N.A., as Fiscal Agent for the
Certificate Insurer or any successor fiscal agent appointed by the Certificate
Insurer (the "Fiscal Agent") of a Notice (as described below), provided that if
such Notice is received after 12:00 noon New York City time on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim under the Certificate Insurance
Policy it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Certificate Insurer or the Fiscal Agent, as
the case may be, shall promptly so advise the Trustee and the Trustee may submit
an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the Trustee on behalf of
the Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured Payment
and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policy.
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As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of June 1,
1996 among Chevy Chase Bank, F.S.B., as Seller and as Servicer, and the Trustee,
as trustee, without regard to any amendment or supplement thereto, unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City, Chevy Chase, Maryland or in the
city in which the Corporate Trust Office of the Trustee under the Agreement or
the Certificate Insurer is located are authorized or obligated by law or
executive order to close.
"DEFICIENCY AMOUNT" means the excess, if any, of Required Payments over Net
Available Distribution Amount for such Distribution Date.
"INSURED PAYMENT" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Certificate Insurance Policy, the original of which is subsequently delivered by
registered or certified mail, from the Trustee specifying the Insured Payment
which shall be due and owing on the applicable Distribution Date.
"OWNER" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the applicable
Certificates to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Certificates that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not otherwise
defined in the Certificate Insurance Policy shall have the respective meanings
set forth in the Agreement as of the date of execution of the Certificate
Insurance Policy, without giving effect to any subsequent amendment or
modification to the Agreement, unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Fiscal Agent of the Certificate Insurer may be made at the address listed
below for the Fiscal Agent of the Certificate Insurer or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New York,
New York 10006 Attention: Municipal Registrar and Paying Agency, or such other
address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Certificates.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTEREST IN VEHICLES
Retail installment sale contracts and installment loans such as the
Receivables evidence the credit sale of automobiles, light duty trucks and vans
by dealers to obligors; the contracts and the installment loan and security
agreements also constitute personal property security agreements and include
grants of security interests in the vehicles under the UCC. Perfection of
security interests in the vehicles is generally governed by the motor vehicle
registration laws of the state in which the vehicle is located. In Maryland,
Virginia and North Carolina, the jurisdictions in which most of the Vehicles are
located, a security interest in a vehicle is perfected by notation of the
secured party's lien on the vehicle's certificate of title and, in Virginia and
North Carolina, by delivery of the certificate of title to the secured party.
Each Receivable prohibits the sale or transfer of the Vehicle without the
consent of the applicable Lender.
Pursuant to the Pooling Agreement, the Seller will assign its security
interests in the Vehicles to the Trustee. However, because of the administrative
burden and expense, neither the Lender nor the Trustee will amend any
certificate of title to identify the Trust as the new secured party on the
certificates of title relating to the Vehicles. Also, the Bank, as Servicer,
will continue to hold any certificates of title relating to the Vehicles in its
possession as custodian for the Trustee pursuant to the Agreement. See "The
Certificates -- Conveyance of Receivables."
Under the laws of Virginia and North Carolina, such an assignment of
security interests may not be, and under the laws of Maryland will not be,
sufficient to convey to the Trustee perfected security interests in the
Vehicles.
Because the Trust is not identified as the secured party on the certificate
of title, the security interest of the Trust in the vehicle could be defeated in
certain circumstances. In the absence of fraud or forgery by the vehicle owner
or the Bank or CFC or administrative error by state or local agencies or the
Bank, the notation of the lien of the Bank (or of CFC with respect to the CFC
Receivables) on the certificates should be sufficient to protect the Trust
against the right of subsequent purchasers of a Vehicle or subsequent lenders
who take a security interest in a Vehicle. If there are any Vehicles as to which
the Bank or CFC failed to obtain a perfected security interest, its security
interest would be subordinate to, among others, subsequent purchasers of the
Vehicles and holders of perfected security interests. Such a failure, however,
would constitute a breach of the Bank's warranties under the Pooling Agreement
and would create an obligation of the Bank to repurchase the related Receivable
unless the breach is cured. See "The Certificates -- Conveyance of Receivables."
Under the laws of most states, the perfected security interest in a vehicle
continues for four months after a vehicle is moved to a state other than the
state which issued the certificate of title and thereafter until the vehicle
owner re-registers the vehicle in the new state. A majority of states require
surrender of a certificate of title to re-register a vehicle; accordingly, a
secured party must surrender possession if it holds the certificate of title to
the vehicle. Thus, the secured party would have the opportunity to re-perfect
its security interest in the vehicle in the state of relocation. In states that
do not require a certificate of title for registration of a motor vehicle,
re-registration could defeat perfection.
In the ordinary course of servicing receivables, the Bank takes steps to
effect re-perfection upon receipt of notice of re-registration or information
from the obligor as to relocation. Similarly, when an obligor sells a vehicle, a
majority of states require surrender of a certificate of title to issue a
certificate of title in the name of the purchaser, in such states the Bank must
surrender possession of the certificate of title, if it holds the certificate of
title, and accordingly will have an opportunity to require satisfaction of the
related Receivable before release of the lien. Under the Pooling Agreement, the
Servicer is obligated to take appropriate steps, at its own expense, to maintain
perfection of security interests in the Vehicles.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for certain unpaid taxes take priority over even a perfected
security interest in a Vehicle. The Code also grants priority
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to certain federal tax liens over the lien of a secured party. The laws of
certain states and federal law permit the confiscation of motor vehicles under
certain circumstances if used in unlawful activities, which may result in the
loss of a secured party's perfected security interest in the confiscated motor
vehicle.
The Seller will represent that, as of the Closing Date, each security
interest in a Vehicle is or will be prior to all other present liens (other than
tax liens and liens that arise by operation of law) upon and security interests
in such Vehicle. However, liens for repairs or taxes, or the confiscation of a
Vehicle, could arise or occur at any time during the term of a Receivable. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises or confiscation occurs.
REPOSSESSION
In the event of default by an Obligor, the holder of the related retail
installment sale contract has all the remedies of a secured party under the UCC,
except where specifically limited by other state laws. The UCC remedies of a
secured party include the right to repossession by self-help means, unless such
means would constitute a breach of the peace. Unless a vehicle is voluntarily
surrendered, self-help repossession is accomplished simply by taking possession
of the related financed vehicle. In cases where the Obligor objects or raises a
defense to repossession, or if otherwise required by applicable state law, a
court order is obtained from the appropriate state court, and the vehicle must
then be recovered in accordance with that order. In some jurisdictions, the
secured party is required to notify the debtor of the default and the intent to
repossess the collateral and give the debtor a time period within which to cure
the default prior to repossession. Generally, this right of cure may only be
exercised on a limited number of occasions during the term of the related
contract. Other jurisdictions permit repossession without prior notice if it can
be accomplished without a breach of the peace (although in some states, a course
of conduct in which the creditor has accepted late payments has been held to
create a right by the Obligor to receive prior notice).
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require a secured party to provide the Obligor
with reasonable notice of the date, time and place of any public sale and/or the
date after which any private sale of the collateral may be held. In addition,
some states also impose substantive timing requirements on the sale of
repossessed vehicles in certain circumstances and/or various substantive timing
and content requirements on such notices. In most states, under certain
circumstances after a financed vehicle has been repossessed, the Obligor may
redeem the collateral by paying the delinquent installments and other amounts
due. The Obligor has the right to redeem the collateral prior to actual sale or
entry by the secured party into a contract for sale of the collateral by paying
the secured party the unpaid principal balance of the obligation, accrued
interest thereon, reasonable expenses for repossessing, holding, and preparing
the collateral for disposition and arranging for its sale, plus, in some
jurisdictions, reasonable attorneys' fees and legal expenses or in some other
states, by payment of delinquent installments on the unpaid principal balance of
the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the Vehicles generally will be applied first to
the expenses of resale and repossession and then to the satisfaction of the
indebtedness. In many instances, the remaining principal amount of such
indebtedness will exceed such proceeds. Under the UCC and laws applicable in
some states, a creditor is entitled to bring an action to obtain a deficiency
judgment from a debtor for any deficiency on repossession and resale of a motor
vehicle securing such debtor's loan; however, in some states, a creditor may not
seek a deficiency judgment from a debtor whose financed vehicle had an initial
cash sales price below some requisite dollar amount. Some states, impose
prohibitions or limitations or notice requirements on actions for deficiency
judgments. In addition to the notice requirement described above, the UCC
requires that every aspect of the sale or other disposition, including the
method, manner, time, place and terms, be "commercially reasonable." Generally,
courts have held that when a sale is not "commercially reasonable," the secured
party loses its right to a deficiency judgment. In addition, the UCC permits the
debtor or other interested party to recover for any loss caused by noncompliance
with the provisions of the UCC. Also, prior to a sale, the UCC permits the
debtor or other interested person to obtain an order mandating that the secured
party refrain from disposing of the collateral if it is established that the
secured
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party is not proceeding in accordance with the "default" provisions under the
UCC. However, the deficiency judgment would be a personal judgment against the
Obligor for the shortfall, and a defaulting Obligor can be expected to have very
little capital or sources of income available following repossession. Therefore,
in many cases, it may not be useful to seek a deficiency judgment or, if one is
obtained, it may be settled at a significant discount or be uncollectible.
Occasionally, after resale of a vehicle and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC requires the
creditor to remit the surplus to any holder of a subordinate lien with respect
to the vehicle or if no such lienholder exists or if there are remaining funds,
the UCC requires the creditor to remit the surplus to the Obligor under the
contract.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon creditors and servicers involved in
consumer finance. These laws include the Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the
Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z,
state adaptations of the National Consumer Act and of the Uniform Consumer
Credit Code, state motor vehicle retail installment sale acts, state "lemon"
laws and other similar laws. In addition, the laws of certain states impose
finance charge ceilings and other restrictions on consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In some cases, this liability could affect the
ability of an assignee such as the Trustee to enforce consumer finance contracts
such as the Receivables.
The so-called "Holder-in-Due-Course Rule" of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting any assignee of the seller in a
consumer credit transaction (and certain related creditors and their assignees)
to all claims and defenses which the Obligor in the transaction could assert
against the seller. Liability under the FTC Rule is limited to the amounts paid
by the Obligor under the contract, and the holder of the contract may also be
unable to collect any balance remaining due thereunder from the Obligor. The FTC
Rule is generally duplicated by the Uniform Consumer Credit Code, other state
statutes or the common law in certain states. To the extent that the Receivables
will be subject to the requirements of the FTC Rule, the Trustee, as holder of
the Receivables, will be subject to any claims or defenses that the purchaser of
the related Vehicle may assert against the seller of such Vehicle. Such claims
will be limited to a maximum liability equal to the amounts paid by the Obligor
under the related Receivable.
Under most state vehicle dealer licensing laws, sellers of automobiles and
light duty trucks are required to be licensed to sell vehicles at retail sale.
In addition, with respect to used vehicles, the Federal Trade Commission's Rule
on Sale of Used Vehicles requires that all sellers of used vehicles prepare,
complete and display a "Buyer's Guide" which explains the warranty coverage for
such vehicles. Furthermore, Federal Odometer Regulations promulgated under the
Motor Vehicle Information and Cost Savings Act and the motor vehicle title laws
of most states require that all sellers of used vehicles furnish a written
statement signed by the seller certifying the accuracy of the odometer reading.
If a seller is not properly licensed or if either a Buyer's Guide or Odometer
Disclosure Statement was not provided to the purchaser of a Vehicle, the Obligor
may be able to assert a defense against the seller of the Vehicle. If an Obligor
on a Receivable were successful in asserting any such claim or defense, the
Servicer would pursue on behalf of the Trust any reasonable remedies against the
seller or manufacturer of the vehicle, subject to certain limitations as to the
expense of any such action specified in the Pooling Agreement.
Any loss relating to any such claim, to the extent not covered by a
withdrawal from the Reserve Account or from a payment under the Certificate
Insurance Policy could result in losses to the Certificateholders. If an Obligor
were successful in asserting any such claim or defense as described in this
paragraph or the two immediately preceding paragraphs, such claim or defense
would constitute a breach of a representation and warranty under the Pooling
Agreement and would create an obligation of the Seller to repurchase the related
Receivable unless the breach were cured.
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<PAGE>
Courts have applied general equitable principles to secured parties pursuing
repossession or litigation involving deficiency balances. These equitable
principles may have the effect of relieving an Obligor from some or all of the
legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections of the 14th Amendment to the Constitution of the United States.
Courts have generally either upheld the notice provisions of the UCC and related
laws as reasonable or have found that the creditor's repossession and resale do
not involve sufficient state action to afford constitutional protection to
consumers.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences of the purchase, ownership and disposition of the Certificates.
This summary is based upon laws, regulations, rulings and decisions currently in
effect, all of which are subject to change. The discussion does not deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. In addition, this summary is generally
limited to investors who are Beneficial Owners of the Certificates holding the
Certificates as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code (the "Code").
Investors should consult their own tax advisers to determine the federal, state,
local and other tax consequences of the purchase, ownership and disposition of
the Certificates. Prospective investors should note that no rulings have been or
will be sought from the Service with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the Service
will not take contrary positions.
TAX STATUS OF THE TRUST
In the opinion of Shaw, Pittman, Potts & Trowbridge, counsel to the Seller,
the Trust will be classified as a grantor trust and not as an association
taxable as a corporation for federal income tax purposes. Each Beneficial Owner
will be treated as owning its pro rata percentage interest in the principal of,
and interest (at the Pass-Through Rate) payable on, each Receivable.
TAXATION OF BENEFICIAL OWNERS
Subject to the discussion below under the heading "Discount and Premium,"
each Beneficial Owner is required to include for federal income tax purposes its
share of the gross income of the Trust, including interest and certain other
charges accrued on the Receivables and any gain upon collection or disposition
of the Receivables. Each Beneficial Owner is entitled to deduct its share of the
amount used to pay expenses of the Trust to the extent described below. Any
amounts received by a Certificateholder from the Reserve Account or the Yield
Maintenance Account will be treated for federal income tax purposes as having
the same characteristics as the payments they replace.
Each Beneficial Owner should report its share of the income of the Trust
under its usual method of accounting. Accordingly, interest is includible in a
Beneficial Owner's gross income when it accrues on the Receivables, or in the
case of Beneficial Owners who are cash basis taxpayers, when received by the
Servicer on behalf of the Beneficial Owners. Because (i) interest accrues on the
Receivables over differing monthly periods and is paid in arrears and (ii)
interest collected on a Receivable generally is paid to Beneficial Owners in the
following month, the amount of interest accruing to a Beneficial Owner during
any calendar month will not equal the interest distributed in that month.
Discount on a Receivable would be includible in income as described below.
Each Beneficial Owner will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust as provided in Section 162 or 212 of the Code. If
a Beneficial Owner is an individual, estate or trust, the deduction for such
Beneficial Owner's share of such fees will be allowed only to the extent that
all of such Beneficial Owner's miscellaneous itemized deductions, including such
Beneficial Owner's share of such fees, exceed 2% of such Beneficial Owner's
adjusted gross income.
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DISCOUNT AND PREMIUM
A Beneficial Owner that purchases a Certificate at a discount (I.E., for an
amount less than its face amount) must include such discount in income over the
life of the Certificates. Distinctions in the Code between original issue
discount and market discount generally are not relevant in the case of the
Certificates.
The rate at which discount must be included in income depends on whether it
is greater or less than a statutorily defined DE MINIMIS amount. Although not
entirely certain, it would appear that the DE MINIMIS computation can be done
for each Certificate overall and need not be done on a Receivable-by-Receivable
basis. Generally, discount is treated as DE MINIMIS if it is less than 1/4 of
one percent of the principal amount of the Certificate times the number of full
years remaining to the maturity date of the Certificate. It is not clear whether
the maturity date for this purpose is the final maturity date or the weighted
average maturity date (and whether expected prepayments are taken into account).
If the discount is DE MINIMIS (which should be the case for original
purchasers of Certificates), it would appear that such discount is includible in
income as principal payments are received on the Receivables and in proportion
to such principal payments. Although not entirely clear, the income attributable
to DE MINIMIS discount should be treated as capital gain.
If the discount is more than a DE MINIMIS amount, such discount must be
included in income as it accrues on the basis of the yield to maturity of the
Certificate to the particular purchaser. It is not clear whether a prepayment
assumption must be taken into account in computing this yield to maturity and
how actual prepayments will affect accruals of discount. Unless the Certificates
are originally issued with more than a DE MINIMIS amount of discount, the
Trustee will not be providing any information relating to the computation of the
accruals of discount by subsequent purchasers of Certificates.
In the event that a Receivable is treated as purchased at a premium (I.E.,
the purchase price thereof exceeds the portion of the remaining principal
balance of the Receivables allocable to the Beneficial Owners), such premium
will be amortizable by a Beneficial Owner as an offset to interest income (with
a corresponding reduction in the Beneficial Owner's basis) under a constant
yield method over the term of the Receivable if an election under Section 171 of
the Code is made (or was previously in effect) with respect to the Certificates.
Any such election will also apply to debt instruments held by the taxpayer
during the year in which the election is made and to all debt instruments
acquired thereafter.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Beneficial Owner's
adjusted basis in the Receivables and any other assets held by the Trust. Such
gain or loss will be treated as capital gain or loss. A Beneficial Owner's
adjusted basis will equal the Beneficial Owner's cost for the Certificate,
increased by any discount previously included in income, and decreased by any
payments received that are attributable to accrued discount by any offset
previously allowed for accrued premium and by the amount of principal payments
previously received.
Except as provided in the discussion of backup withholding, a non-U.S.
Person (other than a nonresident alien individual present in the United States
for a total of 183 days or more during his or her taxable year) will not be
subject to federal income tax, and no withholding of such tax will be required,
with respect to any gain realized upon the disposition or retirement of a
Certificate.
FOREIGN OWNERS
Interest attributable to Receivables which is received by a person that is
not a U.S. Person (a "Foreign Owner") (other than a foreign bank and certain
other persons) generally will not be subject to the normal 30% withholding tax
(or lower treaty rate) imposed with respect to such payments, provided that such
Foreign Owner is not engaged in a trade or business in the United States and
that such Foreign Owner fulfills certain certification requirements. Under such
requirements, the holder must certify, under penalties of perjury, that it is
not a "U.S. Person" and provide its name and address. The Foreign Owner must
inform the Trustee (or the last intermediary in the chain between the Trustee
and the Foreign Owner) of any change in the information in the certification
within 30 days of such change. For this purpose, "U.S. Person" means a citizen
or resident of the United States, a corporation, partnership, or other entity
created or organized in or
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under the laws of the United States or any political subdivision thereof, or an
estate or trust that is subject to federal income tax, regardless of the source
of its income. Payments of interest on a Certificate that are effectively
connected with the conduct of a trade or business in the United States by a
Foreign Owner who is a non-U.S. Person, although exempt from the withholding
tax, may be subject to graduated federal income tax as if such amounts were
earned by a U.S. Person.
BACKUP WITHHOLDING
Backup withholding of federal income tax at a rate of 31% may apply to
payments made in respect of the Certificates, as well as payments of proceeds
from the sale of Certificates, to Beneficial Owners that are not "exempt
recipients" and that fail to provide certain identifying information (such as
the taxpayer identification number of the Beneficial Owner) to the Trustee or
its agent in the manner required. Individuals generally are not exempt
recipients, whereas corporations and certain other entities generally are exempt
recipients. Payments made in respect of the Certificates must be reported to the
Service, unless the recipient is an exempt recipient or establishes an
exemption. Any amounts withheld under the backup withholding rules from a
payment to a person would be allowed as a refund or a credit against such
person's federal income tax, provided that the required information is furnished
to the Service. Furthermore, certain penalties may be imposed by the Service on
a Beneficial Owner who is required to supply information but who does not do so
in the proper manner.
In addition, if a Certificate is sold before the stated maturity to (or
through) a "broker," the broker may be required to withhold 31% of the entire
sale price, unless either (i) the broker determines that the seller is a
corporation or other exempt recipient or (ii) the seller provides, in the
required manner, certain identifying information and, in the case of a non-U.S.
Person, certifies that such seller is a non-U.S. Person (and certain other
conditions are met). Such a sale also must be reported by the broker to the
Service, unless either (i) the broker determines that the seller is an exempt
recipient or (ii) the seller certifies its non-U.S. status (and certain other
conditions are met).
STATE, LOCAL AND FOREIGN TAXATION
The discussion above does not address the tax consequences of purchase,
ownership or disposition of the Certificates under any state, local or foreign
tax law. Investors should consult their own tax advisers regarding state, local
and foreign tax consequences.
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit pension, profit
sharing, or other employee benefit plans, individual retirement accounts or
annuities, employee annuity plans and Keogh plans subject to ERISA or Section
4975 of the Code (collectively referred to as "Benefit Plans") 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. ERISA also imposes certain duties on persons who are fiduciaries of
plans subject to ERISA. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a plan is
considered to be a fiduciary of such plan (subject to certain exceptions not
here relevant). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code for fiduciaries,
"parties in interest" and "disqualified persons."
Unless a statutory, regulatory or administrative exemption is available, a
violation of the prohibited transaction rules could occur if any Certificates
were to be acquired by a Benefit Plan or with "plan assets" of
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any Benefit Plan, and if any of the Transferor, the Trustee, the Underwriters or
any of their affiliates were a "party in interest" or a "disqualified person"
with respect to such Benefit Plan. The Seller, the Trustee and the Underwriter
are likely to be "parties in interest" or "disqualified persons" with respect to
many Benefit Plans.
Pursuant to the Final Regulation issued by the U.S. Department of Labor
("DOL") concerning the definition of what constitutes the "plan assets" of a
Benefit Plan, the assets and properties of certain entities in which a Benefit
Plan makes an equity investment could be deemed to be assets of the Benefit Plan
unless certain exceptions under the Final Regulation apply or an exemption is
available. There can be no assurance that any of the exceptions provided in the
Final Regulation will apply. If the underlying assets of the Trust or the Yield
Maintenance Account were deemed to be plan assets by reason of the acquisition
of Certificates by Benefit Plans, the Seller, the Servicer the Trustee and other
persons who provide services with respect to the Trust might be subject to the
fiduciary responsibility provisions of Title I of ERISA and the operations of
the Trust including those operations related to the Yield Maintenance Account
could result in prohibited transactions.
The DOL has granted to each of J.P. Morgan Securities Inc., CS First Boston
and Smith Barney Inc. an administrative exemption (Prohibited Transactions
Exemptions 90-23, 91-23 and 89-90), (collectively, the "Exemption") which
generally exempts from the application of the prohibited transaction provisions
of Section 406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of
ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of the
Code, certain transactions relating to the servicing and operation of asset
pools, including pools of motor vehicle installment obligations such as the
Receivables and the purchase, sale and holding of asset-backed pass-through
certificates, including pass-through certificates evidencing interests in
certain receivables, loans and other obligations, such as the Certificates,
provided that certain conditions set forth in the Exemption are satisfied. The
Seller believes that the Exemption will apply to the acquisition and holding of
Certificates by Benefit Plans and that all conditions of the Exemption other
than those within the control of the investors have been or will be met. The
Exemption sets forth the following six general conditions which must be
satisfied for a transaction to be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Benefit Plan is on terms
(including the price for the certificates) that are at least as favorable to
the Benefit 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 Benefit Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) The Certificates acquired by the Benefit Plan have received a rating
at the time of such acquisition that is one of the three highest general
rating categories from either S&P, Moody's, Fitch or Duff & Phelps Credit
Rating Co.
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Certificates represents not more
than reasonable compensation for their services. The sum of all payments
made and retained by the Seller pursuant to the assignment of the
Receivables to the Trust represents not more than the fair market value of
such Receivables. The sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for such person's
services under the Pooling Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
(6) The Benefit Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act.
If the general conditions of the Exemption are satisfied, the Exemption
provides an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by
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Sections 4975(c)(1)(A) through (D) of the Code) in connection with the direct or
indirect sale, exchange or transfer of Certificates by Benefit Plans in the
initial issue of Certificates, the holding of Certificates by Benefit Plans or
the direct or indirect acquisition or disposition in the secondary market of
Certificates by Benefit Plans. However, no exemption is provided from the
restrictions of Section 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Certificates, an
Excluded Plan is a Benefit Plan sponsored by (1) an Underwriter, (2) the
Certificate Insurer, (3) the Issuer, (4) the Seller, (5) the Servicer, (6) the
Trustee, (7) any Obligor with respect to Receivables constituting more than 5%
of the aggregate unamortized principal balance of the Receivables as of the date
of initial issuance and (8) any affiliate or successor of a person described in
(1) to (7) above (the "Restricted Group").
If the specific conditions of Section I.B. of the Exemption are also
satisfied, the Exemption provides an exemption from the restrictions imposed by
Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in connection
with (1) the direct or indirect sale, exchange or transfer of Certificates in
the initial issuance of Certificates to a Benefit Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets in Certificates is (a) an Obligor with respect to 5%
or less of the fair market value of the Receivables or (b) an affiliate of such
a person, (2) the direct or indirect acquisition or disposition in the secondary
market of Certificates by Benefit Plans and (3) the holding of Certificates by
Benefit Plans. Among the specific conditions that must be satisfied is the
condition that the Benefit Plan acquires no more than 25% of the Certificates
and immediately after the acquisition of the Certificates no more than 25% of
the assets of the Benefit Plan with respect to which the person is a fiduciary
are invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity. As of the Cut-off Date, the Seller
believes no Obligor with respect to Receivables included in the Trust
constitutes more than 0.017% of the aggregate unamortized principal balance of
the Trust.
If the specific conditions of Section I.C. of the Exemption are also
satisfied, the Exemption provides an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust.
Section I.D of the Exemption provides an exemption from the restrictions
imposed by Section 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" or a "disqualified person" with
respect to an investing Benefit Plan by virtue of providing services to the
Benefit Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of such Benefit Plan's ownership of Certificates.
Assuming compliance with the otherwise applicable conditions of the
Exemption, the Seller believes that the specific exemptions provided by Section
I.C. of the Exemption are also available with respect to transactions
contemplated by the Yield Maintenance Payments, which transactions are provided
for in the Pooling Agreement. Before purchasing a Certificate based on the
Exemption, however, a fiduciary of a Benefit Plan should itself confirm (1) that
such Certificate constitutes a "certificate" for purposes of the Exemption and
(2) that the specific conditions and other requirements set forth in the
Exemption would be satisfied.
Prospective Benefit Plan investors in the Certificates 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. Moreover, each
Benefit Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Certificates is appropriate for the Benefit Plan, taking into account the
overall investment policy of the Benefit Plan and the composition of the Benefit
Plan's investment portfolio.
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RATINGS
It is a condition to the issuance of the Certificates that they be rated in
the highest rating category by at least one of the Rating Agencies. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time. The ratings of Rating Agencies
assigned to Certificates addresses the likelihood of the receipt by the
Certificateholders of all distributions to which such Certificateholders are
entitled. The ratings do not address the timely or ultimate payment of any
withholding tax imposed. The ratings assigned to Certificates do not represent
any assessment of the likelihood that principal prepayments might differ from
those originally anticipated or address the possibility that Certificateholders
might suffer a lower than anticipated yield.
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated June 18, 1996 (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters") have agreed to purchase from the Seller the
following respective principal amounts of the Certificates:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS CERTIFICATES
- --------------------------------------------------------------------------- -----------------
<S> <C>
J.P. Morgan Securities Inc................................................. $
CS First Boston............................................................ $
Smith Barney Inc........................................................... $
-----------------
Total................................................................ $
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Certificates, if any are purchased.
The Seller has been advised by the Underwriters that the Underwriters
propose to offer the Certificates to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of % of the principal amount per Certificate,
and the Underwriters and such dealers may allow a discount of % of such
principal amount per Certificate on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Underwriters.
The Certificates are a new issue of securities with no established trading
market. The Underwriters have advised the Seller that they intend to act as
market makers for the Certificates. However, the Underwriters are not obligated
to do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of any trading market for the
Certificates.
The Seller has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
Each Underwriter has represented and agreed that (a) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and the Public Offers of Securities Regulations 1995 (the "Regulations") with
respect to anything done by it in relation to the Series 1996-1 Certificates in,
from or otherwise involving the United Kingdom; (b) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the Series 1996-1
Certificates if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on; and (c) it has not offered or sold and, during the period of six months from
the date hereof, will not offer or sell any Series 1996-1 Certificates to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or
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disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Regulations.
In the ordinary course of their respective businesses, the Underwriters and
their respective affiliates have engaged and may in the future engage in
commercial banking and investment banking transactions with Chevy Chase Bank,
F.S.B. and its affiliates.
REPORT OF EXPERTS
The financial statements of the Certificate Insurer, MBIA Insurance
Corporation (formerly known as Municipal Bond Investors Assurance Corporation),
included in this Prospectus in Appendix A, as of December 31, 1994 and 1995, and
for the years ended December 31, 1995, 1994 and 1993 have been included in
reliance upon the report of Coopers & Lybrand L.L.P., independent certified
public accountants, appearing in Appendix A, and upon the authority of such firm
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller and the Underwriters by Shaw,
Pittman, Potts & Trowbridge, Washington, D.C.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN A DTC SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, 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
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excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository 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 CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depository, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of CEDEL Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). In the event that the CEDEL Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
48
<PAGE>
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on debt issued in registered form
by U.S. Persons (as defined below), unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A Non-U.S. Person (as defined below), including a corporation or bank
that is a Non-U.S. Person, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States). Form 4224 may also be filed by the
Certificate Owner's Agent.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Owners or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. Owners of Global Securities
or, in the case of a Form 1001 or a Form 4224 filer, their agent, file by
submitting the appropriate form to the person through whom they hold (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one taxable year of the Owner.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof or (iii) an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
49
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Accounts........................................................................... 26
Agreement.......................................................................... 36
APR................................................................................ 7
Available Funds.................................................................... 28
Balloon Receivable................................................................. 14
Bank............................................................................... 1, 4, 13
Bank Receivables................................................................... 13
Beneficial Owners.................................................................. 5
Benefit Plans...................................................................... 42
BIF................................................................................ 17
Book-Entry Certificates............................................................ 20
Business Day....................................................................... 5, 36
Cede............................................................................... 2
CEDEL.............................................................................. 5
CEDEL Participants................................................................. 22
Certificate Account................................................................ 6
Certificate Insurance Policy....................................................... 2, 7
Certificate Insurer................................................................ 2, 35
Certificate Principal Balance...................................................... 5
Certificateholder.................................................................. 2
Certificates....................................................................... 1, 4
CFC................................................................................ 5, 13
CFC Receivables.................................................................... 5, 13
Citibank........................................................................... 20
Claim Date......................................................................... 28
Code............................................................................... 40
Collection Account................................................................. 6
Collection Period.................................................................. 5
Commission......................................................................... 2
Cooperative........................................................................ 22
Cut-Off Date....................................................................... 1
Dealers............................................................................ 13
Defaulted Receivable............................................................... 28
Deficiency Amount.................................................................. 36
Definitive Certificates............................................................ 23
Determination Date................................................................. 27
Distribution Date.................................................................. 5
DOL................................................................................ 43
DTC................................................................................ 2
DTC Participants................................................................... 22
Eligible Bank...................................................................... 26
Eligible Deposit Account........................................................... 26
Eligible Investments............................................................... 26
ERISA.............................................................................. 9
Euroclear.......................................................................... 5
Euroclear Operator................................................................. 22
Euroclear Participants............................................................. 22
European Depositaries.............................................................. 20
Excess Interest.................................................................... 6
Exchange Act....................................................................... 2
Exemption.......................................................................... 43
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
FDIC............................................................................... 17
Final Scheduled Distribution Date.................................................. 1
Financial Intermediary............................................................. 21
FIRREA............................................................................. 17
Fiscal Agent....................................................................... 35
Fitch.............................................................................. 9
Foreign Owner...................................................................... 41
FTC Rule........................................................................... 39
GAAP............................................................................... 34
Global Securities.................................................................. 47
Holders............................................................................ 23
Indirect DTC Participants.......................................................... 22
Initial Yield Maintenance Amount................................................... 7
Insolvency Event................................................................... 31
Insufficiency Amount............................................................... 28
Insured Payment.................................................................... 7, 36
Issuer............................................................................. 4
Late Payment Rate.................................................................. 28
Lenders............................................................................ 13
Liquidated Receivable.............................................................. 28
Liquidation Proceeds............................................................... 28
Monthly Interest................................................................... 28
Monthly Principal.................................................................. 28
Monthly Report..................................................................... 29
Moody's............................................................................ 9
Non-U.S. Person.................................................................... 49
Notice............................................................................. 36
Obligor............................................................................ 5
Optional Termination............................................................... 8
Original Certificate Principal Balance............................................. 5
OTS................................................................................ 17
Owner.............................................................................. 36
Participants....................................................................... 20
Pass-Through Rate.................................................................. 5
Pool Balance....................................................................... 28
Pool Factor........................................................................ 13
Pooling Agreement.................................................................. 1
Preference Amount.................................................................. 36
Purchase Amount.................................................................... 25
Purchased Receivable............................................................... 28
Rating Agencies.................................................................... 9
Receivable File.................................................................... 24
Receivables........................................................................ 1
Record Date........................................................................ 5
Recoveries......................................................................... 29
Registration Statement............................................................. 2
Reimbursement Amount............................................................... 29
Relevant Depositary................................................................ 20
Required Payments.................................................................. 29
Required Rate...................................................................... 7
Reserve Account.................................................................... 6
Reserve Initial Deposit............................................................ 6
Restricted Group................................................................... 44
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
Rules.............................................................................. 21
S&P................................................................................ 9
SAIF............................................................................... 17
SAP................................................................................ 34
Securities Act..................................................................... 2
Seller............................................................................. 1
Service............................................................................ 9
Servicer........................................................................... 1
Servicer Default................................................................... 31
Servicer's Certificate............................................................. 27
Servicing Fee...................................................................... 8
Servicing Fee Rate................................................................. 8
Specified Reserve Balance.......................................................... 6
Terms and Conditions............................................................... 22
Trust.............................................................................. 1, 4
Trust Property..................................................................... 4
Trustee............................................................................ 1
U.S. Person........................................................................ 41, 49
UCC................................................................................ 24
Underwriters....................................................................... 45
Underwriting Agreement............................................................. 45
Vehicles........................................................................... 1
Yield Maintenance Payments......................................................... 4
Yield Maintenance Amount........................................................... 7
</TABLE>
52
<PAGE>
APPENDIX A
AUDITED FINANCIAL STATEMENTS
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
AND FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
A-1
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
MBIA Insurance Corporation:
We have audited the accompanying consolidated balance sheets of MBIA
Insurance Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholder's equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND L.L.P.
New York, New York
January 22, 1996
A-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Investments:
Fixed maturity securities held as available-for-sale at fair value
(amortized cost $3,428,986 and $3,123,838............................... $ 3,652,621 3,051,906
Short-term investments, at amortized cost (which approximates fair
value).................................................................. 198,035 121,384
Other investments........................................................ 14,064 11,970
----------------- -----------------
Total investments...................................................... 3,864,720 3,185,260
Cash and cash equivalents.................................................. 2,135 1,332
Accrued investment income.................................................. 60,247 55,347
Deferred acquisition costs................................................. 140,348 133,048
Prepaid reinsurance premiums............................................... 200,887 186,492
Goodwill (less accumulated amortization of $37,366 and $32,437)............ 105,614 110,543
Property and equipment, at cost (less accumulated depreciation of $12,137
and $9,501)............................................................... 41,169 39,648
Receivable for investments sold............................................ 5,729 945
Other assets............................................................... 42,145 46,552
----------------- -----------------
Total assets........................................................... $ 4,462,994 $ 3,759,167
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue................................................. $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves................................ 42,505 40,148
Deferred income taxes.................................................... 212,925 97,828
Payable for investments purchased........................................ 10,695 6,552
Other liabilities........................................................ 54,682 46,925
----------------- -----------------
Total liabilities...................................................... 1,937,122 1,703,664
----------------- -----------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized, issued and
outstanding -- 100,000 shares........................................... 15,000 15,000
Additional paid-in capital............................................... 1,021,584 953,655
Retained earnings........................................................ 1,341,855 1,134,061
Cumulative translation adjustment........................................ 2,704 427
Unrealized appreciation (depreciation) of investments, net of deferred
income tax provision (benefit) of $78,372 and $(25,334)................. 144,729 (47,640)
----------------- -----------------
Total shareholder's equity............................................. 2,525,872 2,055,503
----------------- -----------------
Total liabilities and shareholder's equity............................. $ 4,462,994 $ 3,759,167
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Gross premiums written.................................................... $ 349,812 $ 361,523 $ 479,390
Ceded premiums............................................................ (45,050) (49,281) (47,552)
---------- ---------- -----------
Net premiums written.................................................... 304,762 312,242 431,838
Increase in deferred premium revenue...................................... (88,365) (93,226) (200,519)
---------- ---------- -----------
Premiums earned (net of ceded premiums of $30,655, $33,340 and
$41,409)............................................................... 216,397 219,016 231,319
Net investment income..................................................... 219,834 193,966 175,329
Net realized gains........................................................ 7,777 10,335 8,941
Other income.............................................................. 2,168 1,539 3,996
---------- ---------- -----------
Total revenues.......................................................... 446,176 424,856 419,585
---------- ---------- -----------
Expenses:
Losses and loss adjustment expenses....................................... 10,639 8,093 7,821
Policy acquisition costs, net............................................. 21,283 21,845 25,480
Underwriting and operating expenses....................................... 41,812 41,044 38,006
---------- ---------- -----------
Total expenses.......................................................... 73,734 70,982 71,307
---------- ---------- -----------
Income before income taxes and cumulative effect of accounting changes...... 372,442 353,874 348,278
Provision for income taxes.................................................. 81,748 77,125 86,684
---------- ---------- -----------
Income before cumulative effect of accounting changes....................... 290,694 276,749 261,594
Cumulative effect of accounting changes..................................... -- -- 12,923
---------- ---------- -----------
Net income.................................................................. $ 290,694 $ 276,749 $ 274,517
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
COMMON STOCK ADDITIONAL CUMULATIVE (DEPRECIATION)
-------------------- PAID-IN RETAINED TRANSLATION OF
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS
--------- --------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993................. 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income............................... -- -- -- 274,517 -- --
Change in foreign currency translation... -- -- -- -- (729) --
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(1,381)................ -- -- -- -- -- 2,461
Dividends declared (per common share
$500.00)................................ -- -- -- (50,000) -- --
Tax reduction related to tax sharing
agreement with MBIA Inc................. -- -- 11,851 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1993............... 100,000 15,000 943,794 895,312 (1,203) 4,840
--------- --------- ------------ ------------ ----------- -------------
Net income............................... -- -- -- 276,749 -- --
Change in foreign currency translation... -- -- -- -- 1,630 --
Change in unrealized depreciation of
investments net of change in deferred
income taxes of $27,940................. -- -- -- -- -- (52,480)
Dividends declared (per common share
$380.00)................................ -- -- -- (38,000) -- --
Tax reduction related to tax sharing
agreement with MBIA Inc................. -- -- 9,861 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1994............... 100,000 15,000 953,655 1,134,061 427 (47,640)
--------- --------- ------------ ------------ ----------- -------------
Exercise of stock options................ -- -- 5,403 -- -- --
Net income............................... -- -- -- 290,694 -- --
Change in foreign currency translation... -- -- -- -- 2,277 --
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(103,707).............. -- -- -- -- -- 192,369
Dividends declared (per common share
$829.00)................................ -- -- -- (82,900) -- --
Capital contribution from MBIA Inc....... -- -- 52,800 -- -- --
Tax reduction related to tax sharing
agreement with MBIA Inc................. -- -- 9,726 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1995............... 100,000 $ 15,000 $ 1,021,584 $ 1,341,855 $ 2,704 $ 144,729
--------- --------- ------------ ------------ ----------- -------------
--------- --------- ------------ ------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
----------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 290,694 $ 276,749 $ 274,517
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in accrued investment income................................ (4,900) (3,833) (5,009)
Increase in deferred acquisition costs............................... (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums............................. (14,395) (15,941) (6,143)
Increase in deferred premium revenue................................. 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves................ 2,357 6,413 8,225
Depreciation......................................................... 2,676 1,607 1,259
Amortization of goodwill............................................. 4,929 4,961 5,001
Amortization of bond (discount) premium, net......................... (2,426) 621 (743)
Net realized gains on sale of investments............................ (7,778) (10,335) (8,941)
Deferred income taxes................................................ 11,391 19,082 7,503
Other, net........................................................... 29,080 (8,469) 15,234
----------- ------------- -----------
Total adjustments to net income...................................... 117,738 90,709 213,015
----------- ------------- -----------
Net cash provided by operating activities............................ 408,432 367,458 487,532
----------- ------------- -----------
Cash flows from investing activities:
Purchase of fixed maturity securities, net of payable for investments
purchased........................................................... (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of receivable for investments
sold................................................................ 473,352 515,548 205,342
Redemption of fixed maturity securities, net of receivable for
investments redeemed................................................ 83,448 128,274 225,608
(Purchase) sale of short-term investments, net....................... (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net............................ (692) 87,456 (37,777)
Capital expenditures, net of disposals............................... (4,228) (3,665) (3,601)
----------- ------------- -----------
Net cash used in investing activities................................ (377,529) (328,873) (437,399)
----------- ------------- -----------
Cash flows from financing activities:
Capital contribution from MBIA Inc................................... 52,800 -- --
Dividends paid....................................................... (82,900) (38,000) (50,000)
----------- ------------- -----------
Net cash used by financing activities................................ (30,100) (38,000) (50,000)
----------- ------------- -----------
Net increase in cash and cash equivalents................................ 803 585 133
Cash and cash equivalents -- beginning of year........................... 1,332 747 614
----------- ------------- -----------
Cash and cash equivalents -- end of year................................. $ 2,135 $ 1,332 $ 747
----------- ------------- -----------
----------- ------------- -----------
Supplemental cash flow disclosures:
Income taxes paid...................................................... $ 50,790 $ 53,569 $ 52,967
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-6
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
- MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995,
the name was again changed to MBIA Insurance Corp. Prior to the
acquisition, all of the obligations of this company were reinsured and/or
indemnified by the former owner.
- Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA
Inc.'s reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the
net insurance in force of the Association. The net assets transferred from
the predecessor included the cash transferred in connection with the
reinsurance agreements, the related deferred acquisition costs and
contingent commissions receivable, net of the related unearned premiums
and contingent commissions payable. The deferred income taxes inherent in
these assets and liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums earned prior to
the effective date of the reinsurance agreements by the Association in
accordance with statutory accounting practices, remained as assets
(liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company of
Bond Investors Guaranty Insurance Company ("BIG Ins."), which was subsequently
renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
A-7
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND ORGANIZATION (CONTINUED)
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp.
("SECO"), to provide fixed-income investment management services for MBIA Inc.'s
municipal cash management service businesses. In 1995, portfolio management for
a portion of MBIA Corp.'s insurance related investment portfolio was transferred
to SECO; the management of the balance of this portfolio was transferred in
January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp.,
MBIA Illinois, MBIA Assurance and BIG Services, Inc. All significant
intercompany balances have been eliminated. Certain amounts have been
reclassified in prior years' financial statements to conform to the current
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial
Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with SFAS 115, MBIA Corp. reclassified its
entire investment portfolio ("Fixed-maturity securities") as
"available-for-sale." Pursuant to SFAS 115, securities classified as
available-for-sale are required to be reported in the financial statements at
fair value, with unrealized gains and losses reflected as a separate component
of shareholder's equity. The cumulative effect of MBIA Corp.'s adoption of SFAS
115 was a decrease in shareholder's equity at December 31, 1994 of $46.8
million, net of taxes. The adoption of SFAS 115 had no effect on MBIA Corp.'s
earnings.
Bond discounts and premiums are amortized on the effective-yield method over
the remaining term of the securities. For pre-refunded bonds the remaining term
is determined based on the contractual refunding date. Short-term investments
are carried at amortized cost, which approximates fair value and include all
fixed-maturity securities with a remaining term to maturity of less than one
year. Investment income is recorded as earned. Realized gains or losses on the
sale of investments are determined by specific identification and are included
as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited partnerships
and a mutual fund which invests principally in marketable equity securities.
MBIA Corp. records dividends from its investment in marketable equity securities
and its share of limited partnerships and mutual funds as a component of
investment income. In addition, MBIA Corp. records its share of the unrealized
gains and losses on these investments, net of applicable deferred income taxes,
as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated
to each bond maturity based on par amount and are earned on a straight-line
basis over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
A-8
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily
to, and vary with, premium production. For business produced directly by MBIA
Corp., such costs include compensation of employees involved in marketing,
underwriting and policy issuance functions, certain rating agency fees, state
premium taxes and certain other underwriting expenses, reduced by ceding
commission income on premiums ceded to reinsurers. For business assumed from the
Association, such costs were comprised of management fees, certain rating agency
fees and marketing and legal costs, reduced by ceding commissions received by
the Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in
an amount equal to MBIA Corp.'s estimate of the identified and unidentified
losses, including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently or
likely to be in default, the present value of expected payments, including loss
and LAE associated with these issues, net of expected recoveries, is allocated
within the total loss reserve as case basis reserves. Management of MBIA Corp.
periodically evaluates its estimates for losses and LAE and any resulting
adjustments are reflected in current earnings. Management believes that the
reserves are adequate to cover the ultimate net cost of claims, but the reserves
are necessarily based on estimates, and there can be no assurance that the
ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the
Association's reinsurers under various reinsurance treaties and are accrued as
the related premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance companies to
deduct from taxable income additions to the statutory contingency reserve,
subject to certain limitations. The tax benefits obtained from such deductions
must be invested in non-interest bearing U. S. Government tax and loss bonds.
MBIA Corp. records purchases of tax and loss bonds as payments of Federal income
taxes. The amounts deducted must be restored to taxable income when the
contingency reserve is released, at which time MBIA Corp. may present the tax
and loss bonds for redemption to satisfy the additional tax liability.
A-9
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment
and MBIA Assurance's furniture, fixtures and equipment, which are recorded at
cost and, exclusive of land, are depreciated on the straight-line method over
their estimated service lives ranging from 4 to 31 years. Maintenance and
repairs are charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which
differs in certain respects from the statutory accounting practices prescribed
or permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
- premiums are earned only when the related risk has expired rather than
over the period of the risk;
- acquisition costs are charged to operations as incurred rather than as the
related premiums are earned;
- a contingency reserve is computed on the basis of statutory requirements
and reserves for losses and LAE are established, at present value, for
specific insured issues which are identified as currently or likely to be
in default. Under GAAP reserves are established based on MBIA Corp.'s
reasonable estimate of the identified and unidentified losses and LAE on
the insured obligations it has written;
- Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
- fixed-maturity securities are reported at amortized cost rather than fair
value;
- tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
- certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
A-10
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP shareholder's equity..................................... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition................................... (328,450) (296,524) (242,577)
Deferral of acquisition costs................................. (140,348) (133,048) (120,484)
Unrealized (gains) losses..................................... (223,635) 71,932 --
Contingent commissions........................................ (1,645) (1,706) (1,880)
Contingency reserve........................................... (743,510) (620,988) (539,103)
Loss and loss adjustment expense reserves..................... 28,024 18,181 26,262
Deferred income taxes......................................... 205,425 90,328 99,186
Tax and loss bonds............................................ 70,771 50,471 25,771
Goodwill...................................................... (105,614) (110,543) (115,503)
Other......................................................... (12,752) (13,568) (11,679)
------------ ------------ ------------
Statutory capital and surplus............................... $ 1,274,138 $ 1,110,038 $ 977,736
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for
1995, 1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax
returns while emphasizing the preservation of capital and claims-paying
capability through maintenance of high-quality investments with adequate
liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure
to any one issuer. The fixed-maturity portfolio is comprised of high-quality
(average rating Double-A) taxable and tax-exempt investments of diversified
maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995
Taxable bonds
United States Treasury and Government Agency............. $ 6,742 $ 354 $ -- $ 7,096
Corporate and other obligations.......................... 592,604 30,536 (212) 622,928
Mortgage-backed.......................................... 389,943 21,403 (932) 410,414
Tax-exempt bonds
State and municipal obligations.......................... 2,637,732 175,081 (2,595) 2,810,218
------------ ----------- ----------- ------------
Total fixed-maturities................................. $ 3,627,021 $ 227,374 $ (3,739) $ 3,850,656
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
A-11
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994
Taxable bonds
United States Treasury and Government Agency............ $ 15,133 -- (149) $ 14,984
Corporate and other obligations......................... 461,601 2,353 (23,385) 440,569
Mortgage-backed......................................... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal obligations......................... 2,450,928 36,631 (77,998) 2,409,561
------------ ----------- ----------- ------------
Total fixed-maturities................................ $ 3,245,222 $ 42,030 $ (113,962) $ 3,173,290
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Fixed-maturity investments carried at fair value of $8.1 million and $7.4
million as of December 31, 1995 and 1994, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturity
Within 1 year......................................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years...................... 448,817 477,039
Beyond 5 years but within 10 years.................... 1,133,527 1,211,645
Beyond 10 years but within 15 years................... 742,790 804,421
Beyond 15 years but within 20 years................... 686,871 730,030
Beyond 20 years....................................... 46,745 38,851
------------ ------------
3,237,078 3,440,242
Mortgage-backed......................................... 389,943 410,414
------------ ------------
Total fixed-maturities and short-term investments... $ 3,627,021 $ 3,850,656
------------ ------------
------------ ------------
</TABLE>
A-12
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed-maturities......................................... $ 216,653 $ 193,729 $ 173,070
Short-term investments................................... 6,008 3,003 2,844
Other investments........................................ 17 12 2,078
---------- ---------- ----------
Gross investment income............................ 222,678 196,744 177,992
Investment expenses...................................... 2,844 2,778 2,663
---------- ---------- ----------
Net investment income.............................. 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains................................................ 9,941 9,635 9,070
Losses............................................... (2,537) (8,851) (744)
---------- ---------- ----------
Net.................................................. 7,404 784 8,326
Other investments:
Gains................................................ 382 9,551 615
Losses............................................... (9) -- --
---------- ---------- ----------
Net.................................................. 373 9,551 615
---------- ---------- ----------
Net realized gains................................. 7,777 10,335 8,941
---------- ---------- ----------
Total investment income............................ $ 227,611 $ 204,301 $ 184,270
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Unrealized gains (losses) consist of:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------
1995 1994
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed-maturities:
Gains.............................................................. $ 227,374 $ 42,030
Losses............................................................. (3,739) (113,962)
---------- -----------
Net.............................................................. 223,635 (71,932)
Other investments:
Gains.............................................................. 287 --
Losses............................................................. (821) (1,042)
---------- -----------
Net.............................................................. (534) (1,042)
---------- -----------
Total............................................................ 223,101 (72,974)
Deferred income tax (benefit)........................................ 78,372 (25,334)
---------- -----------
Unrealized gains (losses) -- net................................. $ 144,729 $ (47,640)
---------- -----------
---------- -----------
</TABLE>
The deferred taxes in 1995 and 1994 relate primarily to unrealized gains and
losses on MBIA Corp.'s fixed-maturity investments, which are reflected in
shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s adoption
of SFAS 115.
A-13
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT INCOME AND GAINS AND LOSSES (CONTINUED)
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
---------- ----------- ----------
IN THOUSANDS
<S> <C> <C> <C>
Fixed-maturities........................................ $ 295,567 $ (289,327) $ 101,418
Other investments....................................... 508 (8,488) 3,842
---------- ----------- ----------
Total................................................. 296,075 (297,815) 105,260
Deferred income taxes (benefit)......................... 103,706 (27,940) 1,381
---------- ----------- ----------
Unrealized gains (losses), net........................ $ 192,369 $ (269,875) $ 103,879
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
SFAS 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
on tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Tax and loss bonds.................................................. $ 71,183 $ 50,332
Unrealized losses................................................... -- 25,334
Alternative minimum tax credit carry forwards....................... 39,072 22,391
Loss and loss adjustment expense reserves........................... 9,809 6,363
Other............................................................... 954 3,981
---------- ----------
Total gross deferred tax assets................................... 121,018 108,401
---------- ----------
Deferred tax liabilities
Contingency reserve................................................. 131,174 91,439
Deferred premium revenue............................................ 64,709 54,523
Deferred acquisition costs.......................................... 49,122 48,900
Unrealized gains.................................................... 78,372 --
Contingent commissions.............................................. 7,158 4,746
Other............................................................... 3,408 6,621
---------- ----------
Total gross deferred tax liabilities.............................. 333,943 206,229
---------- ----------
Net deferred tax liability...................................... $ 212,925 $ 97,828
---------- ----------
---------- ----------
</TABLE>
A-14
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Under SFAS 109, a change in the Federal tax rate requires a restatement of
deferred tax assets and liabilities. Accordingly, the restatement for the change
in the 1993 Federal tax rate resulted in a $5.4 million increase in the tax
provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.................................. $ 70,357 $ 58,043 $ 66,086
Deferred................................. 11,391 19,082 20,598
--------- --------- ---------
Total.................................. $ 81,748 $ 77,125 $ 86,684
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes gives effect to permanent differences between
financial and taxable income. Accordingly, MBIA Corp.'s effective income tax
rate differs from the statutory rate on ordinary income. The reasons for MBIA
Corp.'s lower effective tax rates are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes computed on pre-tax financial income at statutory
rates................................................................ 35.0 % 35.0 % 35.0 %
Increase (reduction) in taxes resulting from:
Tax-exempt interest................................................. (12.5) (12.0) (10.6)
Amortization of goodwill............................................ 0.5 0.5 0.5
Other............................................................... (1.1) (1.7) --
----- ----- -----
Provision for income taxes........................................ 21.9 % 21.8 % 24.9 %
----- ----- -----
----- ----- -----
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Corp. had approximately $44 million available
for the payment of dividends as of December 31, 1995. In 1995, 1994 and 1993,
MBIA Corp. declared and paid dividends of $83 million, $38 million and $50
million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Illinois may pay a dividend only with prior
approval as of December 31, 1995.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
A-15
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650
million with a group of major banks to provide loans to MBIA Corp. after it has
incurred cumulative losses (net of any recoveries) from September 30, 1995 in
excess of the greater of $500 million and 6.25% of average annual debt service.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating $275
million. At December 31, 1995, MBIA Inc. had $18 million outstanding under these
facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on
municipal, asset-/mortgage-backed and other non-municipal securities. MBIA
Corp.'s ultimate exposure to credit loss in the event of nonperformance by the
insured is represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments to
guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
NET NUMBER OF % OF NET NET NUMBER OF % OF NET
INSURANCE ISSUES INSURANCE IN INSURANCE ISSUES INSURANCE IN
GEOGRAPHIC LOCATION IN FORCE OUTSTANDING FORCE IN FORCE OUTSTANDING FORCE
- ------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
($ IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California.......................... $ 51.2 3,122 14.8% $ 43.9 2,832 14.3%
New York............................ 30.1 4,846 8.7 25.0 4,447 8.2
Florida............................. 26.9 1,684 7.7 25.4 1,805 8.3
Texas............................... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania........................ 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey.......................... 16.4 1,730 4.7 15.0 1,590 4.9
Illinois............................ 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts....................... 9.3 1,070 2.7 8.6 1,064 2.8
Ohio................................ 9.1 1,017 2.6 8.3 996 2.7
Michigan............................ 7.9 1,012 2.3 5.7 972 1.9
----------- ----------- ----- ----------- ----------- -----
Subtotal.......................... 206.0 19,745 59.4 184.7 19,055 60.4
Other............................... 135.6 11,147 39.1 118.8 10,711 38.8
----------- ----------- ----- ----------- ----------- -----
Total U.S......................... 341.6 30,892 98.5 303.5 29,766 99.2
----------- ----------- ----- ----------- ----------- -----
International....................... 5.1 53 1.5 2.5 18 0.8
----------- ----------- ----- ----------- ----------- -----
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
----------- ----------- ----- ----------- ----------- -----
----------- ----------- ----- ----------- ----------- -----
</TABLE>
A-16
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NET INSURANCE IN FORCE (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
NET NUMBER OF % OF NET NET NUMBER OF % OF NET
INSURANCE ISSUES INSURANCE IN INSURANCE ISSUES INSURANCE IN
TYPE OF BOND IN FORCE OUTSTANDING FORCE IN FORCE OUTSTANDING FORCE
- ---------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
($ IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Municipal
General Obligation.......................... $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities................................... 60.3 4,931 17.4 56.0 5,087 18.3
Health Care................................. 51.9 2,458 15.0 50.6 2,670 16.5
Transportation.............................. 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue............................. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial development and pollution control
revenue.................................... 17.2 924 5.0 15.1 1,016 4.9
Housing..................................... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education............................ 15.2 1,261 4.4 14.0 1,208 4.6
Other....................................... 7.3 134 2.1 3.8 124 1.2
----------- ----------- ----- ----------- ----------- -----
309.2 26,831 89.2 281.3 26,574 91.9
----------- ----------- ----- ----------- ----------- -----
Non-municipal
Asset/mortgage-backed....................... 20.2 256 5.8 12.8 151 4.2
Investor-owned utilities.................... 6.4 3,559 1.8 5.7 2,918 1.9
International............................... 5.1 53 1.5 2.5 18 0.8
Other....................................... 5.8 246 1.7 3.7 123 1.2
----------- ----------- ----- ----------- ----------- -----
37.5 4,114 10.8 24.7 3,210 8.1
----------- ----------- ----- ----------- ----------- -----
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
----------- ----------- ----- ----------- ----------- -----
----------- ----------- ----- ----------- ----------- -----
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
A-17
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE (CONTINUED)
Amounts deducted from gross insurance in force for reinsurance ceded by MBIA
Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6 billion, at
December 31, 1995 and 1994, respectively. The distribution of ceded insurance in
force by geographic location and type of bond is set forth in the tables below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------
1995 1994
-------------------------- --------------------------
CEDED % OF CEDED CEDED % OF CEDED
INSURANCE INSURANCE IN INSURANCE INSURANCE IN
GEOGRAPHIC LOCATION IN FORCE FORCE IN FORCE FORCE
- --------------------------------------------- ----------- ------------- ----------- -------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
California................................... $ 8.8 17.5% $ 7.5 17.6%
New York..................................... 5.7 11.4 4.9 11.5
New Jersey................................... 3.1 6.1 2.0 4.7
Texas........................................ 2.8 5.6 2.5 5.9
Pennsylvania................................. 2.7 5.4 2.6 6.1
Florida...................................... 2.3 4.6 2.1 4.9
Illinois..................................... 2.2 4.5 2.3 5.4
District of Columbia......................... 1.5 3.0 1.6 3.8
Washington................................... 1.4 2.7 1.2 2.8
Puerto Rico.................................. 1.3 2.6 1.1 2.6
Massachusetts................................ 1.1 2.1 0.9 2.1
Ohio......................................... 1.0 2.1 0.9 2.1
----- ----- ----- -----
Subtotal................................... 33.9 67.6 29.6 69.5
Other........................................ 14.4 28.8 12.3 28.9
----- ----- ----- -----
Total U. S............................... 48.3 96.4 41.9 98.4
International................................ 1.8 3.6 0.7 1.6
----- ----- ----- -----
$ 50.1 100.0% $ 42.6 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
A-18
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------
1995 1994
-------------------------- --------------------------
CEDED % OF CEDED CEDED % OF CEDED
INSURANCE INSURANCE IN INSURANCE INSURANCE IN
TYPE OF BOND IN FORCE FORCE IN FORCE FORCE
- --------------------------------------------- ----------- ------------- ----------- -------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
Municipal
General obligation......................... $ 11.7 23.3% $ 9.7 22.8%
Utilities.................................. 9.0 18.0 8.5 20.0
Health care................................ 6.6 13.1 6.5 15.3
Transportation............................. 5.5 11.0 4.5 10.6
Special revenue............................ 3.2 6.4 2.7 6.3
Industrial development and pollution
control revenue........................... 3.0 6.0 2.9 6.8
Housing.................................... 1.4 2.8 1.0 2.3
Higher education........................... 1.2 2.4 1.2 2.8
Other...................................... 2.4 4.8 1.5 3.5
----- ----- ----- -----
44.0 87.8 38.5 90.4
----- ----- ----- -----
Non-municipal
Asset-/mortgage-backed..................... 3.6 7.2 2.7 6.3
International.............................. 1.8 3.6 0.7 1.6
Other...................................... 0.7 1.4 0.7 1.7
----- ----- ----- -----
6.1 12.2 4.1 9.6
----- ----- ----- -----
$ 50.1 100.0% $ 42.6 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Included in gross premiums written are assumed premiums from other insurance
companies of $11.7 million, $6.3 million and $20.4 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The percentages of the amounts
assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995, 1994 and 1993,
respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in 1993
related to the reassumption by MBIA Corp. of reinsurance previously ceded by the
Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
A-19
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS (CONTINUED)
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. MBIA Corp. recorded $0.1
million of compensation expense in 1995 relating to this program.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred premium
revenue from a member of the Association which had not previously ceded its
insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4 million
of deferred premium revenue relating to one of the trusts which was previously
ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Included in other assets at December 31, 1995 and 1994 is $1.1 million and
$14.5 million of net receivables from MBIA Inc. and other subsidiaries.
A-20
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the
following table have been determined by MBIA Corp. using available market
information and appropriate valuation methodologies. However, in certain cases
considerable judgment is necessarily required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amount MBIA Corp. could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES -- The fair value of fixed-maturity securities
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS -- Short-term investments are carried at amortized
cost which, because of their short duration, is a reasonable estimate of fair
value.
OTHER INVESTMENTS -- Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED -- The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS -- The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE -- The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The carrying amount is composed
of the present value of the expected cash flows for specifically identified
claims combined with an estimate for unidentified claims. Therefore, the
carrying amount is a reasonable estimate of the fair value of the reserve.
A-21
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INSTALLMENT PREMIUMS -- The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1995 1994
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Fixed-maturity securities.............................. $ 3,652,621 $ 3,652,621 $ 3,051,906 $ 3,051,906
Short-term investments................................. 198,035 198,035 121,384 121,384
Other investments...................................... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance premiums........................... 200,887 174,444 186,492 159,736
Receivable for investments sold........................ 5,729 5,729 945 945
Liabilities:
Deferred premium revenue............................... 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment expense reserves.............. 42,505 42,505 40,148 40,148
Payable for investments purchased...................... 10,695 10,695 6,552 6,552
Off-balance-sheet instruments:
Installment premiums................................... -- 235,371 -- 176,944
</TABLE>
A-22
<PAGE>
APPENDIX B
UNAUDITED INTERIM FINANCIAL STATEMENTS
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
B-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheets -- March 31, 1996 (Unaudited) and December 31, 1995 (Audited).................. B-3
Consolidated Statements of Income -- Three months ended March 31, 1996 and 1995 (Unaudited)................ B-4
Consolidated Statement of Changes in Shareholder's Equity -- Three months ended March 31, 1996
(Unaudited)............................................................................................... B-5
Consolidated Statements of Cash Flows -- Three months ended March 31, 1996 and 1995 (Unaudited)............ B-6
Notes to Consolidated Financial Statements (Unaudited)..................................................... B-7
</TABLE>
B-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
MARCH 31, 1996 -----------------
-------------- (AUDITED)
(UNAUDITED)
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale at fair value
(amortized cost $3,664,571 and $3,428,986)................................. $ 3,784,836 $ 3,652,621
Short-term investments, at amortized cost
(which approximates fair value)............................................ 135,428 198,035
Other investments........................................................... 13,374 14,064
-------------- -----------------
Total investments......................................................... 3,933,638 3,864,720
Cash and cash equivalents..................................................... 2,499 2,135
Accrued investment income..................................................... 60,462 60,247
Deferred acquisition costs.................................................... 140,919 140,348
Prepaid reinsurance premiums.................................................. 206,383 200,887
Goodwill (less accumulated amortization of $38,590 and $37,366)............... 104,390 105,614
Property and equipment, at cost (less accumulated depreciation of $12,822 and
$12,137)..................................................................... 41,771 41,169
Receivable for investments sold............................................... 6,501 5,729
Other assets.................................................................. 51,534 42,145
-------------- -----------------
Total assets.............................................................. $ 4,548,097 $ 4,462,994
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue.................................................... $ 1,666,945 $ 1,616,315
Loss and loss adjustment expense reserves................................... 46,376 42,505
Deferred income taxes....................................................... 180,843 212,925
Payable for investments purchased........................................... 15,715 10,695
Other liabilities........................................................... 96,600 54,682
-------------- -----------------
Total liabilities......................................................... 2,006,479 1,937,122
-------------- -----------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized, issued and outstanding
-- 100,000 shares.......................................................... 15,000 15,000
Additional paid-in capital.................................................. 1,025,591 1,021,584
Retained earnings........................................................... 1,423,157 1,341,855
Cumulative translation adjustment........................................... 330 2,704
Unrealized appreciation of investments, net of deferred income tax provision
of $42,114 and $78,372..................................................... 77,540 144,729
-------------- -----------------
Total shareholder's equity................................................ 2,541,618 2,525,872
-------------- -----------------
Total liabilities and shareholder's equity................................ $ 4,548,097 $ 4,462,994
-------------- -----------------
-------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Gross premiums written.................................................................. $ 121,011 $ 71,112
Ceded premiums.......................................................................... (14,715) (7,080)
---------- ----------
Net premiums written.................................................................. 106,296 64,032
Increase in deferred premium revenue.................................................... (45,532) (12,680)
---------- ----------
Premiums earned (net of ceded premiums of $9,220 and $7,839).......................... 60,764 51,352
Net investment income................................................................... 59,003 53,065
Net realized gains...................................................................... 2,692 1,724
Other income............................................................................ 969 908
---------- ----------
Total revenues........................................................................ 123,428 107,049
---------- ----------
Expenses:
Losses and loss adjustment expenses..................................................... 3,178 2,038
Policy acquisition costs, net........................................................... 5,900 5,140
Underwriting and operating expenses..................................................... 10,549 9,752
---------- ----------
Total expenses........................................................................ 19,627 16,925
---------- ----------
Income before income taxes................................................................ 103,801 90,124
Provision for income taxes................................................................ 22,499 19,476
---------- ----------
Net income................................................................................ $ 81,302 $ 70,648
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL CUMULATIVE APPRECIATION
-------------------- PAID-IN RETAINED TRANSLATION OF
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS
--------- --------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996........... 100,000 $ 15,000 $ 1,021,584 $ 1,341,855 $ 2,704 $ 144,729
Exercise of stock options.......... -- -- 1,179 -- -- --
Net income......................... -- -- -- 81,302 -- --
Change in foreign currency
transactions...................... -- -- -- -- (2,374) --
Change in unrealized appreciation
of investments net of change in
deferred income taxes of
$36,258........................... -- -- -- -- -- (67,189)
Tax reduction related to tax
sharing agreement with MBIA
Inc............................... -- -- 2,828 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, March 31, 1996............ 100,000 $ 15,000 $ 1,025,591 $ 1,423,157 $ 330 $ 77,540
--------- --------- ------------ ------------ ----------- -------------
--------- --------- ------------ ------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 81,302 $ 70,648
Adjustments to reconcile net income to net cash provided by operating activities:
(Increase) decrease in accrued investment income.................................... (215) 960
Increase in deferred acquisition costs.............................................. (571) (1,634)
(Increase) decrease in prepaid reinsurance premiums................................. (5,496) 758
Increase in deferred premium revenue................................................ 51,028 11,922
Increase in loss and loss adjustment expense reserves............................... 3,871 1,885
Depreciation........................................................................ 719 630
Amortization of goodwill............................................................ 1,224 1,232
Amortization of bond discount, net.................................................. (1,014) (358)
Net realized gains on sale of investments........................................... (2,692) (1,724)
Deferred income taxes............................................................... 4,176 3,782
Other, net.......................................................................... 34,288 19,601
----------- -----------
Total adjustments to net income..................................................... 85,318 37,054
----------- -----------
Net cash provided by operating activities........................................... 166,620 107,702
----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net of payable for investments purchased....... (329,252) (162,603)
Sale of fixed-maturity securities, net of receivable for investments sold............. 146,729 92,890
Redemption of fixed-maturity securities, net of receivable for investments redeemed... 32,644 16,717
Purchase of short-term investments, net............................................... (15,259) (9,908)
Sale (purchase) of other investments, net............................................. 215 (863)
Capital expenditures, net of disposals................................................ (1,333) (817)
----------- -----------
Net cash used in investing activities............................................... (166,256) (84,584)
----------- -----------
Cash flows from financing activities:
Dividends paid........................................................................ -- (22,500)
----------- -----------
Net cash used by financing activities............................................... -- (22,500)
----------- -----------
Net increase in cash and cash equivalents............................................... 364 618
Cash and cash equivalents -- beginning of period........................................ 2,135 1,332
----------- -----------
Cash and cash equivalents -- end of period.............................................. $ 2,499 $ 1,950
----------- -----------
----------- -----------
Supplemental cash flow disclosures:
Income taxes paid..................................................................... $ 1,151 $ 1
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and include
the accounts of MBIA Insurance Corporation and its Subsidiaries (the "Company").
The statements do not include all of the information and disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1995. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the Company's
financial position and results of operations. The results of operations for the
three months ended March 31, 1996 may not be indicative of the results that may
be expected for the year ending December 31, 1996. The December 31, 1995
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. DIVIDENDS DECLARED
No dividends were declared by the Company during the three months ended
March 31, 1996.
B-7
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<S> <C>
Registration Fee.......................................................... $ 78,517
Printing and Engraving.................................................... $ 50,000
Trustee's Fees............................................................ $ 5,000
Legal Fees and Expenses................................................... $ 115,000
Blue Sky Fees and Expenses................................................ $ 10,000
Accountants' Fees and Expenses............................................ $ 40,000
Rating Agency Fees........................................................ $ 182,158
Miscellaneous Fees........................................................ $ 69,325
---------
Total................................................................... $ 550,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
12 C.F.R. 545.121 of the rules and regulations of the OTS prescribe the
conditions under which indemnification may be obtained by a present or former
director, officer or employee of the Bank against whom an action has been
brought or is threatened, for any amount for which that person is liable under a
judgment and for reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred by that person defending or settling such
action.
Subject to prior OTS review, the OTS rules and regulations require the Bank
to indemnify the director, officer or employee if (a) a final judgment on the
merits is in his favor, or (b) in the case of (i) settlement, (ii) final
judgment against him or (iii) final judgment in his favor, other than on the
merits, if a majority of the disinterested directors of the Bank determines that
he was acting in good faith within the scope of his employment or authority as
he could reasonably have perceived it under the circumstances, and for a purpose
he could reasonably have believed under the circumstances was in the best
interests of the Bank or its shareholders.
The officers and directors of the Bank are covered by directors' and
officers' insurance insuring them against any liability they may incur in their
capacities as such, subject to 12 C.F.R. 545.121 of the rules and regulations of
the OTS.
Pursuant to Section of the Underwriting Agreement, which is attached as
Exhibit 1.1 hereto, the Underwriters will agree to indemnify the Bank and its
officers and directors against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, arising from information which has been
or will be furnished to the Bank by the Underwriters that appears in the
Registration Statement or the Prospectus.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXHIBITS
- -------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
4.1 -- Form of Pooling Agreement (including form of Certificate).
4.2 -- Form of Certificate Guaranty Insurance Policy.
5.1 -- Opinion of Shaw, Pittman, Potts & Trowbridge, Special Counsel to the Bank, with respect to legality.
8.1 -- Opinion of Shaw, Pittman, Potts & Trowbridge, Special Counsel to the Bank, with respect to tax
matters.
23.1 -- Consent of Shaw, Pittman, Potts & Trowbridge, (included in its opinion filed as Exhibit 5.1).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -------------
<C> <C> <S>
23.2 -- Consent of Shaw, Pittman, Potts & Trowbridge, (included in its opinion filed as Exhibit 8.1).
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Powers of Attorney (included on the signature pages).**
</TABLE>
- ------------------------
**Previously filed.
(a) Financial Statements
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) That, for 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.
(b) To provide to the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(c) That 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 provisions described under Item 15
above, 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.
(d) That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(e) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
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.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Chevy Chase, State of Maryland, on June 18, 1996.
CHEVY CHASE BANK, F.S.B.
as Originator of the Trust and
Registrant
By: /s/ B. FRANCIS SAUL II*
------------------------------------
B. Francis Saul II
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on June 18, 1996 by the following persons
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------------- ---------------------------------------------------
<C> <S>
/s/ ALEXANDER R.M. BOYLE*
---------------------------------------- Vice Chairman of the Board
Alexander R.M. Boyle
/s/ VINCENT C. BURKE, JR.*
---------------------------------------- Director
Vincent C. Burke, Jr.
/s/ DONALD G. CONRAD*
---------------------------------------- Director
Donald G. Conrad
---------------------------------------- Director
Gavin Malloy Farr
/s/ JOEL A. FRIEDMAN
---------------------------------------- Senior Vice President and Controller
Joel A. Friedman (Principal Accounting Officer)
---------------------------------------- Director
Gilbert M. Grosvenor
/s/ STEPHEN R. HALPIN, JR.*
---------------------------------------- Executive Vice President
Stephen R. Halpin, Jr. (Principal Financial Officer)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------------- ---------------------------------------------------
<C> <S>
/s/ PENNE PERCY KORTH*
---------------------------------------- Director
Penne Percy Korth
/s/ LASALLE D. LEFFALL*
---------------------------------------- Director
LaSalle D. Leffall
/s/ WILLIAM F. MCSWEENY*
---------------------------------------- Director
William F. McSweeny
/s/ GARLAND P. MOORE, JR*.
---------------------------------------- Director
Garland P. Moore, Jr.
/s/ JESSE F. NICHOLSON*
---------------------------------------- Director
Jesse F. Nicholson
/s/ GEORGE M. ROGERS, JR.*
---------------------------------------- Director
George M. Rogers, Jr.
/s/ B. FRANCIS SAUL II*
---------------------------------------- Chairman of the Board
B. Francis Saul II (Principal Executive Officer)
---------------------------------------- Director
Leonard L. Silverstein
</TABLE>
*By: /s/ JOEL A. FRIEDMAN
- ----------------------------------
Joel A. Friedman
Attorney-in-Fact
II-4
<PAGE>
$227,697,669.92
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
_____% Auto Receivables Backed Certificates
UNDERWRITING AGREEMENT
June ___, 1996
J.P. MORGAN SECURITIES INC.
60 Wall Street, 18th Floor
New York, NY 10260
CS FIRST BOSTON CORPORATION
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055
SMITH BARNEY INC.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
1. INTRODUCTION. Chevy Chase Bank, F.S.B., a federally chartered stock
savings bank ("Chevy Chase"), has authorized the issuance and sale of ___% Auto
Receivables Backed Certificates (the "Certificates"), evidencing interests in a
trust (the "Trust") consisting, among other things, of (i) a combination of
simple interest retail installment sales contracts and installment loans (the
"Receivables") secured by new and used automobiles, light duty trucks and vans
(the "Vehicles") financed thereby, (ii) amounts due or received thereunder on or
after June 1, 1996, (the "Cut-Off Date") , and (iii) security interests in the
Vehicles financed thereby. The Certificates will be issued under a Pooling and
Servicing Agreement dated as of June 1, 1996 (the "Pooling Agreement") between
Chevy Chase as seller and as servicer and First Bank National Association as
trustee (the "Trustee").
The Certificates will evidence fractional undivided interests in the
Trust. The Trustee, on behalf of the holders of the Certificates (the "Certifi-
cateholders"), will have the benefit
<PAGE>
of a financial guaranty insurance policy (the "Certificate Insurance Policy")
from MBIA Insurance Corporation (the "Certificate Insurer"). The Trustee will
also have access to a Reserve Account to be established for the benefit of the
holders of the Certificates and the Certificate Insurer. Each Certificateholder
will also purchase the right to receive a pro rata share of amounts payable
under the Yield Maintenance Account established pursuant to the Pooling
Agreement. The Certificates will be issued in an aggregate principal amount of
$227,697,669.92, which is equal to the original pool balance of the Receivables,
exclusive of accrued interest, as of the opening of business on the Cut-Off
Date. The forms of the Pooling Agreement, the Certificate Insurance Policy and
the Indemnification Agreement (as such term is hereinafter defined) have been
timely filed as exhibits to the Registration Statement (as such term is
hereinafter defined). Capitalized terms used but not defined herein shall have
the meanings given to them in the Pooling Agreement.
Chevy Chase hereby agrees with the several Underwriters named in
Schedule 1 hereto (the "Underwriters") as follows:
2. REPRESENTATIONS AND WARRANTIES OF CHEVY CHASE. Chevy Chase represents
and warrants to, and agrees with, each of the Underwriters that:
(a) A Registration Statement on Form S-3 (Nos. 333-04375 and 333-04375-01)
relating to the Certificates, including a form of Prospectus, has been filed
with the Securities and Exchange Commission (the "Commission") and either (i)
has been declared effective under the Act of 1933 (the "Act") and is not pro-
posed to be amended or (ii) is proposed to be amended by amendment or post-effe-
ctive amendment. If Chevy Chase does not propose to amend such Registration
Statement or if any post-effective amendment to such Registration Statement has
been filed with the Commission prior to the execution and delivery of this
Agreement, such Registration Statement or such post-effective amendment, as the
case may be, has been declared effective by the Commission. For purposes of
this Agreement, "Effective Time" means (i) if Chevy Chase has advised J.P.
Morgan Securities Inc. ("JP Morgan"), as representative of the Underwriters (the
"Representative"), that it does not propose to amend such Registration State-
ment, the date and time as of which such Registration Statement, or the most
recent post-effective amendment thereto (if any) filed prior to the execution
and delivery of this Agreement, was declared effective by the Commission, or
(ii) if Chevy Chase has advised the Representative that it proposes to file an
amendment or post-effective amendment to such Registration Statement, the date
and time as of which such Registration Statement, as amended by such amendment
or post-effective amendment, as the case may be, is declared effective by the
Commission. "Effective Date" means the date of the Effective Time. Such
Registration Statement, as amended at the Effective Time, including all material
incorporated by reference therein and including all information, if any, deemed
to be a part of such Registration Statement as of the Effective Time pursuant to
Rule 430A(b) under the Act, is referred to herein as the "Registration State-
ment", and the form of prospectus relating to the Certificates, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) under the Act
or, if no such filing is required, as included in the Registration Statement,
including all material incorporated by reference in such prospectus, is herein-
after referred to as the "Prospectus."
2
<PAGE>
(b) If the Effective Time is prior to the execution and delivery of this
Agreement: (i) on the Effective Date, the Registration Statement conformed, and
on the date of this Agreement the Registration Statement conforms, in all
material respects with the requirements of the Act and the rules and regulations
of the Commission ("Rules and Regulations") and did not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) on the date of this Agreement, the Prospectus conforms, and at the time of
filing of the Prospectus pursuant to Rule 424(b) and at the Closing Date, the
Prospectus will conform, in all material respects to the requirements of the Act
and the Rules and Regulations, and the Prospectus does not include and does not
omit, and will not include, any untrue statement of a material fact, and does
not omit, to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. If the Effective Time is subsequent to the execution and delivery
of this Agreement: on the Effective Date, the Registration Statement and the
Prospectus will conform in all material respects to the requirements of the Act
and the Rules and Regulations, and (i) the Registration Statement will not
include any untrue statement of a material fact or will not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and (ii) the Prospectus will not include an untrue
statement of a material fact or will not omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The two preceding sentences do not apply
to statements in or omissions from the Registration Statement or Prospectus
based upon written information furnished to Chevy Chase by any Underwriters
through the Representative specifically for use therein, it being understood the
only such information is that described as such in Section 8(b). The conditions
to the use by Chevy Chase of a Registration Statement on Form S-3 under the Act,
as set forth in the General Instructions to Form S-3, have been satisfied with
respect to the Registration Statement and the Prospectus. There are no
contracts or documents which are required to be filed as exhibits to the
Registration Statement pursuant to the Act or the Rules and Regulations which
have not been so filed on or prior to the Effective Date.
(c) Since the respective dates as of which information is given in the
Prospectus, or the Prospectus as amended and supplemented, there has not been
any material adverse change in the general affairs, management, or results of
operations of Chevy Chase or of its subsidiaries otherwise than as set forth or
contemplated in the Prospectus or the Prospectus as amended and supplemented,
nor has there been any adverse change in the general affairs, management, or
results of operations of any other affiliate of Chevy Chase which could have a
material adverse effect on the general affairs, management or results of opera-
tions of Chevy Chase or its subsidiaries, otherwise than as set forth or contem-
plated in the Prospectus or the Prospectus as amended and supplemented.
