<PAGE>
RULE NO. 424(b)(2)
REGISTRATION NO. 333-33733
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 28, 1997)
$178,024,000
CAPITOL REVOLVING HOME EQUITY LOAN TRUST 1997-1
CAPITOL REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1997-1
CHEVY CHASE BANK, F.S.B.
as Transferor and Servicer
-----------
The Capitol Revolving Home Equity Loan Asset Backed Certificates, Series
1997-1 (the "Certificates"), will represent undivided interests in a trust
fund (the "Trust Fund") consisting primarily of a pool of certain revolving
credit line home equity loans made or to be made in the future (the "Mortgage
Loans") secured by first, second or third deeds of trust or mortgages on one-
to four-family residential properties. The Mortgage Loans were originated or
acquired by Chevy Chase Bank, F.S.B. ("Chevy Chase" or the "Transferor"),
which will serve as servicer of the Mortgage Loans.
The aggregate undivided interest in the Trust Fund represented by the
Certificates will initially be equal to $178,024,000 which as of November 1,
1997 (the "Initial Cut-off Date") is approximately 98% of the sum of the Cut-
off Date Trust Balances (as defined herein) of the Initial Mortgage Loans and
the Pre-Funded Amount (each as defined herein). The remaining undivided
interest in the Trust Fund not represented by the Certificates (the
"Transferor Interest") will initially be equal to $3,633,292.49, which as of
the Initial Cut-off Date is approximately 2% of the sum of the Cut-off Date
Trust Balances of the Initial Mortgage Loans and the Pre-Funded Amount.
On the Closing Date, $20,000,000 (the "Pre-Funded Amount") will be deposited
in the Pre-Funding Account (as defined herein). The Pre-Funded Amount may be
used by the Trust to acquire additional Mortgage Loans consisting of the 90-1
Mortgage Loans and 92-1 Mortgage Loans (each as defined herein) to the extent
available, and other Mortgage Loans on or before August 20, 1998 (the
"Subsequent Mortgage Loans").
Distributions of principal and interest on the Certificates will be made on
the 20th day of each month or, if such date is not a Business Day then on the
next succeeding Business Day (a "Distribution Date"), commencing December 22,
1997.
On each Distribution Date, holders of the Certificates (the
"Certificateholders") will be entitled to receive, from and to the limited
extent of funds available in the Certificate Account (as defined herein),
distributions with respect to interest and principal calculated as set forth
herein. The Certificates are not guaranteed by the Transferor or any affiliate
thereof. However, on or before the issuance of the Certificates, the
Transferor will obtain from Ambac Assurance Corporation (the "Certificate
Insurer") a financial guaranty insurance policy relating to the Certificates
(the "Certificate Insurance Policy"), in favor of the Trustee (as defined
herein). The Certificate Insurance Policy will protect holders of Certificates
against certain shortfalls in amounts to be distributed at the times and to
the extent described herein. See "DESCRIPTION OF THE CERTIFICATES--Certificate
Insurance Policy" herein.
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. THE INTERESTS OF THE OWNERS OF THE CERTIFICATES WILL
BE REPRESENTED BY BOOK ENTRIES ON THE RECORDS OF THE DEPOSITORY TRUST COMPANY
("DTC") AND PARTICIPATING MEMBERS THEREOF.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH IN "RISK FACTORS" COMMENCING ON PAGE S-18 HEREIN AND ON PAGE 16 IN THE
PROSPECTUS.
THE CERTIFICATES WILL REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
WILL NOT EVIDENCE A SAVINGS ACCOUNT OR DEPOSIT OR OTHER OBLIGATION OF, OR
INTEREST IN, AND ARE NOT GUARANTEED BY, CHEVY CHASE OR ANY AFFILIATE THEREOF.
NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS (AS DEFINED HEREIN) 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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNT AND PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSIONS TRANSFEROR(1)(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Certificate 100.00% 0.30% 99.70%
- --------------------------------------------------------------------------------------------------------
Total $178,024,000 $534,072 $177,489,928
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) Before deducting expenses payable by the Transferor, estimated to be
$630,000.
-----------
The Certificates are offered by the several Underwriters when, as and if
issued by the Transferor, delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Certificates in book-entry form will be made through the
facilities of DTC, Cedel Bank, societe anonyme, and Euroclear on or about
November 25, 1997, against payment in immediately available funds.
-----------
SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON
The date of this Prospectus Supplement is November 20, 1997.
<PAGE>
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED A FINAL PROSPECTUS SUPPLEMENT
AND THE FINAL PROSPECTUS. TO THE EXTENT ANY STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT CONFLICT WITH STATEMENTS IN THE PROSPECTUS, THE STATEMENTS IN THIS
PROSPECTUS SUPPLEMENT SHALL CONTROL.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CERTIFICATES,
INCLUDING OVER-ALLOTMENT TRANSACTIONS, STABILIZING TRANSACTIONS, SYNDICATE
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING" HEREIN.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Replacement Certificates (as defined herein) are issued,
unaudited monthly and annual reports containing information concerning the
Mortgage Loans will be sent to the Trustee and to CEDE & Co., as registered
holder of the Certificates and the nominee of DTC. See "DESCRIPTION OF THE
CERTIFICATES--Reports to Certificateholders" and "--Evidence as to Compliance"
herein and "THE AGREEMENTS--Reports to Holders" and "--Book Entry Securities"
in the accompanying Prospectus (the "Prospectus"). Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. None of the Transferor, the Servicer or the Certificate
Insurer intends to send any of its financial reports to Certificateholders.
The Servicer, on behalf of the Trust, will file with the Securities and
Exchange Commission (the "Commission") periodic reports concerning the Trust
to the extent required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations thereunder.
AVAILABLE INFORMATION
The Transferor has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Certificates. This
Prospectus Supplement, which forms a part of the Registration Statement,
contains summaries of the material terms of the documents referred to herein,
but does not contain all of the information set forth in the Registration
Statement pursuant to the Rules and Regulations of the Commission. For further
information, reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits can be inspected and copied
at prescribed rates at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows,
Midwest Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
Northeast Regional Office, Seven World Trade Center, New York, New York 10048.
In addition, the Commission maintains a Web site at "http://www.sec.gov" that
contains information regarding registrants that file electronically with the
Commission.
The Trust Fund will be required to file certain reports with the Commission
pursuant to the requirements of the Exchange Act. The Transferor intends to
cause the Trust Fund to suspend filing such reports if and when such reports
are no longer required under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus Supplement and,
if given or made, such information or representations must not be relied upon.
This Prospectus Supplement does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby nor an offer of the Certificates to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus Supplement at any time does not imply that information herein is
correct as of any time subsequent to its date.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index of Principal Terms"
herein and the "Glossary of Terms" in the Prospectus for the location of
definitions of certain capitalized terms.
Securities Offered.......... Capitol Revolving Home Equity Loan Trust 1997-1
(the "Trust") will issue the Capitol Revolving
Home Equity Loan Asset Backed Certificates, Se-
ries 1997-1 (the "Certificates"), pursuant to a
Pooling and Servicing Agreement to be dated as of
November 1, 1997 (the "Pooling and Servicing
Agreement") by and between Chevy Chase Bank,
F.S.B. ("Chevy Chase"), as transferor and
servicer (the "Transferor" and "Servicer," re-
spectively, as the case may be), and U.S. Bank
National Association, doing business as First
Bank National Association, as trustee and custo-
dial agent (the "Trustee" and "Custodial Agent,"
respectively, as the case may be). As of the
Closing Date (as defined herein), the aggregate
undivided interest in the Trust represented by
the Certificates will equal $178,024,000 (the
"Original Certificate Principal Balance" and the
"Original Invested Amount"), which represents ap-
proximately 98% of the sum of the Cut-off Date
Trust Balances of the Initial Mortgage Loans and
the Pre-Funded Amount. Following the Closing
Date, the "Invested Amount" with respect to any
day will be an amount equal to the Original In-
vested Amount minus the sum of (i) the amount of
Principal Collections (as defined herein) previ-
ously distributed to Certificateholders, (ii) any
amounts distributed as principal to
Certificateholders at the end of the Pre-Funding
Period from funds on deposit in the Pre-Funding
Account and (iii) an amount equal to the product
of (a) the Certificateholders' Floating Alloca-
tion Percentage and (b) the Liquidation Loss
Amounts (each as defined herein). The Transferor
will own the remaining undivided interest in the
Trust, which is equal to the Pool Balance (as de-
fined herein) minus the Invested Amount (the
"Transferor Interest"). The principal balance of
the outstanding Certificates (the "Certificate
Principal Balance") on any day is equal to the
Original Certificate Principal Balance minus the
aggregate of amounts actually distributed as
principal to the Certificateholders. See "DE-
SCRIPTION OF THE CERTIFICATES--Distributions on
the Certificates" herein and "DESCRIPTION OF THE
SECURITIES" in the Prospectus.
Trust Fund.................. The assets of the Trust (the "Trust Fund") will
consist primarily of a pool (the "Pool") of cer-
tain revolving credit line home equity loans made
or to be made in the future and conveyed to the
Trust on the Closing Date (the "Initial Mortgage
Loans") and may consist of 90-1 Mortgage Loans
and 92-1 Mortgage Loans (each as defined herein),
provided such loans are purchased by Chevy Chase
from Trust 1990 and Trust 1992 (each as defined
herein), or such other revolving credit line home
equity loans to be transferred to the Trust on or
before the August 20, 1998 Distribution Date (the
S-3
<PAGE>
"Subsequent Mortgage Loans") (the Subsequent
Mortgage Loans and the Initial Mortgage Loans and
any substitutions for any such loans, collec-
tively the "Mortgage Loans") originated or ac-
quired by Chevy Chase or a subsidiary of Chevy
Chase and secured by first, second or third deeds
of trust or mortgages on one- to four-family res-
idential properties (the "Mortgaged Properties");
the Trust's interest in property that secured a
Mortgage Loan which has been acquired by foreclo-
sure or deed in lieu of foreclosure; the Certifi-
cate Account; the Spread Account; the funds on
deposit in the Pre-Funding Account and the Capi-
talized Interest Account (each as defined here-
in); the Certificate Insurance Policy; the
Trust's interest in rights under certain hazard
insurance policies covering the Mortgaged Proper-
ties; and certain other property, as described
more fully herein.
The property conveyed to the Custodial Agent for
the benefit of the Trust will include certain of
the unpaid principal balances of the Mortgage
Loans as of the opening of business on November
1, 1997 (the "Initial Cut-off Date") in the case
of the Initial Mortgage Loans, and on the first
day of the month in which each Subsequent Mort-
gage Loan and any Eligible Substitute Mortgage
Loan (as defined herein) is conveyed to the Trust
(in each case, the "Cut-off Date" and the "Cut-
off Date Trust Balances") and, with respect to
each Mortgage Loan (other than the 90-1 Mortgage
Loans and 92-1 Mortgage Loans), any additions
thereto as a result of advances made after the
Cut-off Date pursuant to the applicable loan
agreements (the "Loan Agreements") which evidence
the Mortgage Loans during the life of the Trust
(the "Additional Balances"). The Additional Bal-
ances will be funded by Chevy Chase, pursuant to
the Loan Agreements. The obligation to fund any
Additional Balances pursuant to the Loan Agree-
ments will not be transferred to the Trust. Cer-
tain balances outstanding on December 1, 1990,
December 1, 1991, December 1, 1992, September 1,
1993 and September 1, 1994 with respect to cer-
tain of the Mortgage Loans (the "Common Mortgage
Loans") were sold by the Transferor to Capitol
Home Equity Loan Trust 1990-1 ("Trust 1990"),
Capitol Home Equity Loan Trust 1991-1 ("Trust
1991") Capitol Home Equity Loan Trust 1992-1
("Trust 1992"), Capitol Home Equity Loan Trust
1993-1 ("Trust 1993") and Capitol Home Equity
Loan Trust 1994-1 ("Trust 1994" and together with
the Trust 1990, Trust 1991, Trust 1992 and Trust
1993, the "Prior Trusts"), respectively. The
Trust Fund will not include any interest in any
portion of the outstanding balance of a Common
Mortgage Loan transferred to a Prior Trust and
not subsequently transferred to the Trust (the
"Sold Balances"). In 1996, Trust 1991 terminated
and all outstanding balances held by Trust 1991
were reacquired by Chevy Chase. Certain of such
balances are currently owned by Chevy Chase and
are hereinafter referred to as the "Reacquired
1991 Balances". Reacquired 1991 Balances consti-
tute Sold Balances.
The "Trust Balance" of a Mortgage Loan (other
than a Liquidated Mortgage Loan, which shall have
a Trust Balance of zero) on any
S-4
<PAGE>
day is equal to its Cut-off Date Trust Balance,
plus (i) any Additional Balances in respect of
such Mortgage Loan, minus (ii) all collections
credited against the principal balance of such
Mortgage Loan (excluding in the case of any Com-
mon Mortgage Loan, any such principal collections
applied to reduce the Sold Balances) in accor-
dance with the related Loan Agreement prior to
such day; provided, however, that if such Mort-
gage Loan is a Common Mortgage Loan, the Cut-off
Date Trust Balance of such Mortgage Loan shall
exclude the Sold Balance thereof. "Pool Balance"
shall mean on any day an amount equal to the sum
of the aggregate of all Trust Balances on such
day plus the amount on deposit in the Pre-Funding
Account as of such day (excluding any net invest-
ment earnings thereon). On the Closing Date the
Trust will include 212 Common Mortgage Loans hav-
ing $1,647,763.80 in aggregate Cut-off Date Trust
Balances which represent approximately 1.0% of
all of the Cut-off Date Trust Balances trans-
ferred and assigned to the Trust.
Transferor and Servicer..... Chevy Chase, a federally chartered stock savings
bank, will transfer and assign the Trust Balances
of the Mortgage Loans to the Trust in exchange
for the Certificates and the Transferor Interest
and will serve as Servicer of the Mortgage Loans.
The principal executive offices of Chevy Chase
are located at 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815, and the telephone number
of Chevy Chase is (301) 986-7000. See "THE TRANS-
FEROR" herein and in the Prospectus.
Trustee..................... The Trustee is U.S. Bank National Association, a
national banking association, doing business as
First Bank National Association. The Trustee's
principal corporate trust office is located at
180 East Fifth Street, St. Paul, Minnesota 55101.
Certificate Insurer......... The Certificate Insurer is Ambac Assurance Corpo-
ration. See "DESCRIPTION OF CERTIFICATE INSURER"
herein.
Collections................. All collections on the Mortgage Loans will be al-
located as to principal and interest in accor-
dance with the Loan Agreements. The Trust's share
of an amount allocated to interest on any Mort-
gage Loan (the "Trust Interest") shall equal the
product of (a) the amount allocated to interest
multiplied by (b) (x) the amount of interest ac-
crued at the Loan Rate on the Trust Balance dur-
ing the related Interest Period (as defined here-
in) divided by (y) the amount of interest accrued
at the Loan Rate on the Loan Balance during such
Interest Period. "Interest Period" means the
monthly period during which interest accrues on
the Mortgage Loans. "Loan Balance" as to any
Mortgage Loan and day, means the unpaid principal
balance of such Mortgage Loan upon which interest
accrued for such day was calculated. Collections
of principal received from a borrower on any Com-
mon Mortgage Loans for any day during any Collec-
tion Period will be applied first to reduce the
balance thereof transferred to Trust 1990, if any
(including any such balances subsequently trans-
ferred to the Trust during the Pre-Funding Peri-
od), to
S-5
<PAGE>
zero, second to reduce the Reacquired 1991 Bal-
ance, if any, to zero, third to reduce the bal-
ance thereof transferred to Trust 1992, if any
(including any such balances subsequently trans-
ferred to the Trust during the Pre-Funding Peri-
od), to zero, fourth to reduce the balance
thereof transferred to Trust 1993, if any, to
zero and fifth to reduce the balance thereof
transferred to Trust 1994, if any, to zero before
any such collections are applied in reduction of
the Trust Balance of such Common Mortgage Loan
(other than 90-1 Mortgage Loans and 92-1 Mortgage
Loans). "Principal Collections" for any Distribu-
tion Date, shall equal (i) the Trust's share of
principal collections received from borrowers un-
der the Mortgage Loans in the related Collection
Period (as defined herein) after the application
of the allocations described in the preceding
sentence, (ii) the principal portion of the Net
Trust Liquidation Proceeds and Trust Insurance
Proceeds and (iii) the principal portion of the
Retransfer Deposit Amount (as defined herein) and
the Substitution Adjustment Amount (as defined
herein) of a retransferred Mortgage Loan. As of
the Initial Cut-off Date, the aggregate amount of
the balances of Common Mortgage Loans owned by
Trust 1990 is $2,450,621.11, the aggregate amount
of the balances of Common Mortgage Loans that are
Reacquired 1991 Balances is $239,356.34, the ag-
gregate amount of the balances of Common Mortgage
Loans owned by Trust 1992 is $693,699.49, the ag-
gregate amount of the balances of Common Mortgage
Loans owned by Trust 1993 is $864,294.86 and the
aggregate amount of the balances of Common Mort-
gage Loans owned by Trust 1994 is $1,322,040.36.
"Liquidation Proceeds" are proceeds (including
Insurance Proceeds but excluding any amounts
drawn on the Certificate Insurance Policy) re-
ceived in connection with the liquidation of Liq-
uidated Mortgage Loans (as defined herein). "Net
Liquidation Proceeds" with respect to a Mortgage
Loan are Liquidation Proceeds reduced by related
expenses (including any amount advanced in re-
spect of the repayment of a senior mortgage or
other Servicer Advance (as defined herein)). "In-
surance Proceeds" are proceeds paid to the
Servicer pursuant to any insurance policy cover-
ing a Mortgage Loan, reduced by related expenses.
The Trust's share of Net Liquidation Proceeds
("Net Trust Liquidation Proceeds") with respect
to any Liquidated Mortgage Loan will be equal to
the sum of (i) the Trust's pro rata share of Net
Liquidation Proceeds not to exceed Trust Interest
with respect to the period from the last day on
which interest was paid in full on such Liqui-
dated Mortgage Loan to the day on which such Liq-
uidated Mortgage Loan became a Liquidated Mort-
gage Loan and (ii) the Trust's pro rata share of
the amount remaining after the payment of such
Trust Interest and the interest payable to the
owners of Sold Balances. "Trust Insurance Pro-
ceeds" means as to any Mortgage Loan and Collec-
tion Period, the Trust's share of Insurance Pro-
ceeds, which share is equal to the product of (i)
the Trust Percentage (as defined herein) and (ii)
Insurance Proceeds received during such Collec-
tion Period which (x) are
S-6
<PAGE>
not Liquidation Proceeds, (y) are not applied or
expected to be applied to the restoration or re-
pair of the related Mortgaged Property or re-
leased to the related mortgagor in accordance
with the normal servicing procedures of the
Servicer and (z) will be applied by the Servicer
in reduction of the Loan Balance of such Mortgage
Loan.
With respect to any Distribution Date, the aggre-
gate amount of Trust Interest collected in the
related Collection Period allocable to the Cer-
tificates ("Certificate Interest Collections")
will equal the aggregate amount of Daily Certifi-
cate Interest Collections for the related Collec-
tion Period. With respect to any day, "Daily Cer-
tificate Interest Collections" shall equal the
product of (i) the aggregate amount of Trust In-
terest collected on such day and (ii) the
Certificateholders' Floating Allocation Percent-
age on such day.
With respect to any day, the "Certificateholders'
Floating Allocation Percentage" will be the per-
centage equivalent of a fraction determined by
dividing the Invested Amount by the Pool Balance
in each case as of the end of the preceding day.
The "Certificateholders' Fixed Allocation Per-
centage" (calculated for any day) will equal the
greater of (x) 98% and (y) the percentage equiva-
lent of a fraction, the numerator of which is the
Invested Amount and the denominator of which is
the Pool Balance in each case as of the end of
the preceding day (but not more than 100%). The
Certificateholders' Fixed Allocation Percentage
initially will be 98%.
On each Distribution Date, the Certificate Inter-
est Collections, together with withdrawals, if
any, from the Capitalized Interest Account, and
any net investment earnings received on the
amounts on deposit in the Pre-Funding Account for
such Distribution Date will be applied to the ex-
tent available in the following order of priori-
ty: (i) as payment of the Servicing Fee; (ii) as
payment for the accrued interest due and any
overdue accrued interest (with interest thereon)
on the Certificate Principal Balance of the Cer-
tificates (other than any Basis Risk Payment (as
defined herein) or accrued interest thereon);
(iii) as payment for the premium for the Certifi-
cate Insurance Policy; (iv) to pay
Certificateholders the product of the
Certificateholders' Floating Allocation Percent-
age and the Liquidation Loss Amount (as defined
herein) for such Distribution Date; (v) as pay-
ment for any Liquidation Loss Amount allocable to
the Certificateholders for a previous Distribu-
tion Date that was not previously (a) funded by
Certificate Interest Collections, (b) funded by
amounts on deposit in the Spread Account (as de-
fined herein) or (c) funded by draws on the Cer-
tificate Insurance Policy; (vi) to reimburse
prior draws made on the Certificate Insurance
Policy together with accrued interest thereon;
(vii) to fund the Spread Account in accordance
with the Pooling and Servicing Agreement and the
Insurance Agreement (as defined herein); (viii)
to pay any other amounts owed to the Certificate
Insurer pursuant to the Insurance Agreement (as
defined herein); (ix) as payment to
Certificateholders of any Basis Risk Payment (and
any accrued interest thereon) from
S-7
<PAGE>
any prior Distribution Date that has not previ-
ously been paid and (x) to the Transferor. Cer-
tificate Interest Collections remaining after
payment of the amounts described in clauses (i),
(ii) and (iii) above, shall be referred to herein
as the "Certificateholders' Excess Interest." Any
interest accruing on the Basis Risk Payment shall
accrue at the related Certificate Rate for such
period.
Certificateholders' Excess Interest may be insuf-
ficient to cover the Certificateholders' Floating
Allocation Percentage of Liquidation Loss
Amounts. If as a result of such insufficiency the
Certificate Principal Balance exceeds the In-
vested Amount, a draw in an amount equal to such
difference will be made on the Certificate Insur-
ance Policy in accordance with the terms of the
Certificate Insurance Policy (after application
of amounts on deposit in the Spread Account) and
the proceeds of such draw paid to the
Certificateholders. Payment of such amounts will
reduce the Certificate Principal Balance but not
the Invested Amount.
Payments to Certificateholders pursuant to
clauses (ii) and (ix) above will be interest pay-
ments on the Certificates. Payments to
Certificateholders pursuant to clause (ix) above
are not guaranteed by the Certificate Insurance
Policy.
"Liquidation Loss Amount" means with respect to
any Liquidated Mortgage Loan, the unrecovered
Trust Balance thereof at the end of the related
Collection Period in which such Mortgage Loan be-
came a Liquidated Mortgage Loan, after giving ef-
fect to the principal portion of Net Trust Liqui-
dation Proceeds in connection therewith.
Principal Collections will be allocated to the
Certificateholders in accordance with the
Certificateholders' Fixed Allocation Percentage,
but a lesser amount of Principal Collections may
be distributed to Certificateholders during the
Managed Amortization Period, as described below.
Payments of principal to the Certificateholders
over the term of the Trust will not exceed the
Original Certificate Principal Balance.
To the extent described herein, the Servicer will
deposit collections of principal and interest on
the Mortgage Loans in an account established for
such purpose under the Pooling and Servicing
Agreement (the "Certificate Account"). See "DE-
SCRIPTION OF THE CERTIFICATES--Payments on the
Mortgage Loans; Deposits to Certificate Account"
herein.
Pre-Funding Account......... On the Closing Date, an aggregate cash amount of
approximately $20,000,000 (the "Pre-Funded
Amount") will be deposited into an account estab-
lished with the Trustee on behalf of the Trust
(the "Pre-Funding Account"). Such amount will be
funded from the sale of the Certificates. From
the Closing Date until the earliest to occur of
(i) the Distribution Date on which the aggregate
amount on de-
S-8
<PAGE>
posit in the Pre-Funding Account is equal to or
less than $100,000, (ii) the commencement of the
Rapid Amortization Period or (iii) August 20,
1998 (the "Pre-Funding Period"), the Trustee
shall purchase, on behalf of the Trust, the Sub-
sequent Mortgage Loans. As a result, the aggre-
gate principal balance of the Mortgage Loans will
increase by an amount equal to the Cut-off Date
Trust Balances of the Subsequent Mortgage Loans
acquired by the Trust, and the amount on deposit
in the Pre-Funding Account will decrease by such
amount. In the event there are any funds remain-
ing in the Pre-Funding Account at the end of the
Pre-Funding Period, the Certificateholders' Fixed
Allocation Percentage of such funds (excluding
any net investment earnings thereon) shall be
distributed to the Certificateholders in respect
of principal on the Certificates.
It is intended that the Subsequent Mortgage Loans
will consist primarily of balances of revolving
credit line home equity loans originated by Chevy
Chase and transferred to Trust 1990 (the "90-1
Mortgage Loans") and Trust 1992 (the "92-1 Mort-
gage Loans"), provided such loans are reacquired
by Chevy Chase. The 90-1 Mortgage Loans and 92-1
Mortgage Loans have terms that are, and were
originated in a manner that is, substantially
similar to the Initial Mortgage Loans originated
by Chevy Chase. Only those 90-1 Mortgage Loans
and 92-1 Mortgage Loans that meet the eligibility
criteria requirements set forth in the Pooling
and Servicing Agreement and are approved by the
Certificate Insurer will be transferred to the
Trust. In the event that the 90-1 Mortgage Loans
and 92-1 Mortgage Loans are not available for
purchase during the Pre-Funding Period, the
Transferor will use its best efforts to transfer
to the Trust revolving credit line home equity
loans that meet the eligibility requirements set
forth in the Pooling and Servicing Agreement and
are approved by the Certificate Insurer during
the Pre-Funding Period. See "RISK FACTORS" herein
and in the Prospectus.