(d) Chevy Chase is a federally chartered stock savings bank duly organized
and validly existing under the laws of the United States of America, and has
full corporate power, authority and legal right to own its properties and
conduct its business as such properties are presently owned and such business is
presently conducted, and to execute, deliver and perform its obligations under
this Agreement, the Pooling Agreement, the Indemnification Agreement, and to
3
<PAGE>
cause the Certificates to be issued. Chevy Chase has conducted and is
conducting its business so as to comply in all material respects with all
applicable statutes and regulations, including, without limitation, all
regulations, decisions, directives and orders of the Office of Thrift Supervi-
sion. Chevy Chase is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification.
(e) (i) There are no legal, governmental or regulatory proceedings pending
to which Chevy Chase is a party or to which any of its property is the subject,
which, if determined adversely to Chevy Chase, would individually or in the
aggregate have a material adverse effect on the performance by Chevy Chase of
this Agreement, the Pooling Agreement, the Indemnification Agreement or the
consummation of the transactions contemplated hereunder or thereunder and (ii)
to the best of its knowledge, no such proceedings are threatened or contemplated
by governmental or regulatory authorities or threatened by others.
(f) This Agreement has been duly authorized and validly executed and
delivered by Chevy Chase and constitutes a valid and binding agreement of Chevy
Chase, enforceable against Chevy Chase in accordance with its terms, except to
the extent that (i) the enforceability hereof may be subject to insolvency,
reorganization, moratorium, receivership, conservatorship, or other similar
laws, regulations or procedures of general applicability now or hereafter in
effect relating to or affecting creditors' or other obligees' rights generally
or the rights of creditors or obligees of federally chartered stock savings
banks, the deposits of which are insured by the Federal Deposit Insurance
Corporation (the "FDIC"), (ii) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought
and (iii) rights to indemnification and contribution under this Agreement may be
limited by state or federal securities laws or the policies underlying such
laws.
(g) The Pooling Agreement and the Indemnification Agreement have been duly
authorized by Chevy Chase and, when executed and delivered by Chevy Chase and
assuming the due authorization, execution and delivery of the Pooling Agreement
and the Indemnification Agreement by the other parties thereto, will constitute
valid and binding obligations of Chevy Chase enforceable against Chevy Chase in
accordance with their respective terms, except to the extent that (i) the
enforceability thereof may be subject to insolvency, reorganization, moratorium,
receivership, conservatorship, or other similar laws, regulations or procedures
of general applicability now or hereafter in effect relating to or affecting
creditors' or obligees' rights generally or the rights of creditors or obligees
of federally chartered stock savings banks, the deposits of which are insured by
the FDIC, and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(h) The issuance and delivery of the Certificates, the consummation of any
other of the transactions contemplated herein in the Pooling Agreement and the
Indemnification Agreement or the fulfillment of the terms of this Agreement, the
Pooling Agreement or the
4
<PAGE>
Indemnification Agreement, do not and will not conflict with or violate any term
or provision of the Charter or By-Laws of Chevy Chase, any statute, order or
regulation applicable to Chevy Chase of any court, regulatory body,
administrative agency or governmental body having jurisdiction over Chevy Chase
and do not and will not conflict with, result in a breach or violation or the
acceleration of or constitute a default under or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of Chevy Chase pursuant to the terms of, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which Chevy Chase is a party
or by which Chevy Chase may be bound or to which any of the property or assets
of Chevy Chase may be subject except for conflicts, violations, breaches,
accelerations and defaults which would not, individually or in the aggregate, be
materially adverse to Chevy Chase or materially adverse to the transactions
contemplated by this Agreement.
(i) Arthur Andersen LLP is an independent public accountant with respect
to Chevy Chase as required by the Act and the Rules and Regulations.
(j) The direction by Chevy Chase to the Trustee to execute, countersign,
issue and deliver the Certificates has been duly authorized by Chevy Chase, and,
assuming the Trustee has been duly authorized to do so, when executed, counter-
signed, issued and delivered by the Trustee in accordance with the Pooling
Agreement, the Certificates will be validly issued and outstanding and will be
entitled to the benefits of the Pooling Agreement.
(k) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body of the United
States is required for the issuance and sale of the Certificates, or the consum-
mation by Chevy Chase of the other transactions contemplated by this Agreement,
the Pooling Agreement or the Indemnification Agreement, except the registration
under the Act of the certificates and such consents, approvals, authorizations,
registrations or qualifications as may have been obtained or effected or as may
be required under securities or Blue Sky laws in connection with the purchase
and distribution of the Certificates by the Underwriters.
(l) Chevy Chase possesses all material licenses, certificates,
authorizations or permits issued by the appropriate state, Federal or foreign
regulatory agencies or bodies necessary to conduct the business now conducted by
it and as described in the Prospectus and Chevy Chase has not received notice of
proceedings relating to the revocation or modification of any such license,
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the conduct of its business, operations, financial condition or
income.
(m) At the time of execution and delivery of the Pooling Agreement, Chevy
Chase (i) will not have assigned to any person any of its right, title or
interest in the Receivables or in the Pooling Agreement or the Certificates and
(ii) will have the power and authority to sell the Receivables to the Trustee
and to sell the Certificates to the Underwriters, and upon execution and
delivery of the Pooling Agreement by the Trustee, the Trustee will have acquired
beneficial ownership of all of Chevy Chase's right, title and interest in and to
the Receivables, and upon delivery
5
<PAGE>
to the Underwriters of the Certificates the Underwriters will have good and
marketable title to the Certificates.
(n) As of the Cut-Off Date, the Receivables will meet the eligibility
criteria described in the Prospectus.
(o) The Trust created by the Pooling Agreement is not, and immediately
following the issuance and sale of the Certificates will not be, required to be
registered as an "investment company" under the Investment Company Act of 1940,
as amended (the "1940 Act"), as in effect on the date hereof.
(p) Chevy Chase has authorized the conveyance of the Receivables to the
Trust, and Chevy Chase has authorized the Trust to issue the Certificates.
(q) Each of the Certificates, the Pooling Agreement and the Certificate
Insurance Policy conforms in all material respects to the descriptions thereof
contained in the Prospectus.
(r) Any taxes, fees and other governmental charges in connection with the
execution, delivery and issuance of this Agreement, the Pooling Agreement, the
Indemnification Agreement, the Certificate Insurance Policy and the Certificates
that are required to be paid by Chevy Chase at or prior to the Closing Date have
been paid or will be paid at or prior to the Closing Date.
(s) Chevy Chase will not apply the proceeds of the sale of the
Certificates pursuant to this Agreement to purchase securities (which term does
not include the Receivables) within the meaning of Regulation T promulgated by
the Federal Reserve Board.
(t) As of the Closing Date, the representations and warranties of Chevy
Chase in the Pooling Agreement and the Indemnification Agreement will be true
and correct.
Any certificate signed by an officer of Chevy Chase and delivered to
the Underwriters or the Underwriters' counsel in connection with an offering of
the Certificates shall be deemed, and shall state that it is, a representation
and warranty as to the matters covered thereby to each person to whom the
representations and warranties in this Section 2 are made.
3. PURCHASE, SALE, DELIVERY AND PAYMENTS. The Underwriters commitment to
purchase the Certificates pursuant to this Agreement shall be deemed to have
been made on the basis of the representations and warranties herein contained
and shall be subject to the terms and conditions herein set forth. Chevy Chase
agrees to instruct the Trustee to issue and agrees to sell to the Underwriters,
and the Underwriters, severally and not jointly, agree, to purchase from Chevy
Chase at the purchase price for the Certificates set forth opposite the names of
the Underwriters on Schedule 1 hereto, the respective principal amount of
Certificates set forth on Schedule I hereto. Payment of the purchase price for,
and delivery of, any Certificates to be purchased by the Underwriters shall be
made at the office of ______________________, or at such other place as shall be
agreed upon by the Underwriters and Chevy Chase, at 10:00 a.m. New York City
time
6
<PAGE>
on June _________, 1996 (the "Closing Date"), or at such other time or date or
time as shall be agreed upon in writing by the Representative and Chevy Chase.
On the Closing Date, payment shall be made to Chevy Chase by wire transfer of
same day funds payable to the account of Chevy Chase against delivery to the
Trustee as custodian for The Depository Trust Company ("DTC") of the
Certificates in the form of one or more global securities in definitive form
(the "Global Certificates") and registered in the name of Cede & Co., as nominee
for DTC. The Global Certificates will be made available for checking at ______-
____________ at least 24 hours prior to the Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the Underwriters
propose to offer the Certificates for sale to the public (which may include
selected dealers) as set forth in the Prospectus.
5. COVENANTS OF CHEVY CHASE. Chevy Chase covenants with the Underwriters
as follows:
(a) To prepare a Prospectus setting forth any price related information
previously omitted from the effective Registration Statement pursuant to Rule
430A under the Act within the time period prescribed by Rule 430A, and to
transmit such Prospectus to the Commission for filing pursuant to Rule 424(b)
under the Act within the prescribed time period, and prior to the Closing Date
to provide evidence satisfactory to the Underwriters of such timely filing, or
to prepare and timely file a post-effective amendment to the Registration
Statement providing such information, which post-effective amendment shall have
been declared effective in accordance with the requirements of Rule 430A under
the Act and to provide evidence satisfactory to the Underwriters of the effec-
tiveness thereof.
(b) If at any time when the Prospectus as amended or supplemented is
required by the Act to be delivered in connection with sales of the Certificates
by the Underwriters, any event shall occur or condition exist as a result of
which it is necessary, in the opinion of the Underwriters' counsel or counsel
for Chevy Chase, further to amend or supplement the Prospectus as then amended
or supplemented in order that the Prospectus as amended or supplemented will not
include an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of circumstances
existing at the time it is delivered to a purchaser, not misleading or if it
shall be necessary, in the opinion of any such counsel, at any such time to
amend or supplement the Registration Statement or the Prospectus as then amended
or supplemented in order to comply with the requirements of the Act or the Rules
and Regulations, or if required by such Rules and Regulations, including Rule
430A thereunder, to file a post-effective amendment to such Registration State-
ment (including an amended Prospectus), Chevy Chase will promptly notify the
Representative of such event and will prepare and file with the Commission
(subject to the Representative's prior review), at its own expense, such amend-
ment or supplement as may be necessary to correct such untrue statement or
omission or to make the Registration Statement comply with such requirements,
and within two Business Days will furnish to the Underwriters as many copies of
the Prospectus, as amended or supplemented, as the Underwriters shall reasonably
request. Neither the Representative's consent to, nor the
7
<PAGE>
Underwriters, delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6 of this Agreement.
(c) Chevy Chase will give the Underwriters reasonable notice of its
intention to file any amendment to the Registration Statement, the Prospectus or
the Prospectus as amended or supplemented, pursuant to the Act, and will furnish
the Underwriters with copies of any such amendment or supplement proposed to be
filed a reasonable time in advance of filing, and will not file any such amend-
ment or supplement to which the Underwriters or the Underwriters, counsel shall
object.
(d) Chevy Chase will notify the Underwriters immediately, and confirm the
notice in writing, (i) of the effectiveness of any amendment to the Registration
Statement, (ii) of the mailing or the delivery to the Commission for filing of
any supplement to the Prospectus or the Prospectus as amended or supplemented,
(iii) of the receipt and contents of any comments from the Commission with
respect to the Registration Statement or the Prospectus or the Prospectus as
amended or supplemented, (iv) of any request by the Commission for any amendment
to the Registration Statement or any amendment or supplement to the Prospectus
or for additional information and (v) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. Chevy Chase will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(e) Chevy Chase will deliver to the Underwriters as many signed and as
many conformed copies of the Registration Statement (as originally filed) and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated by reference in the Prospectus),
each related preliminary prospectus, and so long as delivery of a Prospectus
relating to the Certificates is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case as soon as available
and in such quantities as the Underwriters may reasonably request. Chevy Chase
will also furnish to the Representative copies of any report on Form SR required
by Rule 463 under the Act.
(f) Chevy Chase will make generally available to holders of the
Certificates as soon as practicable, but in any event not later than the Avail-
ability Date (as defined below), earning statements of the Trust (which need not
be audited) complying with Section 11 (a) of the Act and the Rules and Regula-
tions (including Rule 158) and covering a period of at least twelve consecutive
months beginning after the Effective Date which will satisfy the provisions of
Section 11(a) of the Act. For the purposes of the preceding sentence, the
"Availability Date" means the 45th day after the end of the Trust's fourth
fiscal quarter following the fiscal quarter that includes the Effective Date,
except that, if such fourth fiscal quarter is the last quarter of the Trust's
fiscal year, "Availability Date" means the 90th day after the end of such fourth
fiscal quarter.
(g) Chevy Chase will endeavor, in cooperation with the Underwriters, to
qualify the Certificates for sale and the determination of their eligibility for
investment under the applicable
8
<PAGE>
securities laws of such states and other jurisdictions of the United States as
the Representative may designate, and will maintain or cause to be maintained
such qualifications in effect for as long as may be required for the
distribution of the Certificates. Chevy Chase will file or cause the filing of
such statements and reports as may be required by the laws of each jurisdiction
in which the Certificates have been qualified as above provided.
(h) Chevy Chase will not, directly or indirectly, without the
Underwriters' prior consent, publicly offer or sell or contract to sell or
attempt to offer, sell or dispose of any certificates or other similar securi-
ties representing interests in or secured by the Receivables for a period of 30
days following the commencement of the offering of the Certificates to the
public.
(i) For a period from the date of this agreement until the retirement of
the Certificates, Chevy Chase, as Servicer, will deliver to the Representative
and, upon request, to each of the other Underwriters, as soon as practicable,
copies of each certificate, report or notice and the annual statements of
compliance delivered by Chevy Chase, as Servicer, to the Trustee pursuant to
Section 4.10 of the Pooling Agreement, the annual statement of a firm of
independent public accountants furnished to the Trustee pursuant to Section 4.11
of the Pooling Agreement and such other information concerning the Receivables,
Chevy Chase (including in its capacities as the Seller and Servicer) or the
Certificates, as the Representative may from time to time reasonably request.
(j) On or before the Closing Date, Chevy Chase shall furnish or make
available to the Underwriters or its counsel such additional documents and
information regarding Chevy Chase (including in its capacities as the Seller and
Servicer) and its affairs as the Underwriters may from time to time reasonably
request, including any and all documentation reasonably requested in connection
with their due diligence efforts regarding information in the Prospectus and in
order to evidence the accuracy or completeness of any of the conditions con-
tained in this Agreement.
(k) So long as any Certificate is outstanding, Chevy Chase shall furnish
to the Representative by first-class mail as soon as practicable, all documents
(A) distributed, or caused to be distributed, by Chevy Chase to
Certificateholders, (B) filed, or caused to be filed, by Chevy Chase with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (C) any order of the Commission under the Exchange Act or
pursuant to a "no-action" letter from the staff of the Commission and (D) from
time to time, such other information in the possession of Chevy Chase concerning
the Trust as the Representative may reasonably request.
(l) Chevy Chase shall apply the net proceeds from the sale of the
Certificates in the manner set forth in the Prospectus.
(m) If, between the date hereof or, if earlier, the dates as of which
information is given in the Prospectus and the Closing Date, to the knowledge of
Chevy Chase there shall have been any material change, or any development
involving a prospective material change in or
9
<PAGE>
affecting the general affairs, management, financial position, shareholders'
equity or results of operations of Chevy Chase, Chevy Chase will give prompt
written notice thereof to the Underwriters.
(n) To the extent, if any, that any rating provided with respect to the
Certificates set forth in Section 6(j) hereof is conditional upon the furnishing
of documents reasonably available to Chevy Chase or the taking of any other
reasonable actions by Chevy Chase, Chevy Chase shall furnish such documents or
take any such other actions.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the Underwriters to purchase the Certificates pursuant to this Agreement are
subject to the accuracy on and as of the Closing Date of the representations and
warranties on the part of Chevy Chase herein contained, to the accuracy of the
statements of officers of Chevy Chase made pursuant hereto, to the performance
by Chevy Chase of all of its obligations hereunder and to the following
conditions at the Closing Date:
(a) The Representative shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time is prior to the execution and
delivery of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the Registration Statement to be filed shortly prior to the Effec-
tive Time), from Arthur Andersen LLP, in form and substance satisfactory to the
Underwriters and counsel for the Underwriters, confirming that they are indepen-
dent public accountants within the meaning of the Act and the applicable pub-
lished Rules and Regulations thereunder and stating in effect that (i) they have
performed certain specified procedures as a result of which they have determined
that certain information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical information derived
from the general accounting records of the Trust and Chevy Chase set forth in
the Registration Statement and the Prospectus), agrees with the accounting
records of the Trust and Chevy Chase, excluding any questions of legal interpre-
tation, and (ii) they have performed certain specified procedures with respect
to the computer programs used to select the Receivables and to generate informa-
tion with respect to the Receivables set forth in the Registration Statement and
the Prospectus.
For purposes of this subsection (a), if the Effective Time is subse-
quent to the execution and delivery of this Agreement, "Registration Statement"
shall mean the registration statement as proposed to be amended by the amendment
or post-effective amendment to be filed shortly prior to the Effective Time, and
"Prospectus" shall mean the prospectus included in such Registration Statement.
All financial statements included in material incorporated by reference into the
Prospectus shall be deemed included in the Registration Statement for purposes
of this subsection (a).
(b) If the Effective Time is not prior to the execution and delivery of
this Agreement, the Effective Time shall have occurred not later than 10:00
p.m., New York time, on the date of this Agreement or such later date as shall
have been consented to by the Representative. If the
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Effective Time is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5 (a) of this Agreement.
(c) The Registration Statement shall have been declared effective by the
Commission and no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Act or proceedings therefor initiated
or threatened by the Commission, any price-related information previously
omitted from the effective Registration Statement pursuant to Rule 430A under
the Act shall have been included in the Prospectus and transmitted to the
Commission for filing pursuant to Rule 424 under the Act within the prescribed
time period, and Chevy Chase shall have provided evidence satisfactory to the
Underwriters of such timely filing, or a post-effective amendment to the
Registration Statement providing such information shall have been promptly filed
with the Commission and declared effective in accordance with the requirements
of Rule 430A under the Act, and prior to the Closing Date, Chevy Chase shall
have provided evidence satisfactory to the Underwriters of such effectiveness
and there shall not have come to the attention of the Underwriters facts that
would cause the Underwriters to believe that the Prospectus, at the time it was
required to be delivered to a purchaser of the Certificates, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances existing
at such time, not misleading.
(d) The Underwriters shall have received the favorable opinion, dated the
Closing Date, of Shaw, Pittman, Potts & Trowbridge, counsel to Chevy Chase, or
other counsel to Chevy Chase, acceptable to the Underwriters and their counsel,
addressed to the Underwriters and in form and scope satisfactory to the Under-
writers counsel, to the effect that:
i) Chevy Chase has been duly chartered and is validly existing as
a federally chartered stock savings bank under the laws of the United States of
America and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus; Chevy Chase has full
corporate power and authority to execute, deliver, and perform its obligations
under this Agreement, the Pooling Agreement, the Indemnification Agreement and
the Insurance Agreement and to cause the Certificates to be issued and to
consummate the transactions contemplated hereby and thereby.
ii) Chevy Chase has duly authorized and executed this Agreement,
the Pooling Agreement and the Indemnification Agreement, and each such agreement
constitutes the valid, legal and binding obligation of Chevy Chase enforceable
against Chevy Chase in accordance with its terms.
iii) The execution, delivery and performance of this Agreement, the
Pooling Agreement and the Indemnification Agreement the transfer of the
Receivables to the Trust, the issuance and sale of the Certificates and
consummation of any other of the transactions contemplated herein or in the
Pooling Agreement do not conflict with or result in a violation of (a) any law
or regulation of the United States of America or the State of New York or
Maryland (b) the Charter or By-laws of Chevy Chase, (c) any order, writ,
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judgment or decree known to such counsel to which Chevy Chase is a party or is
subject or (d) result in any lien, charge or encumbrance upon any of the proper-
ties or assets of Chevy Chase.
iv) The Certificates have been duly authorized and, when executed
and authenticated in accordance with the terms of the Pooling Agreement and
delivered to and paid for by the Underwriters pursuant to this Agreement, will
be duly and validly issued and outstanding and will be entitled to the benefits
of the Pooling Agreement.
v) No consent, approval or authorization of, or registration,
declaration or filing with, any court or governmental agency or body of the
United States of America is required for the issuance of the Certificates and
the sale of the Certificates to the Underwriters or the consummation of the
other transactions contemplated by this Agreement, the Pooling Agreement or the
Indemnification Agreement, except for (x) the filing of a Uniform Commercial
Code financing statement in the State of Maryland with respect to the transfer
of the Receivables to the Trust, (y) such as have been obtained and made under
the Act and (z) such as may be required under state securities laws.
vi) The Registration Statement was declared effective under the
Act as of the date and time specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule 424 (b) specified
in such opinion on the date specified therein or was included in the
Registration Statement (as the case may be), and, to the best of the knowledge
of such counsel, no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been instituted or is pending or contemplated
under the Act, and the Registration Statement and the Prospectus, and each
amendment or supplement thereof, as of their respective effective or issue
dates, complies as to form in all material respects with the requirements of the
Act and the Rules and Regulations; such counsel have no reason to believe that
the Registration Statement or any amendment thereto, as of its Effective Date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Registration Statement as of the Closing
Date, or the Prospectus, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; it being under-
stood that such counsel need express no opinion as to the financial statements
or other financial data contained in the Registration Statement or the Prospec-
tus.
vii) The conditions to the use by Chevy Chase of a registration
statement on Form S-3 under the Act, as set forth in the General Instructions to
Form S-3, have been satisfied with respect to the Registration Statement and the
Prospectus. There are no contracts or documents of Chevy Chase which are
required to be filed as exhibits to the Registration Statement pursuant to the
Act or the Rules and Regulations thereunder which have not been so filed.
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viii) There are no actions, proceedings or investigations pending or
threatened before any court, administrative agency or other tribunal to which
Chevy Chase is a named party or to which its assets are subject (A) asserting
the invalidity of the Pooling Agreement, the Indemnification Agreement, this
Agreement or the Certificates, (B) seeking to prevent the issuance of the
Certificates or the consummation by Chevy Chase of any of is the transactions
contemplated by the Pooling Agreement, the Indemnification Agreement, or this
Agreement, (C) that might adversely affect the validity or enforceability of the
Pooling Agreement, the Indemnification Agreement, this Agreement or the
Certificates, or (D) seeking to adversely affect the federal income tax attrib-
utes of the Certificates as described in the Prospectus under the heading
"Certain Federal Income Tax Consequences."
ix) The Registration Statement at the time it became effective,
and any amendment thereto at the time such amendment became effective, complied
as to form in all material respects with the applicable requirements of the Act
and the Rules and Regulations.
x) The Pooling Agreement is not required to be qualified under
the Trust Indenture Act of 1939, as amended.
xi) The Trust is not required to be registered under the 1940 Act,
and immediately following the issuance and sale of the Certificates in the
manner contemplated by the Pooling Agreement and this Agreement, the Trust will
not be required to be so registered.
xii) The Certificates, this Agreement, the Pooling Agreement and
the Certificate Insurance Policy conform in all material respects to the
respective descriptions thereof in the Registration Statement and the Prospec-
tus.
xiii) The statements in the Prospectus under the heading "Certain
Legal Aspects of the Receivables," "SUMMARY OF TERMS -- Certain Legal Aspects of
the Receivables," "SUMMARY OF TERMS -- Certain Federal Tax Considerations,"
"Certain Federal Income Tax Consequences," "ERISA Considerations," and "SPECIAL
CONSIDERATIONS -- Certain Legal Aspects," to the extent that they constitute
matters of law or legal conclusions with respect thereto, have been prepared or
reviewed by such counsel and are correct in all material respects.
xiv) No filing or other action, except the filing of a Uniform
Commercial Code financing statement on Form UCC-1 with the Maryland State
Department of Assessments and Taxation naming Chevy Chase as "debtor" and the
Trustee as "secured party," is necessary to perfect the transfer of the
Receivables and proceeds (as defined in Section 9-306 of the Maryland Uniform
Commercial Code) thereof against the claims of creditors of, and transferees
from, Chevy Chase. Such security interest would be enforceable notwithstanding
the insolvency of Chevy Chase or a receivership or conservatorship of Chevy
Chase in which the Federal Deposit insurance Corporation ("FDIC") or the Resolu-
tion Trust Corporation ("RTC") is appointed a receiver or conservator for Chevy
Chase.
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xv) The Receivables constitute "chattel paper" as defined in
Section 9-105 of the Uniform Commercial Code as in effect in the State of
Maryland.
In addition, such counsel shall state that nothing has come to their
attention that would lead them to believe that the Registration Statement, at
the time it became effective, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or that the Prospectus, as of its
date and as of the Closing Date, contains an untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(e) The Underwriters shall have received the favorable opinion of counsel
to the Trustee, dated the Closing Date, addressed to the Underwriters and in
form and scope satisfactory to the Underwriters, counsel, to the effect that:
i) The Trustee has duly authorized, executed and delivered the
Pooling Agreement.
ii) The Trustee has been duly organized and is validly existing as
a national banking corporation in good standing under the laws of the United
States of America and has full power and authority to execute and deliver the
Pooling Agreement and to perform its obligations thereunder and each such
Agreement constitutes the valid, legal and binding obligation of the Trustee,
enforceable against the Trustee in accordance with its terms.
iii) The Certificates have been duly executed and countersigned by
the Trustee.
iv) The execution and delivery by the Trustee of the Pooling
Agreement and the performance by the Trustee of its duties thereunder do not
conflict with or result in a violation of (a) any law or regulation of the
United States of America or the State of Minnesota, (b) the charter or by-laws
of the Trustee, (c) any order, writ, judgment or decree or (d) any agreement,
instrument, order, writ, judgment or decree known to such counsel to which the
Trustee is a party or is subject.
v) No consent, approval or authorization of, or registration,
declaration or filing with, any court or governmental agency or body of the
United States of America or any state thereof is required for the execution,
delivery or performance by the Trustee of the Pooling Agreement.
(f) The Underwriters shall have received the favorable opinion or
opinions, dated the Closing Date, of the Underwriters' counsel, Shaw, Pittman,
Potts & Trowbridge, with respect to the issuance and sale of the Certificates,
the Registration Statement, this Agreement, the Prospectus and such other
related matters as the Underwriters may require.
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(g) The Underwriters shall have received an opinion, dated the Closing
Date, of Shaw, Pittman, Potts & Trowbridge, counsel to Chevy Chase, addressed
to, and satisfactory to, Standard & Poor's Corporation ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc. ("Fitch") and
the Underwriters' counsel, relating to the sale of the Receivables to the
Trustee, and such counsel to Chevy Chase shall have consented to reliance by the
Underwriters on such opinion as though such opinion had been addressed to the
Underwriters.
(h) Chevy Chase shall have furnished to the Underwriters a certificate
signed on behalf of Chevy Chase by any two of the chairman of the board, the
president, any vice chairman of the board, any executive vice president, any
senior vice president, any vice president, the treasurer, or the controller of
the Seller or the Servicer, as appropriate, dated the Closing Date, as to (i)
the accuracy of the representations and warranties of Chevy Chase herein and in
the Pooling Agreement at and as of the Closing Date, (ii) the performance by
Chevy Chase of all of its obligations hereunder to be performed at or prior to
the Closing Date and (iii) such other matters as the Underwriters may reasonably
request.
(i) The Trustee shall have furnished to the Underwriters a certificate of
the Trustee, signed by one or more duly authorized officers of the Trustee,
dated the Closing Date, as to the due acceptance of the Pooling Agreement by the
Trustee and the due execution and delivery of the Certificates by the Trustee
thereunder and such other matters as the Underwriters shall reasonably request.
(j) The Certificates shall have been rated "AAA" by S&P, ""Aaa" by
Moody's and "AAA" by Fitch, and such ratings shall not have been rescinded.
(k) The Underwriters shall have received from Arthur Andersen LLP, or
other independent certified public accountants acceptable to the Underwriters, a
letter, dated as of the date of the Closing Date, delivered at such time in form
satisfactory to the Underwriters.
(l) Prior to the Closing Date the Underwriters' counsel, Shaw, Pittman,
Potts & Trowbridge, shall have been furnished with such documents and opinions
as they may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Certificates as herein contemplated and related
proceedings or in order to evidence the accuracy and completeness of any of the
representations and warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by Chevy Chase in connection with
the issuance and sale of the Certificates as herein contemplated shall be
satisfactory in form and substance to the Underwriters and Shaw, Pittman, Potts
& Trowbridge.
(m) Since the respective dates as of which information is given in the
Prospectus, there shall not have been any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, shareholders, equity or results of operations of Chevy Chase or the
Certificate Insurer otherwise than as set forth in the Prospectus, the effect of
which is in the Underwriters, judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Certificates on the
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terms and in the manner contemplated in the Prospectus or which, in the judgment
of the Underwriters, materially impairs the investment quality of the
Certificates or the ability of the Servicer to service the Receivables.
(n) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, development or event involving a
prospective change, in the condition (financial or other), business, properties
or results of operations of Chevy Chase or its automobile loan business or the
Certificate Insurer which, in the judgment of the Underwriters, is material and
adverse and makes it impracticable or inadvisable to proceed with the completion
of the public offering or the sale of and payment for the Certificates, (ii) any
banking moratorium declared by Federal, New York, Minnesota or Maryland authori-
ties; or (iii) any downgrading in the rating of any securities of Chevy Chase or
the Certificate Insurer by any nationally recognized statistical rating organi-
zation (as defined for purposes of Rule 436 (g) under the Act) or any public
announcement that any such organization has under surveillance or review its
rating of any securities of Chevy Chase or the Certificate Insurer (other than
an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); or (iv) any suspension
or limitation of trading in securities generally on the New York Stock Exchange,
or any setting of minimum prices for trading on such exchange; or (v) any
outbreak or escalation of major hostilities in which the United States is
involved, any declaration of war by Congress or any other substantial national
or international calamity, emergency or change in financial markets if, in the
Representative's judgment, the effect of any such outbreak, escalation, declara-
tion, calamity, emergency or change makes it impractical or inadvisable to
proceed with completion of the sale of and payment for the Certificates.
(o) The Underwriters shall have received evidence satisfactory to the
Underwriters and its counsel that (i) on or before the Closing Date, UCC-1
financing statements have been filed in the offices of the Maryland State
Department of Assessments and Taxation, reflecting the interest of the Trust in
the Receivables and the proceeds thereof and (ii) the Trust will have a first
priority perfected security interest in the amounts on deposit from time to time
in the Reserve Account and the Yield Maintenance Account.
(p) Chevy Chase will provide or cause to be provided to the Representative
such conformed copies of such opinions, certificates, letters and documents
being provided pursuant hereto and such further information, certificates and
documents as the Representative may reasonably request. JP Morgan may in its
sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder.
(q) The Certificate Insurance Policy shall have been duly executed and
issued at or prior to the Closing Date and shall conform in all material
respects to the description thereof in the Prospectus.
(r) The Underwriters shall have received the favorable opinion, dated the
Closing Date, of counsel for the Certificate Insurer, in form and scope
satisfactory to your counsel, to the effect that:
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i) The Certificate Insurer is duly organized as a New York stock
insurance corporation and is validly existing under the laws of New York, and
has the full power and authority (corporate and other) to issue, and to take all
action required of it under, the Certificate Insurance Policy.
ii) The execution, delivery and performance by the Certificate
Insurer of the Certificate Insurance Policy and the Indemnification Agreement
dated as of June 1, 1996 (the "Indemnification Agreement") among the Certificate
Insurer, Chevy Chase and the Underwriters have been duly authorized by all
necessary corporate action on the part of the Certificate Insurer.
iii) The execution, delivery and performance by the Certificate
Insurer of the Certificate Insurance Policy, the Indemnification Agreement do
not require the consent or approval of, the giving of notice to, the regis-
tration with, or the taking of any other action in respect of any state or other
governmental agency or authority which has not previously been effected.
iv) The Certificate Insurance Policy and the Indemnification
Agreement have been duly authorized, executed and delivered by the Certificate
Insurer and constitute legal, valid and binding obligations of the Certificate
Insurer, enforceable against the Certificate Insurer in accordance with their
terms (subject, as to enforcement, to bankruptcy, reorganization, insolvency,
moratorium and other laws affecting creditors, rights generally and to general
equity principles).
v) The Certificate Insurance Policy is not required to be
registered under the Securities Act.
vi) The information set forth under the captions "The Certificate
Insurance Policy" and "The Certificate Insurer" in the Prospectus, insofar as
such statements constitute a description of the Certificate Insurance Policy,
accurately summarizes the Certificate Insurance Policy.
In rendering this opinion, such counsel may rely, as to matters of
fact, on certificates of responsible officers of the Certificate Insurer and
public officials. Such opinion may assume the due authorization, execution and
delivery of the instruments and documents referred to therein by the parties
thereto other than the Certificate Insurer.
The Certificate Insurer shall have furnished to you and Chevy Chase a
certificate of the Certificate Insurer, signed by one or more duly authorized
officers of the Certificate Insurer, dated the Closing Date, certifying (i) the
information relating to the Certificate Insurer in the Prospectus is true and
correct in all material respects as of the dates specified therein, (ii) there
has been no change in the financial condition of the Certificate Insurer since
March 31, 1996 which could have a material adverse effect on the Certificate
Insurer's ability to meet its
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obligations under the Certificate Insurance Policy and (iii) such other matters
as you may reasonably request.
(s) The Certificate Insurance Policy shall have been issued by the
Certificate Insurer pursuant to the Insurance Agreement.
If any condition specified in this Section 6 shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by the Underwriters by notice to Chevy Chase at any time at or prior to the
Closing Date, and such termination shall be without liability of any party to
any other party except as provided in Section 7.
7. PAYMENT OF EXPENSES. Chevy Chase agrees to pay all expenses incident
to the performance of its obligations under this Agreement, and will reimburse
the Underwriters (if and to the extent incurred by them) for any filing fees and
other expenses (including fees and disbursements of counsel), including without
limitation those related to (i) the filing of the Registration Statement and all
amendments thereto, (ii) the duplication and delivery to the Underwriters, in
such quantities as the Underwriters may reasonably request, of copies of this
Agreement, (iii) the preparation, issuance and delivery of the Certificates and
the determination of their eligibility for investment under the laws of such
jurisdictions as the Representative designates, (iv) 50% of the fees and dis-
bursements of Shaw, Pittman, Potts & Trowbridge, and the fees and disbursements
of Arthur Andersen LLP, accountants of Chevy Chase, (v) the qualification of the
Certificates under securities and Blue Sky laws and the determination of the
eligibility of the Certificates for investment in accordance with the provisions
of Section 5(g), including filing fees and disbursements and 50% of the fees of
Shaw, Pittman, Potts & Trowbridge, in connection therewith and in connection
with the preparation of any Blue Sky Survey, (vi) the printing and delivery to
the Underwriters, in such quantities as the Underwriters may reasonably request,
hereinabove stated, of copies of the Registration Statement and Prospectus and
all amendments and supplements thereto, and of any Blue Sky Survey, (vii) for
the filing fee of the National Association of Securities Dealers, Inc., (viii)
the duplication and delivery to the Underwriters in such quantities as the
Underwriters may reasonably request, of copies of the Pooling Agreement, (ix)
the fees charged by nationally recognized statistical rating agencies for rating
the Certificates, (x) the fees and expenses of the Trustee and its counsel, and
(xi) the fees and expenses of the Certificate Insurer and its counsel.
8. INDEMNIFICATION. Chevy Chase agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls each Underwriter within
the meaning of the Act or the Exchange Act, as follows:
(a) Chevy Chase will indemnify and hold harmless the Underwriters against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriters may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are
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based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading (in the case of the Prospectus or any amendment or supplement there-
to, in the light of the circumstances under which they were made) and will
reimburse the Underwriters for any legal or other expenses reasonably incurred
by such Underwriters in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred; provid-
ed, however, that Chevy Chase will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to Chevy Chase by any Underwriters through the Representa-
tive specifically for use therein, it being understood and agreed that the only
such information furnished by any Underwriters consists of the information
described as such in subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless Chevy Chase against any losses, claims, damages or liabilities to which
Chevy Chase may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to Chevy Chase by such Underwriter through the
Representative specifically for use therein, and will reimburse any legal or
other expenses reasonably incurred by Chevy Chase in connection with investigat-
ing or defending any such loss, claim, damage, liability or action as such
expenses are incurred, it being understood and agreed that the only such infor-
mation furnished by any Underwriters consists of the following information in
the Prospectus furnished on behalf of the Underwriters: the last paragraph at
the bottom of the cover page concerning the terms of the offering by the Under-
writers, the legend concerning overallotments and stabilizing on the inside
front cover page and the concession and reallowance figures appearing in the
third paragraph under the caption "Underwriting."
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the
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indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such indemni-
fied party from all liability on any claims that are the subject matter of such
action.
9. CONTRIBUTION. (a) If the indemnification provided for in Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) of Section 8 above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in such subsection (a)
or (b) (i) in such proportion as is appropriate to reflect the relative benefits
received by Chevy Chase on the one hand and each of the Underwriters on the
other from the offering of the Certificates or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of Chevy Chase on the one hand and each of the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by Chevy
Chase on the one hand and the Underwriters on the other shall be deemed to be in
the same proportion as the total net proceeds from the offering (before deduct-
ing expenses) received by Chevy Chase bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by Chevy Chase or the Underwrit-
ers and the parties, relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The amount
paid by an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this Section 9 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this Section 9. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to contribu-
tion from any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations in this Section 9 to contribute are several in
proportion to their respective underwriting obligations and not joint.
(b) The obligations of Chevy Chase under this Section 9 shall be in
addition to any liability which Chevy Chase may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the Underwrit-
ers under this Section 9 shall be in addition to any liability which the respec-
tive Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of Chevy Chase, to each officer of Chevy Chase who
has signed the
20
<PAGE>
Registration Statement and to each person, if any, who controls Chevy Chase
within the meaning of the Act.
Each Underwriter, with respect to the Certificates, agrees that it
will not prepare or distribute to any proposed purchaser of any Certificates any
Derived Information (as such term is hereinafter defined) , unless it shall have
provided to the Servicer a copy of such Derived Information a sufficient time
prior to its proposed distribution to permit the Servicer to review and comment
upon such Derived Information, and such Underwriters shall have obtained the
prior written consent of the Servicer thereto following its review. In addi-
tion, such Underwriters agree to provide the Servicer, no later than the date on
which the Prospectus is required to be filed pursuant to Rule 424, with a
definitive copy of its Derived Information with respect to such Certificates
provided by the Underwriters for filing with the Commission on Form 8-K.
The Underwriters agree, assuming all Companies-provided Information
(as such term is hereinafter defined) provided by Chevy Chase is accurate and
complete in all material respects, to indemnify and hold harmless Chevy Chase,
each of Chevy Chase's officers and directors and each person who controls Chevy
Chase within the meaning of the Act against any and all losses, claims, damages
or liabilities, joint or several, to which they may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement of a
material fact contained in the Derived Information provided by such Underwrit-
ers, or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each such indemnified party for
any legal or other expenses reasonably incurred by him, her or it in connection
with investigating or defending or preparing to defend any such loss, claim,
damage, liability or action as such expenses are incurred. The obligations of
the Underwriters under this Section 9 shall be in addition to any liability
which the Underwriters may otherwise have.
For purposes of this Section 9, the term "Derived Information" means
such portion, if any, of the information delivered to Chevy Chase for filing
with the Commission on Form 8-K as:
i) is not contained in the Prospectus without taking into account
information incorporated therein by reference;
ii) does not constitute Companies-Provided Information; and
iii) is not information provided by the Certificate Insurer.
"Companies-Provided Information" means any computer tape furnished to the
Underwriters by Chevy Chase concerning the Receivables assigned to the Trust.
21
<PAGE>
Notwithstanding the provisions of Sections 8 and 9, the Underwriters
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Certificates underwritten by the Underwriters and
distributed to the public were offered to the public exceeds the amount of any
damages which the Underwriters have otherwise been required to pay in respect of
such losses, liabilities, claims, damages and expenses. For purposes of this
Section 9, each person, if any, who controls the Underwriters within the meaning
of the Act or the Exchange Act shall have the same rights to contribution as
each of the Underwriters and each director of Chevy Chase, each officer of Chevy
Chase who signed the Registration Statement, and each person, if any, who
controls Chevy Chase within the meaning of the Act or the Exchange Act shall
have the same rights to contribution as Chevy Chase.