Capitalized Interest
Account..................... On the Closing Date, there will be deposited
$556,934 in an account (the "Capitalized Interest
Account") in the name of the Trustee on behalf of
the Trust which will be used by the Trustee dur-
ing the Pre-Funding Period to cover certain
shortfalls in interest as described herein.
Amounts in excess of the amount necessary to
cover such shortfalls (the "Overfunded Interest
Amount") are required to be paid directly to the
Transferor on each Distribution Date during the
Pre-Funding Period.
The "Capitalized Interest Requirement" is an
amount that may be withdrawn by the Trustee from
the Capitalized Interest Account on any Distribu-
tion Date during the Pre-Funding Period to be de-
posited into the Certificate Account. This amount
shall be the excess, if any, of (a) the sum of
(i) the amount of interest accruing at the Cer-
tificate Rate during the related Accrual Period
(as defined herein) on 98% of the amount on de-
posit in the Pre-Funding Account (excluding any
net investment earnings thereon) and (ii) the
product of (x) the Premium Rate (as defined here-
in) divided by twelve and (y) 98% of the
S-9
<PAGE>
amount on deposit in the Pre-Funding Account (ex-
cluding any net investment earnings thereon) as
of the close of business on the prior Distribu-
tion Date (or, in the case of the first Distribu-
tion Date, as of the Closing Date) over (b) the
amount of any net investment income earned on
such amounts on deposit in the Pre-Funding Ac-
count.
The "Premium Rate" is the per annum rate on which
the premium payable to the Certificate Insurer is
calculated, as set forth in the Insurance Agree-
ment.
Interest.................... Interest on the Certificates will be distributed
monthly on the 20th day of each month or, if such
date is not a Business Day, then the next suc-
ceeding Business Day (each, a "Distribution
Date"), commencing on December 22, 1997, at the
Certificate Rate for the related Accrual Period.
The "Certificate Rate" for an Accrual Period will
generally equal the sum of (a) the London
Interbank Offered Rate for United States dollar
deposits for one month ("LIBOR") quoted on the
Telerate Page 3750 on the second LIBOR Business
Day prior to the first day of such Accrual Period
(or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Accrual
Period) and (b) 0.22%, subject to a rate cap
equal to the Weighted Average Loan Rate (as de-
fined herein). In addition, if the Certificate
Rate would have exceeded the rate cap described
above, then the Certificateholders will be enti-
tled to receive such difference (the "Basis Risk
Payment") from the following sources and in the
following order of priority: (i) from
Certificateholders' Excess Interest to the extent
available as described herein under "DESCRIPTION
OF THE CERTIFICATES--Distributions on the Certif-
icates", (ii) from the Spread Account only to the
extent that the amount on deposit therein exceeds
the amount required to be on deposit therein and
(iii) from net investment earnings on amounts on
deposit in the Spread Account. The Basis Risk
Payment will bear interest if it is not paid on
the Distribution Date on which it is due, but
neither the Basis Risk Payment nor interest ac-
crued thereon will be covered by the Certificate
Insurance Policy. Interest on the Certificates in
respect of any Distribution Date will accrue from
the preceding Distribution Date (or in the case
of the first Distribution Date, from the date of
the initial issuance of the Certificates (the
"Closing Date")) through the day preceding such
Distribution Date (each such period, an "Accrual
Period") on the basis of the actual number of
days in the Accrual Period and a 360-day year.
Interest payments on the Certificates (other than
Basis Risk Payments) will be funded from Certifi-
cate Interest Collections, the Capitalized Inter-
est Requirement, net investment earnings received
on amounts on deposit in the Pre-Funding Account,
the Spread Account and draws on the Certificate
Insurance Policy. See "DESCRIPTION OF THE CERTIF-
ICATES" herein.
As to any Distribution Date, the "Collection Pe-
riod" is the calendar month preceding such Dis-
tribution Date.
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<PAGE>
Principal Payments from
Principal Collections....... For the period beginning on the first Distribu-
tion Date and, unless a Rapid Amortization Event
shall have earlier occurred, ending on the Dis-
tribution Date in November 2003 (the "Managed Am-
ortization Period"), the amount of Principal Col-
lections payable to Certificateholders as of each
Distribution Date during the Managed Amortization
Period will equal, to the extent funds are avail-
able therefor from Principal Collections, the
Scheduled Principal Collections Distribution
Amount for such Distribution Date. On any Distri-
bution Date with respect to the Managed Amortiza-
tion Period, the "Scheduled Principal Collections
Distribution Amount" shall equal the lesser of
(i) the Maximum Principal Payment and (ii) the
Alternative Principal Payment. With respect to
any Distribution Date, the "Alternative Principal
Payment" is equal to the greater of (x) 1% of the
Certificate Principal Balance immediately prior
to such Distribution Date and (y) the amount, but
not less than zero, of the aggregate amount of
Principal Collections for the related Collection
Period less the aggregate of principal amounts
drawn down each day ("Draws") under the Loan
Agreements during the related Collection Period
for the Mortgage Loans (other than Draws relating
to the 90-1 Mortgage Loans and 92-1 Mortgage
Loans if such loans are transferred to the
Trust). With respect to any Distribution Date,
the "Maximum Principal Payment" will equal the
product of the Certificateholders' Fixed Alloca-
tion Percentage and the aggregate amount of Prin-
cipal Collections for such Distribution Date.
In the event any funds remain in the Pre-Funding
Account at the end of the Pre-Funding Period (ex-
cluding any net investment earnings thereon) af-
ter giving effect to the purchase of any Subse-
quent Mortgage Loans on such day, the
Certificateholders' Fixed Allocation Percentage
of such funds shall be distributed to the
Certificateholders in respect of principal on the
Certificates.
Beginning with the first Distribution Date relat-
ing to the Rapid Amortization Period, the amount
of Principal Collections payable to
Certificateholders on each Distribution Date will
be equal to the Maximum Principal Payment. See
"DESCRIPTION OF THE CERTIFICATES--Rapid Amortiza-
tion Period; Rapid Amortization Events" herein.
On the Distribution Date in June 2030 (the
"Stated Maturity Date"), Certificateholders will
be entitled to receive as payment of principal an
amount equal to the outstanding Certificate Prin-
cipal Balance, which to the extent funds are not
otherwise available therefor, a draw for such
amount on the Certificate Insurance Policy will
be made on such Distribution Date after applica-
tion of funds on deposit in the Spread Account.
See "DESCRIPTION OF THE CERTIFICATES--Certificate
Insurance Policy" herein.
Distributions of Principal Collections based upon
the Certificateholders' Fixed Allocation Percent-
age may result in distribu-
S-11
<PAGE>
tions of principal to Certificateholders in
amounts that are greater relative to the declin-
ing Pool Balance than would be the case if the
Certificateholders' Floating Allocation Percent-
age were used to determine the percentage of
Principal Collections distributed in respect of
the Certificate Principal Balance. The aggregate
distributions of principal to Certificateholders
will not exceed the Original Certificate Princi-
pal Balance.
Certificate Insurance
Policy...................... On or before the Closing Date, the Certificate
Insurance Policy will be issued by the Certifi-
cate Insurer pursuant to the provisions of the
Pooling and Servicing Agreement and the Insurance
and Indemnity Agreement (the "Insurance Agree-
ment"), among the Transferor, the Servicer, the
Certificate Insurer and the Trustee. The Certifi-
cate Insurance Policy will unconditionally and
irrevocably guarantee principal and interest pay-
ments on the Certificates at the times and in the
amounts described below. On each Distribution
Date, a draw will be made on the Certificate In-
surance Policy (after application of amounts on
deposit in the Spread Account) equal to (i) the
amount by which interest accrued at the Certifi-
cate Rate on the outstanding Certificate Princi-
pal Balance exceeds all amounts on deposit in the
Certificate Account available to be distributed
therefor plus (ii) the amount, if any, by which
the Certificate Principal Balance (after giving
effect to all other amounts distributable and al-
locable to principal on the Certificates) exceeds
the Invested Amount as of such Distribution Date
(after giving effect to all other amounts dis-
tributable and allocable to principal on the Cer-
tificates) for such Distribution Date. Basis Risk
Payments (including interest accrued thereon)
will not be covered by the Certificate Insurance
Policy.
In addition, the Certificate Insurance Policy
will guarantee the payment of the outstanding
Certificate Principal Balance on the Stated Matu-
rity Date (after giving effect to all other
amounts distributed and allocable to principal on
such Distribution Date and after applying any
amounts available in the Spread Account).
In the absence of Certificateholders' Excess In-
terest, payments from the Spread Account and pay-
ments under the Certificate Insurance Policy,
Certificateholders will directly bear the credit
and other risks associated with their undivided
interest in the Trust. See "DESCRIPTION OF THE
CERTIFICATES--Certificate Insurance Policy" here-
in.
In the event the Certificate Insurer's claims
paying ratings have been reduced by any of the
Rating Agencies (as defined herein), the Trans-
feror may, but is not obligated to, either (i)
replace the Certificate Insurance Policy with a
financial guaranty insurance policy issued by an-
other certificate insurer, provided that the rat-
ings on the claims paying ability of such re-
placement certificate insurer are higher than
those of the certificate insurer sought to be re-
placed (after giving effect to such reduction) or
(ii) eliminate or provide another form of credit
enhancement; provided that in the case of
S-12
<PAGE>
clause (ii), the Rating Agencies consent thereto
and confirm that the ratings of the Certificates
will be increased from their current levels (af-
ter giving effect to such reduction) as a result
of such action.
Spread Account.............. In accordance with the Pooling and Servicing
Agreement and the Insurance Agreement, the Trust
will be required to establish and maintain an ac-
count (the "Spread Account") for the benefit of
the Certificateholders and the Certificate In-
surer to be used prior to any draws upon the Cer-
tificate Insurance Policy. On each Distribution
Date, the Trustee will be required to deposit
Certificateholders' Excess Interest, to the ex-
tent available in accordance with the priorities
described under "--Collections", into the Spread
Account until the amounts on deposit therein are
equal to an amount specified in the Insurance
Agreement. Such amount may increase or decrease
over time as a result of floors, caps and trig-
gers set forth in the Insurance Agreement.
The provisions relating to the Spread Account may
be amended in any respect by the Transferor, the
Servicer and the Certificate Insurer without the
consent of, or notice to, the Certificateholders.
Such amendment could reduce or eliminate the
funding requirements of the Spread Account or
release such funds for the benefit of persons
other than the Certificateholders. Under any such
amendments, amounts that are no longer required
to be deposited in the Spread Account will be
distributed to the Transferor. Notwithstanding
any reduction in or elimination of the funding
requirements of the Spread Account or the
depletion thereof, the Certificate Insurer will
be obligated under the Certificate Insurance
Policy to fund on each Distribution Date the full
amount otherwise required to be paid on such
Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES--Spread Account" herein.
Final Payment of Principal;
Optional Termination........ The Trust will terminate on the Distribution Date
following the later of (a) the earlier of (i)
payment in full of all amounts owing to the Cer-
tificate Insurer and (ii) the final payment or
other liquidation of the last Mortgage Loan in
the Trust and (b) the earliest of (i) the Distri-
bution Date on which the Certificate Principal
Balance has been reduced to zero, (ii) the final
payment or other liquidation of the last Mortgage
Loan in the Trust and (iii) the Stated Maturity
Date. The Certificates will be subject to op-
tional purchase by the Transferor on any Distri-
bution Date after the Certificate Principal Bal-
ance is reduced to an amount less than or equal
to $8,901,200 (5% of the Original Certificate
Principal Balance) and all amounts due and owing
to the Certificate Insurer and unreimbursed draws
on the Certificate Insurance Policy, together
with interest thereon, as provided under the In-
surance Agreement, have been paid. The purchase
price will be equal to the sum of the outstanding
Certificate Principal Balance and accrued and un-
paid interest thereon at the Certificate Rate
through the day preceding the final Distribution
Date plus any Basis Risk Payment then due and in-
terest accrued
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<PAGE>
thereon. See "DESCRIPTION OF THE CERTIFICATES--
Optional Termination; Retirement of the Certifi-
cates" herein.
In addition, the Trust may be liquidated as a re-
sult of certain events of insolvency, receiver-
ship or conservatorship relating to the Transfer-
or. See "DESCRIPTION OF THE CERTIFICATES--Rapid
Amortization Period; Rapid Amortization Events"
herein.
Servicing Fee............... The Servicer will receive a fee (the "Servicing
Fee") computed monthly at a specified annual rate
(the "Servicing Fee Rate") on the Invested Amount
less 98% of the amount on deposit in the Pre-
Funding Account (excluding any net investment
earnings thereon) as of the opening of business
on the first day of the related Collection Period
or, with respect to the first Distribution Date,
as of the Closing Date. The Servicing Fee Rate
will be 0.50% if Chevy Chase is the Servicer and
up to a maximum of 0.75% if another person is ap-
pointed as successor Servicer pursuant to the
Pooling and Servicing Agreement. See "DESCRIPTION
OF THE CERTIFICATES--Servicing and Other Compen-
sation and Payment of Expenses" herein.
Record Date................. Distributions will be made on each Distribution
Date to the holders of record as reflected in the
certificate register maintained by the Trustee on
the day prior to such Distribution Date if the
Certificates are book-entry certificates and the
last day of the month preceding the month of the
related Distribution Date if the Certificates are
issued in definitive form, except that the final
distribution in respect of any Certificate will
be made only upon presentation and surrender of
such Certificate at the office or agency ap-
pointed by the Trustee for that purpose.
The Mortgage Loans.......... The Mortgage Loans are revolving credit line home
equity loans originated or acquired by the Trans-
feror or a subsidiary of the Transferor and are
secured by first, second or third deeds of trust
or mortgages. The combined loan-to-value ratio of
a Mortgage Loan (computed at its Maximum Credit
Limit as of the Cut-off Date) and any related se-
nior loan (the "Combined Loan-to-Value Ratio")
did not exceed 115% based upon an appraisal of
the related Mortgaged Property or other form of
valuation performed at the time of execution of
the related Loan Agreement.
Interest on the Mortgage Loans is computed daily
and payable monthly on the daily outstanding
principal balance at a floating rate per annum
equal at any time to the sum of a specified mar-
gin and index; provided, however that certain of
the Mortgage Loans have no margin or a margin
equal to 0%. See "THE MORTGAGE LOAN POOL" herein.
Principal amounts may be drawn down (up to the
maximum permitted principal amount as set forth
in the terms of the related Loan Agreement, the
"Maximum Credit Limit") or repaid under each
Mortgage Loan from time to time. Billing state-
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<PAGE>
ments are produced as of the date the related
billing cycle ends (the "Cycle Date") and reflect
all payment activity and any additional
borrowings by the borrower since the last Cycle
Date. See "THE CHEVY CHASE HOME EQUITY LENDING
PROGRAM--Servicing" herein.
Minimum monthly payments are required to be made
on each Mortgage Loan for any period in which in-
terest accrues. The minimum monthly payment for a
Mortgage Loan is an amount equal to the amount of
interest accrued during the related billing cycle
plus the amount, if any, by which the outstanding
balance of such Mortgage Loan exceeds its Maximum
Credit Limit, and, in some cases may include a
portion of principal, any late charges, any ad-
ministrative charges and any credit insurance
charges.
The approximate Trust Balances of the Initial
Mortgage Loans at the Initial Cut-off Date ranged
from $0.00 to $469,637.79 and averaged
$26,817.73. At the Initial Cut-off Date, Maximum
Credit Limits (which, with respect to Mortgage
Loans in their repayment period, are equal to the
related Cut-off Date Trust Balances thereof) of
the Initial Mortgage Loans ranged from $0.07 to
$500,000.00 and averaged approximately
$50,084.91, and the weighted average remaining
term to stated maturity of the Initial Mortgage
Loans was approximately 207.6 months. The latest
scheduled maturity of any Initial Mortgage Loan
is March 21, 2030. See "THE MORTGAGE LOAN POOL"
herein.
All of the properties securing the Mortgage Loans
are required to be covered by standard hazard in-
surance policies insuring against losses due to
fire and various other causes. See "DESCRIPTION
OF THE CERTIFICATES--Hazard Insurance" herein and
"SERVICING OF LOANS--Maintenance of Insurance
Policies and Other Servicing Procedures" in the
Prospectus.
Mandatory Retransfer or
Substitution of Mortgage
Loans....................... The Transferor or the Servicer (in certain cir-
cumstances), as the case may be, has the option
either to accept a retransfer of the Trust Bal-
ance of a Mortgage Loan, in the case of the
Transferor, or transfer, in the case of the
Servicer on account of (A) a material breach of a
representation or warranty made by the Transferor
in the Pooling and Servicing Agreement, (B) a ma-
terial defect in the related loan documentation
or (C) a change in certain terms of the related
Loan Agreement unless permitted as described in
"DESCRIPTION OF THE CERTIFICATES--Amendments to
Loan Agreements" and "--Collection and other Ser-
vicing Procedures" herein (each Mortgage Loan de-
scribed in (A) through (C) above, a "Defective
Mortgage Loan") or substitute balances of new
Mortgage Loans for such Trust Balances. Any Mort-
gage Loan so substituted (an "Eligible Substitute
Mortgage Loan") must, among other things, have a
Trust Balance (or if the new Mortgage Loan is a
Common Mortgage Loan, a balance conveyed to the
Trust) not less than 95% of the Trust Balance of
the Mortgage Loan for which it is being substi-
tuted, and a Loan Rate of not less than the cur-
rent Loan Rate of the
S-15
<PAGE>
Defective Mortgage Loan it replaces and not more
than 100 basis points in excess thereof. See "DE-
SCRIPTION OF THE CERTIFICATES--Assignment of
Mortgage Loan Trust Balances" herein.
Rating...................... It is a condition to the issuance of the Certifi-
cates that the Certificates be rated in the high-
est rating category by at least one nationally
recognized statistical rating organization, which
has been requested by the Transferor to rate the
Certificates (the "Rating Agency" or "Rating
Agencies"). The rating of the Certificates will
depend primarily on an assessment by a Rating
Agency of the underlying Mortgage Loans and the
claims paying ability of the Certificate Insurer
and in part on the level of protection provided
by the Spread Account and Certificateholders' Ex-
cess Interest. There can be no assurance that the
rating assigned to the Certificates on the date
the Certificates are initially issued will not be
reduced, suspended or withdrawn by a Rating
Agency in the future. The ratings of the Certifi-
cates do not address the payment of the Basis
Risk Payment or interest accrued thereon.
Certain Federal Income Tax
Consequences................ In the opinion of federal tax counsel to the
Transferor, under existing law the Certifi-
cates are properly characterized as debt for
federal income tax purposes as of the Clos-
ing Date. Under the Pooling and Servicing
Agreement, the Transferor and the
Certificateholders will agree to treat the
Certificates as indebtedness for federal,
state and local income and franchise tax
purposes. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" herein and "FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus.
ERISA Considerations........ The Certificates may not be acquired or held by
or on behalf of (i) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject
to Title I of ERISA, (ii) a plan described in
Section 4975(e)(1) of the Code, (iii) a govern-
mental plan described in Section 3(32) of ERISA
subject to any federal, state or local law which
is, to a material extent, similar to the provi-
sions of Section 406 of ERISA or Section 4975 of
the Code or (iv) any entity whose underlying as-
sets include plan assets by reason of a plan's
investment in such entity. The foregoing restric-
tions do not apply to the acquisition or holding
of Certificates with assets of the general ac-
count of an insurance company to the extent the
acquisition or holding, respectively, of such
Certificates is permissible under Section 401(c)
of ERISA and final regulations thereunder and
does not result in the contemplated operations of
the Trust being treated as violations of the pro-
hibited transaction rules. By its acceptance of a
Certificate, each Certificate Owner (as defined
herein) will be deemed to have represented and
warranted that it is not subject to the foregoing
restrictions.
Persons contemplating acquiring the Certificates
should consult their counsel to determine whether
they are purchasing on behalf of or
S-16
<PAGE>
with the "plan assets" of any plan. See "ERISA
CONSIDERATIONS" herein for special considerations
for purchasers using assets of an insurance com-
pany general account. See also "ERISA CONSIDERA-
TIONS" herein and in the Prospectus.
Legal Investment
Considerations.............. Although, as a condition to their issuance, the
Certificates will be rated in the highest rating
category by a Rating Agency, the Certificates
will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market En-
hancement Act of 1984 ("SMMEA"), because not all
of the deeds of trust securing the Mortgage Loans
are first deeds of trust. Accordingly, many in-
stitutions with legal authority to invest in com-
parably rated securities based on first mortgage
loans (i.e., "mortgage related securities" under
SMMEA) may not be legally authorized to invest in
the Certificates. See "LEGAL INVESTMENT CONSIDER-
ATIONS" herein and "LEGAL INVESTMENT" in the Pro-
spectus.
Registration of
Certificates................ The Certificates initially will be registered in
the name of CEDE & Co., as the nominee of DTC.
The interests of owners of the Certificates (the
"Certificate Owners") will be represented by book
entries on the records of DTC and participating
members thereof. Certificates representing the
Certificates will be available in definitive form
only under the limited circumstances described
herein. See "RISK FACTORS--Book-Entry Registra-
tion" and "DESCRIPTION OF THE CERTIFICATES--Reg-
istration of Certificates" herein.
S-17
<PAGE>
RISK FACTORS
Prospective investors should consider, in addition to the factors described
under "RISK FACTORS" in the accompanying Prospectus, the following additional
risk factors in connection with a purchase of the Certificates.
Limited Liquidity. Issuance of the Certificates in book-entry form may
reduce the liquidity of such Certificates in the secondary trading market,
since investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates. See "DESCRIPTION OF THE CERTIFICATES--
Registration of Certificates" herein.
Book-Entry Registration. The Certificates initially will be represented by
certificates registered in the name of CEDE & Co., as the nominee of DTC, and
will not be registered in the names of the Certificate Owners or their
nominees. As a result, unless and until Replacement Certificates are issued,
Certificate Owners will not be recognized by the Trustee as
Certificateholders, as such term is used in the Pooling and Servicing
Agreement. Until such time, Certificate Owners will only be able to exercise
the rights of Certificateholders indirectly through DTC, Cedel or Euroclear
and their respective participating organizations.
Since transactions in the Certificates can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants or
certain banks, the ability of a Certificate Owner to pledge a Certificate to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such Certificates, may be limited due to lack of a
physical certificate representing the Certificates.
Nature of Security. The majority of the Initial Mortgage Loans require
minimum monthly payments which consist of interest only and will not amortize
the outstanding principal of the Mortgage Loan. As a result, a borrower
generally will be required to pay the entire principal amount of the Mortgage
Loan at its maturity. The ability of a borrower to make such a payment may
depend on the borrower's ability to obtain refinancing of the balance due on
the Mortgage Loan. An increase in interest rates over the Loan Rate applicable
at the time the Mortgage Loan was originated may have an adverse effect on the
borrower's ability to pay the required monthly payment. In addition, such an
increase in interest rates may reduce the borrower's ability to obtain
refinancing and to pay the balance of the Mortgage Loan at its maturity.
Because the Mortgage Loans are secured primarily by junior liens subordinate
to the rights of the beneficiary under the related senior lien, the proceeds
from any liquidation, insurance or condemnation proceeding will be available
to satisfy the outstanding balance of a Mortgage Loan only to the extent that
the claims of such senior beneficiary (including any related foreclosure
costs) have been satisfied in full. In addition, a beneficiary under a junior
lien may not foreclose upon the property securing such lien unless it
forecloses subject to the related senior lien, in which case it must either
pay the entire amount of the senior lien to the applicable beneficiary at or
prior to the foreclosure sale or undertake the obligation to make payments on
the senior lien in the event of default thereunder. In servicing home equity
mortgage loans in its portfolio, it is the Servicer's practice to satisfy each
such senior lien at or prior to the foreclosure sale only to the extent that
it determines any amounts so paid will be recoverable from future payments and
collections on the loan or otherwise. The Trust will have no source of funds
to satisfy each such senior lien or make payments due to each senior
beneficiary. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Foreclosure on Mortgages
and Deeds of Trust" and "--Junior Mortgages; Rights of Senior Mortgages" in
the Prospectus.
Because a significant portion of the Mortgaged Properties with respect to
the Initial Mortgage Loans are located in Maryland, Virginia, New York and New
Jersey an overall decline in the residential real estate market in such states
could adversely affect the values of the Mortgaged Properties such that the
outstanding Loan Balances, together with the outstanding balances of any
senior loans, may equal or exceed the value of such Mortgaged Properties.
There can be no assurance that residential property values will not decline in
future periods. See the tables under "THE CHEVY CHASE HOME EQUITY LENDING
PROGRAM" herein for delinquency and loss experience data with respect to the
Transferor's home equity loan portfolio. Because most of the Mortgage Loans
are secured by junior liens subordinate to the rights of the beneficiaries
under the related
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<PAGE>
senior liens, such a decline could extinguish the interest of the beneficiary
of a junior lien on the Mortgaged Property before having any effect on the
interest of the beneficiary of a related senior lien. The general condition of
the Mortgaged Property and other factors may have the effect of reducing the
value of the Mortgaged Property from the value at the time the Mortgage Loan
was originated. Because a majority of the Mortgage Loans do not require
payments in reduction of the outstanding principal balance of the Mortgage
Loan prior to maturity, if there is a subsequent reduction in value of the
Mortgaged Property, the ratio of the amount of such Mortgage Loan to the value
of the Mortgaged Property may increase from the ratio existing at the time
such Mortgage Loan was originated. Such an increase may reduce the likelihood
that liquidation or other proceeds will be sufficient to satisfy such Mortgage
Loan after satisfaction of any senior liens.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, delay could be encountered in connection with the
liquidation of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by Certificateholders. Further, the Servicer will
be entitled to make a Servicer Advance for all liquidation expenses with
respect to a Liquidated Mortgage Loan, which will be reimbursed to the
Servicer out of Liquidation Proceeds prior to any such amounts being available
to make payments on the Certificates with respect to such Liquidated Mortgage
Loan. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Foreclosure on Mortgages and
Deeds of Trust" and "--Rights of Redemption" in the Prospectus.
Under federal and state environmental legislation and applicable case law,
it is unclear whether liability for the costs of eliminating environmental
hazards in respect of real property may be imposed on a secured lender (such
as the Trust) acquiring title to such real property. Such costs could be
substantial. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Environmental
Legislation" and "RISK FACTORS--Potential Liability For Environmental
Conditions" in the Prospectus.
Cash Flow Considerations. Under the Pooling and Servicing Agreement, the
Certificate Rate is subject to a rate cap equal to the Weighted Average Loan
Rate of the Mortgage Loans. In the event that the Certificate Rate would have
exceeded the Weighted Average Loan Rate if such cap were not in effect,
Certificateholders will be entitled to receive the Basis Risk Payment to the
extent available from certain sources as described under "DESCRIPTION OF THE
CERTIFICATES--Distributions on the Certificates" herein. The Loan Rates for
the Mortgage Loans are based on a specified index and margin; provided,
however that certain of the Mortgage Loans have no margin or a margin equal to
0%. An extreme change in one month LIBOR at a time when the Weighted Average
Loan Rate does not experience a corresponding change could result in the
Certificate Rate being limited as described above. In addition, because
certain of the Loan Rates are adjusted quarterly and the Certificate Rate is
adjusted monthly, if interest rates generally should rise significantly during
any three-month period, there is a greater likelihood that the Certificate
Rate will be limited than would be the case if all of the Loan Rates were
adjusted each month. As of the Initial Cut-off Date, certain of the Initial
Mortgage Loans in the Pool bear interest at reduced promotional or
introductory rates. Such rates are generally in effect for a period of
approximately six months. To the extent the Mortgage Loans have promotional or
introductory rates in effect, the Weighted Average Loan Rate will be affected,
thereby limiting the Certificate Rate as described above.
Collections on the Mortgage Loans may vary because, among other things, with
respect to a majority of the Mortgage Loans, borrowers may make payments
during any month (other than the month in which the Mortgage Loan matures,
unless the credit limit is exceeded) as low as the interest payment for such
month or as high as the entire outstanding balance (plus accrued interest and
other charges). Collections on Mortgage Loans also may vary due to seasonal
purchasing and payment habits of borrowers.
General credit risk may be greater to Certificateholders than to holders of
instruments representing interests in level-payment first deed of trust loans
since a majority of the Mortgage Loans require no payment of principal until
final maturity unless the credit limit is exceeded. Unless the credit limit is
exceeded on such Mortgage Loans, minimum monthly payments will not exceed
accrued interest except in the month of the Mortgage Loan's maturity date, in
which the Mortgage Loan is scheduled to amortize fully. Borrowers under such
Mortgage Loans are under no obligation to pay down all or part of their
outstanding principal balances prior to maturity unless the credit limit is
exceeded, and, in the event such balances have not been substantially paid
down prior to maturity, some borrowers may find themselves unable to make the
required final payment.
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Prepayment Considerations. All of the Mortgage Loans may be prepaid in whole
or in part at any time. Generally, home equity loans are not viewed by
mortgagors as permanent financing. Accordingly, the Mortgage Loans may
experience a higher rate of prepayment than traditional mortgage loans. On the
other hand, because the Mortgage Loans are not fully amortizing, in the
absence of voluntary borrower prepayments they could experience slower rates
of principal payment than traditional, fully amortizing mortgages. The Trust's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing and homeowner mobility.
To the extent of losses allocable to the Certificateholders,
Certificateholders may receive as payment of principal the amount of such
losses either from Certificateholders' Excess Interest or, in some instances,
from the Spread Account or from draws under the Certificate Insurance Policy.
The level of losses may therefore affect the rate of payment of principal on
the Certificates.
The rate and timing of amortization of the Certificate Principal Balance
will be affected by the inclusion of Trust Balances of Common Mortgage Loans
in the Trust Fund. Common Mortgage Loans, which as of the Initial Cut-off Date
account for approximately 1.0% by principal amount of the balances to be
transferred to the Trust, are those Mortgage Loans which generated balances
that were transferred to Trust 1990, Trust 1992, Trust 1993 or Trust 1994 or
that are Reacquired 1991 Balances. See table captioned "Data on Common
Mortgage Loans" under "THE MORTGAGE LOAN POOL" herein. Payments of principal
(including prepayments) by a borrower on a Common Mortgage Loan will be
applied first to reduce to zero the principal balance, if any, of such Common
Mortgage Loan transferred to Trust 1990 (including any such balance
subsequently transferred to the Trust during the Pre-Funding Period), second
to reduce the Reacquired 1991 Balances, if any, to zero, third to reduce to
zero the principal balance, if any, of such Common Mortgage Loan transferred
to Trust 1992 (including any such balance subsequently transferred to the
Trust during the Pre-Funding Period), fourth to reduce to zero the principal
balance, if any, of such Common Mortgage Loan transferred to Trust 1993 and
fifth to reduce to zero the principal balance, if any, of such Common Mortgage
Loan transferred to Trust 1994 before any such payments are applied to reduce
the Trust Balance of such Common Mortgage Loan (other than 90-1 Mortgage Loans
and 92-1 Mortgage Loans). Partial prepayments of Common Mortgage Loans
therefore would affect the rate and timing of distributions on the
Certificates at a slower rate than partial prepayments of other Mortgage
Loans.
In the event that 90-1 Mortgage Loans and 92-1 Mortgage Loans are conveyed
to the Trust during the Pre-Funding Period, principal collections on such
Mortgage Loans will be applied in the priority described above as if such
balances were still held by Trust 1990 and Trust 1992, respectively, and no
additional balances will be generated with respect thereto, thereby affecting
the average life of the Certificates.
Substantially all of the Mortgage Loans contain due-on-sale provisions. The
Servicer is obligated under the Pooling and Servicing Agreement to enforce
such provisions unless such enforcement is not permitted by applicable law.
The enforcement of a due-on-sale provision will have the same effect as a
prepayment of the related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Due-on-Sale Clauses" herein and "CERTAIN LEGAL ASPECTS OF THE
LOANS--Due-on-Sale Clauses in Mortgage Loans" in the Prospectus. For a
description of certain provisions of the Pooling and Servicing Agreement that
may affect the prepayment experience on the Mortgage Loans, see "DESCRIPTION
OF THE CERTIFICATES--Collection and Other Servicing Procedures" herein.
Under the Pooling and Servicing Agreement, the Transferor or the Servicer,
as applicable, will be obligated to purchase Defective Mortgage Loans or (in
specified circumstances) permitted to substitute Eligible Substitute Mortgage
Loans for Defective Mortgage Loans. The Certificateholders' portion of the
Retransfer Deposit Amount paid in connection with such a purchase or, in the
case of a substitution, the related Certificateholders' portion of the
Substitution Adjustment Amount will be deposited into the Certificate Account.
Amounts so deposited will be distributed to Certificateholders as a prepayment
of the Trust Balance of the applicable Defective Mortgage Loan, accelerating
distributions on the Certificates. See "DESCRIPTION OF THE CERTIFICATES--
Assignment of Mortgage Loan Trust Balances" herein.
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Removal of Mortgage Loans. Subject to the satisfaction of certain conditions
contained in the Pooling and Servicing Agreement, the Transferor may from time
to time, by exercising its rights under the provisions of the Pooling and
Servicing Agreement for removing such Mortgage Loans as described herein,
remove certain Mortgage Loans, and the Trust Balances thereof, from the Trust.
Because such removal will result in the Pool Balance being decreased, the
weighted average life of the Certificates may change. See "MATURITY AND
PREPAYMENT CONSIDERATIONS" herein. For a description of the removal provisions
contained in the Pooling and Servicing Agreement, see "DESCRIPTION OF THE
CERTIFICATES--Optional Retransfers of Mortgage Loans to the Transferor"
herein.
Certificate Rating. The rating of the Certificates will depend primarily on
an assessment by a Rating Agency of the underlying Mortgage Loans and the
claims paying ability of the Certificate Insurer and in part on the level of
protection provided by the Spread Account and Certificateholders' Excess
Interest. Any reduction in the rating assigned to the claims-paying ability of
the Certificate Insurer below the rating initially given to the Certificates
may result in a reduction in the rating of the Certificates. The rating by the
Rating Agencies of the Certificates is not a recommendation to purchase, hold
or sell the Certificates, inasmuch as such rating does not comment as to the
market price or suitability for a particular investor. There is no assurance
that the ratings will remain in effect for any given period of time or that
the ratings will not be reduced, suspended or withdrawn by the Rating
Agencies. The ratings of the Certificates do not address the payment of the
Basis Risk Payment or interest accrued thereon.
Legal Considerations. The Mortgage Loans are secured by first, second or
third deeds of trust or mortgages. With respect to any Mortgage Loan secured
by a first deed of trust, the Servicer has the power under certain
circumstances to consent to a new mortgage lien on the Mortgaged Property
having priority over the related Mortgage Loan. With respect to each Mortgage
Loan secured by a second or third deed of trust or mortgage, the Trust will be
entitled, to the extent described herein, to proceeds that remain from the
sale of the related Mortgaged Property after any related senior loan and any
other prior liens have been satisfied. In the event that such proceeds are
insufficient to satisfy all loans and such other liens in the aggregate, the
Trust and, accordingly, the Certificateholders, as the holders of the junior
loan, bear the risk of delay in distributions while a deficiency judgment
against the borrower is pursued and the risk of delay until the Stated
Maturity Date if the deficiency judgment is not obtained and realized upon.
See "CERTAIN LEGAL ASPECTS OF THE LOANS--Junior Mortgages; Rights of Senior
Mortgages" and "--Anti-Deficiency Legislation and Other Limitations on
Lenders" in the Prospectus.
Insolvency-Related Matters. The Transferor intends that the transfer of all
of the Transferor's right, title and interest in the Mortgage Loans to the
Trust be treated as a sale by the Transferor to the Trust and, accordingly,
that such Trust Balances will not be part of the assets of the Transferor in
the event of the appointment of a receiver or conservator for the Transferor
and will not be available to the creditors of the Transferor. In the event of
an insolvency of the Transferor, however, it is possible that a receiver or a
conservator for, or a creditor of, the Transferor may argue that the
transaction between the Transferor and the Trust was a pledge of each such
Mortgage Loan, in connection with a borrowing by the Transferor, rather than a
sale. If the transfer by the Transferor to the Trust is deemed to be a grant
to the Trust of a security interest in the Mortgage Loans, the Trust should
have an enforceable first priority perfected security interest in the Mortgage
Loans. If a receiver or conservator were appointed for the Transferor, certain
administrative expenses of the receiver or conservator may have priority over
the Trust's right, title and interest in the Mortgage Loans. For so long as
the Transferor is the Servicer, cash collections on the Trust Balances may be
held by the Transferor and commingled with its funds for brief periods, and in
an insolvency proceeding or receivership or conservatorship of the Transferor,
the Trust may not have a perfected interest in such commingled collections.
In the event that the Transferor's transfer of the Mortgage Loans to the
Trust is deemed to constitute the creation of a security interest in the
Mortgage Loans in favor of the Trust, to the extent such security interest was
validly perfected before the Transferor's insolvency and was not taken in
contemplation of insolvency of
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the Transferor, or with the intent to hinder, delay or defraud the Transferor
or the creditors of the Transferor, the Federal Deposit Insurance Act
("FDIA"), as amended by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, as amended ("FIRREA"), provides that such security
interest will not be subject to avoidance by the Federal Deposit Insurance
Corporation (the "FDIC"), as receiver for the Transferor. Subject to
clarification by regulations or interpretations, positions taken by the FDIC
staff prior to the passage of FIRREA do not suggest that the FDIC, as receiver
or conservator for the Transferor, would interfere with the timely transfer to
the Trust of payments collected on the related Mortgage Loans. If, however,
the FDIC were to assert a contrary position, such as requiring the Trustee to
establish its right to those payments by submitting to and completing the
administrative claims procedure under the FDIA, or the conservator or receiver
were to request a stay of proceedings with respect to the Transferor, as
provided under the FDIA, delays in payments on the Certificates and possible
reductions in the amount of those payments could occur. A receiver or
conservator also may disaffirm or repudiate the Transferor's obligations under
the Pooling and Servicing Agreement to accept reassignment of Defective
Mortgage Loans or other provisions of the Pooling and Servicing Agreement. The
FDIA provides that a claim for damages arising from the repudiation of a
contract is limited to "actual direct compensatory damages." In the event the
FDIC were to be appointed as conservator or receiver of the Transferor and
were to repudiate the Pooling and Servicing Agreement, then the amount payable
out of available collections on the Mortgage Loans to the Certificateholders
could be lower than the outstanding principal and accrued interest on the
Certificates. In addition, in the case of an Event of Default (as defined
herein) relating to the conservatorship or receivership of the Servicer, the
receiver or conservator may have the power either to terminate the Servicer
and replace it with a successor Servicer or to prevent the termination of the
Servicer and its replacement with a successor Servicer if no Event of Default
exists other than the receivership, conservatorship or insolvency of the
Servicer.
If a conservator or receiver were appointed for the Transferor, then a Rapid
Amortization Event (as defined herein) would occur with respect to the
Certificates then outstanding and, pursuant to the Pooling and Servicing
Agreement, Additional Balances (and Subsequent Mortgage Loans, if such events
occurred during the Pre-Funding Period) would not be transferred to the Trust
and the Trustee would sell the Trust Balances of the Mortgage Loans (unless
otherwise instructed by holders of more than 50% of the Certificate Principal
Balance and any person designated by the Transferor to the Trustee prior to
the time such conservator or receiver was appointed), thereby causing early
termination of the Trust. Unless a Certificate Insurer Default (as defined
herein) has occurred and is continuing, the Certificate Insurer will have the
power to make such instruction to the Trustee on behalf of the
Certificateholders and such person designated by the Transferor to the
Trustee. Certificateholders will suffer a loss if a Certificate Insurer
Default has previously occurred and is continuing and the Certificateholders'
portion of the net proceeds of such sale are insufficient to pay the
Certificateholders in full. If a Rapid Amortization Event occurs involving
either the insolvency of the Transferor or the appointment of a conservator or
receiver for the Transferor, the conservator or receiver may have the power to
prevent the early sale, liquidation or disposition of the Trust Balances of
the Mortgage Loans and the commencement of the Rapid Amortization Period. A
conservator or receiver may also have the power to cause the early sale of the
Trust Balances of the Mortgage Loans and the early retirement of the
Certificates or to prohibit the continued transfer of Additional Balances and
Subsequent Mortgage Loans to the Trust.
On or prior to the date of closing, the Transferor will have received an
opinion of Shaw Pittman Potts & Trowbridge, counsel to the Transferor, to the
effect that, based on certain assumptions, to the extent that the transfer of
the Mortgage Loans is considered to be a transfer for security, the Trustee
for the benefit of the Trust will have a first priority perfected security
interest in the Mortgage Loans and that, on such basis, such conservator or
receiver should not interfere with payments to be made to Certificateholders.
It should be recognized, however, that a court is not bound by such a legal
opinion.
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THE TRANSFEROR
The Transferor is a federally chartered stock savings bank. The Transferor's
home office is located at 7926 Jones Branch Drive, McLean, Virginia 22102, and
its executive offices are located at 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815. The Transferor's telephone number is (301) 986-7000. The
Transferor is subject to comprehensive regulation, examination and supervision
by the Office of Thrift Supervision ("OTS") within the Department of the
Treasury and the FDIC. Deposits at the Transferor are fully insured up to
$100,000 per insured depositor by the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC.
Based on unaudited results, at June 30, 1997, the Transferor had
consolidated assets of approximately $6.2 billion, deposits of approximately
$4.8 billion and stockholders' equity of approximately $345.5 million. As a
savings bank chartered under the laws of the United States, the Transferor is
subject to certain minimum regulatory capital requirements imposed under
FIRREA. At June 30, 1997, the Transferor's tangible, core, tier 1 risk-based
and total risk-based regulatory capital ratios were 6.48%, 6.48%, 7.19% and
13.21%, respectively. As of such date, the Transferor's capital ratios
exceeded the requirements under FIRREA as well as the standards established
for "well-capitalized" institutions under the prompt corrective action
regulations established pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991. The OTS has the discretion to treat a "well-
capitalized" institution as an "adequately capitalized" institution for
purposes of the prompt corrective action regulations if after notice and an
opportunity for a hearing, the OTS determines that the institution (i) is
being operated in an unsafe or unsound condition or (ii) has received and has
not corrected a less than satisfactory examination rating for asset quality,
management, earnings or liquidity.
Legislation passed in 1996 requires the merger of the Bank Insurance Fund
("BIF") and the SAIF into a single Deposit Insurance Fund on January 1, 1999
but only if the thrift charter is eliminated by that date. Congress is
considering legislation in various forms that would require federal thrifts
like the Transferor to convert their charters to national or state bank
charters. The House Banking Committee approved a version of such legislation
on June 20, 1997 and the House Commerce Committee approved its version of the
legislation on October 30, 1997. In the absence of appropriate "grandfather"
provisions, such legislation could have an adverse effect on the Transferor
and its parent company, the B.F. Saul Real Estate Investment Trust (the "Real
Estate Investment Trust") because, among other things, the Real Estate
Investment Trust engages in activities that are not permissible for bank
holding companies and the regulatory capital and accounting treatment for
banks and thrifts differs in certain significant respects. While the versions
of the bill approved by the House Banking and Commerce Committees both contain
grandfather provisions that address many of these issues, the Transferor
cannot determine at this time whether, or in what form, such legislation may
eventually be enacted, and there can be no assurances that any such
legislation that is enacted will contain adequate grandfather rights for the
Transferor or the Real Estate Investment Trust.
FORMATION OF THE TRUST
The Trust will be formed, in accordance with the laws of the State of New
York, pursuant to the Pooling and Servicing Agreement, and will be the issuer
of the Certificates. Prior to its formation, the Trust will have no assets or
obligations. The Trust will not engage in any business activity other than
acquiring and holding the Trust Balances of the Mortgage Loans, issuing the
Certificates and the Transferor Interest and making payments thereon. The
Trust does not expect to have any additional capital resources.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
used to fund the Pre-Funding Account and the Capitalized Interest Account and
the remainder will be paid to the Transferor. The Transferor will use such
proceeds for its general corporate purposes.
THE CHEVY CHASE HOME EQUITY LENDING PROGRAM
Chevy Chase has originated variable-rate home equity revolving lines of
credit since 1983. At September 30, 1997, Chevy Chase had approximately $534.2
million aggregate principal amount of outstanding revolving credit line home
equity loans, including $36,709,280.48 of outstanding loan balances
transferred to Trust 1990,
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$19,178,748.61 of outstanding loan balances transferred to Trust 1992,
$16,646,843.02 of outstanding loan balances transferred to Trust 1993 and
$38,082,556.91 of outstanding loan balances transferred to Trust 1994. All of
such loan balances are serviced by Chevy Chase.
UNDERWRITING PROCEDURES
Prior to approving a revolving credit line home equity loan, the Home Equity
Department of Chevy Chase undertakes a direct credit investigation of the
applicant designed to assess the applicant's ability and willingness to repay
the loan. This investigation includes the following procedures: (i) reviewing
an independent credit bureau report; (ii) verifying the applicant's employment
and income through a review of the applicant's most recent W-2 form or pay
stub (or, in the case of self-employed individuals, a minimum of two years of
tax returns) or telephone verification (coupled with a request for written
confirmation) by the applicant's current employer; (iii) obtaining written
verification of the balances of any senior mortgage loans; (iv) obtaining and
reviewing a written title report to ensure that all liens (including property
taxes), except for any senior liens, are paid off prior to or at the time of
settlement of the loan; and (v) obtaining a current written appraisal of the
property, including appropriate comparable property appraisal information. If
an applicant has been employed by a current employer for less than two years,
Chevy Chase also obtains verification of employment and income information
from the applicant's other employers within the preceding two years.
Beginning in January 1996, applicants meeting either of the following
criteria may be approved based on the stated income of the applicant, a no-
inspection property analysis and a minimum credit score: (i) a requested line
of credit of less than $20,000 (increased to $25,000 in March 1997) or (ii) a
combined loan-to-value ratio of 60% or less and a requested line of credit of
$100,000 or less. The no-inspection property analysis is an appraisal product
provided by the Chevy Chase Appraisal Department. This method of valuation
renders a value based solely on information gathered through county records,
the Multiple Listing Service (MLS) or internal Chevy Chase appraisal data,
without a physical inspection of the property. The information obtained is
provided in a report and includes the address of the property, a tax
identification number, the assessed value of the property (per tax records),
the date of the valuation and the estimated value.
If, after completion of the credit investigation, Chevy Chase accepts the
application, it assigns a maximum credit limit for a loan (the "Maximum Credit
Limit") based on the prospective borrower's ability to pay and overall
creditworthiness, the value of the mortgaged property and an acceptable
combined loan-to-value ratio.
Prior to January 1991, prospective borrowers generally were required to have
an effective gross monthly income in excess of $1,000, with effective gross
monthly income calculated by subtracting total monthly obligations from total
verified gross income. Total monthly obligations generally included first
mortgage debt (including escrow payments), other real estate obligations,
automobile loans, alimony and child support obligations, and tuition and
personal loans (excluding balances to be retired within four months), as well
as other obligations that appeared on an independent credit bureau report. If
the first mortgage loan contained an adjustable-rate feature, the projected
monthly principal and interest payments on such loans were calculated at an
annual percentage rate ("APR") of 15%. In addition, applicants were required
to have a debt-service ratio not greater than 30%, with the debt-service ratio
calculated by dividing the proposed monthly credit line payment by effective
gross monthly income.
In January 1991, Chevy Chase replaced the gross monthly income and debt-
service ratio criteria with a debt-to-income ratio test. The debt-to-income
ratio is derived by dividing the applicant's monthly payments on all existing
obligations, including the proposed home equity loan payment, by the
applicant's gross monthly income. If the applicant's debt-to-income ratio
exceeds 40% but is less than 55%, the applicant must demonstrate a positive
cash flow. Cash flow is determined by using a computer model that estimates
future living expenses based on current personal and demographic information.
Expenses used in the computation include federal, state and social security
taxes as well as estimated living expenses and debt payments. Applicants with
a debt-to-income ratio of 46% to 55% may be approved for a loan at a maximum
combined loan-to-value ratio of 75%.
Prospective borrowers also must have a consistent record of timely debt
payment (defined generally as payment of debt obligations which have been
received within 30 days of their due dates). Applicants with a past
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history of untimely credit payments may be eligible for a credit line provided
they have no current past-due credit and have not had any delinquent payments
within the two years preceding the application. In most cases, an application
will be rejected if it shows more than one payment delinquent in excess of 30
days on the applicant's first mortgage account.
In April 1995, Chevy Chase expanded its lending program to incorporate a
credit matrix to evaluate the credit background of applicants. Under this
program (the "Sub-Prime Lending Program"), borrowers with credit histories
that do not meet standard underwriting criteria may be eligible for a
variable-rate line with a combined maximum loan-to-value ratio of 65% to 80%.
The determination of an acceptable appraised value is a function of the
residential property's quality, condition and appreciation history and
prospective market conditions. Except as described in the following
paragraphs, the combined loan-to-value ratio for loans secured by owner-
occupied, single-family properties generally may not exceed 80%, although a
maximum combined loan-to-value of 85% was used for loans originated from June
1988 through May 1990. In December 1990, Chevy Chase adopted a tiered combined
loan-to-value system for properties with appraised values of greater than
$400,000. Under the system, Chevy Chase assigns the following maximum combined
loan-to-value ratios to the corresponding increments of a property's appraised
value: up to $400,000 (80%), $401,000 to $800,000 (60%), $801,000 to
$1,200,000 (40%), $1,200,000 to $2,000,000 (20%) and over $2,000,000
(ineligible). If the first mortgage loan provides for negative amortization,
the maximum combined loan-to-value ratio may not exceed 75%. Certain of the
Mortgage Loans will be junior to mortgage loans that provide for negative
amortization. The combined loan-to-value ratio for loans secured by
condominiums may not exceed 70% (100% for the CreditLine 100 Program (as
defined below)). Prior to April 1990, Chevy Chase extended loans secured by
single-family rental properties at a maximum combined loan-to-value ratio of
70%. This program was reinstated in January 1994, with a maximum combined
loan-to-value ratio of 80%. No Mortgage Loans are secured by commercial or
vacation properties.
In February 1994, Chevy Chase began offering loans secured by owner-
occupied, single-family properties with a maximum combined loan-to-value ratio
of 90%. Loans approved by Chevy Chase under this program must be approved and
insured by United Guaranty Residential Insurance Company of North Carolina
("United Guaranty"). United Guaranty provides 100% coverage against losses
resulting from borrower default on each insured loan subject to a maximum
limit of liability of 10% of the total loans approved in each policy year.
United Guaranty does not cover default which results from the failure of a
borrower to pay any balloon payment.
United Guaranty insures lines of credit up to $100,000. To meet United
Guaranty's underwriting guidelines, an applicant must have a debt-to-income
ratio of less than 40%. Condominiums or rental properties are not eligible
properties under this program. United Guaranty requires that insured loans
contain an interest rate cap of 18% and also requires that any existing first
mortgage have a balance less than $300,000 and not allow for negative
amortization. Beginning in March 1997, loans with a maximum combined loan-to-
value of 90% and a minimum loan amount of $25,000 may not require mortgage
insurance if they meet certain credit scoring criteria.
In April 1995, Chevy Chase began offering loans secured by single-family,
owner-occupied and rental properties with a maximum combined loan-to value
ratio of 100% (the "CreditLine 100 Program") with credit limits ranging from
$7,500 to $25,000. Under this program, Chevy Chase utilizes a credit scoring
model. Loans under the program may be insured by United Guaranty. Chevy Chase
offers the CreditLine 100 Program without mortgage insurance for purchase
money second trusts, for lines secured by condominiums, lines where applicants
have a first mortgage with an outstanding balance greater than $250,000 and
lines where the applicant's debt-to-income ratio is greater than 35% and less
than 40%.
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In March 1997, Chevy Chase began offering loans secured by second and third
liens on single-family, owner occupied properties with a maximum combined
loan-to-value ratio up to 125%. The credit limits range from $7,500 to
$25,000. The maximum loan-to-value ratio prior to the home equity credit line
may not exceed 95%. A credit scoring model is also utilized in underwriting
these loans. The maximum debt-to-income ratio is 45%. For debt-to-income
ratios greater than 45%, the applicant must demonstrate a positive cash flow.