10. DEFAULT OF UNDERWRITERS. If any Underwriter defaults in its
obligations to purchase Certificates hereunder on the Closing Date and the
aggregate principal amount of Certificates that such defaulting Underwriter or
Underwriters have agreed but failed to purchase does not exceed 10% of the total
principal amount of Certificates that the Underwriters are obligated to purchase
on such Closing Date, the Representative may make arrangements satisfactory to
Chevy Chase for the purchase of such Certificates by other persons, including
any of the Underwriters, but if no such arrangements are made by such Closing
Date, the nondefaulting Underwriters shall be obligated severally, in proportion
to their respective commitments hereunder, to purchase the Certificates that
such defaulting Underwriters agreed but failed to purchase on such Closing Date.
If any Underwriters so default and the aggregate principal amount of
Certificates with respect to which such default or defaults occur exceeds 10% of
the total principal amount of Certificates that the Underwriters are obligated
to purchase on such Closing Date and arrangements satisfactory to the
Representative and Chevy Chase for the purchase of such Certificates by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
Chevy Chase, except as provided in Section 11. As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section 10. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
11. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of
Chevy Chase or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, Chevy Chase or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Certificates. If this Agreement is terminated or if for any
reason the purchase of the Certificates by the Underwriters is not consummated,
Chevy Chase shall remain responsible for the expenses to be paid or reimbursed
by it pursuant to Section 7 and the respective obligations of Chevy Chase and
the Underwriters pursuant to Section 8 and 9 shall remain in effect, and if any
Certificates have been purchased hereunder the representations and warranties in
Section 2 and all obligations under Section 5 and 6 shall also remain in effect.
If the purchase of the Certificates by the Underwriters is not consummated for
any reason other than solely because of the termination of this Agreement
pursuant to Section 10 or the occurrence of any event specified in clause (ii),
(iv) or (v) of Section
22
<PAGE>
6(n), Chevy Chase will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of Shaw, Pittman, Potts & Trowbridge, Underwr-
iters' counsel) reasonably incurred by them in connection with the offering of
the Certificates.
12. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunications Notices to JP Morgan shall be directed
to the address set forth on the first page hereof, or sent by facsimile machine
which produces an electronic confirmation of receipt to 212/648-5909, attention:
Syndicate Desk. Notices to Chevy Chase shall be directed to Chevy Chase Bank,
F.S.B., 8401 Connecticut Avenue, Chevy Chase, Maryland 20815, or sent by facsim-
ile machine which produces an electronic confirmation of receipt to 301/986-740-
1, attention: Stephen R. Halpin, Jr.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the Underwriters and Chevy Chase, and their respective successors. Nothing
expressed or mentioned in this Agreement is intended nor shall it be construed
to give any person, firm or corporation, other than the parties hereto or
thereto and their respective successors and the controlling persons and officers
and directors referred to in Sections 8 and 9 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or with
respect to this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties and their respective successors and such
controlling persons and officers and directors and their heirs and legal repre-
sentatives (to the extent of their rights as specified herein and therein) and
except as provided above for the benefit of no other person, firm or corpora-
tion. No purchaser of Certificates from the Underwriters shall be deemed to be
a successor by reason merely of such purchase.
14. REPRESENTATIONS OF UNDERWRITERS. The Representative will act for the
several Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representative will
be binding upon all the Underwriters.
15. GOVERNING LAW AND TIME; CONSENT TO JURISDICTION. THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED IN
ACCORDANCE WITH SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
CHEVY CHASE HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE FEDERAL AND
STATE COURTS IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN ANY SUIT OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
16. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but together they shall constitute but
one instrument.
23
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument along with all counterparts will become a binding agreement between
you and Chevy Chase in accordance with its terms.
Very truly yours,
CHEVY CHASE BANK, F.S.B.
By:_________________________________
Name: Mark A. Holles
Title: Vice President
CONFIRMED AND ACCEPTED, as of
the date first above written:
J.P. MORGAN SECURITIES INC.,
acting on behalf of itself
and as the Representative of
the Underwriters.
By: ________________________________
Name: ______________
Title: ______________
24
<PAGE>
Schedule 1
Underwriting
Certificates
--------------------------------
Proceeds to
Purchase Chevy Chase
Price Principal (includes accrued
Underwriters Percentage Amount interest)
------------ ---------- ------ ---------
J.P. Morgan Securities Inc. ___________% $___________ $___________
CS First Boston Corporation ___________% $___________ $___________
Smith Barney Inc. ___________% $___________ $___________
25
<PAGE>
- --------------------------------------------------------------------------------
CHEVY CHASE BANK, F.S.B.,
Seller and Servicer
and
FIRST BANK NATIONAL ASSOCIATION,
Trustee
POOLING AND SERVICING AGREEMENT,
Dated as of June 1, 1996
$227,697,669.92
Chevy Chase Auto Receivables Trust 1996-1
___% Auto Receivables Backed Certificates
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Usage of Terms. . . . . . . . . . . . . . . . . . . . . . . . . 15
1.3 Cut-off Date and Record Date. . . . . . . . . . . . . . . . . . . 16
1.4 Section References. . . . . . . . . . . . . . . . . . . . . . . . 16
1.5 Interest Calculations. . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE II CREATION OF THE TRUST; CONVEYANCE OF RECEIVABLES. . . . . . . . . 16
2.1 Creation of Trust. . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Conveyance of Receivables. . . . . . . . . . . . . . . . . . . . 16
2.3 Acceptance by Trustee. . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE III THE RECEIVABLES. . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 Representations and Warranties of Seller. . . . . . . . . . . . . 18
3.2 Repurchase Upon Breach. . . . . . . . . . . . . . . . . . . . . . 22
3.3 Custody of Receivable Files. . . . . . . . . . . . . . . . . . . 22
3.4 Duties of Servicer and Sub-Servicer as Custodian. . . . . . . . . 23
3.5 Instructions; Authority to Act. . . . . . . . . . . . . . . . . . 24
3.6 Effective Period and Termination. . . . . . . . . . . . . . . . . 24
ARTICLE IV ADMINISTRATION AND SERVICING OF RECEIVABLES . . . . . . . . . . . 24
4.1 Duties of Servicer. . . . . . . . . . . . . . . . . . . . . . . . 24
4.2 Collection of Receivable Payments. . . . . . . . . . . . . . . . 25
4.3 Realization Upon Receivables. . . . . . . . . . . . . . . . . . . 25
4.4 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.5 Maintenance of Security Interests in Financed Vehicles. . . . . . 26
4.6 Covenants of Servicer. . . . . . . . . . . . . . . . . . . . . . 26
4.7 Purchase of Receivables Upon Breach. . . . . . . . . . . . . . . 29
4.8 Servicing Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.9 Servicer's Certificate. . . . . . . . . . . . . . . . . . . . . . 30
4.10 Annual Statement as to Compliance; Notice of Default. . . . . . . 30
4.11 Annual Independent Certified Public Accountants' Report. . . . . 30
4.12 Access to Certain Documentation and Information Regarding
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
i
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Page
----
4.13 Servicer Expenses. . . . . . . . . . . . . . . . . . . . . . . . 31
4.14 Reports to Certificateholders. . . . . . . . . . . . . . . . . . 31
ARTICLE V DISTRIBUTIONS; STATEMENTS TO CERTIFICATEHOLDERS. . . . . . . . . . 32
5.1 Establishment of Accounts. . . . . . . . . . . . . . . . . . . . . 32
5.2 Collections. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.3 Purchase Amounts. . . . . . . . . . . . . . . . . . . . . . . . . 34
5.4 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.5 Certificate Insurance Policy. . . . . . . . . . . . . . . . . . . 36
5.6 Reserve Account and Yield Maintenance Account. . . . . . . . . . . 38
5.7 Statements to Certificateholders. . . . . . . . . . . . . . . . . 39
ARTICLE VI THE CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . 40
6.1 The Certificates. . . . . . . . . . . . . . . . . . . . . . . . . 40
6.2 Authentication of Certificates. . . . . . . . . . . . . . . . . . 41
6.3 Registration of Transfer and Exchange of Certificates. . . . . . . 41
6.4 Mutilated, Destroyed, Lost, or Stolen Certificates. . . . . . . . 42
6.5 Persons Deemed Owners. . . . . . . . . . . . . . . . . . . . . . 42
6.6 Access to List of Certificateholders' Names and Addresses. . . . 42
6.7 Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . 43
6.8 Book-Entry Certificates. . . . . . . . . . . . . . . . . . . . . 43
6.9 Notices to Clearing Agency. . . . . . . . . . . . . . . . . . . . 44
6.10 Definitive Certificates. . . . . . . . . . . . . . . . . . . . . 44
ARTICLE VII THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.1 Representations of Seller. . . . . . . . . . . . . . . . . . . . . 45
7.2 Liability of Seller. . . . . . . . . . . . . . . . . . . . . . . 46
7.3 Merger or Consolidation of, or Assumption of the Obligations of the
Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.4 Limitation on Liability of Certain Persons of Seller. . . . . . . 47
ARTICLE VIII THE SERVICER. . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.1 Representations of Servicer. . . . . . . . . . . . . . . . . . . 48
8.2 Liabilities of Servicer, Indemnities. . . . . . . . . . . . . . . 49
8.3 Merger or Consolidation of, or Assumption of the Obligations of
the Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.4 Limitation on Liability of Certain Persons of Servicer. . . . . . 51
ii
<PAGE>
Page
----
8.5 Servicer Not to Resign. . . . . . . . . . . . . . . . . . . . . . 52
8.6 Delegation of Duties. . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE IX DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
9.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 52
9.2 Appointment of Successor. . . . . . . . . . . . . . . . . . . . . 54
9.3 Notification to Certificateholders. . . . . . . . . . . . . . . . 55
9.4 Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . . 55
9.5 Effect of Event of Default on Sub-Servicer. . . . . . . . . . . . 55
ARTICLE X THE TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.1 Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . . . 55
10.2 Trustee's Certificate. . . . . . . . . . . . . . . . . . . . . . 57
10.3 Trustee's Assignment of Purchased Receivables. . . . . . . . . . 58
10.4 Certain Matters Affecting the Trustee. . . . . . . . . . . . . . 58
10.5 Trustee Not Liable for Certificates or Receivables. . . . . . . 59
10.6 Trustee May Own Certificates. . . . . . . . . . . . . . . . . . 60
10.7 Trustee's Fees. . . . . . . . . . . . . . . . . . . . . . . . . 60
10.8 Eligibility Requirements for Trustee. . . . . . . . . . . . . . 60
10.9 Resignation or Removal of Trustee. . . . . . . . . . . . . . . . 61
10.10 Successor Trustee. . . . . . . . . . . . . . . . . . . . . . . 61
10.11 Merger or Consolidation of Trustee. . . . . . . . . . . . . . . 62
10.12 Appointment of Co-Trustee or Separate Trustee. . . . . . . . . . 62
10.13 Representations and Warranties of Trustee. . . . . . . . . . . 64
10.14 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE XI TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
11.1 Termination of the Trust. . . . . . . . . . . . . . . . . . . . . 65
11.2 Optional Purchase of All Receivables. . . . . . . . . . . . . . 66
ARTICLE XII MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . 66
12.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
12.2 Protection of Title to Trust. . . . . . . . . . . . . . . . . . . 67
12.3 Limitation on Rights of Certificateholders. . . . . . . . . . . 69
12.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 70
12.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
12.6 Severability of Provisions. . . . . . . . . . . . . . . . . . . 70
iii
<PAGE>
Page
----
12.7 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . 70
12.8 Certificates Nonassessable and Fully Paid. . . . . . . . . . . . 71
12.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 71
12.10 Benefits of Agreement. . . . . . . . . . . . . . . . . . . . . 71
12.11 Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . . . 72
Exhibit A Schedule of Receivables
Exhibit B Form of Certificate
Exhibit C Form of Trustee's Certificate (assignment to Seller)
Exhibit D Form of Trustee's Certificate (assignment to Servicer)
Exhibit E Form of Servicer's Certificate
Exhibit F List of Designated Loans
iv
<PAGE>
This POOLING AND SERVICING AGREEMENT (this "Agreement" or this "Pooling and
Servicing Agreement") , dated as of June 1, 1996, is made with respect to the
formation of the Chevy Chase Auto Receivables Trust 1996-1, between CHEVY CHASE
BANK, F.S.B., a federally chartered savings bank, as seller and servicer (the
"Seller" or the "Servicer" in its respective capacities as such), and First Bank
National Association, as trustee (the "Trustee").
WITNESSETH THAT: In consideration of the premises and of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS.
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
"ACCOUNT" means any of the Collection Account, the Certificate
Account, the Yield Maintenance Account and the Reserve Account.
"ADDITIONAL FEES" means any late fees, prepayment charges,
extension fees or other administrative fees or similar charges allowed by
applicable law with respect to the Receivables and collected by the Servicer.
"AMOUNT FINANCED", with respect to a Receivable, means the amount
advanced under the Receivable toward the purchase price of the Financed Vehicle
and any related costs, except with respect to Receivables originated through
applications submitted by Obligors directly to the Seller, exclusive of the
amount allocable to the premium of credit life, disability or hospitalization
insurance covering the Financed Vehicle or the Obligor.
"ANNUAL PERCENTAGE RATE" or "APR" of a Receivable means the
annual interest rate stated in the Receivable.
"APR": see "Annual Percentage Rate."
"AVAILABLE DISTRIBUTION AMOUNT" means, with respect to any
Distribution Date, the sum of the amounts described in clauses (w), (x) and (y)
of Section 5.4(a) on such Distribution Date.
"AVAILABLE FUNDS" means the amount defined as such in Section
5.2(c). The term "Available Funds" does not include Insured Payments and does
not include any amounts that
<PAGE>
cannot be distributed to the Certificateholders by the Trustee as a result of
proceedings under the United States Bankruptcy Code.
"BALLOON PAYMENT" means, with respect to a Balloon Receivable,
the payment to be made by the Obligor on the stated maturity date of such
Balloon Receivable.
"BALLOON RECEIVABLE" means any Receivable that on the date of
origination provided for scheduled monthly payments in level amounts
substantially lower than the amount of the final scheduled payment.
"BOOK-ENTRY CERTIFICATES" means beneficial interests in the
Definitive Certificate described in Section 6.8, the ownership and transfers of
which shall be made through book entries by a Clearing Agency as described in
Section 6.8.
"BUSINESS DAY" means, unless otherwise specified in this
Agreement, any day other than a Saturday, a Sunday, or a day on which banking
institutions in New York, New York, St. Paul, Minnesota or Chevy Chase, Maryland
shall be authorized or obligated by law, executive order, or governmental decree
to be closed.
"CERTIFICATE" means a certificate executed on behalf of the
Trustee and authenticated by the Trustee substantially in the form attached as
Exhibit B.
"CERTIFICATEHOLDER" or "HOLDER" means the Person in whose name
the respective Certificate shall be registered in the Certificate Register,
except that, solely for the purposes of giving any consent, waiver, request, or
demand pursuant to this Agreement, the interest evidenced by any Certificate
registered in the name of the Seller or the Servicer, or any Person controlling,
controlled by, or under common control with the Seller or the Servicer, shall
not be taken into account in determining whether the requisite percentage
necessary to effect any such consent, waiver, request, or demand shall have been
obtained unless all of the Certificates outstanding are registered in the name
of the Seller, the Servicer and any such Persons.
"CERTIFICATE ACCOUNT" means the account designated as such,
established and maintained pursuant to Section 5.1.
"CERTIFICATE FACTOR" means, at any time, a seven digit decimal
number equal to the current Certificate Principal Balance divided by the Initial
Certificate Principal Balance.
"CERTIFICATE INSURANCE POLICY" means the certificate guaranty
insurance policy number _____, issued by the Certificate Insurer to the Trustee
for the benefit of the Certificateholders.
"CERTIFICATE INSURER" means MBIA Insurance Corporation, a New
York stock insurance corporation, and any successor thereto.
2
<PAGE>
"CERTIFICATE OWNER" means, with respect to a Book-Entry
Certificate, the Person who is the owner of such Book-Entry Certificate, as
reflected on the books of the Clearing Agency, or on the books of a direct or
indirect Clearing Agency Participant.
"CERTIFICATE PRINCIPAL BALANCE" means, at any time, the Initial
Certificate Principal Balance minus all distributions of Monthly Principal made
up to such time plus all amounts referred to in Section 5.4(c) unless paid
pursuant to the Certificate Insurance Policy.
"CERTIFICATE REGISTER" and "CERTIFICATE REGISTRAR" mean the
register maintained and the registrar appointed pursuant to Section 6.3.
"CLAIM DATE" shall have the meaning specified in Section 5.5(b).
"CLEARING AGENCY" means an organization registered as a "clearing
agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. The initial Clearing Agency shall be The Depository Trust Company.
"CLEARING AGENCY PARTICIPANT" means a broker, dealer, bank, other
financial institution or other person for whom from time to time a Clearing
Agency effects book-entry transfers of securities deposited with the Clearing
Agency.
"CLOSING DATE" means June ____, 1996.
"CODE" means the Internal Revenue Code of 1986, as it may be
amended from time to time, or any successor statute thereto, and applicable
temporary or final regulations of the U.S. Department of the Treasury
promulgated thereunder.
"COLLATERAL INSURANCE" shall have the meaning specified in
Section 4.4(b).
"COLLECTION ACCOUNT" means the account designated as such,
established and maintained pursuant to Section 5.1.
"COLLECTION PERIOD" means (i) initially, the period from and
including the Cut-off Date through and including the last day of the calendar
month in which the Cut-off Date occurs and (ii) thereafter, each calendar month
until the Trust shall terminate pursuant to Article XI.
"CORPORATE TRUST OFFICE" at the date hereof, is located at
180 East 5th Street, St. Paul, Minnesota, 55101, Attention: Structured Finance;
the telecopy number for the Corporate Trust Office on the date of the execution
of this Agreement is (___) _________.
"CUT-OFF DATE" means June 1, 1996.
3
<PAGE>
"DEALER" means the seller of a Financed Vehicle who arranged for
a sales contract or loan from a Lender to the purchaser of a Financed Vehicle
under an existing agreement with such Lender.
"DEFAULTED RECEIVABLE", with respect to a Distribution Date,
means a Receivable (other than a Purchased Receivable) as to which the
earlier of the following has occured (i) a scheduled payment is 180 days past
due as of the end of the most recently completed Collection Period or (ii)
the Servicer has determined in accordance with its customary servicing
practices, during the Collection Period preceding such Distribution Date,
that eventual payment in full of the Amount Financed is unlikely.
"DEFICIENCY AMOUNT" shall have the meaning specified in
Section 5.5(b).
"DEFINITIVE CERTIFICATES" shall have the meaning specified in
Section 6.8.
"DELINQUENCY PERCENTAGE" means, with respect to any Distribution
Date, the fraction, expressed as a percentage, equal to (x) the aggregate
principal balances of all Receivables 30 or more days delinquent (including any
Receivables relating to repossessed Financed Vehicles held in the Servicer's
inventory) as of the last day of the related Collection Period divided by (y)
the Pool Balance as of such date.
"DELIVERY" when used with respect to any Eligible Investments
means:
(a) with respect to bankers' acceptances, commercial paper,
negotiable certificates of deposit and other obligations that
constitute "instruments" within the meaning of Section 9-105(1)(i) of
the UCC and are susceptible of physical delivery, transfer thereof by
physical delivery to the Trustee endorsed to, or registered in the
name of, the Trustee or its nominee or endorsed in blank, and, with
respect to a certificated security (as defined in Section 8-102 of the
UCC) transfer thereof (i) by delivery of such certificated security to
the Trustee or by delivery of such certificated security to a
financial intermediary endorsed to, or registered in the name of, the
Trustee or its nominee or endorsed in blank to a financial
intermediary (as defined in Section 8-313 of the UCC) and the making
by such financial intermediary of entries on its books and records
identifying such certificated securities as belonging to the Trustee
and the sending by such financial intermediary of a confirmation of
the purchase of such certificated security by the Trustee, or (ii) by
delivery thereof to a "clearing corporation" (as defined in Section 8-
102 (3) of the UCC) and the making by such clearing corporation of
appropriate entries on its books reducing the appropriate securities
account of the transferor and increasing the appropriate securities
account of a financial intermediary by the amount of such certificated
security, the identification by the clearing corporation of the
certificated securities for the sole and exclusive account of the
financial intermediary, the maintenance of such certificated
securities by such clearing corporation or a "custodian bank" (as
defined in Section 8-102(4) of the UCC) or the nominee of either
subject to the clearing corporation's exclusive control, the sending
of a confirmation by the financial intermediary of the purchase by
the Trustee of such securities and the making by such financial
intermediary
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of entries on its books and records identifying such certificated
securities as belonging to the Trustee (all of the foregoing,
"Physical Property"), and such additional or alternative procedures
as may hereafter become appropriate to effect the complete transfer
of ownership of or a security interest in any such Eligible Investment
to the Trustee, consistent with changes in applicable law or
regulations or the interpretation thereof;
(b) with respect to any security issued by the U.S. Treasury,
the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association that is a book-entry security held through the
Federal Reserve System pursuant to federal book-entry regulations, the
following procedures, all in accordance with applicable law, including
applicable federal regulations and Articles 8 and 9 of the UCC: book-
entry registration of such Eligible Investment to an appropriate book-
entry account maintained with a Federal Reserve Bank by a financial
intermediary which is also a "depositary" pursuant to applicable
federal regulations and issuance by such financial intermediary of a
deposit advice or other written confirmation of such book-entry
registration to the Trustee of the purchase by the Trustee of such
book-entry securities; the making by such financial intermediary of
entries in its books and records identifying such book-entry security
held through the Federal Reserve System pursuant to federal book-entry
regulations as belonging to the Trustee and indicating that such
financial intermediary holds such Eligible Investment solely as agent
for the Trustee; and such additional or alternative procedures as may
hereafter become appropriate to effect complete transfer of ownership
of or a security interest in any such Eligible Investment to the
Trustee, consistent with changes in applicable law or regulations or
the interpretation thereof; and
(c) with respect to any Eligible Investment that is an
uncertificated security under Article 8 of the UCC and that is not
governed by clause (b) above, registration on the books and records of
the issuer thereof in the name of the financial intermediary, the
sending of a confirmation by the financial intermediary of the
purchase by the Trustee or its nominee of such uncertificated
security, and the making by such financial intermediary of entries on
its books and records identifying such uncertificated certificates as
belonging to the Trustee.
"DEPOSIT DATE" means, with respect to any Distribution Date, the
Business Day immediately preceding such Distribution Date.
"DESIGNATED LOANS" means any Receivable with an APR below the
Required Rate, as listed on Exhibit F.
"DESIGNATED LOAN REQUIRED AMOUNT" means, with respect to any
Distribution Date, and with respect to each Designated Loan held by the Trust as
of the opening of business on the first day of the Collection Period in which
such Distribution Date occurs, the sum, for such Collection Period and each
future Collection Period (assuming that such Designated Loan amortizes in
accordance with its terms) of the products of (x) one-twelfth, (y) such
Designated Loan's principal balance as of the opening of business on the first
day of such Collection Period
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and all future Collection Periods, assuming that such Designated Loan amortizes
according to its terms and (z) the excess of (i) the Required Rate over
(ii) such Designated Loan's APR.
"DETERMINATION DATE" means the earlier of the eighth Business Day
or the eleventh calendar day of the month (or, if such eleventh calendar day is
not a Business Day, the Business Day preceding the eleventh calendar day of the
month).
"DISTRIBUTION DATE", with respect to each Collection Period,
means the 15th day of the following month, or if the 15th day shall not be a
Business Day, the next following Business Day, commencing July 15, 1996.
"ELIGIBLE ACCOUNT" means either (a) a segregated account with an
Eligible Bank or (b) a segregated trust account with the corporate trust
department of a depository institution with corporate trust powers organized
under the laws of the United States of America or any state thereof or the
District of Columbia (or any United States branch of a foreign bank) and whose
deposits are insured by the FDIC, provided that such institution must have a net
worth in excess of $50,000,000 and must have a rating of Baa3 or higher from
Moody's and a rating of BBB- or higher from Standard & Poor's with respect to
long-term deposit obligations.
"ELIGIBLE BANK" shall mean a depository institution organized
under the laws of the United States or any one of the states thereof, including
the District of Columbia (or any United States branch or agency of a foreign
bank), which is subject to supervision and examination by federal or state
banking authorities, the deposits of which are insured by the Federal Deposit
Insurance Corporation ("FDIC") and which at all times (a) has a net worth in
excess of $50,000,000 and (b) has either (x) a long-term unsecured debt rating
of at least A2 by Moody's and AA by Standard & Poor's or (y) a short-term
certificate of deposit rating of P-1 by Moody's and A-1+ by Standard & Poor's.
"ELIGIBLE INVESTMENT" means any of the following:
(i) Direct obligations of the United States of America and
securities fully and unconditionally guaranteed as to the timely
payment of principal and interest by the United States of America,
provided, that the full faith and credit of the United States of
America must be pledged to any such direct obligation or guarantee
("Direct Obligations");
(ii) Direct Obligations and fully guaranteed certificates of
beneficial interest of the Export-Import Bank of the United States;
consolidated debt obligations and letter of credit-backed issues of
the Federal Home Loan Banks; participation certificates and senior
debt obligations of the Federal Home Loan Mortgage Corporation
("FHLMCs"); debentures of the Federal Housing Administration;
mortgage-backed securities (except stripped mortgage securities which
are valued greater than par on the portion of unpaid principal) and
senior debt obligations of the Federal National Mortgage Association
("FNMAs") ; participation certificates of the General Services
Administration; guaranteed mortgage backed securities and guaranteed
participation certificates of the Government National Mortgage
Association ("GNMAs"); guaranteed participation certificates and
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guaranteed pool certificates of the Small Business Administration;
debt obligations and letter of credit-backed issues of the Student
Loan Marketing Association; local authority bonds of the U.S.
Department of Housing & Urban Development; guaranteed Title XI
financings of the U.S. Maritime Administration; guaranteed transit
bonds of the Washington Metropolitan Area Transit Authority; and
Resolution Funding Corporation securities; all of the foregoing rated,
at the time of purchase, "P-1" or "A2" by Moody's.
(iii) Direct obligations of any state of the United States of
America or any subdivision or agency thereof whose unsecured,
uninsured and unguaranteed general obligation debt is rated, at the
time of purchase "A2" or better by Moody' s and "A" or better by
Standard & Poor's, or any obligation fully and unconditionally
guaranteed by any state, subdivision or agency whose unsecured,
uninsured and unguaranteed general obligation debt is rated, at the
time of purchase, "A2" or better by Moody's and "A" or better by
Standard & Poor's;
(iv) Commercial paper (having original maturities of not more
than 270 days) rated, at the time of purchase, "P-1" by Moody's and
"A-1" or better by Standard & Poor's;
(v) Federal funds, unsecured certificates of deposit, time
deposits or bankers acceptances (in each case having maturities of not
more than 365 days) of any domestic bank including a branch office of
a foreign bank which branch office is located in the United States,
provided legal opinions are received to the effect that full and
timely payment of such deposit or similar obligation is enforceable
against the principal office or any branch of such bank, which, at the
time of purchase, has a short-term "Bank Deposit" rating of "P-1" by
Moody's and a "Short-Term CD" rating of "A-1" or better by Standard &
Poor's and further provided that the bank is subject to the
supervision and examination of federal and state banking authorities.
(vi) Deposits of any bank or savings and loan association which
has combined capital, surplus and undivided profits of not less than
$3 million, provided such deposits are continuously and fully insured
by the Bank Insurance Fund or the Savings Association Insurance Fund
of the FDIC;
(vii) Investments in money-market funds rated "AAAm" or "AAAm-G"
by Standard & Poor's and "Aaa" by Moody's;
(viii) Repurchase agreements collateralized by Direct
Obligations, GNMAs, FNMAs or FHLMCs, as defined above, with any
registered broker/dealer subject to the Securities Investors'
Protection Corporation jurisdiction or any commercial bank insured by
the FDIC, if such broker/dealer or bank has an uninsured, unsecured
and unguaranteed obligation rated "P-1" or "A2" or better by Moody's,
and "A-1" or "A-" or better by Standard Poor's, provided:
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a. a master repurchase agreement or specific written
repurchase agreement governs the transaction; and
b. the securities are held free and clear of any lien by the
Trustee or an independent third party acting solely as
agent ("Agent") for the Trustee, and such third party is
(i) a Federal Reserve Bank, (ii) a bank which is a member
of the FDIC and which has combined capital, surplus and
undivided profits of not less than $50 million or (iii) a
bank approved in writing for such purpose by the
Certificate Insurer, and the Trustee shall have received
written confirmation from such third party that it holds
such securities, free and clear of any lien, as agent for
the Trustee; and
c. a perfected first security interest under the Uniform
Commercial Code, or book entry procedures prescribed at 31
C.F.R. 306.1 et seq. or 31 C.F.R. 350.0 et seq. in such
securities is created for the benefit of the Trustee; and
d. the repurchase agreement has a term of 180 days or less,
and the Trustee or the Agent will value the collateral
securities no less frequently than weekly and will
liquidate the collateral securities if any deficiency in
the required collateral percentage is not restored within
two business days of such valuation; and
e. the fair market value of the securities in relation to the
amount of the repurchase obligation, including principal
and interest, is equal to at least ____%.
f. the securities have a rating, at the time of purchase of
"P-1" or "A-2" or better by Moody's.
(ix) Investment agreements, the issuer, form and substance of
which are specifically approved by the Certificate Insurer with notice
to Standard & Poor's and Moody's.
Notwithstanding the foregoing, Eligible Investments shall not include (i)
"stripped securities" and investments which contractually may return less than
the purchase price therefore, and (ii) instruments with a purchase price greater
than par if such instrument may be prepaid or called at a price less than its
purchase price prior to its stated maturity.
"EVENT OF DEFAULT" means an event specified in Section 9.1.
"EXCESS INTEREST" means, with respect to any Distribution Date,
the funds on deposit in the Certificate Account after distribution of the
Required Payment to the
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Certificateholders on such Distribution Date and payment of the Reimbursement
Amount, the Monthly Trustee's Fee, and the Premium Amount.
"FINANCED VEHICLE" means an automobile, light duty truck or van,
together with all accessions thereto, securing an Obligor's indebtedness under
the respective Receivable.
"FITCH" means Fitch Investors Service, Inc.
"HOLDER" see "Certificateholder."
"INITIAL CERTIFICATE PRINCIPAL BALANCE" shall be $227,697,669.92.
"INITIAL YIELD MAINTENANCE AMOUNT" means $_________________.
"INSURANCE POLICIES" means the insurance policies described in
Section 3.1(xiii).
"INSURED PAYMENT" means (i) as of any Distribution Date, any
Deficiency Amount and (ii) any Preference Amount.
"LATE PAYMENT RATE" means, for any Distribution Date, the rate of
interest as it is publicly announced by Citibank, N.A. at its principal office
in New York, New York as its "Prime Rate" (any change in such Prime Rate of
interest to be effective on the date such change is announced by Citibank, N.A.)
plus 2%. The Late Payment Rate shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.
"LENDERS" means, together, the Seller and the Seller's wholly-
owned subsidiary, Consumer Finance Corporation, a Virginia corporation, and
"Lender" means the Seller or Consumer Finance Corporation.
"LIEN" means a security interest, lien, charge, pledge, equity,
or encumbrance of any kind other than tax liens, mechanics' liens, and any liens
which attach to the respective Receivable by operation of law.
"LIQUIDATION PROCEEDS" means, with respect to a Distribution
Date, all monies collected on a Defaulted Receivable from whatever source (other
than withdrawals from the Reserve Account or the Yield Maintenance Account and
the proceeds of a claim under the Certificate Insurance Policy), including
insurance proceeds and proceeds of Financed Vehicles which have been sold or
otherwise disposed of, during the preceding Collection Period, net of the sum of
any amounts expended by the Servicer for the account of the Obligor plus any
amounts required by law to be remitted to the Obligor.
"MONTHLY INTEREST" for any Distribution Date will equal one-
twelfth of the product of the Pass-Through Rate on the Certificate Principal
Balance immediately prior to such Distribution Date.
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"MONTHLY PRINCIPAL" for any Distribution Date will equal the
Principal Balances of the Receivables on the last day of the second preceding
Collection Period (or, in the case of the first Distribution Date, the Initial
Certificate Principal Balance) less the Pool Balance of the Receivables on the
last day of the preceding Collection Period; PROVIDED, HOWEVER, that Monthly
Principal on the Final Scheduled Distribution Date will equal the Certificate
Principal Balance on such date. For the purpose of determining Monthly
Principal, the Principal Balance of a Defaulted Receivable or a Purchased
Receivable is deemed to be zero on and after the last day of the Collection
Period in which such Receivable became a Defaulted Receivable or a Purchased
Receivable.
"MONTHLY SERVICING FEE" means, for any Distribution Date, one-
twelfth of the product of (a) the Pool Balance as of the beginning of the
Collection Period for the month prior to the month of such Distribution Date and
(b) the Servicing Fee Rate.
"MONTHLY TRUSTEE'S FEE" means, for any Distribution Date, $250.
"MOODY'S" means Moody's Investors Service, Inc.
"NET AVAILABLE DISTRIBUTION AMOUNT" means, with respect to any
Distribution Date, the excess of (x) the Available Distribution Amount for such
Distribution Date over (y) the amounts described in clauses (i) and (ii) of
Section 5.4(a) on such Distribution Date.
"NET AVAILABLE FUNDS" means the amount defined as such in
Section 5.2(c).
"NET LOSSES" means with respect to a Collection Period and with
respect to each Receivable which became a Defaulted Receivable during such
Collection Period, the excess of (x) the principal balance of each such
Defaulted Receivable over (y) the Liquidation Proceeds, if any, collected during
such Collection Period.
"NET LOSS PERCENTAGE" means, with respect to any Distribution
Date, the fraction, expressed as a percentage, equal to (x) twelve times the Net
Losses for the related Collection Period divided, by (y) the Pool Balance as of
the last day of such Collection Period.
"OBLIGOR" on a Receivable means the purchaser or the co-
purchasers of the Financed Vehicle or any other Person who owes payments under
the Receivable. The phrase "payment made on behalf of an Obligor" shall mean
all payments made with respect to a Receivable except payments made by a Lender
or the Servicer.
"OFFICERS' CERTIFICATE" means a certificate signed by any two of
the chairman of the board, the president, any vice chairman of the board, any
executive vice president, any senior vice
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president, any vice president, the treasurer, or the controller of the Seller or
the Servicer, as appropriate; provided that no individual shall sign in a dual
capacity.
"OPINION OF COUNSEL" means a written opinion of counsel, who may
be in-house counsel to the Seller or Servicer, which counsel shall be acceptable
to the Trustee and the Certificate Insurer.
"OPTIONAL PURCHASE PRICE" means the amount specified as such in
Section 11.2.
"ORIGINAL POOL BALANCE" shall be $227,697,669.92.
"PASS-THROUGH RATE" shall be ___% per annum.
"PERSON" means any individual, corporation, estate, partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization, or government or any agency or political
subdivision thereof.
"POOL BALANCE" as of any date means the aggregate Principal
Balance of the Receivables as of such date.
"PREFERENCE AMOUNT" means, as to any Distribution Date, any
amounts included in previous distributions to Certificateholders of Required
Payments (exclusive of Insured Payments) which are recovered from such
Certificateholders as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time,
in accordance with a final, nonappealable order of a court having competent
jurisdiction and which have not theretofore been repaid to such
Certificateholders, provided such Certificateholders have complied with the
provisions of Section 5.5(e).
"PREFERENCE ORDER" shall have the meaning set forth in
Section 5.5(e).
"PREMIUM AMOUNT" means, as to any Distribution Date, one-twelfth
of the product of (x) the Premium Percentage and (y) the Certificate Principal
Balance on such Distribution Date (after taking into account any distributions
of Principal to the Certificateholders to be made on such Distribution Date).
"PREMIUM PERCENTAGE" has the meaning set forth in the letter
agreement between the Seller and the Certificate Insurer.
"PRINCIPAL BALANCE" of a Receivable, at any time, means the
Amount Financed minus that portion of all payments received by the Servicer on
or before such time allocable to principal of such Receivable.
"PURCHASE AMOUNT" means, with respect to a Purchased Receivable
as of a Distribution Date, the amount equal to the sum of the Principal Balance
of such Receivable as of
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the last day of the preceding Collection Period and any unpaid interest accrued
thereon through the date such Receivable is repurchased.
"PURCHASED RECEIVABLE" means, with respect to a Distribution
Date, a Receivable purchased not later than the Determination Date immediately
preceding such Distribution Date by the Servicer pursuant to Section 4.2, 4.7 or
11.2 or repurchased not later than such Determination Date by the Seller
pursuant to Section 3.2.
"RATING AGENCIES" means Moody's, Standard & Poor's and Fitch.
"RECEIVABLE" means any motor vehicle retail installment sales
contract or motor vehicle installment loan executed by an obligor in respect of
a Financed Vehicle, including, without limitation, any extension or revision
agreement relating thereto and all payments due thereunder on or after the Cut-
off Date and all proceeds thereof, which Receivable appears on the Schedule of
Receivables.
"RECEIVABLE FILES" means the documents specified in Section 3.3.
"RECORD DATE" means, as to any Distribution Date, the close of
business, if applicable, on the day (whether or not a Business Day) immediately
preceding such Distribution Date or, if Definitive Certificates are issued
pursuant to Section 6.8, the last day of the calendar month immediately
preceding the month in which such Distribution Date occurs.
"REIMBURSEMENT AMOUNT" means, as of any Distribution Date, the
sum of (i) all Insured Payments previously paid by the Certificate Insurer and
not previously repaid to the Certificate Insurer pursuant to Section 5.5(d),
plus the amount of any unpaid Premium Amount not paid to the Certificate Insurer
pursuant to Section 5.4(a)(ii), plus (ii) interest accrued on each such Insured
Payment not previously repaid and each such unpaid Premium Amount, calculated at
the Late Payment Rate in each case from the date the Certificate Insurer paid
the related Insured Payment, or the date the related Premium Amount was due, as
the case may be. The Certificate Insurer shall notify in writing the Trustee
and the Seller of the amount of any Reimbursement Amount due in respect of any
Distribution Date at least two days prior to the related Determination Date.
"REQUIRED PAYMENTS" means, with respect to any Distribution Date,
the sum of the Monthly Interest and the Monthly Principal for such Distribution
Date.
"REQUIRED RATE" means ____% per annum.
"RESERVE ACCOUNT" means the Reserve Account established pursuant
to Section 5.6.
"RESERVE ACCOUNT DEPOSIT AMOUNT" means, with respect to any
Distribution Date, the lesser of (x) the excess of (i) the Specified Reserve
Balance on such Distribution Date over (ii)
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the amount on deposit in the Reserve Account on such Distribution Date, after
taking into account the amount of any Reserve Account withdrawal Amount on such
Distribution Date and (y) the amount remaining in the Certificate Account after
taking into account the distributions therefrom described in clauses (i) through
(v) of Section 5.4(a).
"RESERVE ACCOUNT WITHDRAWAL AMOUNT" means, with respect to any
Distribution Date, the lesser of (x) the excess of (i) the sum of the amounts
described in clauses (i) through (v) of Section 5.4 (a) over (ii) the Available
Funds for such Distribution Date and (y) the amount on deposit in the Reserve
Account on such Distribution Date before taking into account any withdrawal
therefrom on such Distribution Date.
"RESERVE INITIAL DEPOSIT" shall be $______________.
"RESPONSIBLE OFFICER" means, when used with respect to the
Trustee, any officer within the ___________________ (or any successor group of
the Trustee), including any senior vice president, vice president, assistant
vice president, assistant secretary, assistant treasurer or any other officer or
assistant officer of the Trustee customarily performing functions similar to
those performed by the persons who at the time shall be such officers,
respectively, or to whom any corporate trust matter is referred at the
____________________ because of his knowledge of and familiarity with the
particular subject.
"SCHEDULE OF RECEIVABLES" shall be, as of any date, the schedule
of Receivables included in the Trust on such date. The initial Schedule of
Receivables as of the Cut-off Date is attached hereto as Exhibit A and sets
forth as to each Receivable, among other things, (a) its identifying number and
the state of residence of the related Obligor; (b) its date of origination;
(c) the original number of months to stated maturity; (d) the original stated
maturity; (e) the Amount Financed; (f) the Principal Balance as of the Cut-off
Date; (g) the original Principal Balance; (h) the APR; (i) the scheduled monthly
payment of principal and interest; (j) the amount of the Balloon Payment, if
any; and (k) whether such Receivable is with recourse to any Dealer and the type
of such recourse.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SELLER" means Chevy Chase Bank, F.S.B. in its capacity as the
seller of the Receivables under this Agreement, and each successor to Chevy
Chase Bank, F.S.B. (in the same capacity) pursuant to Section 2.2.