The loans offer a maximum term of ten years with a draw period for the first
five years. The required minimum monthly payment is 2% of the outstanding
balance as of the Cycle Date. Loans secured by third liens are offered to
borrowers only if the second lien is held by Chevy Chase.
The minimum home equity revolving credit limit that Chevy Chase will
establish is $7,500. Revolving home equity lines of $50,000 or less must be
approved by Chevy Chase's home equity underwriting staff. Lines of more than
$50,000, up to $200,000, must be approved by the Division Vice President or
the Vice President of Production of the Home Equity Department. Lines in
excess of $200,000 must be approved by an officer at the level of Senior Vice
President or above. In March 1997 lending authority levels were established.
Each level is defined by the authorized loan approval amount and allowable
exceptions to policy. Lending authority levels are assigned to each
underwriter, team leader, and manager within the Home Equity Department.
Chevy Chase obtains a property and judgment report on the mortgaged property
from its title agent, which confirms the last deed of record and any liens
filed against that deed. The property and judgment report is insured under the
title agent's errors and omissions coverage for a period of one year from the
date of settlement. Chevy Chase also generally obtains title insurance on the
mortgaged property, if (i) the home equity revolving credit line will be
secured by a first lien on the customer's real estate (unless Chevy Chase is
paying off a first lien held by an institutional lender), (ii) the credit line
will be subordinate to a first deed of trust held other than by an
institutional lender, (iii) the credit line exceeds $200,000, (iv) the title
is held in trust, or (v) the mortgaged property is a rental property.
LOAN TERMS
A borrower may access a home equity revolving line of credit by (i) writing
a check, (ii) telephoning the Home Equity Department and requesting funds to
be wire-transferred to a pre-authorized account, (iii) requesting a cashier's
check at a Chevy Chase branch office or (iv) telephoning the Home Equity
Department and requesting a cashier's check.
Home equity loans bear interest at a variable rate and generally are subject
to a maximum per annum interest rate of between 18% and 24%. The interest rate
on all home equity loans originated before April 1995 adjusts quarterly and,
beginning in April 1995, the interest rate on all new home equity loans
adjusts monthly. The daily periodic rate is 1/365th (generally 1/366th in the
case of leap years) of the APR, which is the sum of the index plus a margin
(the "Margin") of from 1.0% to 5.0%. Interest is calculated at a rate applied
to the daily balance of the account for each day of the billing cycle (the
"Loan Rate"). For credit lines with a maximum loan-to-value ratio of 100% or
less, the required minimum monthly payment is equal to the interest accrued
during the related billing cycle plus any late charges, any administrative
charges and any credit insurance charges plus the amount, if any, by which the
outstanding balance of such mortgage loan exceeds its Maximum Credit Limit.
Except for principal amortization that may result from such monthly payments,
there are generally no required payments of principal, except that the entire
outstanding principal amount of most mortgage loans is due ten years or ten
years and three months after the date of origination or 20 years after the
later of the date of origination of the mortgage loan or the date of increase
of the Maximum Credit Limit of such mortgage loan. Since 1991, the term to
stated maturity of mortgage loans originated by Chevy Chase has been twenty
years from the date of origination and Chevy Chase does not extend the
maturity upon an increase of the Maximum Credit Limit. For credit lines with a
maximum loan-to-value ratio greater than 100% and loans originated under the
Sub-Prime Lending Program, the required minimum monthly payment is equal to 2%
of the outstanding balance as of the Cycle Date plus any late charges, any
administrative charges and any credit insurance charges plus the amount, if
any, by which the outstanding balance of such mortgage loan exceeds its
Maximum Credit
S-26
<PAGE>
Limit. The term to stated maturity on loans with a loan-to-value ratio greater
than 100% and on loans originated under the Sub-Prime Lending Program is ten
years, with a draw period for the first five years. All payments are due 15
days after the 15th day of the month. The billing cycle runs from the 16th day
of the month preceding the month in which the billing statement is mailed
until the 15th day of the month in which the statement is mailed.
The index for loans which have their interest rate adjusted quarterly is the
rate of interest publicly announced from time to time as the "prime" or "base"
rate of interest charged by the index bank specified in the related loan
agreement as in effect on the last day of the last full calendar month of the
immediately preceding quarter; the index for loans which have their interest
rate adjusted monthly is the highest prime rate published in the "Money Rates"
section of The Wall Street Journal on the first Business Day of the calendar
month. Some loan agreements provide that, if the index bank ceases to announce
the index, Chevy Chase will designate a replacement method for calculating the
interest rate on the loan that is comparable to the above-described method,
upon notification to the borrower in accordance with such loan agreement. When
a change in the index is published, a change in the Loan Rate will take effect
on a specified date in the first month of the quarter following the date of
the published change for loans which have their interest rates adjusted
quarterly, or in the month of the published change, for loans which have their
interest rates adjusted monthly, and the new Loan Rate will apply to new loans
and charges as well as to the existing loan balance.
In order to promote its home equity lending program, Chevy Chase has offered
promotional or introductory offers to prospective borrowers. Since April 1995,
customers opening a loan with a maximum loan-to-value ratio of 80% have been
offered settlement without closing costs and a 4.9% introductory rate for the
first six months after settlement. From April 1995 through November 1996,
customers opening a loan with a maximum loan-to-value ratio greater than 80%
but less than 90% were offered settlement without closing costs and a 5.9%
introductory rate for the first six months after settlement. Since that time
the introductory rate is no longer offered on loans with a loan-to-value ratio
greater than 80%. Customers approved under the Sub-Prime Lending Program have
been offered settlement without closing costs and an introductory rate of 5.9%
for the first six months after settlement. Since November 1995, Chevy Chase
has offered the option of an introductory rate or a transfer bonus. Customers
selecting the transfer bonus offer will receive $100 for every $5,000
transferred to a new Chevy Chase Home Equity Line from another institution.
For loans with a maximum loan-to-value ratio less than or equal to 100%, the
borrower may draw principal amounts on the loan (up to the Maximum Credit
Limit of the loan) or repay such amounts from time to time. For loans with a
maximum loan-to-value ratio greater than 100%, the borrower may draw principal
amounts on the loan (up to the Maximum Credit Limit of the loan) only during
the draw period. Except for any amortization of principal that may occur
during the amortization period of loans with a maximum loan-to-value ratio
greater than 100% and loans in the Sub-Prime Lending Program and as a result
of the required minimum monthly payments, there are no required payments of
principal until maturity.
For revolving credit line home equity loans originated prior to November 7,
1989, Chevy Chase has the right, under each such loan, on prior notice of the
amendment in accordance with federal and applicable state law, to change its
terms. This includes the right to increase the monthly periodic rate or to
change the index at any time. If Chevy Chase increases the minimum payment or
the maximum rate of finance charge applied to any such loan, such changes may
apply to both new and outstanding balances if the borrower consents to such
changes in writing or uses the loan after the effective amendment date.
Chevy Chase has the right to require the borrower to pay the entire balance
due, plus all other accrued but unpaid charges, immediately, and to cancel the
credit privileges under the related loan agreement under certain
circumstances, which generally include the following: if the borrower commits
fraud or makes a material misrepresentation in connection with the credit
line; if the borrower fails to meet the repayment terms set forth in the loan
agreement; if the borrower acts or fails to act in any way that adversely
affects the mortgaged property or the security interest or any other interest
that Chevy Chase has in the mortgaged property; if the borrower fails to
maintain insurance on the mortgaged property as required by the mortgage or
deed of trust; if the
S-27
<PAGE>
borrower fails to maintain the mortgaged property and such failure adversely
affects the value of the property; if a judgment is filed against the borrower
which adversely affects the security interest of Chevy Chase in the mortgaged
property; if the borrower does not have good and marketable title to the
mortgaged property; or if the warranties and representations made by the
borrower in connection with the credit line constitute fraud or
misrepresentation under applicable state law. Chevy Chase also has the right
to refuse to advance additional credit or to reduce a borrower's credit limit
under certain circumstances, generally including the following: if the value
of the mortgaged property declines significantly below its appraised value at
the time the credit line was established; if there is a material change in the
borrower's financial circumstances; if the borrower is in default of any
material obligation under the loan agreement related to the credit line or the
related mortgage or deed of trust; if Chevy Chase is precluded by governmental
action from imposing the APR provided for in the loan agreement; if the
security interest of Chevy Chase in the mortgaged property is adversely
affected by certain circumstances; if Chevy Chase is notified by a government
agency that further advances to the borrower would constitute an unsafe and
unsound practice; or if the interest rate charged on the credit line reaches
the maximum interest rate permitted by law. All home equity accounts are
subject to a monthly automated account review through Equifax Credit
Information Systems. This review assists Chevy Chase in determining if there
has been a material change in the borrower's financial circumstances. The
Trust will not have the ability to amend the provisions of, or terminate, the
Mortgage Loans.
In the event of a default on a mortgage that is senior to any mortgage loan,
Chevy Chase has the right to satisfy the defaulted senior mortgage in full or
to cure such default and bring the defaulted senior mortgage current. Chevy
Chase may either take the action described above or may refrain from taking
any action based upon reasonable commercial practice in the industry generally
and its customary servicing procedures. Chevy Chase has the right to add
amounts expended in connection with any satisfaction or cure of a default to
the outstanding loan balance for such mortgage loan. See "CERTAIN LEGAL
ASPECTS OF THE LOANS--Foreclosure on Mortgages and Deeds of Trust" and "--
Junior Mortgages; Rights of Senior Mortgages" in the Prospectus.
SERVICING
In its capacity as Servicer, Chevy Chase will be responsible for servicing
the Mortgage Loans.
Chevy Chase generates statements on revolving credit line home equity loans
each month on the date specified in the related loan agreement (the "Cycle
Date"). If any payment becomes 45 days past due and the borrower has not made
arrangements to bring the loan current, Chevy Chase obtains an updated
appraisal of the mortgaged property, verifies the status of any senior loan
and sends a breach letter to the customer requiring that the home equity loan
and any such senior loan be brought current to prevent acceleration of the
loan balance.
Chevy Chase follows practices customary in the savings industry in
attempting to cure delinquencies and in pursuing remedies upon default.
Generally, if the borrower does not cure the delinquency within 90 days, Chevy
Chase initiates foreclosure action. If the loan is not reinstated or paid in
full, an auction will be held to dispose of the property. If Chevy Chase
believes the offer is inadequate in view of the security property's appraised
value, Chevy Chase may decide to participate in the auction. If Chevy Chase is
the successful bidder, Chevy Chase will take steps to liquidate the property.
Servicing and collection policies may change over time in accordance with
Chevy Chase's business judgment, applicable laws and regulations, industry
practices and other items.
S-28
<PAGE>
The following tables set forth the delinquency and loss experience for each
of the periods shown for Chevy Chase's portfolio of revolving credit line home
equity loans. (Loan balances transferred to Trust 1990, Trust 1992, Trust
1993, Trust 1994, Trust 1995 or Trust 1996 are considered part of the Chevy
Chase loan portfolio for purposes of the following discussion.) Chevy Chase
believes that there have been no material trends or anomalies in the
historical delinquency and loss experience as represented in the following
tables. The Mortgage Loans have been selected from these home equity loans
based upon the eligibility criteria shown below in "THE MORTGAGE LOAN POOL."
The data presented in the following tables are for illustrative purposes only
and there is no assurance that the delinquency and loss experience of the
Mortgage Loans will be similar to that set forth below.
MORTGAGE LOAN DELINQUENCY EXPERIENCE(1)
CHEVY CHASE PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------- SEPTEMBER 30,
1994(2) 1995(2) 1996(2) 1997(3)
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Number of Mortgage Loans Serviced.. 19,532 18,931 18,225 21,227
Aggregate Loan Balances of Mortgage
Loans Serviced.................... $508,389 $469,622 $446,270 $534,164
Loan Balance of Mortgage Loans 30-
59 Days Past Due(4)............... 7,630 8,047 7,445 11,954
Loan Balance of Mortgage Loans 60-
89 Days Past Due(4)............... 197 973 1,185 907
Loan Balance of Mortgage Loans 90
or More Days Past Due(4).......... 3,152 4,675 4,241 5,132
Total Delinquencies as a Percentage
of Aggregate Loan Balances of
Mortgage Loans Serviced........... 2.16% 2.92% 2.88% 3.37%
</TABLE>
- --------
(1) All amounts are as of period end. Delinquency figures do not include past
due amounts of $50.00 or less.
(2) Amounts do not include mortgage loans purchased from Ford Consumer Finance
Company ("Ford").
(3) Amounts include mortgage loans purchased from Ford. Because limited
historical data is available with respect to the mortgage loans purchased
from Ford, the actual delinquency experience with respect to the Mortgage
Loans in the Pool may be greater than the amounts and percentages
expressed above and may be substantially greater.
(4) Contractually past due.
MORTGAGE LOAN LOSS EXPERIENCE
CHEVY CHASE PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1994(1) 1995(1) 1996(1) 1997(2)
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Average Principal Balance of
Mortgage Loans Serviced......... $522,373 $491,250 $451,460 $508,439
Gross Charge Offs(3)............. 1,052 856 1,140 1,330
Recoveries on Loans Previously
Charged Off(3).................. 77 22 39 25
Net Charge Offs(3)............... 975 834 1,101 1,305
Gross Charge Offs(3) as a
Percentage of Average Principal
Balance......................... 0.20% 0.17% 0.25% 0.35%(4)
Net Charge Offs(3) as a
Percentage of Average Principal
Balance......................... 0.19% 0.17% 0.24% 0.34%(4)
</TABLE>
- --------
(1) Amounts do not include mortgage loans purchased from Ford.
(2) Amounts include mortgage loans purchased from Ford. Because limited
historical data is available with respect to the mortgage loans purchased
from Ford, the actual loss experience with respect to the Mortgage Loans
in the Pool may be greater than the amounts and percentages expressed
above and may be substantially greater.
(3) The term "charge off" refers to an actual liquidated loss incurred on a
mortgaged property. A charge off is recognized when a property is sold and
the loss actually is incurred.
(4) Annualized.
S-29
<PAGE>
THE FORD PORTFOLIO
In December 1996 Chevy Chase purchased approximately $119 million of
variable-rate revolving home equity lines of credit from Ford Consumer Finance
Company ("Ford"). These loans had been acquired by Ford through a series of
acquisitions between 1990 and 1992. Approximately $64.8 million of these loans
(the "Ford Loans") have been included in the Pool. All of the Ford Loans are
currently serviced by Chevy Chase and have been since April 1997.
Prior to the purchase of the Ford portfolio, Chevy Chase performed an on-
site due diligence review of the portfolio and Ford's servicing operations. In
performing such review, Chevy Chase utilized a due diligence team including
personnel with credit and product experience, lending and credit
administration experience, a compliance officer and systems and operations
personnel. Chevy Chase reviewed a random sample of the loans in the Ford
portfolio and examined the underwriting criteria at the time of origination,
the current credit quality, the quality of the collateral appraisal and
servicing. In addition, Chevy Chase performed an economic analysis of certain
jurisdictions with high concentrations of the loans. Based on the sample
reviewed, Chevy Chase determined that the majority of the Ford Loans were of
prime credit quality.
While the review performed by Chevy Chase in connection with the purchase
was intended to determine compatibility with Chevy Chase's risk profile, Chevy
Chase did not re-underwrite the Ford Loans and no assurance can be given that
each Ford Loan actually complies with Chevy Chase's underwriting standards or
that the Ford Loans will be of the same credit quality or have the same
payment characteristics of mortgage loans originated by Chevy Chase.
LOAN TERMS
All of the Ford Loans bear interest at a variable rate, and the Ford Loans
are generally subject to a maximum per annum interest rate of 18% to 25%.
Interest rates on substantially all of the Ford Loans adjust at least once a
month. Approximately 68.3% of the Ford Loans are secured by second liens and
the remainder are secured by first liens.
Interest rates on substantially all of the Ford Loans are based on a "prime
rate" as set forth in the related loan agreement and the remainder are based
on other publicly available market rates.
All of the Ford Loans have a draw period, during which the borrower may draw
principal amounts on the loan (up to the Maximum Credit Limit of the loan) or
repay such amounts from time to time. Except for a limited number of Ford
Loans with specified draw periods, the draw period for the Ford Loans is
generally equal to the entire life of the loan. During the draw period, the
borrower is only required to make minimum monthly payments consisting of
interest accrued during the related billing cycle and, in some cases, a
portion of principal, the amount by which the outstanding balance exceeds the
Maximum Credit Limit and any late charges, administrative charges and credit
insurance charges. Ford Loans which have a draw period of less than the life
of the loan will amortize monthly over a term of up to thirty years. As of the
Initial Cut-off Date, the majority of the Ford Loans are in their draw period.
SERVICING
The Ford Loans are currently serviced in accordance with Chevy Chase's
overall servicing policies. See "THE CHEVY CHASE HOME EQUITY LENDING PROGRAM--
Servicing." No historical data on the Ford Loans is available prior to January
1, 1997.
THE MORTGAGE LOAN POOL
The Initial Mortgage Loans are evidenced by loan agreements (each, a "Loan
Agreement") secured by deeds of trust or mortgages (of which approximately
25.56% by Cut-off Date Trust Balance are first deeds of trust or mortgages,
approximately 74.43% by Cut-off Date Trust Balance are second deeds of trust
or mortgages and the remainder are third deeds of trust or mortgages) on
Mortgaged Properties, the majority of which are located in Maryland, Virginia,
New York and New Jersey. All of the Initial Mortgage Loans are adjustable-rate
mortgages.
S-30
<PAGE>
Each Initial Mortgage Loan was selected by the Transferor for inclusion in
the Pool from those that met the following criteria, among others, as of the
Initial Cut-off Date: each Initial Mortgage Loan (i) had a current Trust
Balance of not more than $500,000; (ii) had a stated maturity date not later
than 389 months after the Initial Cut-off Date; (iii) was not 30 or more days
contractually delinquent; (iv) had a Combined Loan-to-Value Ratio at the
Initial Cut-off Date not in excess of 115%; and (v) represented a first,
second or third lien position.
As of the Initial Cut-off Date, approximately 12.9% of the Trust Balances of
the Initial Mortgage Loans accrued interest at an introductory rate of 4.9%
for an initial period of approximately six months and approximately 0.2% of
the Trust Balances of the Initial Mortgage Loans accrued interest at an
introductory rate of 5.9% for an initial period of approximately six months.
See "THE CHEVY CHASE HOME EQUITY LENDING PROGRAM--Loan Terms" herein. All of
the 932 Mortgage Loans with Trust Balances accruing interest as of the Initial
Cut-off Date at such introductory rates will be fully indexed by June 24, 1998
and the Margin for such Initial Mortgage Loans will be not less than 1.0%
As of the Initial Cut-off Date, less than 1.5% of the Initial Mortgage Loans
were originated by Chevy Chase under the Sub-Prime Lending Program.
Each Initial Mortgage Loan was originated between August 1983 and the
Initial Cut-off Date or acquired by Chevy Chase. The Initial Mortgage Loans
had individual Combined Loan-to-Value Ratios at the Initial Cut-off Date
ranging from approximately 0% to not more than 115%. As of the Initial Cut-off
Date, the average Trust Balance of the Initial Mortgage Loans was $26,817.73
and the weighted average Combined Loan-to-Value Ratio of the Initial Mortgage
Loans was 61.2%. As of the Initial Cut-off Date, the weighted average loan
utilization rate (computed by dividing the Cut-off Date Trust Balance for each
Initial Mortgage Loan by the related Maximum Credit Limit) was 78.8% and the
weighted average junior mortgage ratio (computed by dividing the Maximum
Credit Limit for each Initial Mortgage Loan, provided such Mortgage Loan was
in a junior lien position, by the sum of such Maximum Credit Limit and the
outstanding balances of all senior mortgage loans affecting the related
Mortgaged Property) was 45.8%. The latest scheduled maturity of any Initial
Mortgage Loan in the Pool is March 21, 2030. As of the Initial Cut-off Date,
approximately 97.4% of the Initial Mortgage Loans by Cut-off Date Trust
Balance (excluding Mortgage Loans bearing interest at an introductory rate)
have indices based on a "prime rate".
S-31
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Mortgage Loans as of the Initial Cut-off Date:
INITIAL CUT-OFF DATE TRUST BALANCES OF INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER
OF % OF POOL
RANGE OF INITIAL CUT- MORTGAGE BY TRUST
OFF DATE TRUST BALANCES LOANS TRUST BALANCES BALANCE
- ----------------------- -------- --------------- ---------
<S> <C> <C> <C>
$ 0.00 to
$ 9,999.99............... 1,920 $ 7,078,540.13 4.4%
$ 10,000.00 to
$ 19,999.99............... 1,285 19,113,703.11 11.8
$ 20,000.00 to
$ 29,999.99............... 1,002 24,737,342.07 15.3
$ 30,000.00 to
$ 39,999.99............... 574 20,141,350.61 12.5
$ 40,000.00 to
$ 49,999.99............... 424 19,306,702.49 11.9
$ 50,000.00 to
$ 59,999.99............... 222 12,114,469.13 7.5
$ 60,000.00 to
$ 69,999.99............... 145 9,421,648.77 5.8
$ 70,000.00 to
$ 79,999.99............... 124 9,310,207.61 5.8
$ 80,000.00 to
$ 89,999.99............... 84 7,123,244.78 4.4
$ 90,000.00 to
$ 99,999.99............... 94 9,030,137.19 5.6
$100,000.00 to
$109,999.99............... 29 3,025,064.40 1.9
$110,000.00 to
$119,999.99............... 20 2,289,380.86 1.4
$120,000.00 to
$129,999.99............... 15 1,884,258.75 1.2
$130,000.00 to
$139,999.99............... 12 1,605,152.78 1.0
$140,000.00 to
$149,999.99............... 18 2,631,949.56 1.6
$150,000.00 to
$159,999.99............... 15 2,330,989.28 1.4
$160,000.00 to
$169,999.99............... 5 832,188.18 0.5
$170,000.00 to
$179,999.99............... 5 867,416.06 0.5
$180,000.00 to
$189,999.99............... 2 362,474.76 0.2
$190,000.00 to
$199,999.99............... 8 1,557,953.52 1.0
$200,000.00 to
$209,999.99............... 1 203,161.71 0.1
$210,000.00 to
$219,999.99............... 5 1,073,404.37 0.7
$220,000.00 to
$229,999.99............... 5 1,113,419.94 0.7
$240,000.00 to
$249,999.99............... 1 243,676.91 0.2
$250,000.00 to
$259,999.99............... 2 509,971.84 0.3
$260,000.00 to
$269,999.99............... 1 265,798.60 0.2
$280,000.00 to
$289,999.99............... 2 566,864.96 0.3
$290,000.00 to
$299,999.99............... 2 592,208.86 0.4
$300,000.00 to
$309,999.99............... 1 301,854.31 0.2
$330,000.00 to
$339,999.99............... 1 337,441.40 0.2
$360,000.00 to
$369,999.99............... 1 367,222.20 0.2
$380,000.00 to
$389,999.99............... 1 385,122.28 0.2
$460,000.00 to
$469,999.99............... 2 932,971.07 0.6
----- --------------- -----
TOTAL................... 6,028 $161,657,292.49 100.0%
===== =============== =====
</TABLE>
S-32
<PAGE>
INITIAL CUT-OFF DATE LOAN RATES OF INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
WEIGHTED
ANGE OF INITIAL R NUMBER OF % OF POOL AVERAGE
CUT- MORTGAGE TRUST BY TRUST LOAN
OF DATE LOAN RATESF LOANS BALANCE BALANCE RATE
- ------------------- --------- --------------- --------- --------
<S> <C> <C> <C> <C>
4.00% to 4.99%.................. 906 $ 20,894,315.34 12.9% 4.90%
5.00% to 5.99%.................. 26 399,640.65 0.2 5.90
8.00% to 8.99%.................. 36 1,372,596.35 0.9 8.38
9.00% to 9.99%.................. 1,220 51,068,019.70 31.6 9.48
10.00% to 10.99%.................. 2,849 67,588,062.61 41.8 10.14
11.00% to 11.99%.................. 371 11,157,901.17 6.9 11.39
12.00% to 12.99%.................. 464 6,718,817.15 4.2 12.46
13.00% to 13.99%.................. 110 1,677,132.94 1.0 13.47
14.00%............................ 46 780,806.58 0.5 14.00
----- --------------- ----- -----
TOTAL........................... 6,028 $161,657,292.49 100.0% 9.47%
===== =============== ===== =====
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS OF INITIAL MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF % OF POOL
RANGE OF COMBINED MORTGAGE TRUST BY TRUST
LOAN-TO-VALUE RATIOS LOANS BALANCE BALANCE
- -------------------- --------- --------------- ---------
<S> <C> <C> <C>
0.00% to 9.99%............................. 91 $ 1,421,094.20 0.9%
10.00% to 19.99%............................ 298 6,219,688.20 3.8
20.00% to 29.99%............................ 413 10,439,301.47 6.5
30.00% to 39.99%............................ 514 15,469,172.39 9.6
40.00% to 49.99%............................ 532 17,067,235.92 10.6
50.00% to 59.99%............................ 600 19,041,564.20 11.8
60.00% to 69.99%............................ 633 20,135,825.25 12.4
70.00% to 79.99%............................ 1,250 37,978,698.02 23.5
80.00% to 89.99%............................ 983 22,112,596.28 13.7
90.00% to 99.99%............................ 570 9,727,020.00 6.0
100.00% to 109.99%.......................... 122 1,639,935.90 1.0
110.00% to 115.00%.......................... 22 405,160.66 0.2
----- --------------- -----
TOTAL..................................... 6,028 $161,657,292.49 100.0%
===== =============== =====
</TABLE>
- --------
(1) Combined loan-to-value ratios of the Initial Mortgage Loans (computed at
their respective Maximum Credit Limits (which, with respect to Mortgage
Loans in their repayment period, are equal to the related Cut-off Date
Trust Balances thereof) at the Initial Cut-off Date) and any related senior
lien, based upon appraisals of the related Mortgaged Properties or other
forms of valuation at the time of execution of the related Loan Agreements.