"SERVICER" means Chevy Chase Bank, F.S.B. in its capacity as the
servicer of the Receivables, and each successor to Chevy Chase Bank, F.S.B. (in
the same capacity) pursuant to Sections 3.3, 3.4 and 9.2.
"SERVICER'S CERTIFICATE" means a certificate completed and
executed by the Servicer by its chairman of the board, its president, any vice
chairman of its board, any executive vice
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president, any senior vice president, any vice president, the treasurer, or the
controller of the Servicer pursuant to Section 4.9.
"SERVICING FEE RATE" means ____%.
"SERVICING OFFICE" means, at the date of this Agreement, the
office of the Servicer specified in this Agreement, or such other address as the
Servicer may designate from time to time by notice to the Seller, the Trustee
and the Certificate Insurer.
"SERVICING OFFICER" means any officer of the Servicer involved
in, or responsible for, the administration and servicing of the Receivables
whose name appears on a list of servicing officers annexed to an Officers,
Certificate furnished to the Trustee by the Servicer, as the case may be, as
such list may from time to time be amended.
"SPECIFIED RESERVE BALANCE" means, with respect to any
Distribution Date, the greater of (i) $_____________, and (ii) 4.5% of the Pool
Balance on the first day of the related Collection Period; except that if on any
Distribution Date (a) the average of the Net Loss Percentage for the three
preceding Collection Periods exceeds 2%, or (b) the average of the Delinquency
Percentages for the three preceding Collection Periods exceeds 4.5%, then the
Specified Reserve Balance applicable to such Distribution Date shall be an
amount equal to the greater of (x) $______________ and (y) 5.625% of the Pool
Balance on the first day of the related Collection Period.
"STANDARD & POOR'S" means Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies, Inc.
"STATE" means (i) any state of the United States of America or
(ii) the District of Columbia.
"STATED FINAL DISTRIBUTION DATE" means the Distribution Date in
December, 2002.
"SUB-SERVICER" means, as to the Sub-Serviced Receivables, the
Servicer's wholly-owned subsidiary, Consumer Finance Corporation, a Virginia
corporation.
"SUB-SERVICED RECEIVABLES" means those Receivables sold to Chevy
Chase Bank, F.S.B. pursuant to the Purchase and Sale Agreement dated as of
_________________, 1996 between Chevy Chase Bank, F.S.B. as Purchaser and
Consumer Finance Corporation as Seller.
"TRUST" means the trust created by this Agreement, the estate of
which shall consist of the Receivables (other than Purchased Receivables) and
all monies due (including accrued interest) or received thereon on or after the
Cut-off Date; security interests in the Financed Vehicles, the Certificate
Account and the Collection Account; funds deposited in the Collection Account
and the Certificate Account; proceeds of Purchased Receivables; the right to
receive payments from funds deposited in the Reserve Account and the Yield
Maintenance Account
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(under the conditions specified herein); all rights to receive payments under
the Certificate Insurance Policy; any property (including the right to receive
future Liquidation Proceeds) that shall have secured a Receivable and that shall
have been acquired by or on behalf of the Trust; proceeds from recourse to
Dealers relating to the Receivables; proceeds from claims on any physical
damage, lender's. single interest, credit life, disability, or hospitalization
insurance policies covering Financed Vehicles or obligors; the rights of
recourse of the Seller against any cosigner or under any personal guarantee and
any and all of the proceeds of the foregoing.
"TRUSTEE" means First Bank National Association, a national
banking association, or its successor in interest, or any successor trustee
appointed as herein provided.
"TRUSTEE'S CERTIFICATE" means a certificate completed and
executed by the Trustee by a Responsible Officer pursuant to Section 10.2,
substantially in the form of, in the case of an assignment to the Seller,
Exhibit C, and, in the case of an assignment to the Servicer, Exhibit D.
"UCC" means the Uniform Commercial Code as in effect in the
applicable jurisdiction.
"YIELD MAINTENANCE ACCOUNT" means the Yield Maintenance Account
established pursuant to Section 5.6.
"YIELD MAINTENANCE AMOUNT" means, with respect to any
Distribution Date, the sum of all Designated Loan Required Amounts as of such
Distribution Date.
"YIELD MAINTENANCE WITHDRAWAL AMOUNT" means, as of any
Distribution Date, the lesser of (i) the sum of, with respect to each Designated
Loan held by the Trust as of the opening of business on the first day of the
related Collection Period, the products of (x) one-twelfth, (y) such Designated
Loan's Principal Balance as of such time and (z) the excess of (1) the Required
Rate over (2) such Designated Loan's APR and (ii) the amount on deposit in the
Yield Maintenance Account on such Distribution Date, exclusive of any net
investment earnings.
SECTION 1.2 USAGE OF TERMS.
With respect to all terms in this Agreement, the singular
includes the plural and the plural the singular; words importing any gender
include the other genders; references to "writing" include printing, typing,
lithography, and other means of reproducing words in a visible form; references
to agreements and other contractual instruments include all subsequent
amendments thereto or changes therein entered into in accordance with their
respective terms and not prohibited by this Agreement; references to Persons
include their permitted successors and assigns; and the term "including" means
"including without limitation."
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SECTION 1.3 CUT-OFF DATE AND RECORD DATE.
All references to the Record Date prior to the first Record Date
in the life of the Trust shall be to the Cut-off Date.
SECTION 1.4 SECTION REFERENCES.
All section references in this Agreement shall be to sections in
this Agreement.
SECTION 1.5 INTEREST CALCULATIONS.
(a) All allocations of payments with respect to a Receivable to
principal and interest and determinations of periodic charges and the like shall
be made using the simple interest method, based on the actual number of days
elapsed and the actual number of days in the calendar year. Each payment on a
Receivable (net of fees and charges) shall be applied first to the amount of
interest accrued on such Receivable to the date of receipt and then to reduce
the principal amount outstanding on the Receivable.
(b) All calculations of interest on the Certificates shall be made on
the basis of a 360-day year comprised of twelve 30-day months.
ARTICLE II
CREATION OF THE TRUST;
CONVEYANCE OF RECEIVABLES
SECTION 2.1 CREATION OF TRUST.
Upon the execution of this Pooling and Servicing Agreement by the
parties hereto and the concurrent conveyance of the Receivables by the Seller to
the Trustee pursuant to Section 2.2, there is hereby created the Chevy Chase
Auto Receivables Trust 1996-1.
SECTION 2.2 CONVEYANCE OF RECEIVABLES.
In consideration of the Trustee's delivery to or upon the order
of the Seller of authenticated Certificates with an initial Certificate
Principal Balance equal to $227,697,669.92, the Seller does hereby sell,
transfer, assign, and otherwise convey to the Trustee, in trust for the benefit
of the Certificateholders and the Certificate Insurer, without re-course
(subject to the obligations herein):
(i) all right, title, and interest of the Seller in and to the
Receivables listed in the Schedule of Receivables, including all monies
due or received thereunder on or after the Cut-off Date;
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(ii) the security interests of the Seller in the Financed
Vehicles granted by obligors pursuant to the Receivables;
(iii) the interest of the Seller in the documents constructively
delivered to the Trustee pursuant to Section 3.3;
(iv) the interest of the Seller in any proceeds from recourse to
Dealers relating to the Receivables;
(v) the interest of the Seller in any Liquidation Proceeds and
any proceeds from claims on any physical damage, theft, vendor's single
interest, credit life, disability or hospitalization insurance policies
covering Financed Vehicles or Obligors;
(vi) the rights of the Seller to proceeds of Insurance Policies;
(vii) the right to receive payments as set forth herein from the
Reserve Account and the Yield Maintenance Account;
(viii) the right to receive payments as set forth herein from the
Certificate Insurance Policy; and
(ix) the proceeds of any and all of the foregoing.
It is the express intention of the Seller and the Trustee that
(a) the assignment and transfer herein contemplated constitute a sale of the
Receivables and the other property of the Trust described above, conveying good
title thereto free and clear of any liens, encumbrances, security interests or
rights of other Persons, from the Seller to the Trust and (b) the Receivables
and the other property of the Trust described above not be a part of the
Seller's estate in the event of an insolvency of the Seller. In the event that
such conveyance is deemed to be a pledge in connection with a financing, the
parties intend that the Seller shall have granted to the Trustee a first
priority perfected security interest in all of the Seller's right, title and
interest in the items of property listed in clauses (i) through (ix) above, and
all proceeds of the foregoing, and that this Agreement shall constitute a
security agreement under applicable law and the Trustee shall have all of the
rights and remedies of a secured party and creditor under the UCC as in force in
the relevant jurisdictions.
The Seller hereby pledges, grants, assigns and otherwise sets
over to the Trustee, in trust, the Yield Maintenance Account and the Reserve
Account and all amounts on deposit therein and all Eligible Investments held
therein from time to time and all proceeds thereof, and hereby grants to the
Trustee for the benefit of the Certificateholders and the Certificate Insurer a
first priority perfected security interest in such Accounts, amounts and
Eligible Investments. It is the intention of the Seller that, with respect to
such Accounts and such amounts and Eligible Investments, this Agreement shall
constitute a security agreement under applicable law and the
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Trustee shall have all of the rights and remedies of a secured party and
creditor under the UCC and other applicable law as in force in the relevant
jurisdictions.
SECTION 2.3 ACCEPTANCE BY TRUSTEE.
The Trustee does hereby accept the assignment by the Seller
pursuant to Section 2.2 and declares that the Trustee accepts such assignment
upon the trusts herein set forth for the benefit of the Certificateholders and
the Certificate Insurer, as their respective interests may appear, subject to
the terms and provisions of this Agreement. The assignment will not constitute,
and is not intended to result in, an assumption by the Trustee, any
Certificateholder or the Certificate Insurer of any obligation of the Seller or
any other Persons in connection with the Receivables, the Receivables Files,
the Insurance Policies or under any agreements or instruments relating to any of
them.
ARTICLE III
THE RECEIVABLES
SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF SELLER.
The Seller makes, the following representations and warranties as
to the Receivables on which the Trustee relies in accepting the Receivables in
trust and executing and authenticating the Certificates and upon which the
Certificate Insurer relies in executing and delivering the Certificate Insurance
Policy. Such representations and warranties speak as of the Closing Date, but
shall survive the sale, transfer, and assignment of the Receivables to the
Trustee.
(i) CHARACTERISTICS OF RECEIVABLES. Each Receivable (a) shall
have been originated or purchased by a Lender, (b) shall have been fully
and properly executed by the parties thereto, (c) is a fully-amortizing
simple interest installment contract or installment loan which provides
for level monthly payments over its original term, provided that (x) some
Receivables may include a payment in the last month in the life of the
Receivable which due to delinquencies or partial prepayments may be
different from the level monthly payment and (y) 0.55% of the Receivables
(measured as a percentage of the Original Pool Balance) may be Balloon
Receivables, (d) shall have created or shall create a valid, subsisting,
and enforceable first priority security interest in favor of such Lender
in the Financed Vehicle, which security interest shall be assignable and
shall have been validly assigned by the Seller to the Trustee, and
(e) shall contain customary and enforceable provisions such that the
rights and remedies of the holder thereof shall be adequate for
realization against the collateral of the benefits of the security.
(ii) SCHEDULE OF RECEIVABLES. The information set forth in the
Schedule of Receivables shall be true and correct in all material respects
as of the opening of business on the Cut-off Date. The Seller shall have
caused each Lender's electronic ledger
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relating to each related Receivable to be clearly and unambiguously marked
to show that such Receivable has been sold to the Trust for the benefit of
the Certificateholders pursuant to this Agreement.
(iii) COMPLIANCE WITH LAW. Each Receivable and each sale of the
related Financed Vehicle shall have complied at the time it was originated
or made and at the execution of this Agreement shall comply in all
material respects with all requirements of applicable federal, State, and
local laws, and regulations thereunder, including, without limitation,
usury laws, the Federal Truth-in-Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair
Debt Collection Practices Act, the Federal Trade Commission Act, the
Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and
Z, and State adaptations of the National Consumer Act and of the Uniform
Consumer Credit Code, and other applicable consumer credit laws and equal
credit opportunity and disclosure laws.
(iv) BINDING OBLIGATION. Each Receivable represents the genuine,
legal, valid, and binding payment obligation in writing of the related
Obligor, enforceable by the holder thereof in accordance with its terms.
All parties to such Receivable have full legal capacity to execute and
deliver such Receivable and all other documents related thereto and to
grant the security interest granted thereby and the terms of such
Receivable have not been waived or modified in any respect (other than
extensions of payments granted in the ordinary course of the Servicer's
collection procedures and the term of which does not extend beyond the
last day of the Collection Period immediately preceding the Stated Final
Distribution Date).
(v) NO GOVERNMENT OBLIGOR. None of the Receivables shall be due
from the United States of America or any State or local government or from
any agency, department, or instrumentality of the United States of America
or any State or local government.
(vi) SECURITY INTEREST IN FINANCED VEHICLE. Immediately prior to
the sale, assignment, and transfer thereof to the Trustee, each Receivable
shall be secured by a validly perfected first priority security interest
in the Financed Vehicle in favor of the Lender that originated or
purchased such Receivable as secured party and all necessary and
appropriate actions with respect to such Receivable shall have been taken
to perfect a first priority security interest in the Financed Vehicle in
favor of such Lender as secured party, which security interest is
assignable and has been so assigned to the Trustee.
(vii) RECEIVABLES IN FORCE. No Receivable shall have been
satisfied, subordinated, or rescinded, nor shall any Financed Vehicle have
been released from the lien granted by the related Receivable in whole or
in part.
(viii) NO WAIVER. No provision of a Receivable shall have been
waived (other than extensions of payments granted in the ordinary course
of the collection procedures
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of the Servicer (or of the Sub-Servicer, with respect to the Sub-Serviced
Receivables)) and the term of which does not extend beyond the last day of
the Collection Period immediately preceding the Stated Final Distribution
Date).
(ix) NO AMENDMENTS. No Receivable shall have been amended such
that the number of the Obligor's scheduled payments shall have been
increased.
(x) NO DEFENSES. No facts exist which would give rise to any
right of rescission, setoff, counterclaim or defense nor shall have any
right of rescission, setoff, counterclaim, or defense been asserted or
threatened with respect to any Receivable.
(xi) NO LIENS. No liens or claims shall have been filed,
including liens for work, labor, materials or taxes relating to a Financed
Vehicle, that shall be liens prior to, or equal or coordinate with, the
security interest in the Financed Vehicle granted by the Obligor pursuant
to the Receivable.
(xii) NO DEFAULT. Except for payment defaults continuing for a
period of not more than 59 days as of the Cut-off Date, no default,
breach, violation or event permitting acceleration under the terms of any
Receivable shall exist; no continuing condition that with notice or lapse
of time would constitute a default, breach, violation or event permitting
acceleration under the terms of any Receivable shall exist; and the
related Lender shall not have waived any of the foregoing.
(xiii) INSURANCE. The Servicer, in accordance with its customary
procedures, shall have (i) required that the Obligor obtain physical
damage and theft insurance covering the Financed Vehicle as of the date of
related contract and (ii) obtained vendor's single interest insurance
covering the Financed Vehicle.
(xiv) TITLE. It is the intention of the Seller that the transfer
and assignment herein contemplated, taken as a whole, constitutes a sale
of the Receivables and other property of the Trust from the Seller to the
Trust and that the beneficial interest in and title to the Receivables and
other Trust property not be part of the receivership or conservatorship
estate in the event of the appointment of a receiver or conservator for
the Seller. No Receivable has been sold, transferred, assigned, or
pledged by the Seller to any Person other than the Trustee. Immediately
prior to the transfer and assignment herein contemplated, the Seller had
good and marketable title to each Receivable free and clear of all Liens,
and, immediately upon the transfer thereof, the Trustee for the benefit of
the Certificateholders and the Certificate Insurer shall have good and
marketable title to each Receivable, free and clear of all Liens and
rights of others, except for the rights of the Certificateholders and the
Certificate Insurer; and the transfer has been perfected under the UCC.
(xv) LAWFUL ASSIGNMENT. No Receivable shall have been originated
in, or shall be subject to the laws of, any jurisdiction under which the
sale, transfer, and assignment of
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such Receivable under this Agreement or transfers of the Certificates
would be unlawful, void, or voidable.
(xvi) ALL FILINGS MADE. All filings (including, without
limitation, UCC filings) necessary in any jurisdiction to give the Trustee
a first priority perfected ownership interest in the Receivables shall
have been made.
(xvii) ONE ORIGINAL. There shall be only one original executed
copy of each Receivable, and immediately prior to the constructive
delivery thereof to the Trustee pursuant to Section 3.3, such copy shall
have been in the custody and possession of the applicable Lender.
(xviii) NO BANKRUPT OBLIGOR. None of the Receivables shall be due
from an Obligor who has commenced a voluntary case under the United States
Bankruptcy Code or consented to the entry of or failed to have stayed
within 60 days of entry an order for relief against it in an involuntary
case under the United States Bankruptcy Code.
(xix) CHATTEL PAPER. The Receivables constitute "chattel paper"
within the meaning of the UCC as in effect in the State of Maryland.
(xx) MAXIMUM AMOUNT FINANCED. No Obligor shall be the Obligor on
Receivables on which the sum of the Principal Balances of such Receivables
is greater than $_________.
(xxi) NO ASSIGNMENT. The related Lender has not taken any action
to convey any right to any Person that would result in such Person having
a right to payments due under the Receivable that is senior to or equal
with that of the Trust.
(xxii) COMPOSITION OF RECEIVABLES. Each Receivable is secured by a
Financed Vehicle which is a new or used automobile, light duty truck or
van.
(xxiii) MATURITY OF RECEIVABLES. Each Receivable shall have an
original term to stated maturity of at least 12 months and not more than
72 months.
(xxiv) MINIMUM AND MAXIMUM ANNUAL PERCENTAGE RATE. Each Receivable
shall have an Annual Percentage Rate no less than ____% and no more than
_____%.
(xxv) MINIMUM AND MAXIMUM PRINCIPAL BALANCE. Each Receivable
shall have a Principal Balance no less than $________ and no more than
$_________.
(xxvi) STATES OF OBLIGOR RESIDENCE. Except with respect to
Receivables with an aggregate Principal Balance representing 15.4% of the
Original Pool Balance, the Obligor under each Receivable resides in
Maryland, Virginia or North Carolina.
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(xxvii) LOCATION OF RECEIVABLE FILES. The Receivable Files shall
be kept by the Servicer as custodian for the Trustee at 7929 Jones Branch
Drive, McLean, Virginia 22102, or at such other location or locations as
may be designated from time to time by notice to the Trustee and the
Certificate Insurer.
(xxviii) ADVANCE PAYMENTS. No Receivable has been paid more than six
months in advance.
(xxix) NO ADVERSE SELECTION. The Receivables were selected from
retail installment sales contracts and motor vehicle installment loans in
the Seller's portfolio that had met the applicable conditions specified in
this Section 3.1 utilizing no selection procedures adverse to the
Certificateholders or the Certificate Insurer relative to similar retail
installment sales contracts and motor vehicle installment loans in the
Seller's portfolio.
SECTION 3.2 REPURCHASE UPON BREACH.
The Seller, the Servicer, the Trustee or the Certificate Insurer,
as the case may be, shall inform the other parties promptly, in writing, upon
the discovery of any breach of the Seller's representations and warranties
contained in Section 3.1; PROVIDED, that the Trustee shall have no duty to
inquire concerning, or to investigate, the breach of any of such representations
and warranties. Unless the breach shall have been cured by the last day of the
Collection Period following the Collection Period during which the Seller
becomes aware of, or receives written notice of, such breach, the Seller shall
repurchase as of such day (or, at the Seller's option, as of the last day of the
month in which such breach was discovered) any Receivable materially and
adversely affected by such breach and any Receivable in which the interest of
the Trust is materially and adversely affected by such breach. In consideration
of the purchase of the Receivable, the Seller shall remit the Purchase Amount,
in the manner specified in Section 5.3. The sole remedy of the Trustee, the
Trust or the Certificateholders with respect to a breach of the Seller's
representations and warranties contained in Section 3.1 shall be to require the
Seller to repurchase Receivables pursuant to this Section 3.2. The Seller shall
notify the Certificate Insurer of any repurchase of any Receivable pursuant to
this Section.
SECTION 3.3 CUSTODY OF RECEIVABLE FILES.
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Trustee, upon the execution and delivery of this
Agreement, hereby revocably appoints the Servicer, and the Servicer hereby
accepts such appointment, to act as the agent of the Trustee as custodian of the
following documents or instruments which are hereby constructively delivered to
the Trustee with respect to each Receivable:
(i) The original of the Receivable fully executed by the
Obligor.
(ii) The original credit application fully executed by the
Obligor.
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(iii) The original certificate of title held by the Lender that
originated or purchased such Receivable evidencing the security interest
of such Lender in the Financed Vehicle.
(iv) Any and all other documents that the Servicer or the
applicable Lender shall keep on file, in accordance with its customary
procedures, relating to a Receivable, an Obligor, or a Financed Vehicle.
SECTION 3.4 DUTIES OF SERVICER AND SUB-SERVICER AS CUSTODIAN.
(a) SAFEKEEPING. The Servicer, in its capacity as custodian, shall
hold the Receivable Files on behalf of the Trustee for the use and benefit of
all present and future Certificateholders and the Certificate Insurer and
maintain such accurate and complete accounts, records, and computer systems
pertaining to each Receivable File as shall enable the Trustee to comply with
this Agreement. In performing its duties as custodian, the Servicer shall act
with reasonable care, using that degree of skill and attention that the Servicer
exercises with respect to the receivable files relating to all comparable
automotive receivables that the Servicer services for itself. The Servicer
shall conduct, or cause to be conducted, periodic audits of the Receivable Files
held by it under this Agreement, and of the related accounts, records, and
computer systems, in such a manner as shall enable the Trustee to verify the
accuracy of the Servicer's record keeping. The Servicer shall promptly report
to the Trustee and the Certificate Insurer any failure on the Servicer's part to
hold the Receivable Files and maintain its accounts, records, and computer
systems as herein provided and promptly take appropriate action to remedy any
such failure.
(b) MAINTENANCE OF AND ACCESS TO RECORDS. The Servicer shall
maintain each Receivable File at its office specified in this Agreement, or at
such other office or offices as shall be specified by the Servicer to the
Trustee and the Certificate Insurer by prior written notice. The Servicer shall
make available to the Trustee and the Certificate Insurer or their respective
duly authorized representatives, attorneys, or auditors a list of locations of
the Receivable Files, and the related accounts, records, and computer systems
maintained by the Servicer at such times during normal business hours as the
Trustee or the Certificate Insurer shall instruct, which does not unreasonably
interfere with the Servicer's normal operations or customer or employee
relations.
(c) RELEASE OF DOCUMENTS. Upon instruction from the Trustee, the
Servicer shall release any document in a Receivable File to the Trustee, the
Trustee's agent, or the Trustee's designee, as the case may be, at such place or
places as the Trustee may designate, as soon as practicable.
(d) The Servicer shall require the Sub-Servicer to comply with the
preceding provisions of this Section 3.4 with respect to the Sub-Serviced
Receivables.
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SECTION 3.5 INSTRUCTIONS; AUTHORITY TO ACT.
The Servicer and the Sub-Servicer shall be deemed to have
received proper instructions with respect to the Receivable Files upon its
receipt of written instructions signed by a Responsible officer of the Trustee.
SECTION 3.6 EFFECTIVE PERIOD AND TERMINATION.
The appointment of the Servicer as custodian shall become
effective as of the Cut-off Date and shall continue in full force and effect for
the term of the Trust unless terminated earlier pursuant to this Section 3.6. If
the Servicer shall resign in accordance with the provisions of Section 8.5 or if
all of the rights and obligations of the Servicer shall have been terminated
under Section 9.1, the appointment of the Servicer and the Sub-Servicer as
custodian may be terminated (1) by the Trustee or by the Holders of Certificates
evidencing not less than a majority of the Certificate Principal Balance, in
either case, with the consent of the Certificate Insurer or (ii) by the
Certificate Insurer, by written notification to the Servicer. The Trustee with
the consent of the Certificate Insurer may terminate the Servicer's appointment
as custodian with cause at any time upon written notification to the Servicer,
in which case the Sub-Servicer shall also be terminated as a custodian. The
Trustee shall notify the Rating Agencies of any termination of the Servicer's
appointment as custodian pursuant to this Section 3.6. As soon as practicable
after any termination of such appointment, the Servicer and the Sub-Servicer
shall deliver the Receivable Files to the Trustee or the Trustee's agent at such
place or places as the Trustee may reasonably designate.
ARTICLE IV
ADMINISTRATION AND SERVICING OF RECEIVABLES
SECTION 4.1 DUTIES OF SERVICER.
The Servicer as agent for the Trustee shall manage, service,
administer, and make collections on the Receivables with reasonable care, using
that degree of skill and attention that the Servicer exercises with respect to
all comparable automotive receivables that it services for itself. The
Servicer' s duties shall include the collection and posting of all payments,
responding to inquiries of Obligors or of federal, state or local governmental
authorities with respect to the Receivables, investigating delinquencies,
sending payment coupons to Obligors, accounting for collections, and furnishing
monthly and annual statements to the Trustee and the Certificate Insurer with
respect to distributions. The Servicer shall follow its customary standards,
policies, and procedures in performing its duties as Servicer; provided, that
with respect to the Sub-Serviced Receivables and for so long as the Sub-Servicer
is sub-servicing the Sub-Serviced Receivables, the Servicer shall follow the
Sub-Servicer's customary standards, policies and procedures. Without limiting
the generality of the foregoing, the Servicer is authorized and empowered by the
Trustee to execute and deliver, on behalf of itself, the Trust, the
Certificateholders, or the Trustee or any of them, any and all instruments of
satisfaction or
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cancellation, or partial or full release or discharge, and all other comparable
instruments, with respect to such Receivables or to the Financed Vehicles
securing such Receivables. If the Servicer shall commence a legal proceeding to
enforce a Receivable, the Trustee shall thereupon be deemed to have
automatically assigned, solely for the purpose of collection, such Receivable to
the Servicer. The Trustee shall execute any documents prepared by the Servicer
and delivered to the Trustee for execution that are necessary or appropriate to
enable the Servicer to carry out its servicing and administrative duties
hereunder.
SECTION 4.2 COLLECTION OF RECEIVABLE PAYMENTS.
The Servicer shall use its best efforts to collect all payments
called for under the terms and provisions of the Receivables as and when the
same shall become due and shall follow such collection procedures as it follows
with respect to all comparable automotive receivables that it services for
itself. If payments are extended in the ordinary course of the Servicer's
collection procedures, and, as a result, any Receivable would be outstanding on
the first day after the end of the Collection Period immediately preceding the
Stated Final Distribution Date, then the Servicer shall be obligated to purchase
such Receivable in the manner set forth in Section 4.7 (unless such Receivable
is otherwise being purchased pursuant to Section 11.2) as of the last day of the
Collection Period following the Collection Period in which the extension was
made (or, at the Servicer's option, as of the last day of the Collection Period
in which the extension was made); PROVIDED, HOWEVER, that the purchase
obligation with respect to a Receivable shall be the obligation of the Servicer
which granted the extension, and not of any successor Servicer; and PROVIDED,
FURTHER, that the purchase obligation of any Servicer shall survive the
termination of such Servicer as Servicer. The Servicer may in its discretion
waive any Additional Fees.
SECTION 4.3 REALIZATION UPON RECEIVABLES.
On behalf of the Trust, the Servicer shall use its best efforts,
consistent with its customary servicing procedures, to repossess or otherwise
convert the ownership of the Financed Vehicle securing any Receivable as to
which the Servicer shall have determined that eventual payment in full is
unlikely. The Servicer shall follow such customary and usual practices and
procedures as it shall deem necessary or advisable in its servicing of
automotive receivables, which may include reasonable efforts to realize upon any
recourse to Dealers and selling the Financed Vehicle at a public or private
sale. The foregoing shall be subject to the provision that, in any case in
which the Financed Vehicle shall have suffered damage, the Servicer shall not
expend funds in connection with the repair or the repossession of such Financed
Vehicle unless it shall determine in its discretion that such repair and/or
repossession will increase the Liquidation Proceeds of the related Receivable by
an amount equal to or greater than the amount of such expenses.
SECTION 4.4 INSURANCE
(a) The Servicer may sue to enforce or collect upon the Insurance
Policies, in its own name, if possible, or as agent of the Trust. If the
Servicer elects to commence a legal proceeding to enforce an Insurance Policy,
the act of commencement shall be deemed to be an automatic
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assignment of the rights of the Trust under such Insurance Policy to the
Servicer for purposes of collection only. If, however, in any enforcement suit
or legal proceeding it is held that the Servicer may not enforce an Insurance
Policy on the grounds that it is not a real party in interest or a holder
entitled to enforce the Insurance Policy, the Trustee, on behalf of the Trust,
at the Servicer's expense, or the Seller, at the Seller's expense, shall take
such steps as the Servicer deems necessary to enforce such Insurance Policy,
including bringing suit in its name or the name of the Trustee for the benefit
of the Certificateholders.
(b) The Servicer shall maintain a vendor's single interest or other
collateral protection insurance policy with respect to all Financed Vehicles
("Collateral Insurance") which policy by its terms insures against physical
damage in the event any Obligor fails to maintain physical damage insurance with
respect to the related Financed Vehicles. The Seller will be the named insured
under all policies of Collateral Insurance. The Servicer shall maintain
Collateral Insurance at all times unless the Certificate Insurer otherwise
consents in writing.
(c) Costs incurred by the Servicer in maintaining Collateral
Insurance shall be paid by the Servicer.
SECTION 4.5 MAINTENANCE OF SECURITY INTERESTS IN FINANCED
VEHICLES.
The Servicer shall, in accordance with its customary servicing
procedures, take such steps as are necessary to maintain perfection of the
security interest created by each Receivable in the related Financed Vehicle.
The Trustee hereby authorizes the Servicer to take such steps as are necessary
to re-perfect such security interest on behalf of the Trust in the event of the
relocation of a Financed Vehicle or for any other reason. In the event that the
assignment of a Receivable to the Trust is insufficient, without a notation on
the related Financed Vehicle's certificate of title, or without fulfilling any
additional administrative requirements under the laws of the State in which the
Financed Vehicle is located, to grant to the Trust a perfected security interest
in the related Financed Vehicle, the Seller hereby agrees on behalf of itself
and the other Lender that the listing of the applicable Lender as the secured
party on the certificate of title is in its capacity as agent of the Trust.
SECTION 4.6 COVENANTS OF SERVICER.
(a) The Servicer shall not release the Financed Vehicle securing any
Receivable from the security interest granted by such Receivable in whole or in
part except in the event of payment in full by or on behalf of the Obligor
thereunder or repossession, nor shall the Servicer impair the rights of the
Trust or the Certificateholders in the Receivables, nor shall the Servicer
change the amount of the scheduled payment under a Receivable (except for an
extension permitted pursuant to Section 4.2) or change the APR of or the Amount
Financed under a Receivable, nor shall the Servicer fail to comply with the
provisions of any Insurance Policy, if the failure to so comply would impair the
protection or benefit to be afforded by such Insurance Policy.
(b) COMPLIANCE WITH APPLICABLE LAWS. The Servicer shall comply with
any law or, to the best of the Servicer's knowledge, any order, rule or
regulation applicable to the Servicer of
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any court or of any federal or state regulatory body, administrative agency, or
other governmental instrumentality having jurisdiction over the Servicer or its
properties, the failure to comply with which may materially and adversely affect
the performance by the Sellers of its obligations under, or the validity or
enforceability of, this Agreement or the Certificates.
(c) CORPORATE EXISTENCE. The Servicer and its successors and assigns
shall maintain their corporate existence and shall at all times continue to be
duly organized under the laws of their respective jurisdictions of incorporation
and duly qualified and duly authorized and shall conduct their business in
accordance with the terms of their certificates of incorporation and bylaws,
PROVIDED, HOWEVER, that the Servicer shall not be required to maintain its
existence as a federally chartered thrift if the board of directors shall
determine that the preservation of such status is no longer desirable and that
the loss thereof is not disadvantageous in any material respect to the
Certificateholders.
(d) FINANCIAL STATEMENTS; ACCOUNTANTS' REPORTS; OTHER INFORMATION.
The Servicer shall keep or cause to be kept in reasonable detail books and
records of account of its assets and business, including, but not limited to,
books and records relating to this Agreement. The Servicer shall furnish or
cause to be furnished to the Certificate Insurer:
(i) ANNUAL FINANCIAL STATEMENTS. As soon as available, and in
any event within 120 days after the close of each fiscal year of the
Servicer, the audited consolidated balance sheets of the Servicer and its
subsidiaries as of the end of such fiscal year and the related audited
consolidated statements of income, changes in shareholders' equity and
cash flows for such fiscal year, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and
period in the preceding fiscal year, prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by
the audit opinion of the Servicer's independent accountants (which shall
be a nationally recognized independent public accounting firm).
(ii) QUARTERLY FINANCIAL STATEMENTS. As soon as available, and
in any event within 90 days after each of the first three fiscal quarters
of each fiscal year of the Servicer, the unaudited consolidated balance
sheets of the Servicer and its subsidiaries as of the end of such fiscal
quarter and the related unaudited consolidated statements of income,
changes in shareholders' equity and cash flows for such fiscal quarter,
all in reasonable detail and stating in comparative form the respective
figures for the corresponding date and period in the preceding fiscal
year, prepared in accordance with generally accepted accounting
principles, consistently applied.
(iii) CERTAIN INFORMATION. Upon the reasonable request of the
Certificate Insurer, the Servicer shall promptly provide copies of any
requested proxy statements, financial statements, reports and registration
statements which the Servicer files with, or delivers to, the Securities
and Exchange Commission or any national securities exchange.
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All financial statements specified in clause (i) above shall be
furnished in consolidated form for the Servicer and its subsidiaries in the
event the Servicer shall consolidate its financial statements with its
subsidiaries.
The Certificate Insurer, by the issuance of the Certificate
Insurance Policy, agrees that it and its agents, accountants and attorneys shall
keep confidential all financial statements, reports and other information
delivered by the Servicer pursuant to this Section 4.6(d).
(e) MAINTENANCE OF INSURANCE. The Servicer shall maintain with a
responsible company, and at its own expense, a blanket fidelity bond and an
errors and omissions insurance policy in a minimum amount generally maintained
by prudent federally chartered thrift institutions engaged in the servicing of
automotive receivables and having servicing portfolios of a similar size.
(f) ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND ACCOUNTANTS. On
an annual basis, or upon the occurrence of an event that could have a material
adverse effect on the ability of the Servicer to perform its obligations under,
or the validity or enforceability of, this Agreement or the Certificates, the
Servicer shall, upon the reasonable request of the Certificate Insurer, permit
the Certificate Insurer or its authorized agents:
(i) to discuss the affairs, finances and accounts of the
Servicer with the chief operating officer and the chief financial officer
of the Servicer, in each case, to the extent related to the Receivables,
or the duty of the Servicer hereunder; and
(ii) with the Servicer's consent, which consent shall not be
unreasonably withheld, to discuss the affairs, finances and accounts of
the Servicer with the Servicer's independent accountants, in each case, to
the extent related to the Receivables, or the duty of the Servicer
hereunder, provided that an officer of the Servicer shall have the right
to be present during such discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the Servicer.
The Certificate Insurer, by the issuance of the Certificate
Insurance Policy, agrees that it and its shareholders, directors, agents,
accountants and attorneys shall keep confidential any matter of which it becomes
aware through such inspections or discussions (unless readily available from
public sources), except as may be otherwise required by regulation, law or court
order or requested by appropriate governmental authorities or as necessary to
preserve its rights or security under or to enforce this Agreement, provided
that the foregoing shall not limit the right of the Certificate Insurer to make
such information available to its regulators, securities rating agencies,
reinsurers, credit and liquidity providers, counsel and accountants. If the
Certificate Insurer is requested or required (by oral questions,
interrogatories, requests for information or documents subpoena, civil
investigative demand or similar process) to disclose any information of which it
becomes aware through such inspections or discussions, the Certificate
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Insurer will promptly notify the Servicer of such request(s) so that the
Servicer may seek an appropriate protective order and/or waive the Certificate
Insurer's compliance with the provisions of this Agreement. If, in the absence
of a protective order or the receipt of a waiver hereunder, the Certificate
Insurer is, nonetheless, in the opinion of its counsel, compelled to disclose
such information to any tribunal or else stand liable for contempt or suffer
other censure or significant penalty, the Certificate Insurer may disclose such
information to such tribunal that the Certificate Insurer is compelled to
disclose, provided that a copy of all information disclosed is provided to the
Servicer promptly upon such disclosure.
(g) NOTICE OF MATERIAL EVENTS. The Servicer shall promptly inform
the Certificate Insurer in writing of the receipt of notice of any proceeding by
any regulatory body seeking any determination or ruling that might materially
and adversely affect the performance by the Sellers of its obligations under, or
the validity or enforceability of, this Agreement or the Certificates.
(h) MAINTENANCE OF LICENSES. The Servicer, or any successors
thereof, shall maintain all licenses, permits, charters and registrations which
are material to the performance of its obligations under this Agreement or the
Certificates.
SECTION 4.7 PURCHASE OF RECEIVABLES UPON BREACH.
The Servicer, the Trustee or the Certificate Insurer shall inform
the other parties promptly, in writing, upon the discovery of any breach by the
Servicer of its obligations under Section 4.5 or 4.6; PROVIDED, that the Trustee
shall have no duty to inquire concerning, or to investigate, the breach of any
of such obligations. Unless the breach shall have been cured by the last day of
the Collection Period following the Collection Period during which the Seller
becomes aware of, or receives written notice of such breach, the Servicer shall
purchase as of such day (or, at the Servicer's option, as of the last day of the
month in which such breach was discovered) any Receivable materially and
adversely affected by such breach and any Receivable in which the interest of
the Trust is materially and adversely affected by such breach. In consideration
of the purchase of such Receivable, the Servicer shall remit the Purchase Amount
with respect to such Receivable in the manner specified in Section 5.3. The
sole remedy of the Trustee, the Trust or the Certificateholders with respect to
a breach pursuant to Section 4.5 or 4.6 shall be to require the Servicer to
purchase Receivables pursuant to this Section 4.7. The Servicer shall notify the
Certificate Insurer of any purchase of a Receivable pursuant to this Section
4.7.
SECTION 4.8 SERVICING FEES.
The servicing fee for a Collection Period shall equal the Monthly
Servicing Fee (except that in the case of a successor Servicer, the servicing
fee shall equal such amount as is arranged in accordance with Section 9.2). The
Servicer shall deposit into the Collection Account all Additional Fees.
Investment earnings on the Collection Account, the Certificate Account, the
Yield Maintenance Account and the Reserve Account, if any, shall be deposited
into the respective accounts. The Monthly Servicing Fee may be retained by
the Servicer from the aggregate interest collections on the Receivables
during the related Collection Period, prior to the deposit in the Collection
Account pursuant to Section 5.2; in no event shall the Servicer retain with
respect to any Collection
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Period, an amount of base servicing compensation in excess of the Monthly
Servicing Fee, even if multiple payments ("advance payments" or "payaheads") are
received from the Obligors during such Collection Period.
SECTION 4.9 SERVICER'S CERTIFICATE.
On or before each Determination Date, the Servicer shall deliver
to the Trustee and the Certificate Insurer by 12:00 pm New York City time a
Servicer's Certificate in the form of Exhibit E attached hereto containing all
information necessary to make the distributions pursuant to Section 5.4, to make
any transfers of funds pursuant to Sections 5.1, 5.2 and 5.6, and to make any
demands on the Certificate Insurance Policy pursuant to Section 5.5 for the
Collection Period preceding the date of such Servicer's Certificate and all
information necessary for the Trustee to send statements to Certificateholders
pursuant to Section 5.7. Receivables purchased by the Servicer or repurchased by
the Seller as of the last day of such Collection Period shall be identified by
the Seller's account number with respect to such Receivable (as specified in the
Schedule of Receivables).
SECTION 4.10 ANNUAL STATEMENT AS TO COMPLIANCE; NOTICE OF
DEFAULT.
(a) The Servicer shall deliver to the Trustee and the Certificate
Insurer, on or before December 31 of each year, beginning December 31, 1997, an
Officers' Certificate stating that (i) a review of the activities of the
Servicer during the preceding 12-month period ended September 30 of such year
(or such longer period since the date of this Agreement) and of its performance
under this Agreement has been made under such officers, supervision and (ii) to
the best of such officers' knowledge, based on such review, the Servicer has
fulfilled all of its obligations under this Agreement throughout such year, or,
if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officers and the nature and status
thereof.
(b) The Servicer shall deliver to the Trustee and the Certificate
Insurer, promptly after having obtained knowledge thereof, but in no event later
than one Business Day thereafter, written notice in an Officers' Certificate of
any event which with the giving of notice or lapse of time, or both, would
become an Event of Default under clause (i) of Section 9.1. The Seller shall
deliver to the Trustee and the Certificate Insurer, promptly after having
obtained knowledge thereof, but in no event later than five Business Days
thereafter, written notice in an Officers' Certificate of any event which with
the giving of notice or lapse of time, or both, would become an Event of Default
under any other clause of Section 9.1.
SECTION 4.11 ANNUAL INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
REPORT.
The Servicer shall cause a firm of independent certified public
accountants, who may also render other services to the Servicer, to deliver to
the Trustee and the Certificate Insurer on or before December 31 of each year
concerning the 12-month period ended September 30 of such year (or such longer
period since the date of this Agreement), beginning December 31, 1997, a report
addressed to the Board of Directors of the Servicer, the Trustee and the
Certificate Insurer, to the effect that such firm has read the monthly
Servicer's Certificates delivered pursuant
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to Section 4.9 with respect to each Collection Period during such one-year (or
longer) period and reviewed the servicing of the Receivables by the Servicer and
that such review (1) included tests relating to automobile, light duty truck and
van loans serviced for others in accordance with the requirements of the Uniform
Single Attestation Program for Mortgage Bankers, to the extent the procedures in
such program are applicable to the servicing obligations set forth in this
Agreement, and (2) except as described in the report, disclosed no exceptions or
errors in the records relating to automobile, light duty truck and van loans
serviced for others that, in the firm's opinion, paragraph four of such program
requires such firm to report.
The report will also indicate that the firm is independent of the
Servicer within the meaning of the Code of Professional Ethics of the American
Institute of Certified Public Accountants.
SECTION 4.12 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION
REGARDING RECEIVABLES.
The Servicer shall provide (and shall require the Sub-Servicer to
provide) to the Certificateholders and the Trustee access to the Receivables
Files in such cases where the Certificateholder or the Trustee shall be required
by applicable statutes or regulations to review such documentation. The
Certificate Insurer shall be afforded such access at any time, subject to the
requirements of the next sentence. Access shall be afforded without charge, but
only upon reasonable request and during the normal business hours at the
respective offices of the Servicer. Nothing in this Section shall affect the
obligation of the Servicer to observe any applicable law prohibiting disclosure
of information regarding the Obligors, and the failure of the Servicer to
provide access to information as a result of such obligation shall not
constitute a breach of this Section 4.12.
SECTION 4.13 SERVICER EXPENSES.
The Servicer shall be required to pay all expenses incurred by it
in connection with its activities hereunder, including fees and disbursements of
independent accountants and taxes imposed on the Servicer.
SECTION 4.14 REPORTS TO CERTIFICATEHOLDERS.
The Trustee shall provide to any Certificateholder, who so
requests in writing (addressed to the Corporate Trust Office) and the Rating
Agencies a copy of any certificate described in Section 4.9, or the annual
statement described in Section 4.10, or the annual report described in Section
4.11. The Trustee may require the Certificateholder to pay a reasonable sum to
cover the cost of the Trustee's compliance with such request.
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ARTICLE V
DISTRIBUTIONS; STATEMENTS TO
CERTIFICATEHOLDERS
SECTION 5.1 ESTABLISHMENT OF ACCOUNTS.
(a) The Trustee, on behalf of the Trust, shall establish the
Collection Account and the Certificate Account as segregated trust accounts in
the name of the Trust for the benefit of Certificateholders and the Certificate
Insurer with the Corporate Trust Office of the Trustee. The Servicer shall
direct the Trustee to invest the amounts in the Collection Account and the
Certificate Account in Eligible Investments that, with respect to the Collection
Account, mature not later than the Business Day prior to the next succeeding
Determination Date or, with respect to the Certificate Account, mature not later
than the next succeeding Deposit Date, and to hold such Eligible Investments to
maturity. The Collection Account and the Certificate Account shall always be
maintained as Eligible Accounts. The Trustee may trade with itself or an
Affiliate in the purchase or sale of Eligible Investments.
(b) (i) The Seller shall establish and maintain the Reserve
Account and the Yield Maintenance Account in the name of the Trustee, each
as an Eligible Account for the benefit of the Trust, the
Certificateholders and the Certificate Insurer. The Reserve Account and
the Yield Maintenance Account shall not be property of the Trust.
(ii) Funds on deposit in the Reserve Account shall be
invested by the Trustee in Eligible Investments, in each case selected by
the Servicer by a written direction, which shall certify that any such
investment is authorized by this Section; PROVIDED, HOWEVER, the Trustee
shall not be liable for any loss arising from such investment in Eligible
Investments (other than as Obligor under any Eligible Investment). All
such Eligible Investments shall be held by the Trustee for the benefit of
the beneficiaries of the Reserve Account and the Yield Maintenance
Account; PROVIDED that on each Distribution Date all interest and other
investment income (net of investment losses and expenses) on funds on
deposit in the Yield Maintenance Account shall be withdrawn from the Yield
Maintenance Account at the direction of the Servicer and shall be paid to
the Seller; all interest and other investment income (net of investment
losses and expenses) on funds on deposit in the Reserve shall be deposited
to the Reserve Account. Funds on deposit in the Reserve Account and the
Yield Maintenance Account shall be invested in Eligible Investments that
will mature so that such funds will be available at the close of business
on the related Deposit Date. Funds deposited in the Reserve Account and
the Yield Maintenance Account on the day which immediately precedes a
Distribution Date upon the maturity of any Eligible Investments are not
required to be (but may be) invested overnight in accordance with the
investment provisions contained herein. The Seller shall treat the funds
and other assets in the Reserve Account and the Yield Maintenance Account
as its own for federal, state and local income tax and franchise tax
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purposes and shall report on its tax returns all income and gain from the
Reserve Account and the Yield Maintenance Account.
(iii) The Trustee agrees as follows with respect to the
Eligible Investments, and the proceeds thereof, held from time to time in
the Reserve Account and the Yield Maintenance Account:
(A) any Eligible Investment that is held in deposit accounts
shall be subject to the exclusive custody and control of the Trustee,
and the Trustee shall have sole signature authority with respect
thereto;
(B) any Eligible Investment that constitutes Physical Property
(as defined in the definition of Delivery) shall be delivered to the
Trustee in accordance with paragraph (a) of the definition of
"Delivery" and shall be held, pending maturity or disposition, solely
by the Trustee or a financial intermediary (as such term is defined in
Section 8-313 (4) of the UCC) acting solely for the Trustee;
(C) any Eligible Investment that is a book-entry security held
through the Federal Reserve System pursuant to federal book-entry
regulations shall be delivered in accordance with paragraph (b) of the
definition of "Delivery" and shall be maintained by the Trustee,
pending maturity or disposition, through continued book entry
registration of such Eligible Investment as described in such
paragraph; and
(D) any Eligible Investment that is an "uncertificated
security" under Article 8 of the UCC and that is not governed by
clause (C) above shall be delivered to the Trustee in accordance with
paragraph (c) of the definition of "Delivery" and shall be maintained
by the Trustee, pending maturity or disposition, through continued
registration of the Trustee's (or its nominee's) ownership of such
security directly or through one or more financial intermediaries.
(iv) The Servicer shall have the power, revocable by the
Trustee, to instruct the Trustee to make withdrawals and payments from the
Reserve Account and the Yield Maintenance Account for the purpose of
making distributions of funds on deposit in such Accounts in accordance
with the provisions hereof.
(c) In the event of any change of law regarding matters relating to
the perfection of security interests in any Account, the amounts or any Eligible
Investments held therein, the Seller shall cause to be furnished to the Trustee,
the Certificate Insurer and each Rating Agency, an opinion of Counsel addressing
such matters and if necessary, the Seller shall cooperate with the Trustee in
taking all actions necessary to comply with the change in law.
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SECTION 5.2 COLLECTIONS.
(a) The Servicer shall remit to the Collection Account within two
Business Days following receipt thereof all payments by or on behalf of the
obligors on the Receivables and all Liquidation Proceeds (including payments
made under any of the Insurance Policies or the Collateral Insurance to the
extent applicable to payments due on the Receivables) , both as collected during
the Collection Period, net of (i) the Servicer's actual out-of-pocket expenses
reasonably incurred with respect to Defaulted Receivables or Vehicles, which
shall be paid from amounts actually recovered with respect to any Defaulted
Receivable or Vehicle, (ii) charge backs attributable to errors in posting,
returned checks, or rights of offset for amounts that should not have been paid
or that must be refunded as the result of a successful claim or defense under
bankruptcy or similar laws and (iii) the Monthly Servicing Fee, as provided in
Section 4.8.
(b) On the Determination Date in each month, the Servicer shall
instruct the Trustee to withdraw from the Collection Account the amount
collected with respect to Receivables, including Additional Fees and Liquidation
Proceeds, received during the Collection Period and investment earnings related
to such Determination Date and deposit such amount in immediately available
funds or by wire transfer in immediately available funds into the Certificate
Account.
(c) On or before each Determination Date, the Servicer shall
determine (i) the sum of (x) the amount of payments on all Receivables,
including all Additional Fees and Liquidation Proceeds (including payments made
under any of the Insurance Policies or the Collateral Insurance to the extent
applicable to payments due on the Receivables), received during the related
Collection Period, investment earnings deposited in the Collection Account or
Certificate Account during the related Collection Period, investment earnings
earned through such Determination Date and not yet deposited in the Collection
Account or Certificate Account, and the Purchase Amounts for all Receivables to
be purchased or repurchased with respect to such Collection Period which have
been deposited in the Certificate Account (the "Net Available Funds") and (y)
the Yield Maintenance Withdrawal Amount for the related Distribution Date (the
sum of (x) and (y) being the "Available Funds") , and (ii) the amount of funds
necessary to make the distributions required pursuant to clauses (i) through
(iv) of Section 5.4(a) on the next Distribution Date. The Servicer shall by a
Servicer's Certificate notify the Trustee of such amounts by telecopy to the
Corporate Trust office (or such other number as the Trustee may from time to
time provide) , followed promptly by mailing such notice to the Trustee at the
Corporate Trust Office, and the Trustee shall provide such notice to the
Certificate Insurer.
SECTION 5.3 PURCHASE AMOUNTS.
On the Determination Date following each Collection Period, the
Servicer or the Seller, as the case may be, shall remit to the Certificate
Account the aggregate Purchase Amount for such Collection Period pursuant to
Sections 3.2, 4.2 and 4.7.
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SECTION 5.4 DISTRIBUTIONS.
(a) on each Distribution Date, the Trustee shall apply or cause to be
applied the sum of (w) the Net Available Funds in the Certificate Account (after
withdrawing amounts deposited in error and Liquidation Proceeds relating to
Purchased Receivables) for the prior Collection Period, (x) the Yield
Maintenance Withdrawal Amount, (y) the Reserve Account Withdrawal Amount and (z)
the amount of any Insured Payment to make the following distributions in the
listed order of priority:
(i) the Monthly Trustee's Fee, including any overdue Monthly
Trustee's Fee, to the Trustee;
(ii) the Premium Amount, including any overdue Premium Amount, to
the Certificate Insurer;
(iii) Monthly Interest, including any overdue Monthly Interest, to
the Certificateholders;
(iv) Monthly Principal, including any overdue Monthly Principal,
to the Certificateholders;
(v) the Reimbursement Amount, to the Certificate Insurer;
(vi) the Reserve Account Deposit Amount, to the Reserve Account;
and
(vii) the remainder, to the Seller.
If the Servicer exercises the purchase option on any Distribution
Date pursuant to Section 11.2, the Optional Purchase Price shall be deposited
into the Certificate Account on the Determination Date related to such
Distribution Date.
In making such distributions, the Trustee shall be entitled to
rely upon (without investigation, confirmation or recalculation) all information
and calculations contained in the Servicer's Certificate delivered to the
Trustee pursuant to Section 4.9.
(b) All monthly distributions to Certificateholders shall be made by
wire transfer (if wiring instructions are received from the Certificateholders),
or, in the absence of such instructions, by check mailed to each
Certificateholder of record on the preceding Record Date at its address
appearing on the Certificate Register, or by such other means as the
Certificateholder and the Trustee shall agree. Payments to the Certificate
Insurer or the Seller shall be made by wire transfer based on instructions
received by the Trustee from either of them. Notwithstanding the foregoing, the
final payment on each Certificate shall be made only against the presentation
and surrender of the Certificate at the office or agency then maintained by the
Trustee.
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(c) Each Certificateholder shall promptly notify the Trustee and the
Certificate Insurer in writing upon the receipt of a nonappealable court order
of a court having competent jurisdiction seeking to recover payments to
Certificateholders or the Trust as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code and shall enclose a
copy of such order with such notice to the Trustee and the Certificate Insurer.
(d) If the Servicer has failed to provide the Trustee with the notice
required pursuant to Section 5.2, the Trustee may calculate Monthly Interest and
apply funds, if any, in the Certificate Account as of the last day of the prior
Collection Period, plus any payments from the Certificate Insurer, to make a
distribution of Monthly Interest to the Certificateholders.
SECTION 5.5 CERTIFICATE INSURANCE POLICY.
(a) By 12:00 noon New York City time on each Determination Date the
Trustee shall, based solely on the information set forth in the related
Servicer's Certificate, determine the Net Available Distribution Amount with
respect to the immediately following Distribution Date.
(b) If the Required Payments for any Distribution Date exceed the Net
Available Distribution Amount for such Distribution Date (such event giving
rise to a "Deficiency Amount") and the Certificate Insurer does not otherwise
fund such Deficiency Amount by 12:00 p.m. New York City time on the third
Business Day preceding the related Distribution Date (the "Claim Date"), the
Trustee shall complete a Notice in the form of Exhibit A attached to the
Certificate Insurance Policy and submit such notice to the Certificate Insurer
no later than 12:00 p.m. New York City time on the Claim Date as a claim for an
Insured Payment in an amount equal to such Deficiency Amount. The Notice shall
specify the amount of the Insured Payment and shall constitute a claim for an
Insured Payment pursuant to the Certificate Insurance Policy.
(c) The Trustee shall report to the Seller and the Certificate
Insurer with respect to the amounts then held in each Account held by the
Trustee and the identity of the investments included therein, as the Seller or
the Certificate Insurer may from time to time request. Without limiting the
generality of the foregoing, the Trustee shall, at the request of the Seller or
the Certificate Insurer, transmit promptly to the Certificate Insurer and the
Seller copies of all accountings of receipts in respect of the Receivables
furnished to it by the Servicer.
(d) The Trustee shall (i) receive as attorney-in-fact of the
Certificateholders any Insured Payment from the Certificate Insurer and
(ii) disburse the same to such Certificateholders as set forth in Section 5.4.
Insured Payments disbursed by the Trustee from proceeds of the Certificate
Insurance Policy shall not be considered payment by the Trust with respect to
the Certificates, and the Certificate Insurer shall become the owner of such
unpaid amounts due from the Trust in respect of Insured Payments as the deemed
assignee of such Certificateholders, as hereinafter provided. The Trust and the
Trustee hereby agree on behalf of each Certificateholder for the benefit of the
Certificate Insurer that to the extent the Certificate Insurer pays Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the Certificateholders, the Certificate Insurer shall be subrogated to the
rights of the
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Certificateholders with respect to such Insured Payments, shall be deemed to the
extent of the Insured Payments so made to be a Certificateholder and shall
receive future distributions until all such Insured Payments by the Certificate
Insurer have been fully reimbursed, as described in the following paragraph. To
evidence such subrogation, the Trustee shall note the Certificate Insurer's
rights as subrogee on the Certificate Register upon receipt from the Certificate
Insurer of proof of the payment of any Insured Payment, after making the
distribution on any such future Distribution Date to the Certificateholders
other than to the Certificate Insurer.
The Certificate Insurer shall be entitled to receive the related
Reimbursement Amount pursuant to Section 5.4 with respect to each Insured
Payment made by the Certificate Insurer. The Trustee hereby agrees on behalf of
each Certificateholder and the Trust for the benefit of the Certificate Insurer
that it recognizes that to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the Certificateholders, or to the extent any Premium Amount remains unpaid, as
the case may be, the Certificate Insurer shall be entitled to receive the
related Reimbursement Amount pursuant to Section 5.4.
It is understood and agreed that the intention of the parties is
that the Certificate Insurer shall not be entitled to reimbursement on any
Distribution Date for amounts previously paid by it unless on such Distribution
Date the Certificateholders shall also have received the full amount of the
Required Payments for such Distribution Date.
(e) Each Certificateholder which pays any Preference Amounts
theretofore received by such Certificateholder on account of such Certificate
will be entitled to receive reimbursement for such amounts from the Certificate
Insurer in accordance with the terms of the Certificate Insurance Policy, but
only after (i) delivering a copy to the Certificate Insurer of a final,
nonappealable order (a "Preference Order") of a court having competent
jurisdiction under the United States Bankruptcy Code demanding payment of such
amount to the bankruptcy court and (ii) irrevocably assigning such
Certificateholder's claim with respect to such Preference Order to the
Certificate Insurer in such form as is required by the Certificate Insurer. In
no event shall the Certificate Insurer pay more than one Insured Payment in
respect of any Preference Amount. Consequently, the Trustee shall not be
entitled to reimbursement with respect to any Preference Order relating to the
Certificateholder's receipt of funds representing Insured Payments made by the
Certificate Insurer in respect of such Distribution Date.
The Trustee, for itself and on behalf of the Certificateholders,
agrees that the Certificate Insurer may at any time during the continuation of
any proceeding relating to a Preference Order direct all matters relating to
such Preference Order, including, without limitation, the direction of any
appeal of any order relating to such Preference Order and the posting of any
surety, supersedeas or performance bond pending any such appeal. In addition
and without limitation of the foregoing, the Certificate Insurer shall be
subrogated, to the extent of Insured Payments, to the rights of the Seller, the
Servicer, the Trustee and each Certificateholder in the conduct of any such
preference claim, including, without limitation, all rights of any party to
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any adversarial proceeding or action with respect to any court order issued in
connection with any such preference claim.
(f) The Trustee shall keep a complete and accurate record of the
amount of interest and principal paid in respect of any Certificate from moneys
received under the Certificate Insurance Policy. The Certificate Insurer shall
have the right to inspect such records at reasonable times during normal
business hours upon one Business Day's prior notice to the Trustee.
(g) The Certificate Insurer shall have the right to give
participations in its rights under this Agreement and to enter into contracts of
reinsurance with respect to the Certificate Insurance Policy and each such
participant or reinsurer shall be entitled to the benefit of any representation,
warranty, covenant and obligation of the Seller and the Servicer hereunder as if
such participant or reinsurer was a party hereto; provided that no such grant of
participation shall operate to relieve the Certificate Insurer of liability on
the Certificate Insurance Policy, and provided further that not such
participation or contract of reinsurance shall require the Servicer, the Trustee
or the Seller to deal with any person other than the Certificate Insurer.
SECTION 5.6 RESERVE ACCOUNT AND YIELD MAINTENANCE ACCOUNT.
(a) On the Closing Date, the Seller shall deposit the Reserve Initial
Deposit into the Reserve Account. Amounts held from time to time in the Reserve
Account shall be held by the Trustee for the benefit of Seller, subject to the
first priority security interest granted under Section 2.2 hereof to the Trustee
for the benefit of the Certificateholders and the Certificate Insurer, but the
Reserve Account shall not be an asset of the Trust.
The Certificate Insurer may, by written notice to the Trustee,
direct the Trustee to reduce the amount of the Specified Reserve Balance;
PROVIDED, HOWEVER, that no such notice given to the Trustee shall be effective
unless accompanied by written evidence from each Rating Agency that such
reduction in the Specified Reserve Balance will not result in the reduction or
withdrawal of any rating then assigned to the Certificates.
On each Distribution Date (i) if the amount on deposit in the
Reserve Account is less than the Specified Reserve Balance, the Trustee shall,
after payment of any amounts required to be distributed pursuant to clauses
(i) through (iv) of Section 5.4(a) deposit in the Reserve Account the Reserve
Account Deposit Amount and (ii) if the amount on deposit in the Reserve Account
on any Distribution Date (after giving effect to all other deposits thereto and
withdrawals therefrom to be made on such Distribution Date) is greater than the
Specified Reserve Balance, the Trustee shall distribute the amount of such
excess to the Seller on such Distribution Date.
(b) On each Distribution Date, the Servicer shall instruct the
Trustee (based on the information contained in the Servicer's Certificate
delivered on the related Determination Date) to withdraw the Reserve Account
Withdrawal Amount from the Reserve Account and deposit such amount in the
Certificate Account.
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(c) On the Closing Date, the Seller shall deposit the Initial Yield
Maintenance Amount into the Yield Maintenance Account. Amounts held from time
to time in the Yield Maintenance Account shall be held by the Trustee for the
benefit of the Seller, subject to the first priority security interest granted
under Section 2.2 hereof to the Trustee for the benefit of the
Certificateholders and the Certificate Insurer, but the Yield Maintenance
Account shall not be an asset of the Trust.
On each Distribution Date (i) the Trustee shall withdraw the
Yield Maintenance Withdrawal Amount from the Yield Maintenance Account and
distribute such amount to the Certificateholders pursuant to Section 5.4 hereof,
(ii) the Trustee shall withdraw from the Yield Maintenance Account the net
investment earnings then on deposit thereon and distribute such amount to the
Seller and (iii) if the amount then on deposit in the Yield Maintenance Account
(after giving effect to all withdrawals therefrom to be made on such
Distribution Date) is greater than the Yield Maintenance Amount, the Trustee
shall distribute the amount of such excess to the Seller on such Distribution
Date.
(d) Amounts properly received by the Seller pursuant to this
Agreement shall not be available to the Trustee or the Trust for the purpose of
making deposits to the Reserve Account, or making payments to the
Certificateholders, nor shall the Seller be required to refund any amount
properly received by it.
SECTION 5.7 STATEMENTS TO CERTIFICATEHOLDERS.
On each Distribution Date, the Trustee shall mail or send by
facsimile to the Certificateholders, the Rating Agencies and the Certificate
Insurer a statement, based on information in the Servicer's Certificate
furnished to the Trustee by the Servicer pursuant to Section 4.9, setting forth
for the Collection Period relating to such Distribution Date the following
information (which in the case of items (i), (ii) and (iii) shall be based on a
Certificate in a principal amount of $1,000):
(i) the amount of the distribution allocable to principal,
including any overdue principal;
(ii) the amount of the distribution allocable to interest,
including any overdue interest;
(iii) the Monthly Servicing Fee, including any overdue Monthly
Servicing Fee, and the Monthly Trustee's Fee;
(iv) the amount of any Insured Payments;
(v) the Reserve Account Withdrawal Amount and the Yield
Maintenance Withdrawal Amount;
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(vi) the aggregate Net Losses on the Receivables for the related
Collection Period;
(vii) the Pool Balance and Certificate Factor as of the end of the
related Collection Period;
(viii) the aggregate Principal Balance of all Receivables which
were delinquent 30 days or more as of the last day of the related
Collection Period;
(ix) the Certificate Principal Balance (after giving effect to
any distribution of Monthly Principal made on such Distribution Date) on
which Monthly Interest will be calculated with respect to the next
succeeding Distribution Date;
(x) the Delinquency Percentage relating to such Distribution
Date;
(xi) the aggregate of all Purchase Amounts received on the
related Determination Date;
(xii) the aggregate amount received with respect to Defaulted
Receivables, including Liquidation Proceeds, during the related Collection
Period; and
(xiii) the Reimbursement Amount for such Distribution Date.
Within the prescribed period of time for tax reporting purposes
after the end of each calendar year during the term of this Agreement, the
Trustee shall mail, to each Person who at any time during such calendar year
shall have been a Certificateholder, a statement containing the sum of the
amounts determined in clauses (i), (ii) and (iii) for such calendar year or, in
the event such Person shall have been a Certificateholder during a portion of
such calendar year, for the applicable portion of such year, unless
substantially comparable information has been provided to such
Certificateholder, for the purposes of such Certificateholder's preparation of
federal income tax returns.
ARTICLE VI
THE CERTIFICATES
SECTION 6.1 THE CERTIFICATES.
(a) The Certificates shall be issued in denominations of $1,000 and
integral multiples thereof; PROVIDED, HOWEVER, that one Certificate may be
issued in a denomination that includes any residual amount. The Certificates
shall be executed on behalf of the Trust by manual signature of a Responsible
Officer of the Trustee. Certificates bearing the signatures of individuals who
were, at the time when such signatures shall have been affixed, authorized to
sign on behalf of the Trust, shall be valid and binding obligations of the
Trust, notwithstanding that such individuals or any of
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them shall have ceased to be so authorized prior to the authentication and
delivery of such Certificates or did not hold such offices at the date of such
Certificates.
(b) The Certificates are pass-through securities having the rights
described therein and herein. Notwithstanding references herein or therein with
respect to the Certificates as to "principal" and "interest" no debt of any
Person is represented thereby, nor are the Certificates or the underlying
Receivables guaranteed by any Person (except that the Receivables may be
recourse to the Obligors thereof to the extent permitted by law and except for
the rights of the Trustee with respect to the Certificate Insurance Policy).
Distributions on the Certificates are payable solely from payments received on
or with respect to the Receivables, moneys in the Collection Account and the
Certificate Account, except as otherwise provided herein, from earnings on
moneys and the proceeds of property held as a part of the Trust and, upon the
occurrence of certain events as herein provided, from draws on the Reserve
Account and the Yield Maintenance Account and claims under the Certificate
Insurance Policy. Each Certificate entitles the Certificate Owner thereof to
receive monthly on each Distribution Date a specified portion of such payments
with respect to the Receivables, earnings, proceeds and withdrawals from the
Reserve Account and the Yield Maintenance Account and claims under the
Certificate Insurance Policy PRO RATA in accordance with the ownership interest
of such Certificate Owner.
SECTION 6.2 AUTHENTICATION OF CERTIFICATES.
The Trustee shall cause the Certificates to be executed on behalf
of the Trust, authenticated, and delivered to or upon the written order of the
Seller, signed by its chairman of the board, any vice chairman of the board, its
president, any executive vice president, any senior vice president or any vice
president, without further corporate action by the Seller, in authorized
denominations, pursuant to this Agreement. No Certificate shall entitle its
holder to any benefit under this Agreement, or shall be valid for any purpose,
unless there shall appear on such Certificate a certificate of authentication,
substantially as set forth in the form of Certificate attached as Exhibit B
hereto, executed by the Trustee by manual signature; such authentication shall
constitute conclusive evidence that such Certificate shall have been duly
authenticated and delivered hereunder. All Certificates shall be dated the date
of their authentication.
SECTION 6.3 REGISTRATION OF TRANSFER AND EXCHANGE OF
CERTIFICATES.
The Certificate Registrar shall keep or cause to be kept, at the
office or agency maintained pursuant to Section 6.7, a Certificate Register in
which, subject to such reasonable regulations as it may prescribe, the Trustee
shall provide for the registration of Certificates and of transfers and
exchanges of Certificates as herein provided. The Trustee shall be the initial
Certificate Registrar.
Upon surrender for registration of transfer of any Certificate at
the Corporate Trust Office, the Trustee shall execute, authenticate, and
deliver, in the name of the designated transferee or transferees, one or more
new Certificates in authorized denominations of a like aggregate amount dated
the date of authentication by the Trustee. At the option of a Holder,
Certificates may be exchanged for other Certificates of authorized denominations
of a like
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aggregate amount upon surrender of the Certificates to be exchanged at the
Corporate Trust Office.
Every Certificate presented or surrendered for registration of
transfer or exchange shall be accompanied by a written instrument of transfer in
form satisfactory to the Trustee and the Certificate Registrar duly executed by
the Holder or his or her attorney duly authorized in writing. Each Certificate
surrendered for registration of transfer and exchange shall be canceled and
subsequently destroyed by the Trustee.
No service charge shall be made for any registration of transfer
or exchange of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.
SECTION 6.4 MUTILATED, DESTROYED, LOST, OR STOLEN CERTIFICATES.
If (a) any mutilated Certificate shall be surrendered to the
Certificate Registrar, or if the Certificate Registrar shall receive evidence to
its satisfaction of the destruction, loss, or theft of any Certificate and (b)
there shall be delivered to the Certificate Registrar or the Trustee such
security or indemnity as may be required by them to save each of them harmless,
then in the absence of notice that such Certificate shall have been acquired by
a bona fide purchaser other than the Person who requested a replacement
Certificate, the Trustee on behalf of the Trust shall execute and the Trustee
shall authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost, or stolen Certificate, a new Certificate of like
tenor and denomination. in connection with the issuance of any new Certificate
under this Section 6.4, the Trustee and the Certificate Registrar may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith. Any duplicate Certificate issued
pursuant to this Section 6.4 shall constitute conclusive evidence of ownership
in the Trust, as if originally issued, whether or not the lost, stolen, or
destroyed Certificate shall be found at any time.
SECTION 6.5 PERSONS DEEMED OWNERS.
Prior to registration of transfer, the Trustee or the Certificate
Registrar may treat the Person in whose name any Certificate shall be registered
as the owner of such Certificate for the purpose of receiving distributions
pursuant to Section 5.4 and for all other purposes whatsoever, and neither the
Trustee, the Certificate Insurer nor the Certificate Registrar shall be bound by
any notice to the contrary.
SECTION 6.6 ACCESS TO LIST OF CERTIFICATEHOLDERS' NAMES AND
ADDRESSES.
The Trustee shall furnish or cause to be furnished to the
Servicer and the Certificate Insurer, within 15 days after receipt by the
Trustee of a request therefor from such party in writing, a list, in such form
as such party may reasonably require, of the names and addresses of the
Certificateholders as of the most recent Record Date. If three or more
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Certificateholders, or one or more Holders of Certificates aggregating not less
than __% of the Certificate Principal Balance, apply in writing to the Trustee,
and such application states that the applicants desire to communicate with other
Certificateholders with respect to their rights under this Agreement or under
the Certificates and such application shall be accompanied by a copy of the
communication that such applicants propose to transmit, then the Trustee shall,
within five Business Days after the receipt of such application, afford such
applicants access during normal business hours to the current list of
Certificateholders. Each Holder, by receiving and holding a Certificate, shall
be deemed to have agreed to hold neither the Servicer nor the Trustee
accountable by reason of the disclosure of its name and address, regardless of
the source from which such information was derived.
SECTION 6.7 MAINTENANCE OF OFFICE OR AGENCY.
The Trustee shall maintain an office or offices or agency or
agencies where Certificates may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Trustee in respect of the
Certificates and this Agreement may be served. The Trustee initially designates
the Corporate Trust Office as specified in this Agreement as its office for such
purposes. The Trustee shall give prompt written notice to the Servicer, the
Certificate Insurer and Certificateholders of any change in the location of the
Certificate Register or any such office or agency.
SECTION 6.8 BOOK-ENTRY CERTIFICATES.
The Certificates (other than a Certificate representing any
residual portion of the Pool Balance as of the Cut-Off Date), upon original
issuance, shall be issued in the form of typewritten Certificates representing
the Book-Entry Certificates, to be delivered to The Depository Trust Company,
the initial Clearing Agency, by the Seller or on its behalf. The Certificates
shall initially be registered on the Certificate Register in the name of CEDE &
Co., the nominee of the initial Clearing Agency, and no Certificate Owner will
receive a definitive certificate representing such Certificate Owner's interest
in the Certificates, except as provided in Section 6.10. Unless and until
definitive, fully registered Certificates ("Definitive Certificates") have been
issued to Certificateholders pursuant to Section 6.10:
(i) the provisions of this Section 6.8 shall be in full force
and effect;
(ii) the Seller, the Servicer and the Trustee may deal with the
Clearing Agency and the Clearing Agency Participants for all purposes
(including the making of distributions on the Certificates and the taking
of actions by the Certificateholders) as the authorized representatives of
the Certificate Owners;
(iii) to the extent that the provisions of this Section 6.8
conflict with any other provisions of this Agreement, the provisions of
this Section 6.8 shall control;
(iv) the rights of Certificate Owners shall be exercised only
through the Clearing Agency (or to the extent Certificate Owners are not
Clearing Agency Participants through
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the Clearing Agency Participants through which such Certificate Owners own
Book-Entry Certificates) and shall be limited to those established by law
and agreements between such Certificate Owners and the Clearing Agency
and/or the Clearing Agency Participants, and all references in this
Agreement to actions by Certificateholders shall refer to actions taken by
the Clearing Agency upon instructions from the Clearing Agency
Participants, and all references in this Agreement to distributions,
notices, reports and statements to Certificateholders shall refer to
distributions, notices, reports and statements to the Clearing Agency or
its nominee, as registered Holder of the Certificates, as the case may be,
for distribution to Certificate Owners in accordance with the procedures
of the Clearing Agency; and
(v) pursuant to an agreement between the Clearing Agency and the
Seller, the initial Clearing Agency will make Book-Entry transfers among
the Clearing Agency Participants and receive and transmit distributions of
principal and interest on the Certificates to the Clearing Agency
Participants, for distribution by such Clearing Agency Participants to the
Certificate Owners or their nominees.
SECTION 6.9 NOTICES TO CLEARING AGENCY.
Whenever notice or other communication to the Certificateholders
is required under this Agreement, unless and until Definitive Certificates shall
have been issued to Certificate Owners pursuant to Section 6.10, the Trustee
shall give to the Clearing Agency all such notices and communications specified
herein to be given to Certificateholders.
SECTION 6.10 DEFINITIVE CERTIFICATES.
If (i)(A) the Servicer advises the Trustee in writing that the
Clearing Agency is no longer willing or able properly to discharge its
responsibilities as Clearing Agency with respect to the Certificates, and
(B) the Trustee or the Servicer is unable to locate a qualified successor,
(ii) the Servicer, at its option, elects to terminate the Book-Entry system
through the Clearing Agency or (iii) after the occurrence of an Event of
Default, Certificate Owners representing in the aggregate not less than a
majority of the Certificate Principal Balance advise the Clearing Agency
through the Clearing Agency Participants in writing that the continuation
of a Book-Entry system through the Clearing Agency is no longer in the best
interests of the Certificate Owners, the Trustee shall notify the Clearing
Agency of the occurrence of any such event and of the availability of
Definitive Certificates to Certificate Owners requesting the same. Upon
surrender to the Trustee by the Clearing Agency, accompanied by
re-registration instructions front the Clearing Agency for registration and
instructions and directions from the Servicer to execute and authenticate new
Certificates, the Trustee shall issue authenticated Definitive Certificates.
The Servicer shall arrange for, and will bear all costs of, the printing and
issuance of such Definitive Certificates. None of the Seller, the Servicer,
the Trustee or the Certificate Insurer shall be liable for any delay in delivery
of such instructions and may conclusively rely on, and shall be protected in
relying on, such instructions. Upon the issuance of Definitive Certificates,
all references herein to obligations imposed upon or to be performed by the
Clearing Agency shall be deemed to be imposed upon and performed by the Trustee,
to the extent applicable with respect to such
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Definitive Certificates and the Trustee shall recognize the Holders of the
Definitive Certificates as Certificateholders hereunder.
ARTICLE VII
THE SELLER
SECTION 7.1 REPRESENTATIONS OF SELLER.
The Seller makes the following representations on which the
Trustee relies in accepting the Receivables in trust and executing and
authenticating the Certificates and upon which the Certificate Insurer relies in
executing and delivering the Certificate Insurance Policy. The representations
speak as of the Closing Date and shall survive the sale of the Receivables to
the Trustee.
(i) DUE ORGANIZATION AND GOOD STANDING. The Seller shall have
been duly organized and shall be validly existing as a federal savings
bank in good standing under the laws of the United States of America, with
the corporate power and authority to own its properties and to conduct its
business as such properties shall be currently owned and such business is
presently conducted, and had at all relevant times, and shall have, the
corporate power and authority and legal right to acquire and own the
Receivables.
(ii) DUE QUALIFICATION. The Seller shall be duly qualified to do
business as a foreign corporation in good standing, and shall have
obtained all necessary licenses and approvals in all jurisdictions in
which the ownership or lease of property or the conduct of its business
shall require such qualifications, except where the failure to be so
qualified or to have obtained such licenses or approvals would not have a
material adverse effect on the transactions contemplated by this
Agreement.
(iii) POWER AND AUTHORITY. The Seller shall have the corporate
power and authority to execute and deliver this Agreement and to carry out
its terms, the Seller shall have full power and authority to sell and
assign the property to be sold and assigned to and deposited with the
Trustee as part of the Trust and shall have duly authorized such sale and
assignment to the Trustee by all necessary corporate action; and the
execution, delivery, and performance of this Agreement shall have been
duly authorized by the Seller by all necessary corporate action.
(iv) VALID SALE; BINDING OBLIGATIONS. This Agreement shall
evidence a valid sale, transfer, and assignment of the Receivables,
enforceable against creditors of and purchasers from the Seller; and shall
evidence a legal, valid, and binding obligation of the Seller enforceable
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other similar laws affecting
the enforcement of creditors' rights or other obligees' rights in general
or the rights of creditors or obligees of federally chartered stock
savings banks, the deposits of which are insured by the FDIC,
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and by general principles of equity, regardless of whether such
enforceability shall be considered in a proceeding in equity or at law.
(v) NO VIOLATION. The consummation of the transactions
contemplated by this Agreement and the fulfillment of the terms hereof
shall not conflict with, result in any breach of any of the terms and
provisions of, nor constitute (with or without notice or lapse of time) a
default under, the charter or by-laws of the Seller, or any indenture,
agreement, or other instrument to which the Seller is a party or by which
it shall be bound; nor result in the creation or imposition of any Lien
upon any of its properties pursuant to the terms of any such indenture,
agreement, or other instrument (other than this Agreement); nor violate
any law or, to the best of the Seller's knowledge, any order, rule, or
regulation applicable to the Seller of any court or of any federal or
state regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over the Seller or its properties.
(vi) NO PROCEEDINGS. There are no proceedings or investigations
pending or, to the Seller's best knowledge, threatened before any court,
regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over the Seller or its properties (A)
asserting the invalidity of this Agreement or the Certificates, (B)
seeking to prevent the issuance of the Certificates or the consummation of
any of the transactions contemplated by this Agreement, (C) seeking any
determination or ruling that might materially and adversely affect the
performance by the Seller of its obligations under, or the validity or
enforceability of, this Agreement or the Certificates, or (D) which might
adversely affect the federal income tax attributes of the Certificates.
(vii) NO CONSENT REQUIRED. The Seller is not required to obtain
the consent of any other Person or any consent, license, approval or
authorization of, or make any registration or declaration with, any
governmental authority or agency in connection with the execution,
delivery and performance of this Agreement (except as have been obtained),
other than as may be required under the Blue Sky laws of any state or the
Securities Act.
(viii) NO INSOLVENCY. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby were not made
in contemplation of the insolvency of the Seller or after the commission
of any act of insolvency by the Seller.
(ix) NOT AN INVESTMENT COMPANY. The Trust is not required to be
registered as an "investment company" under the Investment Company Act of
1940, as amended.
SECTION 7.2 LIABILITY OF SELLER.
The Seller shall be liable in accordance herewith only to the
extent of the obligations specifically undertaken and the representations made
by the Seller under this Agreement.
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SECTION 7.3 MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE
OBLIGATIONS OF THE SELLER.
Any Person (a) into which the Seller may be merged or
consolidated, (b) which may result from any merger or consolidation to which
the Seller shall be a party, or (c) which may succeed to the properties and
assets of the Seller substantially as a whole, which Person in any of the
foregoing cases executes an agreement of assumption to perform every obligation
of the Seller under this Agreement, shall be the successor to the Seller
hereunder without the execution or filing of any document or any further act by
any of the parties to this Agreement; PROVIDED, HOWEVER, that (x) the Seller
shall have delivered to the Trustee and the Certificate Insurer an Officers'
Certificate and an Opinion of Counsel each stating that such consolidation,
merger, or succession and such agreement of assumption comply with this Section
7.3, and (y) all conditions precedent, if any, provided for in this Agreement
relating to such merger, consolidation or succession have been complied with.
Notwithstanding the above, no such transaction shall result in the Seller
becoming subject to the provisions of the United States Bankruptcy Code or
similar laws of any State. The Seller or its successor hereunder shall provide
the Trustee, the Servicer, the Certificate Insurer and the Rating Agencies with
prompt notice of any such transaction.
SECTION 7.4 LIMITATION ON LIABILITY OF CERTAIN PERSONS OF
SELLER.