S-33
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES OF INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF % OF POOL
MORTGAGE BY TRUST
JURISDICTION LOANS TRUST BALANCE BALANCE
- ------------ --------- --------------- ---------
<S> <C> <C> <C>
Maryland.................................... 2,838 $ 65,500,745.65 40.5%
Virginia.................................... 1,111 27,482,190.06 17.0
New York.................................... 446 23,680,655.39 14.7
New Jersey.................................. 493 15,945,607.15 9.9
District of Columbia........................ 241 7,622,321.85 4.7
California.................................. 175 5,808,283.23 3.6
Florida..................................... 221 4,422,469.35 2.7
Arizona..................................... 162 2,914,921.55 1.8
Other....................................... 341 8,280,098.26 5.1
----- --------------- -----
TOTAL..................................... 6,028 $161,657,292.49 100.0%
===== =============== =====
</TABLE>
INITIAL CUT-OFF DATE MARGIN RANGES OF INITIAL MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF % OF POOL
MORTGAGE BY TRUST
RANGE OF INITIAL CUT-OFF DATE MARGINS LOANS TRUST BALANCE BALANCE
- ------------------------------------- --------- --------------- ---------
<S> <C> <C> <C>
0.00% to 0.49%............................. 6 $ 373,685.71 0.2%
0.50% to 0.99%............................. 57 3,375,836.20 2.1
1.00% to 1.49%............................. 1,683 63,064,309.61 39.0
1.50% to 1.99%............................. 2,647 56,153,358.09 34.8
2.00% to 2.49%............................. 485 14,071,167.00 8.7
2.50% to 2.99%............................. 83 2,757,958.96 1.7
3.00% to 3.49%............................. 343 9,798,233.77 6.1
3.50% to 3.99%............................. 49 798,740.22 0.5
4.00% to 4.49%............................. 458 7,246,826.98 4.5
4.50% to 4.99%............................. 121 1,995,862.93 1.2
5.00% to 5.49%............................. 13 348,932.50 0.2
5.50% to 5.99%............................. 83 1,672,380.52 1.0
----- --------------- -----
TOTAL.................................... 6,028 $161,657,292.49 100.0%
===== =============== =====
</TABLE>
- --------
(1) After expiration of any applicable introductory interest rate period. See
"THE CHEVY CHASE HOME EQUITY LENDING PROGRAM--Loan Terms."
S-34
<PAGE>
MONTHS REMAINING TO MATURITY OF INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF % OF POOL BY
NUMBER OF MONTHS REMAINING TO STATED MATURITY MORTGAGE LOANS TRUST BALANCE TRUST BALANCE
- --------------------------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
0 to 12 Months.................. 28 $ 692,533.94 0.4%
13 to 24 Months.................. 97 2,735,750.65 1.7
25 to 36 Months.................. 67 1,877,097.21 1.2
37 to 48 Months.................. 66 1,423,015.99 0.9
49 to 60 Months.................. 70 1,700,446.06 1.1
61 to 72 Months.................. 73 2,127,783.65 1.3
73 to 84 Months.................. 72 2,296,840.17 1.4
85 to 96 Months.................. 111 3,400,528.67 2.1
97 to 108 Months ................. 57 1,329,167.93 0.8
109 to 120 Months.................. 211 4,052,106.29 2.5
121 to 132 Months.................. 118 2,336,817.57 1.4
133 to 144 Months.................. 179 3,285,077.16 2.0
145 to 156 Months.................. 146 2,920,734.88 1.8
157 to 168 Months.................. 92 2,293,533.10 1.4
169 to 180 Months.................. 111 2,714,522.60 1.7
181 to 192 Months.................. 138 2,018,891.40 1.3
193 to 204 Months.................. 106 2,801,350.22 1.7
205 to 216 Months.................. 113 3,798,389.18 2.4
217 to 228 Months.................. 677 20,544,561.40 12.7
229 to 240 Months.................. 3,208 81,329,855.50 50.3
241 to 252 Months.................. 96 4,377,744.02 2.7
253 to 264 Months.................. 101 7,077,706.80 4.4
265 to 276 Months.................. 3 175,047.43 0.1
349 to 360 Months.................. 41 1,549,613.33 1.0
361 to 372 Months.................. 17 947,063.79 0.6
373 to 384 Months.................. 1 51,769.20 0.0
385 to 389 Months.................. 29 1,799,344.35 1.1
------ --------------- -----
TOTAL............................ 6,028 $161,657,292.49 100.0%
====== =============== =====
</TABLE>
S-35
<PAGE>
MAXIMUM CREDIT LIMIT UTILIZATION RATES OF INITIAL MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF % OF POOL
CREDIT LIMIT MORTGAGE TRUST BY TRUST CREDIT
UTILIZATION RATES LOANS BALANCE BALANCE LIMIT
- ----------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
0.00% to 9.99%.......... 1,012 $ 1,347,924.34 0.8% $ 59,176,600.00
10.00% to 19.99%.......... 375 3,074,121.27 1.9 21,179,000.00
20.00% to 29.99%.......... 368 5,427,811.23 3.4 21,947,100.00
30.00% to 39.99%.......... 321 6,308,667.86 3.9 18,121,500.00
40.00% to 49.99%.......... 336 7,892,448.48 4.9 17,725,425.00
50.00% to 59.99%.......... 358 10,542,767.22 6.5 19,218,650.00
60.00% to 69.99%.......... 362 12,561,754.74 7.8 19,195,237.00
70.00% to 79.99%.......... 435 15,858,616.47 9.8 21,080,800.00
80.00% to 89.99%.......... 537 20,515,342.47 12.7 24,043,109.00
90.00% to 99.99%.......... 1,398 62,762,114.15 38.8 64,858,706.00
100.00%................... 526 15,365,724.26 9.5 15,365,724.26
----- --------------- ----- ---------------
TOTAL................... 6,028 $161,657,292.49 100.0% $301,911,851.26
===== =============== ===== ===============
</TABLE>
(1) The Maximum Credit Limit of a Mortgage Loan in its repayment period is
equal to its Cut-off Date Trust Balance.
S-36
<PAGE>
DATA ON COMMON MORTGAGE LOANS INCLUDED AS INITIAL MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER % OF POOL
OF BY 1997-1 1990 REACQUIRED* 1992 1993 1994
OWNERSHIP OF MORTGAGE 1997-1 TRUST TRUST 1991 TRUST TRUST TRUST
MORTGAGE LOAN BALANCE LOANS TRUST BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE
- --------------------- -------- --------------- --------- ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trust 1997-1 on-
ly................ 5,816 $160,009,528.69 98.98% $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Trust 1997-1 and
1990.............. 32 203,676.62 0.13 1,363,794.86 0.00 0.00 0.00 0.00
Trust 1997-1 and
1991.............. 2 1,500.00 0.00 0.00 46,861.43 0.00 0.00 0.00
Trust 1997-1 and
1992.............. 11 100,345.60 0.06 0.00 0.00 53,368.78 0.00 0.00
Trust 1997-1 and
1993.............. 14 118,231.36 0.07 0.00 0.00 0.00 215,820.73 0.00
Trust 1997-1 and
1994.............. 59 642,344.69 0.40 0.00 0.00 0.00 0.00 976,359.92
Trust 1997-1, 1990
and 1991.......... 1 350.00 0.00 118,867.09 2,350.00 0.00 0.00 0.00
Trust 1997-1, 1990
and 1992.......... 7 24,007.05 0.02 214,606.30 0.00 81,491.97 0.00 0.00
Trust 1997-1, 1990
and 1993.......... 6 36,528.79 0.02 123,802.39 0.00 0.00 40,469.90 0.00
Trust 1997-1, 1990
and 1994.......... 2 4,425.00 0.00 54,620.70 0.00 0.00 0.00 8,587.69
Trust 1997-1, 1991
and 1992.......... 1 1,434.93 0.00 0.00 14,886.15 13,492.21 0.00 0.00
Trust 1997-1, 1992
and 1993.......... 14 105,469.21 0.07 0.00 0.00 256,083.54 95,200.85 0.00
Trust 1997-1, 1992
and 1994.......... 6 17,820.97 0.01 0.00 0.00 147,110.68 0.00 33,363.70
Trust 1997-1, 1993
and 1994.......... 26 241,670.77 0.15 0.00 0.00 0.00 283,968.85 205,360.42
Trust 1997-1,
1990, 1991 and
1992.............. 3 10,667.75 0.01 97,323.30 50,816.30 2,675.00 0.00 0.00
Trust 1997-1,
1990, 1992 and
1993.............. 2 10,218.03 0.01 51,108.07 0.00 3,900.00 4,950.00 0.00
Trust 1997-1,
1990, 1993 and
1994.............. 5 5,610.00 0.00 198,506.55 0.00 0.00 48,948.76 5,363.38
Trust 1997-1,
1991, 1992 and
1993.............. 2 1,952.00 0.00 0.00 41,237.86 592.00 575.00 0.00
Trust 1997-1,
1991, 1992 and
1994.............. 1 1,130.95 0.00 0.00 36,258.56 5,096.00 0.00 5,289.00
Trust 1997-1,
1992, 1993 and
1994.............. 7 49,016.98 0.03 0.00 0.00 64,742.17 114,220.63 57,036.53
Trust 1997-1,
1990, 1991, 1992
and 1993.......... 2 6,402.80 0.00 13,210.89 2,677.23 4,446.71 4,621.02 0.00
Trust 1997-1,
1990, 1991, 1992
and 1994.......... 1 1,600.00 0.00 31,292.32 350.00 1,500.00 0.00 1,500.00
Trust 1997-1,
1990, 1992, 1993
and 1994.......... 4 40,169.05 0.03 78,381.45 0.00 33,342.90 22,879.52 10,779.62
Trust 1997-1,
1991, 1992, 1993
and 1994.......... 1 19,157.00 0.01 0.00 24,313.81 21,100.90 19,219.60 7,803.28
Trust 1997-1,
1990, 1991, 1992,
1993 and 1994..... 3 4,034.25 0.00 105,107.19 19,605.00 4,756.63 13,420.00 10,596.82
----- --------------- ----- ------------- ----------- ----------- ----------- -------------
TOTAL........... 6,028 $161,657,292.49 100.0% $2,450,621.11 $239,356.34 $693,699.49 $864,294.86 $1,322,040.36
===== =============== ===== ============= =========== =========== =========== =============
<CAPTION>
OWNERSHIP OF TOTAL
MORTGAGE LOAN BALANCE BALANCE
- --------------------- ---------------
<S> <C>
Trust 1997-1 on-
ly................ $160,009,528.69
Trust 1997-1 and
1990.............. 1,567,471.48
Trust 1997-1 and
1991.............. 48,361.43
Trust 1997-1 and
1992.............. 153,714.38
Trust 1997-1 and
1993.............. 334,052.09
Trust 1997-1 and
1994.............. 1,618,704.61
Trust 1997-1, 1990
and 1991.......... 121,567.09
Trust 1997-1, 1990
and 1992.......... 320,105.32
Trust 1997-1, 1990
and 1993.......... 200,801.08
Trust 1997-1, 1990
and 1994.......... 67,633.39
Trust 1997-1, 1991
and 1992.......... 29,813.29
Trust 1997-1, 1992
and 1993.......... 456,753.60
Trust 1997-1, 1992
and 1994.......... 198,295.35
Trust 1997-1, 1993
and 1994.......... 731,000.04
Trust 1997-1,
1990, 1991 and
1992.............. 161,482.35
Trust 1997-1,
1990, 1992 and
1993.............. 70,176.10
Trust 1997-1,
1990, 1993 and
1994.............. 258,428.69
Trust 1997-1,
1991, 1992 and
1993.............. 44,356.86
Trust 1997-1,
1991, 1992 and
1994.............. 47,774.51
Trust 1997-1,
1992, 1993 and
1994.............. 285,016.31
Trust 1997-1,
1990, 1991, 1992
and 1993.......... 31,358.65
Trust 1997-1,
1990, 1991, 1992
and 1994.......... 36,242.32
Trust 1997-1,
1990, 1992, 1993
and 1994.......... 185,552.54
Trust 1997-1,
1991, 1992, 1993
and 1994.......... 91,594.59
Trust 1997-1,
1990, 1991, 1992,
1993 and 1994..... 157,519.89
---------------
TOTAL........... $167,227,304.65
===============
</TABLE>
- ----
* Reacquired 1991 Balance column shows Trust 1991 balances reacquired by Chevy
Chase at the termination of Trust 1991 and currently owned by Chevy Chase--
these balances have priority over Trust Balances.
(1) Common Mortgage Loans are those Initial Mortgage Loans which generated
balances that were transferred to Trust 1990, Trust 1992, Trust 1993 or
Trust 1994 or that are Reacquired 1991 Balances. Principal collections on a
Common Mortgage Loan will be applied first to reduce the balance thereof
transferred to Trust 1990, if any (including any such balances subsequently
transferred to the Trust during the Pre-Funding Period), to zero, second to
reduce the Reacquired 1991 Balances, if any, to zero, third to reduce the
balance thereof transferred to Trust 1992, if any (including any such
balances subsequently transferred to the Trust during the Pre-Funding
Period), to zero, fourth to reduce the balance thereof transferred to Trust
1993, if any to zero and fifth to reduce the balance thereof transferred to
Trust 1994, if any, to zero before any such collections are applied in
reduction of the Trust Balance of such Common Mortgage Loan (other than 90-
1 Mortgage Loans and 92-1 Mortgage Loans). See "RISK FACTORS--Prepayment
Considerations" herein.
S-37
<PAGE>
No assurance can be given that values of the Mortgaged Properties as of the
dates of origination of the related Mortgage Loans have remained or will
remain constant. See "RISK FACTORS--Nature of Security" herein.
The Transferor has transferred and assigned to the Trustee for the benefit
of the holders of the Certificates all right, title and interest in the Trust
Balances of the Initial Mortgage Loans as of the Initial Cut-off Date. In
addition, Subsequent Mortgage Loans and Additional Balances will be
transferred by the Transferor to the Trust pursuant to the Pooling and
Servicing Agreement. See "ALLOCATIONS OF PAYMENTS ON THE COMMON MORTGAGE LOANS
BETWEEN THE TRUST AND TRUST 1990, REACQUIRED 1991 BALANCES, TRUST 1992, TRUST
1993 AND TRUST 1994" herein.
Chevy Chase, as Servicer, will continue to service the Mortgage Loans
pursuant to the Pooling and Servicing Agreement, and will receive a monthly
servicing fee for such services. See "DESCRIPTION OF THE CERTIFICATES--
Assignment of Mortgage Loan Trust Balances" and "--Servicing and Other
Compensation and Payment of Expenses" herein.
DESCRIPTION OF CERTIFICATE INSURER
The information set forth in this section has been provided by Ambac
Assurance Corporation (the "Certificate Insurer"). No representation is made
by the Underwriters, the Transferor or the Servicer or any of their affiliates
as to the accuracy or completeness of any such information.
The Certificate Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Certificate Insurer primarily
insures newly-issued municipal and structured finance obligations. The
Certificate Insurer is a wholly-owned subsidiary of Ambac Financial Group,
Inc. (formerly AMBAC Inc.), a 100% publicly-held company. Moody's Investors
Service, Inc., Standard & Poor's Ratings Services and Fitch Investors Service,
L.P. have each assigned a triple-A claims-paying ability rating to the
Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and its
subsidiaries as of December 31, 1996 and December 31, 1995 and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC,
Inc. (which was filed with the Securities and Exchange Commission (the
"Commission") on March 12, 1997; Commission File No. 1-10777) and the
consolidated financial statements of the Certificate Insurer and its
subsidiaries as of September 30, 1997 and for the periods ending September 30,
1997 and September 30, 1996, included in the Quarterly Report on Form 10-Q of
Ambac Financial Group, Inc. for the period ended September 30, 1997 (which was
filed with the Commission on November 14, 1997) are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein or incorporated by reference
herein also modifies or supersedes such statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this Prospectus Supplement and prior to the termination of the
offering of the Certificates shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the respective
dates of filing such documents.
The following table sets forth the capitalization of the Certificate Insurer
as of December 31, 1994, December 31, 1995, December 31, 1996 and September
30, 1997, respectively, in conformity with generally accepted accounting
principles.
S-38
<PAGE>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997
1994 1995 1996 (UNAUDITED)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Unearned premiums......... $ 840 $ 906 $ 995 $1,047
Other liabilities......... 136 295 259 311
------ ------- ------ ------
Total liabilities......... $ 976 $ 1,201 $1,254 $1,358
------ ------- ------ ------
Stockholder's equity:
Common Stock............ $ 82 $ 82 $ 82 $ 82
Additional paid-in
capital................ 444 481 515 521
Unrealized gains
(losses) on
investments, net of
tax.................... (46) 87 66 89
Retained earnings....... 782 907 992 1,130
------ ------- ------ ------
Total stockholder's
equity................... $1,262 $ 1,557 $1,655 $1,822
------ ------- ------ ------
Total liabilities and
stockholder's equity..... $2,238 $ 2,758 $2,909 $3,180
====== ======= ====== ======
</TABLE>
For additional financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer incorporated by
reference herein. Copies of the financial statements of the Certificate
Insurer incorporated herein by reference and copies of the Certificate
Insurer's annual statement for the year ended December 31, 1996 prepared in
accordance with statutory accounting standards are available, without charge,
from the Certificate Insurer. The address of the Certificate Insurer's
administrative offices and its telephone number are One State Street Plaza,
17th Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Certificates
or the advisability of investing in the Certificates and makes no
representation regarding, nor has it participated in the preparation of this
Prospectus Supplement other than the information supplied by the Certificate
Insurer and presented under this heading "DESCRIPTION OF CERTIFICATE INSURER"
and in the financial statements incorporated herein by reference.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
ALLOCATIONS OF PAYMENTS ON THE COMMON MORTGAGE
LOANS BETWEEN THE TRUST AND TRUST 1990,
REACQUIRED 1991 BALANCES, TRUST 1992,
TRUST 1993 AND TRUST 1994
Balances outstanding on December 1, 1990, December 1, 1991, December 1,
1992, September 1, 1993 and September 1, 1994 with respect to certain of the
Mortgage Loans (the "Common Mortgage Loans") were transferred by the
Transferor to Trust 1990, Trust 1991, Trust 1992, Trust 1993 and Trust 1994,
respectively. The Cut-off Date Trust Balances of the Initial Mortgage Loans
and all Additional Balances with respect thereto have been transferred and
assigned to the Trust. Future payments on the Common Mortgage Loans will be
allocated between the Trust and the owners of the Sold Balances, in the
following manner:
S-39
<PAGE>
(a) Each borrower's payment will be applied first to interest on the
Mortgage Loan at the then current Loan Rate. The Trust's share of an
interest payment on any Mortgage Loan (the "Trust Interest") shall equal
the product of (a) such interest payment and (b) (x) the amount of interest
accrued on the Trust Balance at the Loan Rate during the related Interest
Period divided by (y) the amount of interest accrued on the Loan Balance at
the Loan Rate during such Interest Period.
(b) Any remaining portion of a borrower's payment will be applied to
principal on the Mortgage Loan. Such collections of principal on the
Mortgage Loans during any Collection Period will be applied first to reduce
the balance thereof transferred to Trust 1990, if any (including any such
balances subsequently transferred to the Trust during the Pre-Funding
Period), to zero, then to reduce the Reacquired 1991 Balances, if any, to
zero, then to reduce the balance thereof transferred to Trust 1992, if any
(including any such balances subsequently transferred to the Trust during
the Pre-Funding Period), to zero, then to reduce the balance thereof
transferred to Trust 1993, if any, to zero, then to reduce the balance
thereof transferred to Trust 1994, if any, to zero before such payment is
applied as a principal payment in reduction of the Trust Balance of such
Common Mortgage Loan (other than 90-1 Mortgage Loans and 92-1 Mortgage
Loans).
(c) The Trust's share of Net Liquidation Proceeds ("Net Trust Liquidation
Proceeds"), with respect to any Liquidated Mortgage Loan will be equal to
the sum of (i) the Trust's pro rata share of Net Liquidation Proceeds not
to exceed Trust Interest with respect to the period from the last day on
which interest was paid in full on such Liquidated Mortgage Loan to the day
on which such Liquidated Mortgage Loan became a Liquidated Mortgage Loan
and (ii) the Trust's pro rata share of the amount remaining after payment
of such Trust Interest and the interest payable to the owners of the Sold
Balances.
(d) Insurance Proceeds (other than those included in Liquidation
Proceeds) received with respect to a Mortgage Loan will be allocated first
to unpaid interest in the manner described above. Any remaining proceeds
will be allocated on a pro rata basis between the Trust Balance and the
Sold Balances of such Mortgage Loan.
The "Trust Percentage" shall equal, with respect to any Mortgage Loan (other
than any Liquidated Mortgage Loan) for any day, the percentage (carried to
four decimal places) obtained by dividing the Trust Balance of such Mortgage
Loan for such day by the Loan Balance of such Mortgage Loan for such day. With
respect to any Liquidated Mortgage Loan on any day, the Trust Percentage will
equal the Trust Percentage on the day such Mortgage Loan became a Liquidated
Mortgage Loan.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Pooling and Servicing Agreement, except as otherwise described herein,
provides that the Certificateholders will be entitled to receive on each
Distribution Date distributions of principal, in the amounts described herein,
until the Certificate Principal Balance is reduced to zero. In the event there
are any funds remaining in the Pre-Funding Account after the Pre-Funding
Period, the Certificateholders' Fixed Allocation Percentage of such funds
(excluding any net investment earnings thereon) shall be distributed to the
Certificateholders in respect of principal on the Certificates. During the
Managed Amortization Period, Certificateholders will receive amounts from
Principal Collections either generally based upon their Certificateholders'
Fixed Allocation Percentage of such collections received or a formula
described below, whichever is less. During the Rapid Amortization Period,
Certificateholders will receive amounts from Principal Collections generally
based upon their Certificateholders' Fixed Allocation Percentage. Because
prior principal distributions to Certificateholders serve to reduce the
Certificateholders' Floating Allocation Percentage but generally do not change
their Certificateholders' Fixed Allocation Percentage, allocations of
Principal Collections based on the Certificateholders' Fixed Allocation
Percentage may result in distributions of principal to the Certificateholders
in amounts that are, in most cases, greater relative to the declining balance
of the Pool than would be the case if the Certificateholders' Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to Certificateholders. This is especially true during
the Rapid Amortization Period when the Maximum Principal Payment and not a
lesser formula amount is used to determine the amount distributed to
Certificateholders. Moreover, to the extent of losses allocable to the
Certificateholders,
S-40
<PAGE>
Certificateholders may also receive as payment of principal the amount of such
losses either from Certificateholders' Excess Interest or, in some instances,
from the Spread Account or from draws under the Certificate Insurance Policy.
The level of losses may therefore affect the rate of payment of principal on
the Certificates.
To the extent borrowers make more draws than principal payments on the
Mortgage Loans, the Transferor Interest may grow. Because during the Rapid
Amortization Period the Certificateholders' share of Principal Collections is
based upon their Certificateholders' Fixed Allocation Percentage, an increase
in the Transferor Interest due to additional draws may also result in
Certificateholders receiving principal at a greater rate. The Pooling and
Servicing Agreement permits the Transferor, at its option, but subject to the
satisfaction of certain conditions specified in the Pooling and Servicing
Agreement, including the conditions described below, to remove certain
Mortgage Loans from the Trust at any time during the life of the Trust, so
long as the Transferor Interest (after giving effect to such removal) is not
less than the Overall Minimum Amount. Such removals may affect the rate at
which principal is distributed to Certificateholders by reducing the overall
Pool Balance and thus the amount of Principal Collections. See "DESCRIPTION OF
THE CERTIFICATES--Optional Retransfers of Mortgage Loans to the Transferor"
herein.
The rate and timing of amortization of the Certificate Principal Balance
will be affected by the inclusion of Trust Balances of Common Mortgage Loans
in the Trust Fund. Common Mortgage Loans, which account for approximately 1.0%
by principal amount of the balances of Initial Mortgage Loans to be
transferred to the Trust, are those Mortgage Loans which generated balances
that were transferred to Trust 1990, Trust 1992, Trust 1993 or Trust 1994 or
that are Reacquired 1991 Balances. See table captioned "Data on Common
Mortgage Loans" under "THE MORTGAGE LOAN POOL" herein. Payments of principal
(including prepayments) by a borrower on a Common Mortgage Loan will be
applied first to reduce to zero the principal balance, if any, of such Common
Mortgage Loan transferred to Trust 1990 (including any such balance
subsequently transferred to the Trust during the Pre-Funding Period), second
to reduce to zero the Reacquired 1991 Balance, if any, third to reduce to zero
the principal balance, if any, of such Common Mortgage Loan transferred to
Trust 1992 (including any such balance subsequently transferred to the Trust
during the Pre-Funding Period), fourth to reduce to zero the principal
balance, if any, of such Common Mortgage Loan transferred to Trust 1993, and
fifth to reduce to zero the principal balance, if any, of such Common Mortgage
Loan transferred to Trust 1994 before any such payments are applied to reduce
the Trust Balance of such Common Mortgage Loan (other than the 90-1 Mortgage
Loans and 92-1 Mortgage Loans). Partial prepayments of Common Mortgage Loans
therefore would affect the rate and timing of distributions on the
Certificates at a slower rate than partial prepayments of other Mortgage
Loans.
The actual maturity of the Certificates will depend in part on the
availability of Subsequent Mortgage Loans. All of the Mortgage Loans may be
prepaid without penalty in full or in part at any time. The prepayment
experience with respect to the Mortgage Loans will affect the life of the
Certificates.
In the event that 90-1 Mortgage Loans and 92-1 Mortgage Loans are conveyed
to the Trust during the Pre-Funding Period, principal collections on such
Mortgage Loans will be applied in the priority described above as if such
balances were still held by Trust 1990 and Trust 1992, respectively.
Accordingly, the Trust Balances of such Mortgage Loans will decline at a rate
faster than other Mortgage Loans held by the Trust. In addition, no additional
balances will be generated with respect to the 90-1 Mortgage Loans and 92-1
Mortgage Loans, thereby affecting the average life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity revolving credit lines such as the Mortgage Loans have been originated
in significant volume only during the past eleven years and the Transferor is
not aware of any publicly available studies or statistics on the rate of
prepayment of such loans. Generally, home equity revolving credit lines are
not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first
mortgage loans. On the other hand, because the Mortgage Loans amortize as
described herein, the absence of voluntary borrower prepayments could cause
rates of principal payment to be slower than those of traditional fully-
amortizing first mortgages. The prepayment experience of the Trust with
respect to the Mortgage Loans may be affected by a
S-41
<PAGE>
wide variety of factors, including general economic conditions, economic
conditions in Maryland, Virginia, New York and New Jersey, prevailing interest
rate levels, the availability of alternative financing and homeowner mobility,
the frequency and amount of any future draws on the Loan Agreements and
changes affecting the deductibility for Federal income tax purposes of
interest payments on home equity credit lines. Substantially all of the
Mortgage Loans contain "due-on-sale" provisions, and the Servicer is obligated
to enforce such provisions, unless such enforcement is not permitted by
applicable law. The enforcement of a "due-on-sale" provision will have the
same effect as a prepayment of the related Mortgage Loan. See "CERTAIN LEGAL
ASPECTS OF MORTGAGE LOANS--Due-on-Sale Clauses" herein and "CERTAIN LEGAL
ASPECTS OF THE LOANS--Due-on-Sale Clauses in Mortgage Loans" in the
Prospectus.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other things, with
respect to a majority of the Mortgage Loans, borrowers may make payments
during any month as low as the minimum monthly payment for such month or as
high as the entire outstanding principal balance plus accrued interest and the
fees and charges thereon. It is possible that borrowers may fail to make
scheduled payments. Collections on the Mortgage Loans may vary due to seasonal
purchasing and payment habits of borrowers. See "RISK FACTORS--Prepayment
Considerations" herein.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See
"DESCRIPTION OF THE SECURITIES--Weighted Average Life of the Securities" in
the Prospectus.
S-42
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus Supplement is a part. The
following summary describes certain provisions of the Pooling and Servicing
Agreement, but does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the
Pooling and Servicing Agreement.
GENERAL
The Certificates represent beneficial interests in the Trust only and do not
evidence a savings account or deposit or other obligation of, or interest in,
and are not guaranteed by, Chevy Chase or the Trustee or any of their
affiliates, or by the SAIF, the FDIC or any other government agency or
instrumentality.
The Certificates will be issued in denominations of $1,000 and integral
multiples thereof (except that one Certificate may be issued in a denomination
that is not an integral multiple of $1,000) and will evidence specified
undivided interests in the Trust. The Trust Fund, which represents the assets
of the Trust, will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) each of the Mortgage Loans, including any Subsequent
Mortgage Loans and any Eligible Substitute Mortgage Loans acquired by the
Trust, and Additional Balances that from time to time are subject to the
Pooling and Servicing Agreement, and principal and interest payments allocable
thereto; (ii) collections on the Mortgage Loans received after the Cut-off
Date that are allocable to the Trust Balances; (iii) the interest of the Trust
in Mortgaged Properties relating to the Mortgage Loans that are acquired by
foreclosure or deed in lieu of foreclosure; (iv) the Certificate Account; (v)
the Spread Account; (vi) the Pre-Funding Account; (vii) the Capitalized
Interest Account; (viii) the Certificate Insurance Policy; (ix) the interest
of the Trust in certain hazard insurance policies maintained by the borrowers
with respect to the Mortgaged Properties; and (x) the proceeds of the
foregoing. The Trust Fund will not include any interest in any Sold Balances.
Replacement Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee, which will initially act as
Certificate Registrar. No service charge will be made for any registration,
exchange or transfer of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge.
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date (as defined herein) will equal
$178,024,000 of principal (the "Original Certificate Principal Balance" and
the "Original Invested Amount"), which represents approximately 98% of the sum
of the Cut-off Date Trust Balances of the Initial Mortgage Loans and the Pre-
Funded Amount. Following the Closing Date, the "Invested Amount" with respect
to any day will be an amount equal to the Original Invested Amount minus the
sum of (i) the amount of Principal Collections previously distributed to
Certificateholders, (ii) any amounts distributed as principal to
Certificateholders at the end of the Pre-Funding Period from funds on deposit
in the Pre-Funding Account and (iii) an amount equal to the product of (a) the
Certificateholders' Floating Allocation Percentage and (b) the Liquidation
Loss Amounts. The principal balance of the outstanding Certificates (the
"Certificate Principal Balance") on any day is equal to the Original
Certificate Principal Balance minus the aggregate of amounts actually
distributed as principal to the Certificateholders. See "--Distributions on
the Certificates" below. Each Certificate represents the right to receive
payments of interest at the Certificate Rate and payments of principal as
described below.
The Transferor will own the remaining undivided interest in the Trust Fund
(the "Transferor Interest") which is equal to the Pool Balance less the
Invested Amount. In general, the Pool Balance will vary each day as principal
is paid on the Trust Balances of the Mortgage Loans, liquidation losses are
incurred, Additional Balances are drawn down by borrowers under the Loan
Agreements and Mortgage Loans are retransferred to the Transferor or the
Servicer, as applicable.
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The Transferor has the right to sell and pledge the Transferor Interest at
any time, provided (i) the Rating Agencies have notified the Transferor and
the Trustee in writing that such action will not result in the reduction or
withdrawal of the ratings assigned to the Certificates and have confirmed that
such action will not result in the reduction or withdrawal of the ratings of
the Certificates without regard to the Certificate Insurance Policy, and (ii)
certain other conditions in the Pooling and Servicing Agreement are satisfied.
ASSIGNMENT OF MORTGAGE LOAN TRUST BALANCES
At the time of issuance of the Certificates, the Transferor will assign to
U.S. Bank National Association, as custodial agent (the "Custodial Agent") for
the benefit of the Trustee all of its right, title and interest in and to the
Initial Mortgage Loans, including all payments of interest and principal, from
whatever source derived, which are received on or after the Initial Cut-off
Date and are allocable to the Trust Balances, together with the other assets
included in the Trust Fund. In addition, on or prior to the date the
Certificates are initially issued by the Trust, the Transferor will cause the
Certificate Insurance Policy to be delivered to the Trustee. Concurrently with
such assignment, the Trustee will deliver the Certificates and the Transferor
Interest to the Transferor. Subject to the following conditions, among others,
Subsequent Mortgage Loans, to the extent of the availability thereof and the
availability of sufficient funds on deposit in the Pre-Funding Account, will
be sold to the Trust on or before the last Distribution Date of the Pre-
Funding Period: (i) each Subsequent Mortgage Loan must meet the general
criteria for eligibility set forth in the Pooling and Servicing Agreement and
(ii) the selection of such Subsequent Mortgage Loans by the Transferor must be
done in a manner it believes will not materially adversely affect the
Certificateholders or the Certificate Insurer. In addition, any Additional
Balances in respect of such Mortgage Loans (other than the 90-1 Mortgage Loans
and 92-1 Mortgage Loans) arising in the future will be transferred to the
Trust. Each Mortgage Loan will be identified in a schedule delivered to the
Trustee.
Under the Pooling and Servicing Agreement, the documentation relating to
each Mortgage Loan (the "Mortgage Files") will be delivered to and maintained
by the Custodial Agent. The Transferor will be required to either (i) record
assignments of the Mortgage Loans and related Trust property in favor of the
Custodial Agent or (ii) deliver to the Custodial Agent assignments of each
Mortgage in recordable form, together with an opinion of counsel to the effect
that recording is not required to perfect a first priority security interest
in favor of the Custodial Agent. The Custodial Agent will review such Mortgage
Files, other than the Mortgage Files of Common Mortgage Loans previously
reviewed by the trustee of Trust 1990, the trustee of Trust 1992, the trustee
of Trust 1993 or the trustee of Trust 1994, within the period specified in the
Pooling and Servicing Agreement. If any document required to be included in
any Mortgage File does not bear manual signatures, has not been received or is
unrelated to the applicable Mortgage Loan, and such defect is not cured as
provided in the Pooling and Servicing Agreement following receipt of
notification thereof to the Transferor from the Trustee or its agent, the
Transferor will be required either to accept the retransfer of or to replace
the affected Trust Balance in the manner set forth below.
The Transferor will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Initial Mortgage Loan, including Combined Loan-
to-Value Ratio as of the Initial Cut-off Date, Cut-off Date Trust Balance and
minimum Loan Rate. In addition, the Transferor will represent and warrant
that, as of the Initial Cut-off Date, no Mortgage Loan was 30 or more days
contractually delinquent. Such representations and warranties will be repeated
for the Subsequent Mortgage Loans as of the date they are transferred to the
Trust. In the event there is a breach of any representation or warranty made
by the Transferor in the Pooling and Servicing Agreement as to a Mortgage Loan
that materially and adversely affects the interest of the Certificateholders
in such Mortgage Loan, the Transferor will, after the expiration of the
applicable cure period, be required either to (i) accept the retransfer of the
related Trust Balance from the Trust or (ii) substitute therefor an Eligible
Substitute Mortgage Loan, in each case in the manner described below.
Any Mortgage Loan required to be accepted for retransfer from the Trust by
the Transferor as a result of a defect, omission or breach of representation
or warranty will be retransferred at a deposit amount equal to such
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Mortgage Loan's Trust Balance as of the end of the Collection Period
immediately preceding the date of retransfer, plus accrued and unpaid interest
on the Trust Balance at the Loan Rate less the Servicing Fee Rate (the "Net
Loan Rate") through the Cycle Date occurring in such Collection Period (the
"Retransfer Deposit Amount"). The Certificateholders' portion of the
Retransfer Deposit Amount will be deposited into the Certificate Account on
the Business Day immediately preceding the Distribution Date in the month
following the Collection Period in which the related cure period expired.
As to any Eligible Substitute Mortgage Loan, the Transferor will deposit
into the Certificate Account the Certificateholders' portion of the amount, if
any, by which the conveyed balance of such Eligible Substitute Mortgage Loan
at the end of the Collection Period in which the events giving rise to the
related substitution occurred is less than the Trust Balance of the related
Mortgage Loan being removed from the Trust at the end of such Collection
Period (the "Substitution Adjustment Amount"). The Transferor will substitute
any Eligible Substitute Mortgage Loan, and deposit to the Certificate Account
the Certificateholders' portion of such Substitution Adjustment Amount into
the Certificate Account, on the Business Day immediately preceding the
Distribution Date in the month following such Collection Period. Upon
substitution, an Eligible Substitute Mortgage Loan will be subject to the
terms of the Pooling and Servicing Agreement and the Transferor will be deemed
to have made, with respect to such Eligible Substitute Mortgage Loan, as of
the date of substitution, the representations and warranties made by the
Transferor with respect to all other Mortgage Loans in the Trust. Upon receipt
by the Trustee of written notification of any such acceptance of retransfer or
substitution, subject to certain conditions set forth in the Pooling and
Servicing Agreement, the Trustee will execute and deliver an instrument of
transfer or assignment necessary to vest in the Transferor legal and
beneficial ownership of the Trust Balance of the retransferred Mortgage Loan
(including any property acquired in respect thereof or proceeds of any
insurance policy with respect thereto). The obligation of the Transferor to
accept a retransfer or replace any such Trust Balance will be the sole remedy
against the Transferor available to Certificateholders or the Trustee.
An Eligible Substitute Mortgage Loan is a Mortgage Loan that, as of the
substitution date, (i) has an outstanding Loan Balance (or if the new Mortgage
Loan is a Common Mortgage Loan, a balance conveyed to the Trust), not less
than 95% of the Trust Balance of the Defective Mortgage Loan it replaces as of
the substitution date; (ii) has a Loan Rate not less than the current Loan
Rate of such Defective Mortgage Loan and not more than 100 basis points in
excess thereof; (iii) has a Margin not less than the Margin of such Defective
Mortgage Loan and not more than 100 basis points in excess of the Margin of
such Defective Mortgage Loan; (iv) has a remaining term to maturity not
greater than nor more than six months less than the remaining term to maturity
of such Defective Mortgage Loan; (v) has a Combined Loan-to-Value Ratio not
greater than the Combined Loan-to-Value Ratio of such Defective Mortgage Loan
as of the related Cut-off Date or, in the case of an Eligible Substitute
Mortgage Loan that replaces a Mortgage Loan that has had an increase in its
Maximum Credit Limit, where such increase results in a Combined Loan-to-Value
Ratio (computed at the new Maximum Credit Limit and any related senior
mortgage loan) in excess of 80%, has a Combined Loan-to-Value Ratio (computed
at its Maximum Credit Limit and any related senior mortgage loan) not greater
than 80%; (vi) has a maximum Loan Rate not lower than the maximum Loan Rate of
such Defective Mortgage Loan; (vii) has an index based on a "prime rate";
(viii) is secured by a Mortgaged Property that is subject to the same use and
has the same structural characteristic (attached or detached) as the Mortgaged
Property securing such Defective Mortgage Loan; and (ix) has a Mortgage in a
lien position not junior to the lien position of the Mortgage of such
Defective Mortgage Loan. The Maximum Credit Limit of an Eligible Substitute
Mortgage Loan as of the substitution date will be used in computing the
Combined Loan-to-Value Ratio of such Eligible Substitute Mortgage Loan on such
date.
Pursuant to the Pooling and Servicing Agreement, the Servicer will service
and administer the Mortgage Loans, as more fully set forth below under "--
Collection and Other Servicing Procedures."
None of the Mortgage Loans are insured by the Federal Housing Administration
or guaranteed by the Veterans Administration or any other governmental agency
or instrumentality.
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AMENDMENTS TO LOAN AGREEMENTS
Subject to applicable law, the Servicer may change the terms of the Loan
Agreements at any time, provided that such changes (i) do not materially
adversely affect the interests of Certificateholders and (ii) are consistent
with prudent business practice.
The Servicer has agreed under the Pooling and Servicing Agreement that,
except as otherwise required by any requirement of law applicable to the
Servicer, it shall not reduce the Margin of any Mortgage Loan by more than
0.25% per annum unless the Servicer has received (a) an opinion of counsel
that such reduction in the Margin will not materially adversely affect the
characterization of the Certificates as debt for Federal income tax purposes,
(b) the consent of the Certificate Insurer and (c) confirmation from each
Rating Agency then rating the Certificates that such reduction will not cause
a reduction or withdrawal of the rating of the Certificates without regard to
the Certificate Insurance Policy; provided however that, the Servicer may
reduce the Margin of any Mortgage Loan by more than 0.25% if the Servicer, not
later than the Business Day immediately preceding the Distribution Date
following the related Collection Period shall either remove the applicable
Mortgage Loan or substitute an Eligible Substitute Mortgage Loan or Loans for
such Mortgage Loan.
The Servicer may extend the maturity date on (i) any Mortgage Loan which is
then currently in default under the terms of the related Loan Agreement, (ii)
any Mortgage Loan; provided that the Servicer may only grant the extensions
described in this clause (ii) on Mortgage Loans with aggregate Trust Balances
in any one calendar year of up to 2% of the Pool Balance (net of amounts on
deposit in the Pre-Funding Account) as of the beginning of such calendar year,
as subsequently adjusted for any Subsequent Mortgage Loans transferred to the
Trust, (iii) any Mortgage Loan in respect of which the Servicer has delivered
a certificate to the Trustee certifying that such extension will not
materially adversely affect the interests of the Certificateholders and (iv)
any Mortgage Loan for which the Servicer has not later than the Business Day
immediately preceding the Distribution Date next following the related
Collection Period either removed the applicable Mortgage Loan or substituted
an Eligible Substitute Mortgage Loan or Loans for such Mortgage Loan but, in
the case of (i), (ii) and (iii), not beyond the last day of the Collection
Period immediately preceding the Stated Maturity Date.
CONSENT TO SENIOR LIENS
The Servicer may consent to the placement of a lien on any Mortgaged
Property senior to that of the related Mortgage Loan, provided that (i) such
action is consistent with reasonable commercial practice and (ii) such consent
is given in either of the following situations:
(a) immediately following the placement of such senior lien, such
Mortgage Loan is in a second lien position and either (A) the outstanding
principal amount of the mortgage loan secured by such senior lien is no
greater than the outstanding principal amount of the first mortgage loan
(if any) secured by the Mortgaged Property as of the date the related
Mortgage Loan was conveyed to the Trust or (B) an updated Combined Loan-to-
Value Ratio of such Mortgage Loan is not greater than the Combined Loan-to-
Value Ratio of such Mortgage Loan as of the date such Mortgage Loan was
conveyed to the Trust; or
(b) such senior lien secures a mortgage loan that refinances an existing
first mortgage loan and either (A) the outstanding principal amount of the
replacement first mortgage loan immediately following such refinancing is
not greater than the outstanding principal amount of such existing first
mortgage loan at the date of such refinancing or (B) an updated Combined
Loan-to-Value Ratio of the applicable Mortgage Loan is not greater than the
Combined Loan-to-Value Ratio of such Mortgage Loan as of the date such
Mortgage Loan was conveyed to the Trust.
OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Pooling and Servicing Agreement,
if on the 27th day of any Collection Period or if that day is not a Business
Day the next preceding Business Day (the "Retransfer Notification Date") the
Removal Condition is satisfied, the Transferor may, but shall not be obligated
to, remove on the last Business Day of the Collection Period (the "Retransfer
Date") from the Trust, the entire Trust Balance of certain Mortgage Loans
without notice to the Certificateholders. Mortgage Loans so designated will
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only be removed upon satisfaction of certain conditions specified in the
Pooling and Servicing Agreement, including: (i) the Removal Condition is
satisfied; (ii) the Transferor shall have delivered to the Trustee a "Mortgage
Loan Schedule" containing a list of all Mortgage Loans remaining in the Trust
after such removal; (iii) the Transferor shall represent and warrant that no
selection procedures reasonably believed by the Transferor to be adverse to
the interests of the Certificateholders or the Certificate Insurer were used
by the Transferor in selecting such Mortgage Loans; (iv) each Rating Agency
shall have been notified of the proposed retransfer and prior to the
Retransfer Date shall not have notified the Transferor that such retransfer
would result in a reduction or withdrawal of the ratings of the Certificates
without regard to the Certificate Insurance Policy; provided, however that
with respect to the first proposed retransfer, each Rating Agency shall have
been notified of the proposed retransfer and prior to the Retransfer Date
shall have notified the Transferor that such retransfer would not result in a
reduction or withdrawal of the ratings of the Certificates without regard to
the Certificate Insurance Policy; and (v) the Transferor shall have delivered
to the Trustee and the Certificate Insurer an officer's certificate confirming
the conditions set forth in clauses (i) through (iv) above.
The "Removal Condition" is satisfied if, on the Retransfer Date, after
giving effect to such removal the sum of the Transferor Interest and the
amount on deposit in the Spread Account is not less than the greater of (a) 5%
of the Pool Balance on such date and (b) 2% of the Pool Balance on the Initial
Cut-off Date (the "Overall Minimum Amount"); provided, however, that during
the Rapid Amortization Period, no removal shall occur unless (A) no Rapid
Amortization Event has occurred and (B) immediately prior to such removal, the
Pool Balance is at least equal to the sum of (x) the outstanding Certificate
Principal Balance and (y) the Overall Minimum Amount.
PAYMENTS ON THE MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
The Servicer has established and will maintain a single separate trust
account (the "Certificate Account") for the benefit of the Certificateholders
and the owner of the Transferor Interest, as their interests may appear. The
Certificate Account will be an Eligible Account (as defined herein). The
Servicer shall deposit into the Certificate Account amounts in respect of the
Trust Balances of the Mortgage Loans (excluding amounts representing
administrative charges, annual fees, taxes, assessments, credit insurance
charges, insurance proceeds to be applied to the restoration or repair of a
Mortgaged Property or similar items) on a daily basis within two Business Days
following receipt thereof in an amount equal to the sum of (i) Daily
Certificate Interest Collections and (ii) Daily Certificate Principal
Collections; provided, however, that during the Managed Amortization Period,
on any day in which the aggregate amount of Daily Certificate Principal
Collections on deposit in the Certificate Account is equal to or exceeds 1% of
the Certificate Principal Balance as of the immediately prior Distribution
Date, the Servicer shall only be required to deposit an amount, but not less
than zero, equal to (a) the aggregate amount of Principal Collections for the
Collection Period through such date minus the aggregate amount of Draws for
such Collection Period through such date minus (b) 1% of the Certificate
Principal Balance as of the immediately prior Distribution Date. To the extent
that the aggregate amount of Daily Certificate Principal Collections on
deposit in the Certificate Account at the end of the Collection Period is in
excess of the Scheduled Principal Collections Distribution Amount for the
related Distribution Date on the second Business Day after the end of the
Collection Period, the Trustee shall withdraw the amount of such excess from
the Certificate Account and distribute such amount to the Transferor.
With respect to any Distribution Date, the aggregate amount of Trust
Interest collected in the related Collection Period allocable to the
Certificates ("Certificate Interest Collections") will equal the aggregate
amount of Daily Certificate Interest Collections for the related Collection
Period. With respect to any day, "Daily Certificate Interest Collections"
shall equal the product of (i) the aggregate amount of Trust Interest as of
such day and (ii) the Certificateholders' Floating Allocation Percentage for
such day. With respect to any day, the "Certificateholders' Floating
Allocation Percentage" is the percentage equivalent of a fraction determined
by dividing the Invested Amount by the Pool Balance, in each case as of the
end of the preceding day. The remaining amount of Trust Interest will be
allocated to the Transferor Interest.
With respect to any Distribution Date, "Principal Collections" shall equal
(i) the Trust's share of principal collections received from the borrowers
under the Mortgage Loans in the related Collection Period after the
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application of such principal collections to the Sold Balances, (ii) the
principal portion of Net Trust Liquidation Proceeds and Trust Insurance
Proceeds and (iii) the principal portion of the Retransfer Deposit Amount and
the Substitution Adjustment Amount of a retransferred Mortgage Loan. "Daily
Certificate Principal Collections" shall mean for any day the aggregate amount
of Principal Collections received on such day.
Amounts deposited in the Certificate Account will be invested in Permitted
Investments (as described in the Pooling and Servicing Agreement) maturing no
later than one Business Day prior to the Distribution Date or on such other
date as may be approved by the Rating Agencies and the Certificate Insurer.
Not later than the fifth Business Day prior to each Distribution Date (the
"Determination Date"), the Servicer will notify the Trustee of the amount of
such deposit to be included in funds available for the related Distribution
Date.
An "Eligible Account" is an account that is (i) maintained with a depository
institution which has a short-term certificate of deposit rating at the time
of any deposit therein in the highest short-term debt rating category by the
Rating Agencies, (ii) one or more accounts with a depository institution whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation with a minimum long-term unsecured debt rating of Baa3, (iii) a
trust account maintained with the Trustee in its corporate trust department or
(iv) otherwise acceptable to each Rating Agency as evidenced by a letter from
such Rating Agency to the Trustee, without reduction or withdrawal of their
then current ratings of the Certificates, and acceptable to the Certificate
Insurer.
"Permitted Investments" are specified in the Pooling and Servicing Agreement
and are limited to investments which meet the criteria of the Rating Agencies
from time to time as being consistent with their then current ratings of the
Certificates.
The Trustee will deposit any amounts drawn under the Certificate Insurance
Policy into the Certificate Account.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount of approximately $20,000,000
(the "Pre-Funded Amount") will be deposited into an account established with
the Trustee on behalf of the Trust (the "Pre-Funding Account"). Such amount
will be funded from the sale of the Certificates. The Pre-Funded Amount will
be used to acquire Subsequent Mortgage Loans during the period from the
Closing Date to the earliest to occur of (i) the Distribution Date on which
the aggregate amount in the Pre-Funding Account is equal to or less than
(a) $100,000, (ii) the commencement of the Rapid Amortization Period or (iii)
the August 20, 1998 Distribution Date (the "Pre-Funding Period"). As a result,
the aggregate principal balance of the Mortgage Loans will increase by an
amount equal to the Cut-off Date Trust Balances of the Subsequent Mortgage
Loans acquired by the Trust, and the amount on deposit in the Pre-Funding
Account will decrease by such amount. In the event there are any funds
remaining in the Pre-Funding Account after the Pre-Funding Period, the
Certificateholders' Fixed Allocation Percentage of such funds (excluding any
net investment earnings thereon) shall be distributed to the
Certificateholders in respect of principal on the Certificates.
It is intended that the Subsequent Mortgage Loans will consist primarily of
balances of revolving credit line home equity loans originated by Chevy Chase
and transferred to Trust 1990 (the "90-1 Mortgage Loans") and Trust 1992 (the
"92-1 Mortgage Loans"), provided such loans are reacquired by Chevy Chase. The
90-1 Mortgage Loans and 92-1 Mortgage Loans have terms that are, and were
originated in a manner that is, substantially similar to the Initial Mortgage
Loans originated by Chevy Chase. Only those 90-1 Mortgage Loans and 92-1
Mortgage Loans that meet the eligibility criteria requirements set forth in
the Pooling and Servicing Agreement and are approved by the Certificate
Insurer will be transferred to the Trust. Because some of the mortgage loans
owned by Trust 1990 and Trust 1992 share balances with Trust 1993, Trust 1994,
Capitol Revolving Home Equity Loan Trust 1995-1 ("Trust 1995") and Capital
Revolving Home Equity Loan Trust 1996-1 ("Trust 1996"), such 90-1 Mortgage
Loans and 92-1 Mortgage Loans, if transferred to the Trust, will constitute
Common Mortgage Loans and Trust 1993, Trust 1994, Trust 1995 and Trust 1996
will constitute
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Prior Trusts. As a result, the balances of such Common Mortgage Loans
transferred to the Prior Trusts shall be excluded from the Cut-off Date Trust
Balance and shall constitute Sold Balances. In the event that 90-1 Mortgage
Loans and 92-1 Mortgage Loans are not available for purchase during the Pre-
Funding Period, the Transferor will use its best efforts to transfer to the
Trust revolving credit line home equity loans that meet the eligibility
requirements set forth in the Pooling and Servicing Agreement and are approved
by the Certificate Insurer during the Pre-Funding Period.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, there will be deposited $556,934 in an account (the
"Capitalized Interest Account") in the name of the Trustee on behalf of the
Trust which will be used by the Trustee during the Pre-Funding Period to cover
certain shortfalls in interest as described herein. Amounts in excess of the
amount necessary to cover such shortfalls (the "Overfunded Interest Amount")
are required to be paid directly to the Transferor on each Distribution Date
during the Pre-Funding Period.