No recourse under or upon any obligation or covenant of this
Agreement, or of any Certificate or for any claim based thereon or otherwise in
respect thereof, shall be had against any incorporator, shareholder, officer or
director as such, of the Seller or of any successor corporation, either directly
or through the Seller, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise. This
Agreement and the obligations created hereunder are solely corporate
obligations, and no personal liability whatever shall attach to, or is or shall
be incurred by the incorporators, shareholders, officers or directors, as such,
of the Seller, or any of them, because of the issuance of the Certificates, or
under or by reason of the obligations, covenants or agreements contained in this
Agreement or in any of the Certificates or implied therefrom. Any and all such
personal liability, either at common law or in equity or by constitution or
statute, of, and any and all such rights and claims against, every such
incorporator, shareholder, officer or director, as such, because of the issuance
of the Certificates, or under or by reason of the obligations, covenants or
agreements contained in this Agreement or in any of the Certificates or implied
therefrom, are hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Agreement and the issuance of the
Certificates. The Seller and any director, officer, employee or agent of the
Seller may rely in good faith on any document of any kind PRIMA FACIE properly
executed and submitted by any Person respecting any matters arising hereunder.
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ARTICLE VIII
THE SERVICER
SECTION 8.1 REPRESENTATIONS OF SERVICER.
The Servicer makes the following representations on which the
Trustee relies in accepting the Receivables in trust and executing and
authenticating the Certificates and upon which the Certificate Insurer relies in
executing and delivering the Certificate Insurance Policy. The representations
speak as of the Closing Date and shall survive the sale of the Receivables to
the Trustee.
(a) DUE ORGANIZATION AND GOOD STANDING. The Servicer shall have been
duly organized and shall be validly existing as a federal savings bank in good
standing under the laws of the United States of America, with the corporate
power and authority to own its properties and to conduct its business as such
properties shall be currently owned and such business is presently conducted,
and had at all relevant times, and shall have, the corporate power and authority
and legal right to acquire, own, sell, and service the Receivables and to hold
the Receivable Files as custodian on behalf of the Trustee.
(b) DUE QUALIFICATION. The Servicer shall be duly qualified to do
business as a foreign corporation in good standing, and shall have obtained all
necessary licenses and approvals in all jurisdictions in which the ownership or
lease of property or the conduct of its business (including the servicing of the
Receivables as required by this Agreement) shall require such qualifications,
except where the failure to be so qualified or to have obtained such licenses or
approvals would not have a material adverse effect on the transactions
contemplated by this Agreement and would not render any Receivable unenforceable
by the Trustee on behalf of the Certificateholders and the Certificate Insurer.
(c) POWER AND AUTHORITY. The Servicer shall have the corporate power
and authority to execute and deliver this Agreement and to carry out its terms,
and the execution, delivery, and performance of this Agreement shall have been
duly authorized by the Servicer by all necessary corporate action.
(d) BINDING OBLIGATIONS. This Agreement shall constitute a legal,
valid, and binding obligation of the Servicer enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, or other similar laws affecting the enforcement of creditors' or
other obligees' rights in general or the rights of creditors or obligees of
federally chartered stock savings banks, the deposits of which are insured by
the Federal Deposit Insurance Corporation, and by general principles of equity,
regardless of whether such enforceability shall be considered in a proceeding in
equity or at law.
(e) NO VIOLATION. The consummation of the transactions contemplated
by this Agreement and the fulfillment of the terms hereof shall not conflict
with, result in any breach of
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any of the terms and provisions of, nor constitute (with or without notice or
lapse of time) a default under, the charter or by-laws of the Servicer, or any
indenture, agreement, or other instrument to which the Servicer is a party or by
which it shall be bound; nor result in the creation or imposition of any Lien
upon any of its properties pursuant to the terms of any such indenture,
agreement, or other instrument (other than this Agreement); nor violate any law
or, to the best of the Servicer's knowledge any order, rule, or regulation
applicable to the Servicer of any court or of any federal or State regulatory
body, administrative agency, or other governmental instrumentality having
jurisdiction over the Servicer or its properties.
(f) NO PROCEEDINGS. There are no proceedings or investigations
pending or, to the Servicer's best knowledge, threatened before any court,
regulatory body, administrative agency, or other governmental instrumentality
having jurisdiction over the Servicer or its properties (A) asserting the
invalidity of this Agreement or the Certificates, (B) seeking to prevent the
issuance of the Certificates or the consummation of any of the transactions
contemplated by this Agreement, (C) seeking any determination or ruling that
might materially and adversely affect the performance by the Servicer of its
obligations under, or the validity or enforceability of, this Agreement or the
Certificates, or (D) which might adversely affect the federal income tax
attributes of the Certificates.
SECTION 8.2 LIABILITIES OF SERVICER, INDEMNITIES.
(a) The Servicer shall be liable in accordance herewith only to
the extent of the obligations specifically undertaken and the representations
made by the Servicer under this Agreement, including its duties as custodian of
the Receivable Files.
(i) The Servicer, except as set forth in this Section 8.2, shall
not be under any liability to the Trust or the Certificateholders for
taking any action or for refraining from taking any action pursuant to
this Agreement, or for errors in judgment; PROVIDED, HOWEVER, that this
provision shall not protect the Servicer against any liability which would
otherwise be imposed upon the Servicer by reason of its willful
misfeasance, bad faith or negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties as
Servicer hereunder.
(ii) The Servicer shall indemnify, defend, and hold harmless the
Trustee, its officers, directors, agents and employees, the Trust, the
Certificateholders and the Certificate Insurer from and against any and
all costs, expenses, losses, damages, claims, and liabilities, arising out
of or resulting from the use, ownership or operation by the Servicer or
any Affiliate thereof of a Financed Vehicle; PROVIDED, that the Servicer
shall have no obligation to indemnify any Person against any credit losses
on any Receivable serviced by the Servicer in accordance with the
requirements of this Agreement.
(iii) The Servicer shall indemnify, defend and hold harmless the
Trust, the Trustee and its officers, directors, employees and agents and
the Certificate Insurer from and against any loss, liability, expense,
damage or injury, including any judgment, award, settlement and other
costs or expenses incurred in connection with the defense of any
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action, proceeding or claim, to the extent such loss, liability, expense,
damage or injury arose out of, or was imposed upon such persons through,
the willful misfeasance, bad faith or negligence of the Servicer in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties as Servicer hereunder.
(iv) The initial Servicer shall indemnify, defend and hold
harmless the Trustee, its officers, directors, employees and agents from
and against any loss, liability or expense incurred without negligence or
bad faith on the part of the Trustee or its officers, directors, employees
or agents and arising out of or in connection with the acceptance or
administration by the Trustee of this Trust, as applicable, including the
costs and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of the Trustee's powers
or duties hereunder.
(v) The Servicer shall defend, indemnify and hold harmless the
Trust and the Trustee, its respective officers, directors, agents and
employees, the Certificate Insurer and the Certificateholders from and
against any taxes that may at any time be asserted against the Trust, the
Trustee, the Certificate Insurer or the Certificateholders with respect to
the transactions contemplated in this Agreement, including, without
limitation, any sales, gross receipts, general corporation, tangible
personal property, privilege or license taxes (but not including any
personal property taxes asserted with respect to ownership of the
Receivables, or federal or other income taxes arising out of distributions
on the Certificates) and costs and expenses in defending against the same.
Indemnification under this Section 8.2 shall include reasonable
fees and expenses of counsel and expenses of litigation.
Within a reasonable period after receipt by the Trustee, the
Trust, the Certificate Insurer or the Certificateholders of notice of the
commencement of any action with respect to which indemnification is sought under
this Section 8.2, such party shall notify the Servicer in writing of the
commencement thereof. In case any such action shall be brought, the Servicer
shall be entitled to participate in and, to the extent that it shall wish, to
assume the defense thereof, with counsel satisfactory to such indemnified party,
and after notice from the Servicer to the indemnified party of its election so
to assume the defense thereof, the Servicer shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
The Servicer shall not be liable for any settlement of any
litigation or proceeding effected without the written consent of the Servicer
(which shall not be unreasonably withheld). The indemnified party shall not,
without the Servicer's written consent (which shall not be unreasonably
withheld), settle or compromise any claim or consent to entry of any judgment
which would impose an injunction or other equitable relief on the Servicer or
which does not include as an unconditional term thereof the release by the
claimant or the plaintiff of the Servicer from all liability in respect of such
claim.
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The rights to indemnification under this Section 8.2 shall
survive the termination, resignation or removal of the Servicer with respect to
acts and omissions to act of the Servicer giving rise to such rights and
occurring prior to such termination, resignation or removal. In addition, the
rights to indemnification under this Section 8.2 shall survive the termination
of the Trust.
SECTION 8.3 MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE
OBLIGATIONS OF THE SERVICER.
Any Person (a) into which the Servicer may be merged or
consolidated, (b) which may result from any merger or consolidation to which the
Servicer shall be a party, or (c) which may succeed to the properties and assets
of the Servicer substantially as a whole, which Person in any of the foregoing
cases executes an agreement of assumption to perform every obligation of the
Servicer hereunder, shall be the successor to the Servicer under this Agreement
without the execution or filing of any document or any further act on the part
of any of the parties to this Agreement; PROVIDED, HOWEVER, that (x) the
Servicer shall have delivered to the Trustee and the Certificate Insurer an
Officers' Certificate and an Opinion of Counsel each stating that such
consolidation, merger or succession and such agreement of assumption comply with
this Section 8.3 and (y) all conditions precedent, if any, provided for in this
Agreement relating to such merger, consolidation or succession have been
complied with. The Servicer or its successor hereunder shall provide the
Trustee, the Seller, the Certificate Insurer and the Rating Agencies with prompt
notice of any such transaction.
SECTION 8.4 LIMITATION ON LIABILITY OF CERTAIN PERSONS OF
SERVICER.
No recourse under or upon any obligation or covenant of this
Agreement, or of any Certificate or for any claim based thereon or otherwise in
respect thereof, shall be had against any incorporator, shareholder, officer or
director as such, of the Servicer or of any successor corporation, either
directly or through the Servicer, whether by virtue of any constitution, statute
or rule of law, or by the enforcement of any assessment or penalty or otherwise.
This Agreement and the obligations created hereunder are solely corporate
obligations, and no personal liability whatever shall attach to, or is or shall
be incurred by the incorporators, shareholders, officers or directors, as such,
of the Servicer, or any of them, because of the issuance of the Certificates, or
under or by reason of the obligations, covenants or agreements contained in this
Agreement or in any of the Certificates or implied therefrom. Any and all such
personal liability, either at common law or in equity or by constitution or
statute, of, and any and all such rights and claims against, every such
incorporator, shareholder, officer or director, as such, because of the issuance
of the Certificates, or under or by reason of the obligations, covenants or
agreements contained in this Agreement or in any of the Certificates or implied
therefrom, are hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Agreement and the issuance of the
Certificates. The Servicer and any director, officer, employee or agent of the
Servicer may rely in good faith on any document of any kind PRIMA FACIE properly
executed and submitted by any Person respecting any matters arising hereunder.
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Except as provided in this Agreement, the Servicer shall not be
under any obligation to appear in, prosecute, or defend any legal action that
shall not be incidental to its duties to service the Receivables in accordance
with this Agreement (collection actions with respect to Defaulted Receivables
are understood to be incidental to the Servicer's duties to service the
Receivables), and that in its opinion may involve it in any expense or
liability.
SECTION 8.5 SERVICER NOT TO RESIGN.
The Servicer shall not resign from its obligations and duties
under this Agreement except upon determination that the performance of its
duties shall no longer be permissible under applicable law (any such
determination permitting the resignation of the Servicer shall be evidenced by
an Opinion of Counsel to such effect delivered to the Trustee and the
Certificate Insurer). Notice of any such determination permitting the
resignation of the Servicer, shall be communicated to the Trustee, the
Certificate Insurer and the Rating Agencies at the earliest practicable time and
any such determination permitting the resignation of the Servicer shall be
evidenced by an Opinion of Counsel to such effect delivered to the Trustee
concurrently with such notice. No such resignation shall become effective until
the Trustee or other successor Servicer shall have assumed the responsibilities
and obligations of the Servicer in accordance with Section 9.2.
SECTION 8.6 DELEGATION OF DUTIES.
The Servicer may at any time delegate any duties hereunder to any
Person, including, without limitation, the Sub-Servicer, who agrees to conduct
such duties in accordance with this Agreement. Such delegation shall not
relieve the Servicer of its responsibilities and liabilities with respect to
such duties, and shall not constitute a resignation within the meaning of
Section 8.5.
ARTICLE IX
DEFAULT
SECTION 9.1 EVENTS OF DEFAULT.
If any one of the following events ("Events of Default") shall
occur and be continuing:
(i) any failure by the Servicer to deliver to the Trustee the
Servicer's Certificate for a Collection Period or to deliver to the
Trustee for distribution to Certificateholders any proceeds or payment
required to be so delivered under the terms of the Certificates and this
Agreement that shall continue unremedied for a period of more than three
Business Days after written notice from (x) the Trustee or the Holders of
Certificates evidencing not less than 25% of the Certificate Principal
Balance, which
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notice, in either case, shall be consented to by the Certificate Insurer,
or (y) the Certificate Insurer is received by the Servicer as specified in
this Agreement; or
(ii) failure on the part of the Servicer or the Seller duly to
observe or to perform in any material respect any other covenants or
agreements of the Servicer or the Seller, as the case may be, set forth in
the Certificates or in this Agreement, which failure shall (a) materially
and adversely affect the rights of Certificateholders (determined without
regard to the availability of the Certificate Insurance Policy) and (b)
continue unremedied for a period of more than 30 days after the date on
which written notice of such failure, requiring the same to be remedied,
shall have been given (x) (1) to the Servicer or the Seller, as the case
may be, by the Trustee, or (2) to the Servicer or the Seller, as the case
may be, and to the Trustee by the Holders of Certificates evidencing not
less than 25% of the Certificate Principal Balance, which notice, in
either case, shall be consented to by the Certificate Insurer, or (y) to
the Servicer or the Seller, as the case may be, by the Certificate
Insurer; or
(iii) the entry of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver, or liquidator for the Servicer in
any insolvency, readjustment of debt, marshaling of assets and
liabilities, or similar proceedings, or for the winding up or liquidation
of its affairs, and the continuance of any such decree or order unstayed
and in effect for a period of 60 consecutive days; or
(iv) the consent by the Servicer to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings of or
relating to the Servicer or of or relating to substantially all of its
property; or the admission by the Servicer in writing of its inability to
pay its debts generally as they become due, the filing by the Servicer of
a petition to take advantage of any applicable insolvency or
reorganization statute, the making by the servicer of an assignment for
the benefit of its creditors, or the voluntary suspension by the Servicer
of payment of its obligations;
then, and in each and every case, so long as an Event of Default shall not have
been remedied, (x) the Trustee or the Holders of Certificates evidencing not
less than 51% of the Certificate Principal Balance, in either case with the
consent of the Certificate Insurer or (y) the Certificate Insurer, by notice
then given in writing to the Servicer (and to the Trustee if given by the
Certificate Insurer or the Certificateholders), may terminate all of the rights
and obligations of the Servicer under this Agreement.
On or after the receipt by the Servicer of such written notice,
all authority and power of the Servicer under this Agreement, whether with
respect to the Certificates or the Receivables or otherwise, shall, without
further action, pass to and be vested in the Trustee or such successor Servicer
as may be appointed under Section 9.2 pursuant to and under this Section 9.1;
and, without limitation, the Servicer, the Trustee or such other successor
Servicer, as the case may be, is hereby authorized and empowered to execute and
deliver, on behalf of the predecessor
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Servicer, as attorney-in-fact or otherwise, any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement of the Receivables and related documents,
or otherwise; PROVIDED, HOWEVER, that the Trustee or any successor Servicer
shall not be liable for any acts, omissions or obligations of the Servicer prior
to such succession. The predecessor Servicer shall cooperate with the successor
Servicer and the Trustee in effecting the termination of the responsibilities
and rights of the predecessor Servicer under this Agreement, including the
transfer to the successor Servicer of electronic records related to the
Receivables or such form as the successor Servicer may reasonably request and
the transfer to the successor Servicer for administration by it of all cash
amounts that shall at the time be held by the predecessor Servicer for deposit,
or shall thereafter be received with respect to a Receivable. The Trustee shall
give the Rating Agencies and the Certificate Insurer notice of any termination
of the Servicer pursuant to the terms of this Section 9.1.
SECTION 9.2 APPOINTMENT OF SUCCESSOR.
(a) Upon the Servicer's receipt of notice of termination pursuant to
Section 9.1 or the Servicer's resignation in accordance with the terms of this
Agreement, the predecessor Servicer shall continue to perform its functions as
Servicer under this Agreement, in the case of termination, only until the date
specified in such termination notice or, if no such date is specified in a
notice of termination, until receipt of such notice and, in the case of
resignation, until the later of (x) the date 45 days from the delivery to the
Trustee and the Certificate Insurer of written notice of such resignation (or
written confirmation of such notice) in accordance with the terms of this
Agreement and (y) the date upon which the predecessor Servicer shall become
unable to act as Servicer, as specified in the notice of resignation and
accompanying Opinion of Counsel. In the event of the Servicer's resignation or
termination hereunder, the Trustee shall, with the consent of the Certificate
Insurer, appoint a successor Servicer, and the successor Servicer shall accept
its appointment by a written assumption in form acceptable to the Trustee. In
the event that a successor Servicer has not been appointed at the time when the
predecessor Servicer has ceased to act as Servicer in accordance with this
Section 9.2, the Trustee without further action shall automatically be appointed
the successor Servicer; PROVIDED, HOWEVER, that the Trustee shall not be liable
for any acts, omissions or obligations of the Servicer prior to such succession.
Notwithstanding the above, the Trustee shall, if it shall be legally unable so
to act, appoint, or petition a court of competent jurisdiction to appoint, any
established financial institution, having a net worth of not less than
$50,000,000 and whose regular business shall include the servicing of automotive
receivables, as the successor to the Servicer under this Agreement.
(b) Upon appointment, the successor Servicer shall be the successor
in all respects to the predecessor Servicer and shall be subject to all the
responsibilities, duties, and liabilities arising thereafter relating thereto
placed on the predecessor Servicer, and shall be entitled to all of the rights
granted to the predecessor Servicer, by the terms and provisions of this
Agreement.
(c) In connection with such appointment, the Trustee may make such
arrangements for the compensation of a successor Servicer out of payments on
Receivables as it and such successor Servicer shall agree; PROVIDED, HOWEVER,
that no such compensation shall be in excess
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of that permitted the original Servicer under this Agreement. The Trustee and
such successor Servicer shall take such action, consistent with this Agreement,
as shall be necessary to effectuate any such succession.
The Servicer shall cooperate with the successor Servicer in
effecting the transfer of the rights and responsibilities of the Servicer under
this Agreement.
SECTION 9.3 NOTIFICATION TO CERTIFICATEHOLDERS.
Upon any notice of an Event of Default or upon any termination
of, or appointment of a successor to, the Servicer pursuant to this Article IX,
the Trustee shall give prompt written notice thereof to Certificateholders at
their respective addresses appearing in the Certificate Register, to the Rating
Agencies and to the Certificate Insurer.
SECTION 9.4 WAIVER OF PAST DEFAULTS.
The Certificate Insurer or, provided they have obtained the prior
consent of the Certificate Insurer, the Holders of Certificates evidencing not
less than 51% of the Certificate Principal Balance may, on behalf of all Holders
of Certificates, waive any default by the Servicer or the Seller in the
performance of its obligations hereunder and its consequences, except a default
in making any required deposits to or payments from the Certificate Account in
accordance with this Agreement. Upon any such waiver of a past default, such
default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereon.
SECTION 9.5 EFFECT OF EVENT OF DEFAULT ON SUB-SERVICER.
Any removal of the Servicer pursuant to this Article IX shall
IPSO FACTO constitute a removal of the Sub-Servicer.
ARTICLE X
THE TRUSTEE
SECTION 10.1 DUTIES OF TRUSTEE.
The Trustee both prior to and after the occurrence of an Event of
Default, shall undertake to perform such duties as are specifically set forth in
this Agreement. If an Event of Default shall have occurred and shall not have
been cured, the Trustee shall exercise such of the rights and powers vested in
it by this Agreement, and shall use the same degree of care and skill in their
exercise, as a prudent man or woman would exercise or use under the
circumstances in the conduct of his or her own affairs; PROVIDED, HOWEVER, that
if the Trustee shall assume the duties of the Servicer pursuant to Section 9.2,
the Trustee in performing such duties shall use the degree of
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skill and attention customarily exercised by a servicer with respect to
automobile receivables that it services for itself or others.
The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Trustee that shall be specifically required to be furnished pursuant to
any provision of this Agreement, shall examine them to determine whether they
conform as to form to the requirements of this Agreement.
No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own bad faith; PROVIDED, HOWEVER, that:
(i) prior to the occurrence of an Event of Default, and after
the curing of all such Events of Default that may have occurred, the
duties and obligations of the Trustee shall be determined solely by the
express provisions of this Agreement, the Trustee shall not be liable
except for the performance of such duties and obligations as shall be
specifically set forth in this Agreement, no implied covenants or
obligations shall be read into this Agreement against the Trustee and, in
the absence of bad faith on the part of the Trustee, or manifest error,
the Trustee may conclusively rely on the truth of the statements and the
correctness of the opinions expressed in any certificates or opinions
furnished to the Trustee and conforming to the requirements of this
Agreement;
(ii) the Trustee shall not be liable for an error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee shall have been negligent in ascertaining the pertinent
facts;
(iii) the Trustee shall not be liable with respect to any action
taken, suffered, or omitted to be taken in good faith in accordance with
this Agreement or at the direction of the Certificate Insurer or the
Holders of Certificates evidencing not less than 25% of the Certificate
Principal Balance with the consent of the Certificate Insurer relating to
the time, method, and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred upon
the Trustee, under this Agreement;
(iv) the Trustee shall not be charged with knowledge of any
failure by the Servicer to comply with the obligations of the Servicer
referred to in clause (i) or (ii) of Section 9.1, or of any failure by the
Seller to comply with the obligations of the Seller referred to in clause
(ii) of Section 9.1, unless a Responsible Officer of the Trustee receives
written notice of such failure (it being understood that knowledge of the
Servicer or the Servicer as custodian, in its capacity as agent for the
Trustee, is not attributable to the Trustee) from the Servicer, the Seller
or the Certificate Insurer, as the case may be, or the Holders of
Certificates evidencing not less than 25% of the Certificate Principal
Balance; and
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(v) without limiting the generality of this Section or Section
10.4, the Trustee shall have no duty (i) to see to any recording, filing,
or depositing of this Agreement or any agreement referred to therein or
any financing statement evidencing a security interest in the Receivables
or the Financed Vehicles, or to see to the maintenance of any such
recording or filing or depositing or to any rerecording, refiling or
redepositing of any thereof, (ii) to see to any insurance of the Financed
Vehicles or Obligors or to effect or maintain any such insurance, (iii) to
see to the payment or discharge of any tax, assessment, or other
governmental charge or any Lien or encumbrance of any kind owing with
respect to, or assessed or levied against, any part of the Trust, (iv) to
confirm or verify the contents of any reports or certificates of the
Servicer delivered to the Trustee pursuant to this Agreement believed by
the Trustee to be genuine and to have been signed or presented by the
proper party or parties, or (v) to inspect the Financed Vehicles at any
time or ascertain or inquire as to the performance or observance of any of
the Seller's or the Servicer's representations, warranties or covenants or
the Servicer's duties and obligations as Servicer and as custodian of the
Receivable Files under this Agreement.
The Trustee shall not be required to expend or risk its own funds
or otherwise incur financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers, if there shall be
reasonable ground for believing that the repayment of such funds or adequate
indemnity against such risk or liability shall not be reasonably assured to it,
and none of the provisions contained in this Agreement shall in any event
require the Trustee to perform, or be responsible for the manner of performance
of, any of the obligations of the Servicer under this Agreement except during
such time, if any, as the Trustee shall be the successor to, and be vested with
the rights, duties, powers, and privileges of, the Servicer in accordance with
the terms of this Agreement.
SECTION 10.2 TRUSTEE'S CERTIFICATE.
On or as soon as practicable after each Distribution Date on
which Receivables shall be (i) assigned to the Seller pursuant to Section 3.2 or
(ii) assigned to the Servicer pursuant to Section 4.2, 4.7 or 11.2, the Trustee
shall execute a Trustee's Certificate, substantially in the form of, in the case
of an assignment to the Seller, Exhibit C, or, in the case of an assignment to
the Servicer, Exhibit D, based on the information contained in the Servicer's
Certificate for the related Collection Period, amounts deposited to the
Certificate Account, and notices received pursuant to this Agreement,
identifying the Receivables repurchased by the Seller pursuant to Section 3.2 or
purchased by the Servicer pursuant to Section 4.2, 4.7 or 11.2 with respect to
such Collection Period, and shall deliver such Trustee's Certificate,
accompanied by a copy of the Servicer's Certificate for such Collection Period
to the Seller or the Servicer, as the case may be, with a copy to the
Certificate Insurer. The Trustee's Certificate shall be an assignment pursuant
to Section 10.3.
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SECTION 10.3 TRUSTEE'S ASSIGNMENT OF PURCHASED RECEIVABLES.
With respect to each Receivable repurchased by the Seller
pursuant to Section 3.2 or purchased by the Servicer pursuant to Section 4.2,
4.7 or 11.2, the Trustee shall assign, on the day on which the Trustee receives
payment for such Receivable, effective as of the last day of the Collection
Period during which such Receivable became subject to repurchase by the Seller
or purchase by the Servicer, without recourse, representation, or warranty, to
the Seller or the Servicer (as the case may be) all the Trustee's right, title,
and interest in and to such Receivables, and all security and documents relating
thereto, and all proceeds thereof, such assignment being an assignment outright
and not for security. If in any enforcement suit or legal proceeding it shall
be held that the Servicer may not enforce a Receivable on the ground that it
shall not be a real party in interest or a holder entitled to enforce the
Receivable, the Trustee shall, at the Servicer's expense, take such steps as the
Trustee deems necessary to enforce the Receivable, including bringing suit in
its name or the name of the Certificateholders.
SECTION 10.4 CERTAIN MATTERS AFFECTING THE TRUSTEE.
Except as otherwise provided in Section 10.1:
(i) The Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, Officers' Certificate,
Servicer's Certificate, certificate of auditors, or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond, or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties.
(ii) The Trustee may consult with counsel and any Opinion of
Counsel shall be full and complete authorization and protection in respect
of any action taken or suffered or omitted by it under this Agreement in
good faith and in accordance with such Opinion of Counsel.
(iii) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Agreement, or to institute,
conduct, or defend any litigation under this Agreement or in relation to
this Agreement, at the request, order, or direction of any of the
Certificateholders pursuant to the provisions of this Agreement, unless
such Certificateholders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses, and liabilities that
may be incurred therein or thereby; nothing contained in this Agreement,
however, shall relieve the Trustee of the obligations, upon the occurrence
of an Event of Default (that shall not have been cured) , to exercise such
of the rights and powers vested in it by this Agreement, and to use the
same degree of care and skill in their exercise as a prudent man or woman
would exercise or use under the circumstances in the conduct of his or her
own affairs.
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(iv) The Trustee shall not be liable for any action taken,
suffered, or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon it
by this Agreement.
(v) Prior to the occurrence of an Event of Default and after the
curing of all Events of Default that may have occurred, the Trustee shall
not be bound to make any investigation into the facts of matters stated in
any resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, approval, bond, or other paper or
document, unless requested in writing to do so by the Holders of
Certificates evidencing not less than 25% of the Certificate Principal
Balance or the Certificate Insurer; PROVIDED, HOWEVER, that if the payment
within a reasonable time to the Trustee of the costs, expenses, or
liabilities likely to be incurred by it in the making of such
investigation shall be, in the opinion of the Trustee, not reasonably
assured to the Trustee by the security afforded to it by the terms of this
Agreement, the Trustee may require reasonable indemnity against such cost,
expense, or liability as a condition to so proceeding. Nothing in this
clause (v) shall affect the obligation of the Servicer to observe any
applicable law prohibiting disclosure of information regarding the
Obligors.
(vi) The Trustee may execute any of the trusts or powers
hereunder or perform any duties under this Agreement either directly or by
or through agents or attorneys or a custodian and shall not be liable for
the negligence of any of such agents, attorneys or custodians appointed
with due care. The Trustee shall not be responsible for any misconduct or
negligence solely attributable to the acts or omissions of the Servicer in
its capacity as Servicer or custodian.
(vii) Subsequent to the sale of the Receivables by the Seller to
the Trustee, the Trustee shall have no duty of independent inquiry, except
as may be required by Section 10.1, and the Trustee may rely upon the
representations and warranties and covenants of the Seller and the
Servicer contained in this Agreement with respect to the Receivables and
the Receivable Files.
SECTION 10.5 TRUSTEE NOT LIABLE FOR CERTIFICATES OR RECEIVABLES.
The recitals contained herein and in the Certificates (other than
the certificate of authentication on the Certificates) shall be taken as the
statements of the Seller or the Servicer, as the case may be, and the Trustee
assumes no responsibility for the correctness thereof. The Trustee shall make
no representations as to the validity or sufficiency of this Agreement or of the
Certificates (other than the certificate of authentication on the Certificates),
or of any Receivable or related document. The Trustee shall at no time have any
responsibility or liability for or with respect to the legality, validity, and
enforceability of any security interest in any Financed Vehicle or any
Receivable, or the perfection and priority of such a security interest or the
maintenance of any such perfection and priority, or for or with respect to the
efficacy of the Trust or its ability to generate the payments to be distributed
to Certificateholders under this Agreement, including, without limitation, the
existence, condition, location, and ownership of any Financed Vehicle; the
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existence and enforceability of any physical damage insurance, lender's single
interest insurance, or credit life or disability and hospitalization insurance
with respect to any Receivable; the existence and contents of any Receivable or
any computer or other record thereof; the validity of the assignment of any
Receivable to the Trust or of any intervening assignment; the completeness of
any Receivable; the performance or enforcement of any Receivable; the compliance
by the Seller or the Servicer with any warranty or representation made under
this Agreement or in any related document and the accuracy of any such warranty
or representation prior to the Trustee's receipt of notice or other discovery of
any noncompliance therewith or any breach thereof; any investment of monies by
the Servicer or any loss resulting therefrom other than investments in
obligations of or guaranteed by the Trustee (it being understood that the
Trustee shall remain responsible for any Trust property that it may hold); the
acts or omissions of the Seller, the Servicer, or any Obligor; any action of the
Servicer taken in the name of the Trustee; or any action by the Trustee taken at
the instruction of the Servicer; PROVIDED, HOWEVER, that the foregoing shall not
relieve the Trustee of its obligation to perform its duties under this
Agreement. Except with respect to a claim based on the failure of the Trustee
to perform its duties under this Agreement or based on the Trustee's negligence
or willful misconduct, no recourse shall be had for any claim based on any
provision of this Agreement, the Certificates, or any Receivable or assignment
thereof against the Trustee in its individual capacity, the Trustee shall not
have any personal obligation, liability, or duty whatsoever to any
Certificateholder or any other Person with respect to any such claim, and any
such claim shall be asserted solely against the Trust or any indemnitor who
shall furnish indemnity as provided in this Agreement. The Trustee shall not be
accountable for the use or application by the Seller of any of the Certificates
or of the proceeds of such Certificates, or for the use or application of any
funds paid to the Seller or the Servicer in respect of the Receivables. The
Trustee shall not be responsible for any statement in any document prepared,
executed or delivered in connection with the sale and issuance of the
Certificates other than any such document prepared, executed or delivered by the
Trustee in connection therewith on the Closing Date.
SECTION 10.6 TRUSTEE MAY OWN CERTIFICATES.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Certificates with the same rights as it would have if it
were not Trustee.
SECTION 10.7 TRUSTEE'S FEES.
The Trustee's fee for a Collection Period shall equal the Monthly
Trustee's Fee. The Monthly Trustee's Fee will be paid from the funds of the
Trust in accordance with Section 5.4.
SECTION 10.8 ELIGIBILITY REQUIREMENTS FOR TRUSTEE.
The Trustee under this Agreement shall at all times be a
corporation having an office in the same State as the location of the Corporate
Trust Office as specified in this Agreement; and organized and doing business
under the laws of such State or the United States of America; authorized under
such laws to exercise corporate trust powers; having a combined
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capital and surplus of at least $50,000,000 and subject to supervision or
examination by federal or State authorities; having a rating of its long-term
debt obligations by Moody's of no less than Baa3; and reasonably satisfactory to
the Certificate Insurer. If such corporation shall publish reports of condition
at least annually, pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then for the purpose of this Section 10.8,
the combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. In case at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section 10.8, the Trustee shall resign
immediately in the manner and with the effect specified in Section 10.9.
SECTION 10.9 RESIGNATION OR REMOVAL OF TRUSTEE.
The Trustee may at any time resign and be discharged from the
trusts hereby created by giving written notice thereof to the Servicer. Upon
receiving such notice of resignation, the Servicer shall, with the consent of
the Certificate Insurer, promptly appoint a successor Trustee by written
instrument, in duplicate, one copy of which instrument shall be delivered to the
resigning Trustee and one copy to the successor Trustee. If no successor
Trustee shall have been so appointed and have accepted appointment within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If at any time the Trustee shall cease to be eligible in
accordance with the provisions of Section 10.8 and shall fail to resign after
written request therefor by the Servicer or the Certificate Insurer, or if at
any time the Trustee shall be legally unable to act, or shall be adjudged a
bankrupt or insolvent, or a receiver of the Trustee or of its property shall be
appointed, or any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation, or
liquidation, then the Servicer or the Certificate Insurer may remove the
Trustee. If it shall remove the Trustee under the authority of the immediately
preceding sentence, the Servicer shall promptly appoint a successor Trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor Trustee.
Any resignation or removal of the Trustee and appointment of a
successor Trustee pursuant to any of the provisions of this Section 10.9 shall
not become effective without the consent of the Certificate Insurer and until
acceptance of appointment by the successor Trustee pursuant to Section 10.10.
SECTION 10.10 SUCCESSOR TRUSTEE.
Any successor Trustee appointed pursuant to Section 10.9 shall
execute, acknowledge, and deliver to the Servicer and to its predecessor Trustee
an instrument accepting such appointment under this Agreement, and thereupon the
resignation or removal of the predecessor Trustee shall become effective and
such successor Trustee, without any further act, deed, or conveyance, shall
become fully vested with all the rights, powers, duties, and obligations of its
predecessor under this Agreement, with like effect as if originally named as
Trustee. The
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predecessor Trustee shall deliver to the successor Trustee all documents and
statements held by it under this Agreement; and the Servicer and the predecessor
Trustee shall execute and deliver such instruments and do such other things as
may reasonably be required for fully and certainly vesting and confirming in the
successor Trustee all such rights, powers, duties, and
obligations.
No successor Trustee shall accept appointment as provided in this
Section 10.10 unless at the time of such acceptance such successor Trustee shall
be eligible pursuant to Section 10.8.
Upon acceptance of appointment by a successor Trustee pursuant to
this Section 10.10, the Servicer shall mail notice of the successor of such
Trustee under this Agreement to all Holders of Certificates at their addresses
as shown in the Certificate Register, to the Certificate Insurer and to the
Rating Agencies. If the Servicer shall fail to mail such notice within 10 days
after acceptance of appointment by the successor Trustee, the successor Trustee
shall cause such notice to be mailed at the expense of the Servicer.
SECTION 10.11 MERGER OR CONSOLIDATION OF TRUSTEE.
Any corporation into which the Trustee may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion, or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be eligible pursuant to Section 10.8, without
the execution or filing of any instrument or any further act on the part of any
of the parties hereto, anything herein to the contrary notwithstanding. The
Trustee or its successor hereunder shall provide the Servicer, the Certificate
Insurer and the Rating Agencies with prompt notice of any such transaction.
SECTION 10.12 APPOINTMENT OF CO-TRUSTEE OR SEPARATE TRUSTEE.
Notwithstanding any other provisions of this Agreement, at any
time, for the purpose of meeting any legal requirements of any jurisdiction in
which any part of the Trust or any Financed Vehicle may at the time be located,
the Servicer and the Trustee with the consent of the Certificate Insurer acting
jointly shall have the power and shall execute and deliver all instruments to
appoint one or more Persons approved by the Trustee to act as co-trustee,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust, and to vest in such Person, in such capacity and for the
benefit of the Certificateholders and the Certificate Insurer, such title to the
Trust, or any part thereof, and, subject to the other provisions of this Section
10.12, such powers, duties, obligations, rights, and trusts as the Servicer and
the Trustee may consider necessary or desirable. If the Servicer shall not have
joined in such appointment within 15 days after the receipt by it of a request
so to do, or in the case an Event of Default shall have occurred and be
continuing, the Trustee alone shall have the power to make such appointment. No
co-trustee or separate trustee under this Agreement shall be required to meet
the terms of eligibility as a successor Trustee pursuant to Section 10.8 and no
notice to
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Certificateholders of the appointment of any co-trustee or separate trustee
shall be required pursuant to Section 10.10.
Each separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following provisions and
conditions:
(i) all rights, powers, duties, and obligations conferred or
imposed upon the Trustee shall be conferred upon and exercised or
performed by the Trustee and such separate trustee or co-trustee jointly
(it being understood that such separate trustee or co-trustee is not
authorized to act separately without the Trustee joining in such act),
except to the extent that under any law of any jurisdiction in which any
particular act or acts are to be performed (whether as Trustee under this
Agreement or as successor to the Servicer under this Agreement), the
Trustee shall be incompetent or unqualified to perform such act or acts,
in which event such rights, powers, duties, and obligations (including the
holding of title to the Trust or any portion thereof in any such
jurisdiction) shall be exercised and performed singly by such separate
trustee or co-trustee, but solely at the direction of the Trustee;
(ii) no trustee under this Agreement shall be personally liable
by reason of any act or omission of any other trustee under this
Agreement; and
(iii) the Servicer, the Trustee and the Certificate Insurer acting
jointly may at any time accept the resignation of or remove any separate
trustee or co-trustee.
Any notice, request, or other writing given to the Trustee shall
be deemed to have been given to each of the then separate trustees and co-
trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Agreement and
the conditions of this Article X. Each separate trustee and co-trustee, upon its
acceptance of the trusts conferred, shall be vested with the estates or property
specified in its instrument of appointment, either jointly with the Trustee or
separately, as may be provided therein, subject to all the provisions of this
Agreement, specifically including every provision of this Agreement relating to
the conduct of, affecting the liability of, or affording protection to, the
Trustee. Each such instrument shall be filed with the Trustee and a copy
thereof given to the Servicer and the Certificate Insurer.
Any separate trustee or co-trustee may at any time appoint the
Trustee, its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign, or be removed, all of its
estates, properties, rights, remedies, and trusts shall vest in and be exercised
by the Trustee, to the extent permitted by law, without the appointment of a new
or successor trustee.
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SECTION 10.13 REPRESENTATIONS AND WARRANTIES OF TRUSTEE.
The Trustee shall make the following representations and
warranties on which the Seller, the Certificate Insurer and Certificateholders
may rely:
(i) DUE ORGANIZATION AND GOOD STANDING. The Trustee is a
national banking association duly organized, validly existing, and in good
standing under the laws of the United States of America.
(ii) POWER AND AUTHORITY. The Trustee has full power, authority,
and legal right to execute, deliver, and perform this Agreement, and shall
have taken all necessary action to authorize the execution, delivery, and
performance by it of this Agreement.
(iii) NO VIOLATION. The execution, delivery, and performance by
the Trustee of this Agreement shall not violate any provision of any law
governing the banking and trust powers of the Trustee or, to the best of
the Trustee's knowledge, any order, writ, judgment, or decree of any
court, arbitrator, or governmental authority applicable to the Trustee or
any of its assets.
(iv) NO PROCEEDINGS. The execution, delivery, and performance by
the Trustee of this Agreement shall not require the authorization,
consent, or approval of, the giving of notice to, the filing or
registration with, or the taking of any other action in respect of any
governmental authority or agency regulating the banking and corporate
trust activities of the Trustee.
(v) DULY EXECUTED. This Agreement shall have been duly executed
and delivered by the Trustee and shall constitute the legal, valid, and
binding agreement of the Trustee, enforceable in accordance with its
terms.
SECTION 10.14 TAX RETURNS.