The "Capitalized Interest Requirement" is an amount that may be withdrawn by
the Trustee from the Capitalized Interest Account on any Distribution Date
during the Pre-Funding Period to be deposited into the Certificate Account.
This amount shall be the excess, if any, of (a) the sum of (i) the amount of
interest accruing at the Certificate Rate during the related Accrual Period on
98% of the amount on deposit in the Pre-Funding Account (excluding any net
investment earnings thereon) and (ii) the product of (x) the Premium Rate
divided by twelve and (y) 98% of the amount on deposit in the Pre-Funding
Account (excluding any net investment earnings thereon) as of the close of
business on the prior Distribution Date (or, in the case of the first
Distribution Date, as of the Closing Date) over (b) the amount of any net
investment income earned on such amounts on deposit in the Pre-Funding
Account. The Trustee will deposit the Capitalized Interest Requirement into
the Certificate Account to be distributed as Certificate Interest Collections.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on December 22,
1997), distributions on the Certificates will be made by the Trustee or the
Paying Agent on each Distribution Date to the persons in whose names such
Certificates are registered at the close of business on the day prior to each
Distribution Date or, if the Certificates are no longer book-entry
certificates, at the close of business on the last day of the month preceding
such Distribution Date (the "Record Date"). The term "Distribution Date" means
the 20th day of each month or, if such date is not a Business Day, then the
next succeeding Business Day. Distributions will be made by check or money
order mailed (or upon the request of a Certificateholder owning Certificates
having denominations aggregating at least $5,000,000, by wire transfer or as
otherwise agreed by the Trustee) to the address of the person entitled thereto
(which, in the case of book-entry certificates, will be DTC or its nominee) as
it appears on the Certificate Register in amounts calculated as described
herein on the Determination Date. However, the final distribution in respect
of the Certificates will be made only upon presentation and surrender thereof
at the office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution. For purposes of the Pooling and
Servicing Agreement, a "Business Day" is any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the States of New York
or Maryland (or such other state in which the corporate trust office of the
Trustee or the main business office of the Paying Agent under the Pooling and
Servicing Agreement is located) are required or authorized by law to be
closed.
Application of Certificate Interest Collections. On each Distribution Date,
the Trustee or the Paying Agent will apply the Certificate Interest
Collections, together with withdrawals, if any, from the Capitalized Interest
Account, and any earnings received on the amounts on deposit in the Pre-
Funding Account in the following manner and order of priority:
(i) as payment of the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon) on the Certificate Principal Balance of
the Certificates (other than any Basis Risk Payment or interest accrued
thereon);
(iii) as payment for the premium for the Certificate Insurance Policy;
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(iv) to pay Certificateholders the product of the Certificateholders'
Floating Allocation Percentage and the Liquidation Loss Amount for such
Distribution Date;
(v) as payment for any Liquidation Loss Amount allocable to the
Certificateholders for a previous Distribution Date that was not previously
(a) funded by Certificate Interest Collections allocable to the
Certificateholders, (b) funded by amounts on deposit in the Spread Account
or (c) funded by draws on the Certificate Insurance Policy;
(vi) to reimburse prior draws made from the Certificate Insurance Policy
(with interest thereon at a rate specified in the Insurance Agreement);
(vii) to fund the Spread Account in accordance with the Pooling and
Servicing Agreement and the Insurance Agreement;
(viii) to pay any other amounts owed to the Certificate Insurer pursuant
to the Insurance Agreement;
(ix) as payment to Certificateholders of any Basis Risk Payment (and any
accrued interest thereon) from any prior Distribution Date that has not
previously been paid; and
(x) to the Transferor.
Certificate Interest Collections remaining after payment of the amounts
described in clauses (i), (ii) and (iii) above, shall be referred to herein as
the "Certificateholders' Excess Interest."
Any interest accruing on the Basis Risk Payment shall accrue at the related
Certificate Rate for such period.
Payments to Certificateholders pursuant to clauses (ii) and (ix) above will
be interest payments on the Certificates. Payments to Certificateholders
pursuant to clause (ix) above are not guaranteed by the Certificate Insurance
Policy.
The Certificateholders' Excess Interest may be insufficient to cover the
Certificateholders' Floating Allocation Percentage of Liquidation Loss
Amounts. If as a result of such insufficiency the Certificate Principal
Balance exceeds the Invested Amount as of such Distribution Date (after giving
effect to all other amounts distributable and allocable to principal on the
Certificates on such Distribution Date), a draw in an amount equal to such
difference will be made on the Certificate Insurance Policy in accordance with
the terms of the Certificate Insurance Policy (after application of amounts on
deposit in the Spread Account) and the amount of such draw will be deposited
in the Certificate Account for distribution to Certificateholders. Payment of
such amounts will reduce the Certificate Principal Balance but not the
Invested Amount. Any such insufficiency resulting from the sale of the Trust
Balances of the Mortgage Loans as the result of an Insolvency Event shall
result in a draw on the Certificate Insurance Policy.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of all Trust Balances on such date plus amounts on deposit in the Pre-Funding
Account on such date (excluding any net investment earnings thereon). The
Trust Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-off Date Trust Balance thereof, plus (i) any
Additional Balances in respect of such Mortgage Loan minus (ii) all
collections credited against the principal balance of such Mortgage Loan
(excluding in the case of any Common Mortgage Loan, any such principal
collections applied to reduce the Sold Balances) in accordance with the
related Loan Agreement prior to such day, provided, however, that if such
Mortgage Loan is a Common Mortgage Loan, the Cut-off Date Trust Balance of
such Mortgage Loan shall exclude any Sold Balances. The Trust Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Trust Balance thereof at the end of the related
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan, after giving effect to the principal portion of the Net Trust
Liquidation Proceeds in connection therewith.
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A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Pooling and Servicing Agreement, as of
the end of the preceding Collection Period that all Liquidation Proceeds which
it expects to recover with respect to the disposition of the related Mortgaged
Property have been recovered. "Liquidation Proceeds" are the proceeds
(including Insurance Proceeds but excluding any amounts drawn on the
Certificate Insurance Policy) received in connection with the liquidation of
any Mortgage Loan, whether through trustee's sale, foreclosure sale or
otherwise. The Certificateholders' Floating Allocation Percentage of the
Liquidation Loss Amount will be allocated to the Certificateholders. Although
payment of Liquidation Loss Amounts will be paid from Certificateholders'
Excess Interest, such payments are payments of principal for purposes of
calculating the Invested Amount and the Certificate Principal Balance.
As to any Distribution Date, the "Collection Period" is the calendar month
preceding such Distribution Date.
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Accrual Period (as defined below). The "Certificate Rate"
for an Accrual Period will generally equal the sum of (a) LIBOR, determined as
specified herein, as of the second LIBOR Business Day prior to the immediately
preceding Distribution Date (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Distribution Date) plus (b) 0.22% per
annum. Notwithstanding the foregoing, in no event will the Certificate Rate
exceed a rate equal to the average of the Loan Rates (net of the Servicing Fee
Rate and the Premium Rate) weighted on the basis of the average daily balance
of each Mortgage Loan during the preceding Collection Period (the "Weighted
Average Loan Rate"). If the Certificate Rate would have exceeded the rate cap
described above, then the Certificateholders will be entitled to receive such
difference (the "Basis Risk Payment") from the following sources and in the
following order of priority: (i) from Certificateholders' Excess Interest to
the extent available as described above, (ii) from the Spread Account only to
the extent that the amount on deposit therein exceeds the amount required to
be on deposit therein and (iii) from net investment earnings on amounts on
deposit in the Spread Account. The Basis Risk Payment will bear interest if it
is not paid on the Distribution Date on which it is due, but neither the Basis
Risk Payment nor interest accrued thereon will be covered by the Certificate
Insurance Policy.
Interest on the Certificates in respect of any Distribution Date will accrue
on the Certificate Principal Balance from the preceding Distribution Date (or
in the case of the first Distribution Date, from the date of the initial
issuance of the Certificates (the "Closing Date")) through the day preceding
such Distribution Date (each such period, an "Accrual Period") on the basis of
the actual number of days in the Accrual Period and a 360-day year. Interest
payments on the Certificates will be funded from Certificate Interest
Collections, the Capitalized Interest Requirement, earnings received on
amounts on deposit in the Pre-Funding Account, the Spread Account and from
draws on the Certificate Insurance Policy.
Calculation of the LIBOR Rate. LIBOR with respect to any Accrual Period will
be established by the Trustee and will equal the rate for one month U.S.
dollar deposits quoted on Telerate Page 3750 as of 11:00 A.M., London time, on
the second LIBOR Business Day prior to the first day of such Accrual Period.
"Telerate Page 3750" means the display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service
for displaying LIBOR or comparable rates as may be selected by the Servicer),
the rate will be the Reference Bank Rate. The "Reference Bank Rate" will be
determined on the basis of the rates at which deposits in U.S. dollars are
offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the
Servicer) as of 11:00 A.M., London time, on the day that is two LIBOR Business
Days prior to the immediately proceeding Distribution Date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the Certificate Principal Balance then outstanding. The Trustee will
request the principal London office of each of the reference banks to provide
a quotation of its rate. If at least two such quotations are provided, the
rate will be the arithmetic mean of the quotations. If on such date fewer than
two quotations are provided as requested, the rate will be the arithmetic mean
of the rates quoted by one or more major banks in
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New York City, selected by the Trustee after consultation with the Servicer,
as of 11:00 A.M., New York City time, on such date for loans in U.S. dollars
to leading European banks for a period of one month in amounts approximately
equal to the Certificate Principal Balance then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date. "LIBOR Business Day" means any date other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the State of New York or
in the city of London, England are required or authorized by law to be closed.
Transferor Collections. Principal Collections allocable to the Transferor
Interest will be distributed to the Transferor only to the extent that such
distribution will not reduce the Transferor Interest below zero.
Distributions of Principal Collections. For the period beginning on the
first Distribution Date and, unless a Rapid Amortization Event shall have
earlier occurred, ending on the 72nd Distribution Date in November 2003 (the
"Managed Amortization Period"), the amount of Principal Collections payable to
Certificateholders as of each Distribution Date during the Managed
Amortization Period will equal, to the extent funds are available therefor
from Principal Collections, the Scheduled Principal Collections Distribution
Amount for such Distribution Date. See "--Managed Amortization Period" below.
Upon the earlier to occur of a Rapid Amortization Event or the Distribution
Date in December 2003, the Rapid Amortization Period will commence and the
Maximum Principal Payment will be distributed to the extent funds are
available therefore. See "--Rapid Amortization Period; Rapid Amortization
Events" below. In the event there are any funds remaining in the Pre-Funding
Account after the Pre-Funding Period, the Certificateholders' Fixed Allocation
Percentage of such funds (excluding any net investment earnings thereon) shall
be distributed to the Certificateholders in respect of principal on the
Certificates.
The Paying Agent. The Paying Agent shall initially be the Trustee together
with any successor thereto in such capacity (the "Paying Agent"). The Paying
Agent shall have the revocable power to withdraw funds from the Certificate
Account for the purpose of making distributions to the Certificateholders.
MANAGED AMORTIZATION PERIOD
For the period beginning on the first Distribution Date and, unless a Rapid
Amortization Event shall have earlier occurred, ending on the Distribution
Date in November 2003 (the "Managed Amortization Period"), the amount of
Principal Collections payable to Certificateholders as of each Distribution
Date during the Managed Amortization Period will equal, to the extent funds
are available therefor from Principal Collections, the Scheduled Principal
Collections Distribution Amount for such Distribution Date. On any
Distribution Date with respect to the Managed Amortization Period, the
"Scheduled Principal Collections Distribution Amount" shall equal the lesser
of (i) the Maximum Principal Payment and (ii) the Alternative Principal
Payment. With respect to any Distribution Date, the "Alternative Principal
Payment" is equal to the greater of (x) 1% of the Certificate Principal
Balance immediately prior to such Distribution Date and (y) the amount, but
not less than zero, of the aggregate amount of Principal Collections for the
related Collection Period less the aggregate of principal amounts drawn down
each day ("Draws") under the Loan Agreements during the related Collection
Period for the Mortgage Loans (other than Draws relating to the 90-1 Mortgage
Loans and 92-1 Mortgage Loans if such loans are transferred to the Trust).
With respect to any Distribution Date, the "Maximum Principal Payment" will
equal the product of the Certificateholders' Fixed Allocation Percentage and
the aggregate amount of Principal Collections for such Distribution Date.
Beginning with the first Distribution Date relating to the Rapid
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
Distributions of Principal Collections based upon the Certificateholders'
Fixed Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Certificateholders' Floating Allocation
Percentage were used to determine the percentage of Principal Collections
distributable to Certificateholders. Principal Collections not allocated to
the Certificateholders will be allocated to the Transferor Interest. The
aggregate distributions of principal to the Certificateholders will not exceed
the Original Certificate Principal Balance.
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RAPID AMORTIZATION PERIOD; RAPID AMORTIZATION EVENTS
The Managed Amortization Period will continue through the Distribution Date
in November 2003, unless a Rapid Amortization Event occurs prior to such date
in which case the Rapid Amortization Period will commence prior to such date.
Upon the occurrence of the earlier of a Rapid Amortization Event or the
Distribution Date in December 2003, (the "Rapid Amortization Period") the
Maximum Principal Payment will be distributed to Certificateholders to the
extent funds are available therefor. "Rapid Amortization Event" refers to any
of the following events:
(a) failure on the part of the Transferor (i) to make a payment or
deposit required under the Pooling and Servicing Agreement within five
Business Days after the date such payment or deposit is required to be
made, (ii) to record assignments when required or (iii) to observe or
perform in any material respect any other covenants or agreements of the
Transferor set forth in the Pooling and Servicing Agreement, which failure
materially adversely affects the interests of the Certificateholders or the
Certificate Insurer and continues unremedied and continues to materially
adversely affect the interests of the Certificateholders or the Certificate
Insurer for a period of 60 days after written notice;
(b) any representation or warranty made by the Transferor in the Pooling
and Servicing Agreement proves to have been incorrect in any material
respect when made and continues to be incorrect in any material respect for
a period of 60 days after written notice and as a result of which the
interests of the Certificateholders or the Certificate Insurer are
materially and adversely affected; provided, however, that a Rapid
Amortization Event shall not be deemed to occur if the Transferor has
accepted the retransfer of the related Mortgage Loans or all Mortgage Loans
if applicable during such period (or within an additional 60 days with the
consent of the Trustee) in accordance with the provisions of the Pooling
and Servicing Agreement;
(c) the occurrence of certain events of insolvency, receivership or
conservatorship relating to the Transferor;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended;
(e) a Trigger Event (as defined herein) occurs under the Pooling and
Servicing Agreement (other than the event described in clause (iv) of the
definition thereof);
(f) the aggregate principal draws under the Certificate Insurance Policy
exceed 1% of the Pool Balance as of the Initial Cut-off Date; or
(g) if at any time, Liquidation Loss Amounts incurred by the Trust exceed
$4,450,600 and any of (i) Certificateholders' Excess Interest is less than
2% of the Certificate Principal Balance (based on a six month rolling
average), (ii) Certificateholders' Excess Interest is less than 1.5% of the
Certificate Principal Balance (based on a three month rolling average) or
(iii) there exists any unreimbursed draw under the Certificate Insurance
Policy for a period of six months.
In the case of any event described in clause (a), (b) or (e), a Rapid
Amortization Event will be deemed to have occurred only if, after the
applicable grace period described in such clauses, either the Certificate
Insurer, the Trustee or Certificateholders holding Certificates evidencing
more than 51% of the Certificate Principal Balance, by written notice to the
Servicer (and to the Trustee, if given by the Certificate Insurer or the
Certificateholders) declare that a Rapid Amortization Event has occurred as of
the date of such notice. In the case of any event described in clause (c),
(d), (f) or (g), a Rapid Amortization Event will be deemed to have occurred
without any notice or other action on the part of the Trustee, the Certificate
Insurer or the Certificateholders immediately upon the occurrence of such
event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if an Insolvency Event occurs with respect to the Transferor, on the
day of any such filing or appointment the Transferor will immediately cease to
transfer Additional Balances and Subsequent Mortgage Loans to the Trust and
the Transferor will promptly give notice to the Trustee of any such Insolvency
Event. Unless otherwise instructed
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within a specified period by the holders of more than 50% of the Certificate
Principal Balance and any person designated by the Transferor to the Trustee
prior to the time such conservator or receiver was appointed, the Trustee will
sell, dispose of or otherwise liquidate the Trust Balances of the Mortgage
Loans in a commercially reasonable manner and on commercially reasonable
terms. Unless a Certificate Insurer Default has occurred and is continuing,
the Certificate Insurer will have the power to make such instruction to the
Trustee on behalf of the Certificateholders and such person designated by the
Transferor to the Trustee. The proceeds from the sale, disposition or
liquidation of the Trust Balances of the Mortgage Loans will be treated as,
and be allocated in the same manner as collections, and the portion thereof
allocated to Certificateholders will be distributed to the Certificateholders
on the Distribution Date following the date such proceeds are received (the
"Dissolution Distribution Date"). If the Certificate Insurer elects to cause a
termination of the Trust under such circumstances, the Certificate Insurance
Policy will be available to cover the payment of the then-accrued and unpaid
interest on the outstanding Certificate Principal Balance at the Certificate
Rate, as well as the outstanding Certificate Principal Balance, in each case
on the Dissolution Distribution Date after giving effect to the allocation of
all other amounts distributed on or prior to such Dissolution Distribution
Date.
A "Certificate Insurer Default" occurs if (i) the Certificate Insurer fails
to make a payment required under the Certificate Insurance Policy in
accordance with its terms, or (ii) an Insolvency Event shall occur with
respect to the Certificate Insurer.
Notwithstanding the foregoing, if a conservator or receiver is appointed for
the Transferor and no Rapid Amortization Event exists other than such
conservatorship, receivership or insolvency of the Transferor, the conservator
or receiver may have the power to prevent the commencement of the Rapid
Amortization Period or the sale of the Trust Balances of the Mortgage Loans
described above.
An "Insolvency Event" shall occur, if the Transferor or the Certificate
Insurer, as applicable, shall consent to the appointment of a conservator or
receiver or liquidator or trustee in any insolvency, receivership,
conservatorship, readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to such person or relating to all or
substantially all of its property, or a court or agency or supervisory
authority having jurisdiction in the premises shall issue, or enter against
such person, a decree or order for the appointment of a conservator or
receiver or liquidator or trustee in any insolvency, receivership,
conservatorship, readjustment of debt, marshaling of assets and liabilities or
similar proceedings or for the winding-up or liquidation of its affairs; or
such person shall admit in writing its inability to pay its debts generally as
they become due, file a petition to take advantage of any applicable
insolvency, reorganization, liquidation, receivership, or conservatorship
statute, make any assignment for the benefit of its creditors or voluntarily
suspend payment of its obligations; or a proceeding shall have been instituted
by a court having jurisdiction in the premises seeking a decree or order for
relief in respect of such person in an involuntary case under any debtor
relief law, or for the appointment of a receiver, liquidator, assignee,
trustee, custodian, sequestrator, conservator or other similar official, of
such person for any substantial part of its property, or for the liquidation
and winding-up of its affairs and, if instituted against such person, any such
proceeding shall continue undismissed or unstayed and in effect for a period
of 60 consecutive days, or any of the actions sought in such proceeding shall
occur.
CERTIFICATE INSURANCE POLICY
On or before the Closing Date, the Certificate Insurance Policy will be
issued by the Certificate Insurer pursuant to the provisions of the Pooling
and Servicing Agreement and the Insurance and Indemnity Agreement (the
"Insurance Agreement"), among the Transferor, the Servicer, the Certificate
Insurer and the Trustee. The Certificate Insurance Policy will unconditionally
and irrevocably guarantee principal and interest payments on the Certificates
at the times and in the amounts described below. On each Distribution Date, a
draw will be made on the Certificate Insurance Policy (after application of
amounts on deposit in the Spread Account) equal to (i) the amount by which
interest accrued at the Certificate Rate on the outstanding Certificate
Principal Balance exceeds all amounts on deposit in the Certificate Account
available to be distributed therefor on such Distribution Date, plus (ii) the
amount, if any, by which the Certificate Principal Balance (after giving
effect to all other amounts distributable and allocable to principal on the
Certificates on such Distribution Date) exceeds the
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Invested Amount as of such Distribution Date (after giving effect to all other
amounts distributable and allocable to principal on the Certificates on such
Distribution Date). If the Certificate Insurer elects to cause a termination
of the Trust upon the occurrence of an Insolvency Event with respect to the
Transferor, the Certificate Insurance Policy will be available to cover the
payment of the then-accrued and unpaid interest on the outstanding Certificate
Principal Balance at the Certificate Rate, as well as the outstanding
Certificate Principal Balance, in each case on the Dissolution Distribution
Date after giving effect to the allocation of all other amounts distributed on
or prior to such Dissolution Distribution Date and after applying any amounts
available in the Spread Account. In addition, the Certificate Insurer will
guarantee the payment of the outstanding Certificate Principal Balance on the
Stated Maturity Date (after giving effect to all other amounts distributed and
allocable to principal on such Distribution Date and after applying any
amounts available in the Spread Account). The Certificate Insurance Policy
will not cover Basis Risk Payments (including interest accrued thereon).
In the event that the Certificate Insurer's claims paying ratings have been
reduced by any of the Rating Agencies, the Transferor may, but is not
obligated to, either (i) replace the Certificate Insurance Policy with a
financial guaranty insurance policy issued by another certificate insurer,
provided that the ratings on the claims paying ability of such replacement
certificate insurer are higher than those of the certificate insurer sought to
be replaced (after giving effect to such reduction) or (ii) eliminate or
provide another form of credit enhancement; provided that in the case of
clause (ii), the Rating Agencies consent thereto and the Rating Agencies
confirm that the ratings of the Certificates will be increased from their
current levels (after giving effect to such reduction) as a result of such
action.
SPREAD ACCOUNT
In accordance with the Pooling and Servicing Agreement and the Insurance
Agreement, the Trust will be required to establish and maintain an account
(the "Spread Account") for the benefit of the Certificateholders and the
Certificate Insurer to be used prior to any draws upon the Certificate
Insurance Policy. On each Distribution Date, the Trustee will be required to
deposit Certificateholders' Excess Interest, to the extent available in
accordance with the priorities described under "--Distributions on the
Certificates", into the Spread Account until the amounts on deposit therein
are equal to an amount specified in the Insurance Agreement. Such amount may
increase or decrease over time as a result of floors, caps and triggers set
forth in the Insurance Agreement.
The provisions relating to the Spread Account may be amended in any respect
by the Transferor, the Servicer and the Certificate Insurer without the
consent of, or notice to, the Certificateholders. Such amendment could reduce
or eliminate the funding requirements of the Spread Account or release such
funds for the benefit of persons other than the Certificateholders. Under any
such amendments, amounts that are no longer required to be deposited in the
Spread Account will be distributed to the Transferor. Notwithstanding any
reduction in or elimination of the funding requirements of the Spread Account
or the depletion thereof, the Certificate Insurer will be obligated under the
Certificate Insurance Policy to fund on each Distribution Date the full amount
otherwise required to be paid on such Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Servicer
will forward to the Trustee for mailing to such Certificateholders and the
Certificate Insurer a statement setting forth:
(i) the Certificateholders' Floating Allocation Percentage for the last
day of the Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution, the related
Certificate Rate and the portion thereof attributable to collections in
respect of the Mortgage Loans;
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(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest after
giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution and
the portion thereof attributable to collections in respect of the Mortgage
Loans;
(vii) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation Loss
Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount and the Certificate Principal Balance, each after
giving effect to such distribution;
(xi) the amount, if any, on deposit in the Spread Account, and the
amount, if any, transferred from the Spread Account in respect of such
Distribution Date;
(xii) the Pool Balance as of the end of the preceding Collection Period;
(xiii) the number and aggregate Trust Balances of the Mortgage Loans as
to which the minimum monthly payment is delinquent for 30-59 days, 60-89
days and 90 or more days, respectively, as of the end of the preceding
Collection Period;
(xiv) the aggregate Liquidation Loss Amount for all Mortgage Loans that
became Liquidated Mortgage Loans in the preceding Collection Period;
(xv) the Trust Balance of any Mortgage Loan, the related Mortgaged
Property of which is acquired by the Trust through foreclosure;
(xvi) the amount of any draws on the Certificate Insurance Policy;
(xvii) the amount on deposit in the Pre-Funding Account;
(xviii) the amount of Subsequent Mortgage Loans purchased during such
period using the Pre-Funding Account;
(xix) the Capitalized Interest Account balance; and
(xx) the amount of any Basis Risk Payment (including interest accrued
thereon).
In the case of information furnished pursuant to clauses (ii), (iii), (iv)
and (vi) above, the amounts shall be expressed as a dollar amount per
Certificate with a $1,000 denomination.
Within 90 days after the end of each calendar year, the Servicer will be
required to forward to the Trustee a statement containing the information set
forth in clauses (iii) and (vi) above aggregated for such calendar year.
Unless and until Replacement Certificates are issued, it is anticipated that
the only "holder" of Certificates entitled to receive the foregoing monthly
and annual reports will be CEDE & Co., as nominee of DTC. Certificate Owners
may request copies of such reports from DTC's direct or indirect participating
organizations in accordance with the rules, regulations and procedures
creating and affecting DTC. See "--Registration of Certificates" below.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments called for
under the Mortgage Loans and, consistent with the Pooling and Servicing
Agreement, will follow such collection procedures as are customary to the
servicing of mortgage loans that are comparable to the Mortgage Loans.