The Servicer shall prepare or shall cause to be prepared any tax
returns required to be filed by the Trust and the Trustee shall promptly sign
and file such returns. In no event shall the Trustee be liable for any
liabilities, costs or expenses of the Trust or the Certificateholders under any
tax law, including without limitation federal, state or local income or excise
taxes or any other tax imposed on or measured by income (or any interest or
penalty with respect thereto or arising from a failure to comply therewith).
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ARTICLE XI
TERMINATION
SECTION 11.1 TERMINATION OF THE TRUST.
The respective obligations and responsibilities of the Seller,
the Servicer, and the Trustee created hereby and the Trust created by this
Agreement shall terminate upon (i) the purchase as of the last day of any
Collection Period by the Servicer at its option, pursuant to Section 11.2, of
the corpus of the Trust or (ii) the payment to Certificateholders and the
Certificate Insurer of all amounts required to be paid to them pursuant to this
Agreement and the disposition of all property held as part of the Trust;
PROVIDED, HOWEVER, that in no event shall the trust created by this Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of the descendants of Joseph P. Kennedy, the late ambassador of the Court of St.
James, living on the date of this Agreement. The Servicer shall promptly notify
the Trustee and the Certificate Insurer of any prospective termination pursuant
to this Section 11.1.
Notice of any termination, specifying the Distribution Date upon
which the Certificateholders may surrender their Certificates to the Trustee for
payment of the final distribution and cancellation, shall be given promptly by
the Trustee by letter to Certificateholders mailed not later than the first day
of the month in which the specified Distribution Date occurs, stating (A) the
Distribution Date upon which final payment of the Certificates shall be made
upon presentation and surrender of the Certificates at the office of the Trustee
therein designated, (B) the amount of any such final payment, and (C) that the
Record Date otherwise applicable to such Distribution Date is not applicable,
payments being made only upon presentation and surrender of the Certificates at
the office of the Trustee therein specified. The Trustee shall give such notice
to the Certificate Registrar (if other than the Trustee) at the time such notice
is given to Certificateholders. Upon presentation and surrender of the
Certificates, the Trustee shall cause to be distributed to Certificateholders
and the Certificate Insurer amounts distributable on such Distribution Date
pursuant to Section 5.4.
In the event that all of the Certificateholders shall not
surrender their Certificates for cancellation within six months after the date
specified in the above-mentioned written notice, the Trustee shall give a second
written notice to the remaining Certificateholders to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Certificates shall
not have been surrendered for cancellation, the Trustee may take appropriate
steps, or may appoint an agent to take appropriate steps, to contact the
remaining Certificateholders concerning surrender of their Certificates, and the
cost thereof shall be paid out of the funds and other assets that shall remain
subject to this Agreement. Any funds remaining in the Trust after exhaustion of
such remedies shall, upon notice to the Trustee, be paid by the Trustee to the
Servicer for deposit into an escrow account, and thereafter Certificateholders
shall look only to such escrow account with respect to any claims in respect of
such funds.
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SECTION 11.2 OPTIONAL PURCHASE OF ALL RECEIVABLES.
The Seller shall have the option to purchase the corpus of the
Trust on any Distribution Date following a Record Date on which the Pool Balance
is 5% or less of the Original Pool Balance. To exercise such option, the
Seller shall deposit in the Certificate Account an amount equal to the
aggregate Purchase Amounts for the Receivables, together with any Reimbursement
Amount then owed to the Certificate Insurer (the "Optional Purchase Price");
PROVIDED, HOWEVER, that the Seller may not effect any such purchase unless the
Trustee and the Certificate Insurer shall have received an Opinion of Counsel
acceptable to them that such purchase does not constitute a fraudulent
conveyance under applicable federal and state laws. Such price shall be
deposited to the Certificate Account in immediately available funds by 12:00
noon, New York City time, on the Distribution Date and, upon notice to the
Trustee of such deposit, the Trustee shall release the Receivables and the
Receivable Files and all other property of the Trust to the Seller, whereupon
the Certificates shall no longer evidence any right or interest in the
Receivables or other property of the Trust or any proceeds thereof.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.1 AMENDMENT.
This Agreement may be amended by the Seller, the Servicer and the
Trustee, without the consent of any of the Certificateholders but with the
consent of the Certificate Insurer, to cure any ambiguity or defect, to correct
or supplement any provisions in this Agreement, to correct any typographical
error or to add any other provisions with respect to matters or questions
arising under this Agreement; PROVIDED, HOWEVER, that such action shall not, as
evidenced by an Opinion of Counsel, adversely affect in any material respect the
interests of any Certificateholder.
This Agreement may also be amended from time to time by the
Seller, the Servicer and the Trustee with the consent of the Certificate Insurer
and the Holders of Certificates evidencing not less than 51% of the Certificate
Principal Balance for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Agreement, or of modifying
in any manner the rights of the Holders of Certificates; PROVIDED, HOWEVER, that
no such amendment shall, without the consent of the Holders of all Certificates
then outstanding, reduce the aforesaid percentage required to consent to any
such amendment. In no case may any such amendment increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collections of
payments on Receivables or distributions that shall be required to be made on
any Certificate without the consent of the Holder of such Certificate.
The Trustee shall notify each Rating Agency prior to any
amendment of this Agreement; to the extent practicable, such notice shall be
given not less than 10 days prior to the date on which such amendment is
executed.
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Promptly after the execution of any amendment or consent, the
Trustee shall furnish written notification of the substance of such amendment or
consent to each Certificateholder, each Rating Agency and the Certificate
Insurer; a copy of any proposed amendment shall be furnished to the Certificate
Insurer by the Seller prior to its execution by the Seller.
It shall not be necessary for the consent of Certificateholders
pursuant to this Section 12.1 to approve the particular form of any proposed
amendment or consent, but it shall be sufficient if such consent shall approve
the substance thereof. The manner of obtaining such consents and of evidencing
the authorization of the execution thereof by Certificateholders shall be
subject to such reasonable requirements as the Trustee may prescribe.
Prior to the execution of any amendment to this Agreement, the
Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating
that the execution of such amendment is authorized or permitted by this
Agreement and the Opinion of Counsel referred to in Section 12.2(i)(1). The
Trustee may, but shall not be obligated to, enter into any such amendment which
affects the Trustee's own rights, duties, or immunities under this Agreement.
SECTION 12.2 PROTECTION OF TITLE TO TRUST.
(a) The Seller shall execute and file, or cause to be executed and
filed, such financing statements and cause to be executed and filed such
continuation statements, all in such manner and in such places as may be
required by law fully to preserve, maintain, and protect the interest of the
Certificateholders, the Certificate Insurer and the Trustee under this Agreement
in the Receivables and in the proceeds thereof. The Seller shall deliver (or
cause to be delivered) to the Trustee and the Certificate Insurer file-stamped
copies of, or filing receipts for, any document filed as provided above, as soon
as available following such filing.
(b) Neither the Seller nor the Servicer shall change its name,
identity, or corporate structure in any manner that would, could, or might make
any financing statement or continuation statement filed by the Seller in
accordance with paragraph (a) above seriously misleading within the meaning of
Section 9-402(7) of the UCC, unless the Seller or Servicer shall have filed (or
cause to be filed) UCC financing statements upon any of the stated events.
(c) If, as a result of a relocation of the Seller's or Servicer's
principal executive office, the applicable provisions of the UCC would require
the filing of any amendment of any previously filed financing or continuation
statement or of any new financing statement, then the Seller or the Servicer
shall file or cause to be filed such amendment or continuation statement or new
financing statement within the period of time necessary fully to preserve and
protect the interest of the Trustee in the Receivables. The Servicer shall at
all times maintain each office from which it shall service Receivables, and its
principal executive office, within the United States of America.
(d) The Servicer shall maintain accounts and records as to each
Receivable accurately and in sufficient detail to permit (i) the reader thereof
to know at any time the status of such
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Receivable, including payments and recoveries made and payments owing (and the
nature of each) and (ii) reconciliation between payments or recoveries on (or
with respect to) each Receivable and the amounts from time to time deposited in
the Certificate Account in respect of such Receivable.
(e) The Servicer shall maintain its computer systems so that, from
and after the time of sale under this Agreement of the Receivables to the
Trustee, the Servicer's master computer records (including any back-up archives)
that refer to a Receivable shall indicate clearly with reference to the
particular grantor trust that such Receivable is owned by the Trustee.
Indication of the Trustee's ownership of a Receivable shall be deleted from or
modified on the Servicer's computer systems when, and only when, the Receivable
shall have been paid in full or repurchased.
(f) If at any time the Seller or the Servicer shall propose to sell,
grant a security interest in, or otherwise transfer any interest in automotive
receivables to any prospective purchaser, lender, or other transferee, the
Servicer shall give to such prospective purchaser, lender, or other transferee
computer tapes, records, or print-outs (including any restored from back-up
archives) that, if they shall refer in any manner whatsoever to any Receivable,
shall indicate clearly that such Receivable has been sold and is owned by the
Trustee.
(g) The Servicer shall permit the Trustee and the Certificate Insurer
and their respective agents at any time during normal business hours to inspect,
audit, and make copies of and abstracts from the Servicer's records regarding
any Receivable to the extent permitted by applicable banking, privacy and other
laws limiting such access.
(h) Upon request, the Servicer shall furnish to the Trustee and to
the Certificate Insurer, within five Business Days, a list of all Receivables
(by contract number and name of Obligor) then held as part of the Trust,
together with a reconciliation of such list to the Schedule of Receivables and
to each of the Servicer's Certificates furnished before such request indicating
removal of Receivables from the Trust.
(i) The Servicer shall deliver to the Trustee and the Certificate
Insurer:
(1) promptly after the execution and delivery of
this Agreement and of each amendment hereto and at the time of
any merger, consolidation or succession of the Seller or the
Servicer, an Opinion of Counsel either (a) stating that, in the
opinion of such counsel, all financing statements and
continuation statements have been executed and filed that are
necessary fully to preserve and protect the first priority
perfected security interest of the Trustee in the Receivables,
and reciting the details of such filings or referring to prior
Opinions of Counsel in which such details are given, or (b)
stating that, in the opinion of such counsel, no such action
shall be necessary to preserve and protect such interest; and
(2) by December 31 of each calendar year beginning
December 31, 1996, an Opinion of Counsel, dated as of a date
during the 90-day
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period ending on such date, either (a) stating that, in the
opinion of such counsel, all financing statements and
continuation statements have been executed and filed that are
necessary fully to preserve and protect the first priority
perfected security interest of the Trustee in the Receivables,
and reciting the details of such filings or referring to prior
Opinions of Counsel in which such details are given, or (b)
stating that, in the opinion of such counsel, no such action
shall be necessary to preserve and protect such interest.
SECTION 12.3 LIMITATION ON RIGHTS OF CERTIFICATEHOLDERS.
The death or incapacity of any Certificateholder shall not
operate to terminate this Agreement or the Trust, nor entitle such
Certificateholder's legal representatives or heirs to claim an accounting or to
take any action or commence any proceeding in any court for a partition or
winding up of the Trust, nor otherwise affect the rights, obligations, and
liabilities of the parties to this Agreement or any of them.
No Certificateholder shall have any right to vote (except as
provided in Section 9.1, 9.4, 12.1, 12.3 or 12.7) or in any manner otherwise
control the operation and management of the Trust, or the obligations of the
parties to this Agreement, nor shall anything in this Agreement set forth, or
contained in the terms of the Certificates, be construed so as to constitute the
Certificateholders from time to time as partners or members of an association;
nor shall any Certificateholder be under any liability to any third person by
reason of any action taken pursuant to any provision of this Agreement.
No Certificateholder shall have any right by virtue or by
availing itself of any provisions of this Agreement to institute any suit,
action, or proceeding in equity or at law upon or under or with respect to this
Agreement, unless such Holder previously shall have received the written consent
of the Certificate Insurer and shall have given to the Trustee a written notice
of default and of the continuance thereof, as hereinbefore provided, and unless
also the Holders of Certificates evidencing not less than 25% of the Certificate
Principal Balance shall have made written request upon the Trustee to institute
such action, suit, or proceeding in its own name as Trustee under this Agreement
and shall have offered to the Trustee such reasonable indemnity as it may
require against the costs, expenses, and liabilities to be incurred therein or
thereby, and the Trustee, for 30 days after its receipt of such notice, request,
and offer of indemnity, shall have neglected or refused to institute any such
action, suit, or proceeding and during such 30-day period no direction
inconsistent with such written request has been given to the Trustee pursuant to
Section 9.4; no one or more Holders of Certificates shall have any right in any
manner whatever by virtue or by availing itself or themselves of any provisions
of this Agreement to affect, disturb, or prejudice the rights of the Holders of
any other of the Certificates, or to obtain or seek to obtain priority over or
preference to any other such Holder, or to enforce any right, under this
Agreement except in the manner provided in this Agreement and for the equal,
ratable, and common benefit of all Certificateholders. For the protection and
enforcement of the provisions of this Section 12.3, each Certificateholder and
the Trustee shall be entitled to such relief as can be given either at law or in
equity.
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SECTION 12.4 GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO CONFLICTS
OF LAW PRINCIPLES) APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED WITHIN THE
STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS, AND REMEDIES OF THE PARTIES
UNDER THIS AGREEMENT SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 12.5 NOTICES.
All demands, notices, and communications under this Agreement
shall be in writing, personally delivered or mailed by certified mail, return
receipt requested, and shall be deemed to have been duly given upon receipt (a)
in the case of the Seller or the Servicer, to the agent for service as specified
in this Agreement, at the following address: Chevy Chase Bank, F.S.B., 8401
Connecticut Avenue, 6th Floor, Chevy Chase, Maryland 20815, Attention: General
Counsel, or at such other address as shall be designated by the Seller or the
Servicer in a written notice to the Trustee and (b) in the case of the Trustee,
at the Corporate Trust Office, (c) in the case of the Certificate Insurer, at
113 King Street, Armonk, New York 10504, Attention: Insured Portfolio Management
- - Structured Finance. Any notice required or permitted to be mailed to a
Certificateholder shall be given by first class mail, postage prepaid, at the
address of such Holder as shown in the Certificate Register. Any notice so
mailed within the time prescribed in this Agreement shall be conclusively
presumed to have been duly given, whether or not the Certificateholder shall
receive such notice.
SECTION 12.6 SEVERABILITY OF PROVISIONS.
If any one or more of the covenants, agreements, provisions, or
terms of this Agreement shall be for any reason whatsoever held invalid, then
such covenants, agreements, provisions, or terms shall be deemed severable from
the remaining covenants, agreements, provisions, or terms of this Agreement and
shall in no way affect the validity or enforceability of the other provisions of
this Agreement or of the Certificates or the rights of the Holders thereof or
the rights of the Certificate Insurer.
SECTION 12.7 ASSIGNMENT.
Notwithstanding anything to the contrary contained herein, except
as provided in Sections 7.3 and 8.3 and as provided in the provisions of this
Agreement concerning the resignation of the Servicer, this Agreement may not be
assigned by the Seller or the Servicer without the prior written consent of (x)
the Certificate Insurer or (y) the Trustee or the Holders of Certificates
evidencing not less than 66% of the Certificate Principal Balance, in either
case acting with the consent of the Certificate Insurer.
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SECTION 12.8 CERTIFICATES NONASSESSABLE AND FULLY PAID.
Certificateholders shall not be personally liable for obligations
of the Trust. The interests represented by the Certificates shall be
nonassessable for any losses or expenses of the Trust or for any reason
whatsoever, and, upon authentication thereof by the Trustee pursuant to
Section 6.2, Certificates shall be deemed fully paid.
SECTION 12.9 COUNTERPARTS.
For the purpose of facilitating the execution of this Agreement
and for other purposes, this Agreement may be executed simultaneously in any
number of counterparts, each of which counterparts shall be deemed to be an
original, and all of which counterparts shall constitute but one and the same
instrument.
SECTION 12.10 BENEFITS OF AGREEMENT.
This Agreement shall inure to the benefit of and be binding upon
the parties hereto, the Certificateholders and their respective successors and
assigns, and to the extent provided herein, the Certificate Insurer. Without
limiting the generality of the foregoing, all covenants and agreements in this
Agreement which expressly confer rights upon the Certificate Insurer shall be
for the benefit of and run directly to the Certificate Insurer, and the
Certificate Insurer shall be entitled to rely on and enforce such covenants to
the same extent as if it were a party hereto. Except as otherwise provided in
this Agreement, no other person shall have any rights or obligations hereunder.
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SECTION 12.11 TAX TREATMENT.
The parties hereto agree that the Trust created hereby will at
all times be characterized as a grantor trust for federal, state and local
income tax purposes.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed by their respective officers as of the day and year first above
written.
CHEVY CHASE BANK, F.S.B.,
as Seller and Servicer
By:
-------------------------------------
Name: Mark A. Holles
Title: Vice President
FIRST BANK NATIONAL ASSOCIATION,
as Trustee
By:
-------------------------------------
Name:
----------------------------
Title:
----------------------------
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EXHIBIT A
SCHEDULE OF RECEIVABLES
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EXHIBIT B
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
____% AUTO RECEIVABLES BACKED CERTIFICATE
evidencing a fractional undivided interest in the Trust, as defined below,
the property of which includes a pool of simple interest retail installment
sales contracts and installment loans and other similar evidences of
installment indebtedness, secured by new and used automobiles, light duty
trucks and vans and sold to the Trustee by Chevy Chase Bank, F.S.B.
This Certificate does not represent an interest in or obligation of Chevy Chase
Bank, F.S.B. or any of its affiliates. This Certificate is not a savings
account or a deposit and neither this Certificate nor the underlying Receivables
(as defined below) and other property are insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. This Certificate
is limited in right of payment to certain collections in respect of the
Receivables and payments made pursuant to the Certificate Insurance Policy and,
under certain circumstances, amounts available in the Reserve Account and the
Yield Maintenance Account.
<PAGE>
NUMBER: CUSIP:___________
$______________
THIS CERTIFIES THAT Cede & Co. is the registered owner of a $___________
dollars nonassessable, fully paid, fractional undivided interest in the Chevy
Chase Auto Receivables Trust 1996-1 (the "Trust") formed by Chevy Chase Bank,
F.S.B., a federally chartered savings bank (the "Bank", or the "Seller" or the
"Servicer" in its respective capacities as such). The Trust was created
pursuant to a Pooling and Servicing Agreement dated as of June __, 1996 (the
"Agreement") between Chevy Chase Bank, F.S.B., as Seller and Servicer, and
________________________, as trustee (the "Trustee"), a summary of certain of
the pertinent provisions of which is set forth below. To the extent not
otherwise defined herein, the capitalized terms used herein have the meanings
assigned to them in the Agreement. This Certificate is one of the duly
authorized Certificates designated as "____% Auto Receivables Backed
Certificates" (the "Certificates"). This Certificate is issued under and is
subject to the terms, provisions, and conditions of the Agreement, to which
Agreement the holder of this Certificate by virtue of the acceptance hereof
assents and by which such holder is bound. The property of the Trust includes a
pool of simple interest retail installment sales contracts and installment loans
for new and used automobiles, light duty trucks and vans (the "Receivables"),
all monies due or received thereon on or after June 1, 1996, security interests
in the vehicles financed thereby, such amounts as from time to time may be held
in the Collection Account and the Certificate Account, all rights to receive
payments under certain circumstances from the Reserve Account and the Yield
Maintenance Account, the Certificate Insurance Policy (described below),
proceeds from claims on physical damage, credit life, and disability or
hospitalization insurance policies covering vehicles financed thereby and the
obligors thereunder, any property (including the right to receive future
Liquidation Proceeds) that secures a Receivable that may from time to time be
acquired by or on behalf of the Trustee, proceeds from recourse to Dealers
relating to the Receivables, and the proceeds of any and all of the foregoing.
Under the Agreement, there will be distributed on the first Business Day on
or after the 15th day of each month (the "Distribution Date"), commencing on
July 15, 1996, to the person in whose name this Certificate is registered at the
close of business, if applicable, on the day (whether or not a Business Day)
immediately preceding such Distribution Date (the "Record Date"), such
Certificateholder's fractional interest in Monthly Interest and Monthly
Principal. Each Certificateholder's "fractional interest" is equal to the
original principal amount of such Certificateholder's Certificate, as set forth
on the face thereof, divided by the aggregate original principal amount of all
of the Certificates.
Distributions on this Certificate will be made by the Trustee by wire
transfer (if wiring instructions are received from the Certificateholder), by
check or money order mailed to the Person entitled thereto, or by such other
means as the Certificateholder and the Trustee shall agree, without the
presentation or surrender of this Certificate or the making of any notation
hereon. Except as otherwise provided in the Agreement and notwithstanding the
above, the final distribution on this Certificate will be made after due notice
by the Trustee of the pendency of such distribution and only upon presentation
and surrender of this Certificate at the office or agency
2
<PAGE>
maintained for that purpose by the Trustee in Minneapolis, Minnesota, or at such
other office as the Trustee may designate.
Unless the certificate of authentication hereon shall have been executed by
a Responsible Officer of the Trustee, by manual signature, this Certificate
shall not entitle the holder hereof to any or benefit under the Agreement or be
valid for any purpose.
Pursuant to the Certificate Insurance Policy, the Certificate Insurer is
required, to the extent of any insufficiency in the Available Distribution
Amount, to make Insured Payments available to the Trustee necessary to
distribute the full amount of the Required Payments with respect to the
Certificates on each Distribution Date.
The Certificates do not represent an obligation of, or an interest in, the
Bank or any affiliate of the Bank. The Certificates are limited in right of
payment to certain collections and recoveries respecting the Receivables and
rights to payments under certain circumstances from the Reserve Account, the
Yield Maintenance Account and the Certificate Insurance Policy, all as more
specifically set forth in the Agreement. A copy of the Agreement may be
examined during normal business hours at the principal office of the Seller, and
at such other places, if any, designated by the Seller, by any Certificateholder
upon request.
The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Seller and the rights of the Certificateholders under the Agreement at any time
by the Seller, the Servicer and the Trustee with the consent of the Certificate
Insurer and the Holders of Certificates evidencing not less than 51% of the
Certificate Principal Balance. Any such consent by the Holder of this
Certificate shall be conclusive and binding on such Holder and on all future
Holders of this Certificate and of any Certificate issued upon the transfer
hereof or in exchange herefor or in lieu hereof whether or not notation of such
consent is made upon this Certificate. The Agreement also permits the amendment
thereof, in certain limited circumstances, without the consent of the Holders of
any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set
forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies maintained by the Trustee in its capacity as Certificate
Registrar, or by any successor Certificate Registrar, accompanied by a written
instrument of transfer in form satisfactory to the Trustee and the Certificate
Registrar duly executed by the holder hereof or such holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of authorized
denominations evidencing the same aggregate interest in the Trust will be issued
to the designated transferee.
The Certificates are issuable only as registered Certificates without
coupons in integral multiples of $1,000; PROVIDED, HOWEVER, that one Certificate
may be issued in a denomination that includes any residual amount. As provided
in the Agreement and subject to certain limitations therein set forth,
Certificates are exchangeable for new Certificates of authorized
3
<PAGE>
denominations evidencing the same aggregate denomination, as requested by the
holder surrendering the same.
No service charge will be made for any such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or governmental charges payable in connection therewith.
The Trustee, the Certificate Registrar, and any agent of the Trustee or the
Certificate Registrar may treat the person in whose name this Certificate is
registered as the owner hereof for all purposes, and neither the Trustee, the
Certificate Registrar, nor any such agent shall be affected by any notice to the
contrary.
The obligations and responsibilities created by the Agreement and the Trust
created thereby shall terminate upon the payment to Certificateholders and the
Certificate Insurer of all amounts required to be paid to them pursuant to the
Agreement or the disposition of all property held as part of the Trust. The
Servicer of the Receivables may at its option purchase the corpus of the Trust
at a price specified in the Agreement, and such purchase of the Receivables and
other property of the Trust will effect early retirement of the Certificates;
however, such right of purchase is exercisable on any Distribution Date
following a Record Date on which the Pool Balance is 5% or less of the original
aggregate principal balance of the Receivables.
IN WITNESS WHEREOF, the Trustee on behalf of the Trust and not in its
individual capacity has caused this Certificate to be duly executed.
Dated: ____________, 1996
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
By: _______________________, as Trustee
By: ____________________________________
[name]
4
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to
in the within-mentioned Agreement
___________________________, as Trustee
By: ____________________________________
[name]
Dated: ____________, 1996
5
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY _______________________________
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE _______________________________
______________________________________________________________________________
(Please print or typewrite name and address, including postal zip code, of
assignee)
______________________________________________________________________________
the within Certificate, and all rights thereunder, hereby irrevocably
constituting and appointing
_______________________________________________________________________ Attorney
to transfer said Certificate on the books of the Certificate Registrar, with
full power of substitution in the premises.
Dated:
_________________________________________*
Signature Guaranteed
_________________________________________*
* NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within Certificate in every particular, without
alteration, enlargement or any change whatever. Such a signature must be
guaranteed by a member of the New York Stock Exchange or a commercial bank or
trust company.
6
<PAGE>
EXHIBIT C
TRUSTEE'S CERTIFICATE
PURSUANT TO SECTION 10.2
OF THE POOLING AND SERVICING AGREEMENT
First Bank National Association, as trustee (the "Trustee") of the Chevy
Chase Auto Receivables Trust 1996-1 created pursuant to the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of June 1,
1996, between Chevy Chase Bank, F.S.B. (the "Seller") and the Trustee, does
hereby sell, transfer, assign and otherwise convey to the Seller, without
recourse, representation or warranty, all of the Trustee's right, title and
interest in and to all of the Receivables (as defined in the Pooling and
Servicing Agreement) identified in the attached Servicer's Certificate as
"Purchased Receivables," which are to be repurchased by the Seller pursuant to
Section 3.2, and all Insurance Policies, security and documents relating thereto
IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of __________,
1996.
___________________________________
<PAGE>
EXHIBIT D
TRUSTEE'S CERTIFICATE
PURSUANT TO SECTION 10.2
OF THE POOLING AND SERVICING AGREEMENT
First Bank National Association, as trustee (the "Trustee") of the Chevy
Chase Auto Receivables Trust 1996-1 created pursuant to the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of June 1,
1996, between Chevy Chase Bank, F.S.B. (the "Seller") and the Trustee, does
hereby sell, transfer, assign and otherwise convey to the Servicer, without
recourse, representation or warranty, all of the Trustee's right, title and
interest in and to all of the Receivables (as defined in the Pooling and
Servicing Agreement) identified in the attached Servicer's Certificate as
"Purchased Receivables," which are to be purchased by the Servicer pursuant to
Sections 4.2, 4.7 or 11.2, and all Insurance Policies, security and documents
relating thereto.
IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of __________,
1996.
___________________________________
<PAGE>
EXHIBIT E
FORM OF SERVICER'S CERTIFICATE
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
_____% AUTO RECEIVABLES BACKED CERTIFICATES
Distribution Date: _______________
Collection Period: _______________
Record Date: _______________
Under the Pooling and Servicing Agreement, dated as of June 1, 1996,
between Chevy Chase Bank, F.S.B. (as "Seller" and "Servicer") and First Bank
National Association, as trustee, the Servicer is required to prepare certain
information each month regarding current distributions to Certificateholders and
the performance of the Chevy Chase Auto Receivables Trust 1996-1 (the "Trust")
during the previous month. The information which is required to be prepared
with respect to the Distribution Date and Collection Period listed above is set
forth below. Certain of the information is presented on the basis of an
original principal amount of $1,000 per Certificate, and certain other
information is presented based upon the aggregate amounts for the Trust as a
whole.
A. INFORMATION REGARDING THE CURRENT MONTHLY DISTRIBUTION.
1. CERTIFICATES.
(a) The aggregate amount of the distribution to
Certificateholders on the Distribution Date
set forth above. . . . . . . . . . . . . . . . . $__________
(b) The amount of the distribution set forth in
paragraph (a) above allocable to principal,
including any overdue principal. . . . . . . . . $__________
(c) The amount of the distribution set forth in
paragraph (a) above allocable to interest,
including any overdue interest . . . . . . . . . $__________
(d) The Insured Payments, if any, with respect to
such Distribution Date . . . . . . . . . . . . . $__________
(e) The Premium Amount, with respect to such
Distribution Date . . . . . . . . . . . . . . . $__________
1
<PAGE>
(f) The amount of the distribution set forth in
paragraph (a) above, per Certificate in a
principal amount of $1,000 . . . . . . . . . . . $__________
(g) The amount of the distribution set forth in
paragraph (b) above, per Certificate in a
principal amount of $1,000 . . . . . . . . . . . $__________
(h) The amount of the distribution set forth in
paragraph (c) above, per Certificate in a
principal amount of $1,000 . . . . . . . . . . . $__________
(i) The amount set forth in paragraph (d) above, per
Certificate in a principal amount of $1,000 . . $__________
(j) The Certificate Principal Balance as of such
Distribution Date (after giving effect to any
distribution on such Distribution Date) . . . . $__________
(k) The balance of the Reserve Account, after giving
effect to distributions and deposits and the
change in the balances from that of the prior
Distribution Date . . . . . . . . . . . . . . . $__________
(l) The balance of the Yield Maintenance Account,
after giving effect to distributions from the
prior Distribution Date . . . . . . . . . . . . $__________
B. INFORMATION REGARDING THE PERFORMANCE OF THE TRUST.
1. NET LOSSES, DELINQUENCIES AND POOL BALANCE.
(a) The aggregate net losses on the Receivables
for the related Collection Period . . . . . . . $__________
(b) The aggregate principal balance of all
Receivables which were delinquent 30 days or
more as of the last day of the related
Collection Period . . . . . . . . . . . . . . . $__________
(c) The Pool Balance as of the end of the related
Collection Period . . . . . . . . . . . . . . . $__________
(d) The Certificate Factor as of the end of the
related Collection Period . . . . . . . . . . . $__________
2
<PAGE>
EXHIBIT F
LIST OF DESIGNATED LOANS
<PAGE>
CERTIFICATE GUARANTY INSURANCE POLICY
OBLIGATIONS: $227,697,669.92 POLICY NUMBER:
Chevy Chase Auto Receivables Trust 1996-1
[]% Auto Receivables Backed Certificates
MBIA Insurance Corporation (the "Insurer"), in consideration of the payment
of the premium and subject to the terms of this Certificate Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment will
be received by First Bank National Association, or its successor, as trustee
for the Owners (the "Trustee"), on behalf of the Owners from the Insurer, for
distribution by the Trustee to each Owner of each Owner's proportionate share of
the Insured Payment. The Insurer's obligations hereunder with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in this Policy, and no accelerated Insured Payments shall
be made regardless of any acceleration of the Obligations, unless such
acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Trustee
for withholding taxes, if any (including interest and penalties in respect of
any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount on the
Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of
such preference payment, (ii) an opinion of counsel satisfactory to the Insurer
that such order is final and not subject to appeal, (iii) an assignment in such
form as is reasonably required by the Insurer, irrevocably assigning to the
Insurer all rights and claims of the Owner relating to or arising under the
Obligations against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be
<PAGE>
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the
Obligations to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than 12:00
noon, New York City time, on the later of the Distribution Date on which the
related Deficiency Amount is due or the third Business Day following receipt in
New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by
the Insurer (the "Fiscal Agent") of a Notice (as described below); provided that
if such Notice is received after 12:00 noon, New York City time, on such
Business Day, it will be deemed to be received on the following Business Day.
If any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim hereunder, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due hereunder, unless otherwise stated herein, will be
disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
As used herein, the following terms shall have the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of June 1,
1996 among Chevy Chase Bank, F.S.B., as Seller and as Servicer, and the Trustee,
as trustee, without regard to any amendment or supplement thereto unless such
amendment or modification has been approved in writing by the Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City, Chevy Chase, Maryland or in the
city in which the corporate
<PAGE>
trust office of the Trustee under the Agreement or the Insurer is located are
authorized or obligated by law or executive order to close.
"DEFICIENCY AMOUNT" means the excess, if any, of Required Payments over Net
Available Distribution Amount for such Distribution Date.
"INSURED PAYMENT" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached hereto, the
original of which is subsequently delivered by registered or certified mail,
from the Trustee specifying the Insured Payment which shall be due and owing on
the applicable Distribution Date.
"OWNER" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the applicable
Obligations to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Agreement as of the date of execution
of this Policy, without giving effect to any subsequent amendment to or
modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent of the
Insurer may be made at the address listed below for the Fiscal Agent of the
Insurer or such other address as the Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
<PAGE>
This Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this Policy
is not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Obligations.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and
attested this __th day of June, 1996.
MBIA INSURANCE CORPORATION
By
_________________________________
Attest:
By
-----------------
Secretary
<PAGE>
EXHIBIT A
TO CERTIFICATE GUARANTY INSURANCE POLICY
NUMBER:
NOTICE UNDER CERTIFICATE GUARANTY
INSURANCE POLICY NUMBER
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
61 Broadway, 15th Floor
New York, NY 10006
Attention: Municipal Registrar and
Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of , as trustee (the
"Trustee"), hereby certifies to State Street Bank and Trust Company, N.A. (the
"Fiscal Agent") and MBIA Insurance Corporation (the "Insurer"), with reference
to Certificate Guaranty Insurance Policy Number: (the "Policy") issued by
the Insurer in respect of the $227,697,669.92 Chevy Chase Auto Receivables Trust
1996-1 []% Auto Receivables Backed Certificates (the "Obligations"), that:
(i) the Trustee is the trustee under the Pooling and Servicing
Agreement dated as of June 1, 1996 between Chevy Chase Bank, F.S.B., as Seller
and as Servicer, and the Trustee, as trustee for the Owners;
(ii) the amount of Required Payments due for the Distribution Date
occurring on (the "Applicable Distribution Date") is $ ;
(iii) the amount of the Net Available Distribution Amount for the
Applicable Distribution Date is $ ;
<PAGE>
(iv) the excess of the amounts listed in paragraph (ii) over the
amount listed in paragraph (iii) above is $ (the "Deficiency Amount");
(v) the amount of previously distributed payments on the Obligations
that is recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with a final
nonappealable order of a court having competent jurisdiction is $ (the
"Preference Amount");
(vi) the total Insured Payment due is $ , which amount equals the
sum of the Deficiency Amount and the Preference Amount;
(vii) the Trustee is making a claim under and pursuant to the terms of
the Policy for the dollar amount of the Insured Payment set forth in (iv) above
to be applied to the payment on the Obligations for the Applicable Distribution
Date in accordance with the Agreement and for the dollar amount of the Insured
Payment set forth in (v) above to be applied to the payment of any Preference
Amount; and
(viii) the Trustee directs that payment of the Insured Payment be made
to the following account by bank wire transfer of federal or other immediately
available funds in accordance with the terms of the Policy: [TRUSTEE'S ACCOUNT].
Any capitalized term used above in this Notice and not otherwise defined herein
shall have the meaning assigned thereto in the Policy.
ANY PERSON WHO KNOWINGLY AND WITH INTENT TO DEFRAUD ANY INSURANCE COMPANY OR
OTHER PERSON FILES AN APPLICATION FOR INSURANCE OR STATEMENT OF CLAIM CONTAINING
ANY MATERIALLY FALSE INFORMATION, OR CONCEALS FOR THE PURPOSE OF MISLEADING,
INFORMATION CONCERNING ANY FACT MATERIAL THERETO, COMMITS A FRAUDULENT INSURANCE
ACT, WHICH IS A CRIME, AND SHALL ALSO BE SUBJECT TO A CIVIL PENALTY NOT TO
EXCEED FIVE THOUSAND DOLLARS AND THE STATED VALUE OF THE CLAIM FOR EACH SUCH
VIOLATION.
<PAGE>
IN WITNESS WHEREOF, the Trustee has executed and delivered this Notice under
the Policy as of the day of , .
as Trustee
By
------------------------------------------
Title
---------------------------------------
<PAGE>
Exhibit 5.1
[LETTERHEAD OF SHAW, PITTMAN, POTTS & TROWBRIDGE]
June 18, 1996
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Re: Chevy Chase Auto Receivables Trust 1996-1
Auto Receivables Backed Certificates
Registration on Form S-3 (Registration
Nos. 333-04375 and 333-04375-01)
------------------------------------------
Dear Sirs:
We have acted as your counsel in connection with the above-referenced
Registration Statement on Form S-3, as amended by Amendment No. 1 thereto
("Amendment No. 1" and together with such Registration Statement, the
"Registration Statement") to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), relating
to the Chevy Chase Auto Receivables Trust 1996-1 Auto Receivables Backed
Certificates (the "Certificates"). The Certificates will be issued pursuant
to a Pooling and Servicing Agreement (the "Pooling Agreement"), a form of
which is to be filed as Exhibit 4.1 to Amendment No. 1, to be entered into
between Chevy Chase Bank, F.S.B. (the "Bank") and First Bank National
Association, as trustee (the "Trustee").
We have made such investigations of law as we deemed appropriate, have
examined and are familiar with originals, or copies certified or otherwise
identified to our satisfaction, of such corporate records of the Bank,
certificates of officers of the Bank and of public officials and such other
documents as we have deemed appropriate as a basis for the opinions expressed
below.
<PAGE>
Chevy Chase Bank, F.S.B.
June 18, 1996
Page 2
In rendering the opinions herein, we have assumed, without independent
verification, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as copies or specimens and the authenticity
of the originals of such documents submitted as copies or specimens. As to
any facts material to such opinions that we did not independently establish
or verify, we have relied upon statements and representations of officers and
other representatives of the Bank.
Based upon the foregoing, we are of the opinion that when:
1. the Registration Statement shall become effective under the Act,
2. the Pooling Agreement shall have been duly authorized by all
necessary corporate action and have been duly executed and
delivered by the parties thereto,
3. the Certificates shall have been duly authorized by all necessary
corporate action and have been duly executed and authenticated by
the Trustee in accordance with the Pooling Agreement and delivered
by the Bank in accordance with the Underwriting Agreement among
the Bank and the Underwriters named therein (the "Underwriting
Agreement"), and
4. The Bank shall have received the agreed purchase price for the
Certificates in accordance with the Underwriting Agreement,
the Certificates will be fully paid and non-assessable, validly issued and
outstanding and will be entitled to the benefits of the Pooling Agreement.
We are licensed to practice law in the State of New York, and nothing
contained herein shall be construed to be an opinion as to any laws other
than the laws of the State of New York and federal laws. The Pooling
Agreement and the Certificates are governed by New York law.
<PAGE>
Chevy Chase Bank, F.S.B.
June 18, 1996
Page 3
We consent to the use of this opinion in the Registration Statement and
to the reference to our name in the Prospectus constituting a part of such
Registration Statement under the caption "Legal Matters."
Very truly yours,
/s/ Shaw, Pittman, Potts & Trowbridge
<PAGE>
Exhibit 8.1
[LETTERHEAD OF SHAW, PITTMAN, POTTS & TROWBRIDGE]
June 18, 1996
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Re: Chevy Chase Auto Receivables Trust 1996-1
Auto Receivables Backed Certificates
Registration on Form S-3 (Registration
Nos. 333-04375 and 333-04375-01)
-----------------------------------------
Dear Sirs:
We have acted as your counsel in connection with the above-referenced
Registration Statement on Form S-3, as amended by Amendment No. 1 thereto
("Amendment No. 1" and together with such Registration Statement, the
"Registration Statement") to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), relating
to the Chevy Chase Auto Receivables Trust 1996-1 Auto Receivables Backed
Certificates (the "Certificates"). The Certificates will be issued pursuant
to a Pooling and Servicing Agreement (the "Pooling Agreement"), a form of
which is to be filed as Exhibit 4.1 to Amendment No. 1, to be entered into
between Chevy Chase Bank, F.S.B. (the "Bank") and First Bank National
Association, as trustee (the "Trustee").
The statements in the Prospectus constituting a part of the Registration
Statement under the heading "Certain Federal Income Tax Consequences," to the
extent they constitute matters of federal law or legal conclusions with
respect thereto, have been prepared or reviewed by us and, in our opinion,
provide a fair and accurate summary of such law or conclusions.
<PAGE>
Chevy Chase Bank, F.S.B.
June 18, 1996
Page 2
We consent to the use of this opinion in the Registration Statement and
to the reference to our name in the Prospectus constituting a part of such
Registration Statement under the caption "Legal Matters."
Very truly yours,
/s/ Shaw, Pittman, Potts & Trowbridge
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Registration Statement on Form S-3
(Registration Statement No. 333-04375) of our report dated January 22, 1996 on
our audits of the consolidated financial statements of MBIA Insurance
Corporation and Subsidiaries. We also consent to the reference to our firm
under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
June 12, 1996
New York, New York