Consistent with this requirement, the Servicer, in its discretion, may waive
any late payment charge in respect of a late Mortgage Loan payment.
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The Servicer has discretion to extend relief to borrowers whose payments
become delinquent. The Servicer may arrange with a borrower a schedule for the
payment of interest due and unpaid for a period not to exceed 90 days,
provided that any such arrangement is consistent with the Servicer's customary
servicing procedures.
The Servicer may increase the Maximum Credit Limit of up to 10% of the
number of Mortgage Loans in the Pool. In the case of a credit line increase
affecting any Mortgage Loan, the Servicer will be required to purchase such
Mortgage Loan or substitute therefor an Eligible Substitute Mortgage Loan
unless, after giving effect to such increase, the ratio of the new Maximum
Credit Limit plus the principal amount of any related senior mortgage loan to
the appraised value of the related Mortgaged Property does not exceed 80%. The
Certificateholders' portion of the Retransfer Deposit Amount or the
Substitution Adjustment Amount, as applicable, paid in connection with such
purchase or substitution will be deposited into the Certificate Account.
Amounts so deposited will be distributed to Certificateholders as a prepayment
of the Trust Balance of the applicable Mortgage Loan. Such prepayment would
accelerate distributions on the Certificates.
In any case in which a Mortgaged Property is being conveyed by the borrower,
the Servicer will be obligated to exercise its rights to accelerate the
maturity of such Mortgage Loan under any due-on-sale clause applicable thereto
unless such exercise is not permitted by applicable law. If the Servicer is
prevented from enforcing such due-on-sale clause under applicable law, the
Servicer will enter into an assumption and modification agreement with the
person to whom such Mortgaged Property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Loan Agreement. To the
extent permitted by applicable law, such assumption will not release the
original borrower from its obligation under the Mortgage Loan. Any fee
collected by the Servicer for entering into an assumption or substitution of
liability agreement will be retained by the Servicer as additional servicing
compensation. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Due-on-Sale
Clauses" herein and "CERTAIN LEGAL ASPECTS OF THE LOANS--Due-on-Sale Clauses
in Mortgage Loans" in the Prospectus. In connection with any such assumption,
the Loan Rate borne by the related Loan Agreement may not be altered, except
to the extent described herein. See "--Amendments to Loan Agreements" above.
The Pooling and Servicing Agreement generally requires the Servicer to apply
the same servicing standards to the Trust that it applies to Trust 1990, Trust
1992, Trust 1993, Trust 1994, Trust 1995 and Trust 1996.
HAZARD INSURANCE
The Pooling and Servicing Agreement requires the Servicer to cause to be
maintained for each Mortgage Loan a hazard insurance policy naming the
Servicer as loss payee thereunder and providing for extended coverage in an
amount equal to the lesser of the combined Loan Balance of such Mortgage Loan
and any mortgage loan senior to such Mortgage Loan or the maximum insurable
value of the improvements securing such Mortgage Loan from time to time. The
Servicer will also maintain on property acquired in foreclosure proceedings
hazard insurance with extended coverage in an amount which is at least equal
to the lesser of (i) the maximum insurable value of the improvements which are
a part of such property or (ii) the sum of the Loan Balance of such Mortgage
Loan and the principal balance of any mortgage loan senior to such Mortgage
Loan at the time of foreclosure, plus accrued interest and the good-faith
estimate of the Servicer of related Liquidation Expenses to be incurred in
connection therewith. The ability of the Servicer to assure that hazard
insurance proceeds are appropriately applied may depend on its being named as
an additional insured under any hazard insurance policy and under any flood
insurance policy, or upon the extent to which information in this regard is
furnished to the Servicer by a borrower. As set forth above, the
Certificateholders' portion of all amounts collected by the Servicer under any
hazard policy (except for amounts applied or expected to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with the Servicer's normal servicing procedures), to the extent
they constitute Net Trust Liquidation Proceeds or Trust Insurance Proceeds,
ultimately will be deposited into the Certificate Account. The Pooling and
Servicing Agreement provides that the Servicer may satisfy its obligation to
cause hazard policies to be maintained by maintaining a blanket policy issued
by an insurer acceptable to the Rating Agencies insuring against hazard losses
to the
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collateral securing the Mortgage Loans. If such blanket policy contains a
deductible clause, the Servicer will deposit into the Certificate Account the
Certificateholders' portion of the Trust Percentage of the amount not
otherwise payable under the blanket policy because of such deductible clause.
See "SERVICING OF LOANS--Maintenance of Insurance Policies and Other Servicing
Procedures" in the Prospectus.
Since residential properties historically have appreciated in value over
time, if the amount of hazard insurance maintained on the improvements
securing the Mortgage Loans were to decline as the principal balances owing
thereon decreased, hazard insurance proceeds could be insufficient to restore
fully the damaged property in the event of a partial loss.
REALIZATION UPON LIQUIDATED MORTGAGE LOANS
In the event that title to any Mortgaged Property securing a Mortgage Loan
is acquired by foreclosure or by deed in lieu of foreclosure, Net Trust
Liquidation Proceeds with respect to such Mortgage Loan will be held by the
Trustee for the benefit of the Certificateholders to the extent of their
interest therein. Such Mortgaged Property will be disposed of by or on behalf
of the Trustee. Notwithstanding any such acquisition of title and cancellation
of the related Mortgage Loan, such Mortgage Loan will be considered for most
purposes to be an outstanding Mortgage Loan held in the Trust to the extent of
the Trust Balance until such time as the Mortgaged Property is sold and such
Mortgage Loan is liquidated or the Mortgage Loan otherwise becomes a
Liquidated Mortgage Loan. Mortgaged Properties which are related to Common
Mortgage Loans must generally be disposed of within two years of the date of
acquisition of the Mortgaged Property.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a fee (the "Servicing Fee") computed monthly at a
specified annual rate (the "Servicing Fee Rate") on the Invested Amount less
98% of the amount on deposit in the Pre-Funding Account (excluding any net
investment earnings thereon) as of the opening of business on the first day of
the related Collection Period or, with respect to the first Distribution Date,
as of the Closing Date. The "Servicing Fee Rate" will be 0.50%, if Chevy Chase
is the Servicer, and up to a maximum of 0.75%, if any other person is
appointed as successor Servicer pursuant to the Pooling and Servicing
Agreement. On each Distribution Date, the Servicing Fee will be distributed to
the Servicer from amounts on deposit in the Certificate Account prior to
amounts distributed to Certificateholders.
The Servicer will pay certain ongoing expenses associated with the Trust and
incurred by it in connection with its responsibilities under the Pooling and
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Certificate Registrar (who initially will be the Trustee) and any Paying
Agent. In addition, the Servicer will be entitled to immediate reimbursement
for certain expenses incurred by it in connection with Liquidated Mortgage
Loans and in connection with the restoration of Mortgaged Properties as a
Servicer Advance. See "--Servicer Advances" below. Such right of reimbursement
will be prior to the rights of the Certificateholders to receive any Principal
Collections.
SERVICER ADVANCES
The Servicer shall be entitled to advance its own funds to pay for any
related expenses of foreclosure and disposition of any Liquidated Mortgage
Loan or related Mortgaged Property (the "Servicer Advance"). The Servicer
shall be entitled to reimbursement for such expenses out of Liquidation
Proceeds prior to such amounts being available to make payments to
Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that on or before December
31 of each year, beginning in 1998, a firm of independent public accountants
will furnish a statement to the Trustee and the Certificate Insurer to the
effect that such firm has examined, for the preceding 12 months ended
September 30, certain
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documents and records related to the servicing of the Mortgage Loans under the
Pooling and Servicing Agreement and that such examination, which has been
conducted substantially in compliance with either (i) the audit guide for
audits of non-supervised mortgagees approved by the Department of Housing and
Urban Development or (ii) the requirements of the Uniform Single Audit Program
for Mortgage Bankers, has disclosed no items of non-compliance with the
provisions of the Pooling and Servicing Agreement that, in the opinion of the
firm, are material, except for such items of non-compliance as shall be
referred to in the report.
The Pooling and Servicing Agreement also will provide for delivery on or
before December 31 of each year, beginning in 1998, to the Trustee and the
Certificate Insurer of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its material
obligations under the Pooling and Servicing Agreement throughout the preceding
12 months.
CERTAIN MATTERS REGARDING THE SERVICER AND THE TRANSFEROR
The Pooling and Servicing Agreement will provide that, except in connection
with a permitted transfer of servicing, the Servicer may not resign from its
obligations and duties thereunder unless (i) for so long as the Pool contains
Trust Balances of Common Mortgage Loans under which there are Sold Balances
held by Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust
1996, it has resigned from its obligations and duties as servicer of Trust
1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust 1996, as the
case may be, or (ii) its duties under the Pooling and Servicing Agreement are
no longer permissible under applicable law or are in material conflict by
reason of applicable law with any other activities of a type and nature
presently carried on by it or its affiliates. For so long as the Pool contains
Trust Balances of Common Mortgage Loans under which there are Sold Balances
held by Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust
1996, the determination set forth in clause (ii) will provide the basis for
the Servicer's resignation only if the Servicer simultaneously resigns from
its obligations and duties as servicer of Trust 1990, Trust 1992, Trust 1993,
Trust 1994, Trust 1995 or Trust 1996, as the case may be. Further, for so long
as the Pool contains Trust Balances of Common Mortgage Loans under which there
are Sold Balances held by Trust 1990, Trust 1992, Trust 1993, Trust 1994,
Trust 1995 or Trust 1996, the Servicer shall be required to resign from its
obligations and duties under the Pooling and Servicing Agreement if it resigns
from its obligations and duties as servicer of Trust 1990, Trust 1992, Trust
1993, Trust 1994, Trust 1995 or Trust 1996, as the case may be. No such
resignation will become effective until the Trustee or a successor Servicer
has assumed the Servicer's obligations and duties under the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement will provide that the Servicer will not
be under any liability to the Trust or the Certificateholders for taking any
action or for refraining from taking any action in good faith pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that the Servicer will not be protected against any liability that otherwise
would be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of its reckless disregard
of its obligations and duties thereunder. Under the Pooling and Servicing
Agreement, the Transferor will indemnify all third party creditors for the
entire amount of any losses, claims, damages or liabilities arising out of or
based on the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement further will provide that the Servicer and any director, officer,
employee or agent of the Servicer will be entitled to indemnification by the
Trust and will be held harmless to the extent provided in the Pooling and
Servicing Agreement against any loss, liability or expense incurred in
connection with any legal action relating to the Pooling and Servicing
Agreement or the Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except any such loss,
liability or expense otherwise reimbursable pursuant to the Pooling and
Servicing Agreement) and any loss, liability or expense incurred by the
Servicer by reason of its willful misfeasance, bad faith or gross negligence
in the performance of its duties thereunder or by reason of the Servicer's
reckless disregard of its obligations and duties thereunder.
The Pooling and Servicing Agreement will provide that the Servicer will not
be under any obligation to appear in, prosecute or defend any legal action
that is not incidental to its duties under the Pooling and Servicing Agreement
and that in its opinion may involve it in any expense or liability. The
Servicer, however, in its discretion, may undertake any such action that it
may deem necessary or desirable with respect to the Pooling
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and Servicing Agreement and the rights and duties of the parties thereto and
the interest of the Certificateholders and Certificate Insurer thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust, and
the Servicer will be entitled to be reimbursed therefor to the extent provided
in the Pooling and Servicing Agreement. The Servicer's right to such indemnity
or reimbursement will survive any resignation or termination of the Servicer
with respect to any losses, expenses, costs or liabilities arising prior to
such resignation or termination (or arising from events that occurred prior to
such resignation or termination). Any claims by or on behalf of the
Certificateholders or the Trust will be made only against the Servicer, who
will be liable with respect to its own acts and omissions as well as the acts
and omissions of its directors, officers, employees and agents.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer, or any corporation that executes an agreement of
assumption to perform every obligation of the Servicer hereunder, will be the
successor of the Servicer under the Pooling and Servicing Agreement and will
be required to execute and deliver to the Trustee and the Certificate Insurer
an agreement in form reasonably satisfactory to the Trustee and the
Certificate Insurer which contains an assumption by such successor entity of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the Pooling and Servicing
Agreement.
EVENTS OF DEFAULT AND TRIGGER EVENTS
"Events of Default" under the Pooling and Servicing Agreement will consist
of (i) any failure by the Servicer to deposit into the Certificate Account any
deposit required to be made under the Pooling and Servicing Agreement, which
failure continues unremedied for five (5) Business Days after the giving of
written notice of such failure to the Servicer by the Trustee or to the
Servicer and the Trustee by the Certificate Insurer or by notice to the
Servicer, the Trustee and the Certificate Insurer by the Certificateholders
evidencing not less than 51% of the Certificate Principal Balance; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
other of its covenants or agreements in the Insurance Agreement or the Pooling
and Servicing Agreement which failure materially and adversely affects the
interests of the Certificateholders and continues unremedied for 60 days after
the giving of written notice of such failure to the Servicer and the
Certificate Insurer by the Trustee, or to the Servicer and the Trustee by the
Certificate Insurer or to the Servicer, the Certificate Insurer and the
Trustee by holders of the Certificates evidencing not less than 51% of the
Certificate Principal Balance of the Certificates, respectively; and (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the Servicer and certain actions
by the Servicer indicating its insolvency or inability to pay its obligations.
A "Trigger Event" is the occurrence of any of the following events: (i)
failure by the Servicer to pay the Certificate Insurer amounts payable under
the Insurance Agreement, which failure continues unremedied for five (5)
Business Days after receipt by the Servicer of notice thereof (ii) the
Servicer's failure to pay amounts payable under the Pooling and Servicing
Agreement, which failure continues unremedied for five (5) Business Days after
receipt by the Servicer of notice thereof and results in a draw on the
Certificate Insurance Policy; (iii) the occurrence of an Event of Default; or
(iv) a determination that the performance of the Servicer under the Pooling
and Servicing Agreement is not satisfactory in the reasonable opinion of the
Certificate Insurer.
RIGHTS UPON EVENTS OF DEFAULT AND TRIGGER EVENTS
So long as an Event of Default remains unremedied, either the Certificate
Insurer (unless a Certificate Insurer Default has occurred and is continuing)
or the Trustee or holders of Certificates evidencing not less than 51% of the
Certificate Principal Balance with the consent of the Certificate Insurer
(unless a Certificate Insurer Default has occurred and is continuing), may
terminate all of the rights and obligations of the Servicer under the Pooling
and Servicing Agreement; provided, however, that for so long as the Pool
contains Trust Balances of Common Mortgage Loans under which Sold Balances are
held by Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust
1996, the Servicer may not be terminated in such circumstances if, and for so
long as,
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the Servicer continues to act as servicer of Trust 1990, Trust 1992, Trust
1993, Trust 1994, Trust 1995 or Trust 1996, as the case may be. Upon such
termination, for so long as the Pool contains Trust Balances of Common
Mortgage Loans under which Sold Balances are held by Trust 1990, Trust 1992,
Trust 1993, Trust 1994, Trust 1995 or Trust 1996, and if and for so long as
the Trustee also acts as servicer of Trust 1990, Trust 1992, Trust 1993, Trust
1994, Trust 1995 or Trust 1996, as the case may be, the Trustee will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Pooling and Servicing Agreement. In the event that the Trustee would be
obligated to succeed the Servicer but is unable so to act, it may appoint with
the consent of the Certificate Insurer (unless a Certificate Insurer Default
has occurred and is continuing), or petition a court of competent jurisdiction
to appoint, a housing and home finance institution with a net worth of at
least $10,000,000 to act as successor to the Servicer under the Pooling and
Servicing Agreement, provided that, for so long as the Pool contains Trust
Balances of Common Mortgage Loans under which Sold Balances are held by Trust
1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust 1996, such
institution is then acting, or has been designated to act, as servicer of
Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust 1996, as
the case may be. Pending such appointment, the Trustee is obligated to act in
such capacity. The Trustee, the Certificate Insurer (unless a Certificate
Insurer Default has occurred and is continuing) and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than 0.75%.
No Certificateholder will have any right under the Pooling and Servicing
Agreement to institute any proceeding in its name with respect to the Pooling
and Servicing Agreement unless such holder previously has given to the Trustee
and the Certificate Insurer written notice of default and unless holders of
Certificates evidencing not less than 25% of the Certificate Principal Balance
with the consent of the Certificate Insurer have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
has neglected or refused to institute any such proceeding. The Trustee will be
under no obligation to exercise any of the trusts or powers vested in it by
the Pooling and Servicing Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of Certificates or the Certificate Insurer covered by the Pooling
and Servicing Agreement, unless such Certificateholders or the Certificate
Insurer have offered to the Trustee reasonable security or indemnity against
the costs, expenses and liabilities that may be incurred therein or thereby.
Following the occurrence of any Trigger Event, the Certificate Insurer will
have (unless a Certificate Insurer Default has occurred and is continuing),
among other things, the right to require the Trustee to terminate the Servicer
and appoint a successor Servicer pursuant to the Pooling and Servicing
Agreement. Notwithstanding the foregoing, for so long as the Pool contains
Trust Balances of Common Mortgage Loans under which Sold Balances are held by
Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust 1996, the
Certificate Insurer may not require the Trustee to terminate the Servicer in
such circumstances if, and for so long as, the Servicer continues to act as
servicer of Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or
Trust 1996, as the case may be.
If the Servicer is terminated as servicer of Trust 1990, Trust 1992, Trust
1993, Trust 1994, Trust 1995 or Trust 1996, for so long as the Pool contains
Trust Balances of Common Mortgage Loans under which Sold Balances are held by
Trust 1990, Trust 1992, Trust 1993, Trust 1994, Trust 1995 or Trust 1996, and
whether or not there is an Event of Default under the Pooling and Servicing
Agreement, the Trustee will promptly deliver a notice of termination to the
Servicer under the Pooling and Servicing Agreement and, unless the Trustee
assumes the responsibilities, duties and liabilities of the Servicer as
described above, it will appoint as the successor Servicer such other person
as is appointed to act as servicer of Trust 1990, Trust 1992, Trust 1993,
Trust 1994, Trust 1995 or Trust 1996, as the case may be.
AMENDMENT OF POOLING AND SERVICING AGREEMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Servicer, the Transferor and the Trustee without the consent of any of the
Certificateholders, to cure any ambiguity; to correct any defective provisions
or to correct or supplement any provisions therein which may be inconsistent
with any other provisions therein; to add or delete any other provisions with
respect to matters or questions arising under the Pooling and Servicing
Agreement, including provisions relating to the Trust's ownership of Trust
Balances of
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Common Mortgage Loans, that are not inconsistent with the provisions of the
Pooling and Servicing Agreement; to add or amend any provision as required by
the Rating Agencies in order to maintain or improve the rating of the
Certificates (it being understood that, after obtaining the ratings in effect
on the Closing Date, neither the Transferor nor the Servicer is obligated to
obtain, maintain or improve any such rating); or to add any other provisions
with respect to matters or questions arising thereunder; provided that such
action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Certificateholder or the Certificate
Insurer (and provided that any such amendment will be deemed not to materially
and adversely affect the Certificateholders if the person requesting such
amendment obtains a letter from each Rating Agency stating that such amendment
would not result in a downgrading or withdrawal of the rating of the
Certificates and provided further that any such amendment will be deemed not
to materially and adversely affect the Certificate Insurer if each Rating
Agency has confirmed that such amendment would not result in a reduction below
investment grade of the Certificates without regard to the Certificate
Insurance Policy).
The Pooling and Servicing Agreement also may be amended from time to time by
the Servicer, the Transferor and the Trustee, with the consent of the
Certificate Insurer (in certain circumstances) and the holders of Certificates
evidencing not less than 51% of the Certificate Principal Balance, and the
Servicer, the Trustee and the Certificate Insurer may from time to time
consent to the amendment of the Certificate Insurance Policy for the purpose
of adding any provisions to or changing in any manner or eliminating any of
the provisions of the Pooling and Servicing Agreement or the Certificate
Insurance Policy or of modifying in any manner the rights of holders of the
Certificates. No such amendment, however, may (i) reduce in any manner the
amount of, or delay the timing of, collection of payments of Mortgage Loans or
distributions or payments under the Certificate Insurance Policy or
distributions that are required to be made on any Certificate without the
consent of the holder of such Certificate, (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of
the holders of all Certificates affected thereby or (iii) adversely affect in
any material respect the interests of the Certificate Insurer without the
consent of the Certificate Insurer. In connection with any amendment of the
Pooling and Servicing Agreement, an opinion of counsel must be obtained that
such amendment will not adversely affect the federal income tax
characterization of the Certificates.
OPTIONAL TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of (A)
the earlier of (i) payment in full of all amounts owing to the Certificate
Insurer and (ii) the final payment or other liquidation of the last Mortgage
Loan in the Trust and (B) the earliest of (i) the Distribution Date on which
the Certificate Principal Balance has been reduced to zero, (ii) the final
payment or other liquidation of the last Mortgage Loan in the Trust and (iii)
the Stated Maturity Date, on which date, the Certificate Insurance Policy will
be available to pay any outstanding Certificate Principal Balance. The
Certificates will be subject to optional repurchase by the Transferor on any
Distribution Date after the Certificate Principal Balance is reduced to an
amount less than or equal to $8,901,200 (5% of the Original Certificate
Principal Balance) and all amounts due and owing to the Certificate Insurer
and unreimbursed draws on the Certificate Insurance Policy, together with
interest thereon, as provided under the Insurance Agreement, have been paid.
The purchase price will be equal to the sum of the outstanding Certificate
Principal Balance and accrued and unpaid interest thereon at the Certificate
Rate through the day preceding the final Distribution Date plus any Basis Risk
Payment then due and interest accrued thereon. In no event, however, will the
Trust created by the Pooling and Servicing Agreement continue in perpetuity.
Written notice of termination of the Pooling and Servicing Agreement will be
given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
In addition, the Trust may be liquidated as a result of certain events of
insolvency, receivership or conservatorship relating to the Transferor. See
"--Rapid Amortization Period; Rapid Amortization Events" above.
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THE TRUSTEE
U.S. Bank National Association will serve as Custodial Agent and Trustee
under the Pooling and Servicing Agreement. The Trustee may have normal banking
relationships with the Transferor and the Servicer or their affiliates, or
both.
The Trustee may resign at any time. The Transferor also may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
REGISTRATION OF CERTIFICATES
Certificateholders may hold their Certificates through DTC (in the United
States) or Cedel or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations that are participants in such
systems.
CEDE & Co., as nominee for DTC, will be the registered holder of the global
Certificates. No Certificateholder will be entitled to receive a certificate
representing such person's interest in the Certificates. Unless and until
Replacement Certificates are issued under the limited circumstances described
below, all references herein to actions by Certificateholders shall refer to
actions taken by DTC upon instructions from DTC Participants (as defined
herein), and all references herein to distributions, notices, reports and
statements to Certificateholders shall refer to distributions, notices,
reports and statements to CEDE & Co., as the registered holder of the
Certificates, for distribution to Certificateholders in accordance with DTC
procedures.
Cedel and Euroclear will hold omnibus positions on behalf of the Cedel
Participants and the Euroclear Participants (each as defined herein),
respectively, through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries (collectively,
the "Depositaries") which in turn will hold such positions in customers'
securities accounts in the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its participants ("DTC Participants") and facilitates the
clearance and settlement among DTC Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
book-entry changes in DTC Participants' accounts, thereby eliminating the need
for physical movement of securities certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to the DTC system is also
available to others such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through 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 its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the
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transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the Business Day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such Business Day. Cash
received in Cedel or Euroclear as a result of sales of securities by or
through a Cedel Participant or a Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available
in the relevant Cedel or Euroclear cash account only as of the Business Day
following settlement in DTC.
Purchases of Certificates under the DTC system must be made by or through
DTC Participants, which will receive a credit for the Certificates on DTC's
records. The ownership interest of each actual Certificate Owner is in turn to
be recorded on the DTC Participants' and Indirect Participants' records.
Certificate Owners will not receive written confirmation from DTC of their
purchase, but Certificate Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC Participant or Indirect Participant through which the
Certificate Owner entered into the transaction. Transfers of ownership
interests in the Certificates are to be accomplished by entries made on the
books of DTC Participants acting on behalf of Certificate Owners. Certificate
Owners will not receive certificates representing their ownership interest in
Certificates, except in the event that use of the book-entry system for the
Certificates is discontinued.
To facilitate subsequent transfers, all Certificates deposited by DTC
Participants with DTC are registered in the name of DTC's nominee, CEDE & Co.
The deposit of Certificates with DTC and their registration in the name of
CEDE & Co. effects no change in beneficial ownership. DTC has no knowledge of
the actual Certificate Owners of the Certificates; DTC's records reflect only
the identity of the DTC Participants to whose accounts such Certificates are
credited, which may or may not be the Certificate Owners. The DTC Participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants, and by DTC Participants and
Indirect Participants to Certificate Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Neither DTC nor CEDE & Co. will consent or vote with respect to
Certificates. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns CEDE & Co.'s
consenting or voting rights to those DTC Participants to whose accounts the
Certificates are credited on the record date (identified in a listing attached
thereto).
Principal and interest payments on the Certificates will be made to DTC.
DTC's practice is to credit DTC Participants' accounts on the applicable
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by DTC Participants to Certificate Owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name" and will be the responsibility of such DTC
Participant and not of DTC, the Trustee or the Transferor, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest to DTC is the responsibility of the Trustee,
disbursement of such payments to DTC Participants shall be the responsibility
of DTC, and disbursement of such payments to Certificate Owners shall be the
responsibility of DTC Participants and Indirect Participants.
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DTC may discontinue providing its services as securities depository with
respect to the Certificates at any time by giving reasonable notice to the
Transferor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Replacement Certificates are
required to be printed and delivered. The Transferor may decide to discontinue
use of the system of book-entry transfers through DTC (or a successor
securities depository). In that event, Replacement Certificates will be
delivered to Certificateholders.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Transferor believes to be reliable,
but the Transferor takes no responsibility for the accuracy thereof.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book-entry changes in accounts of Cedel Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in Cedel in any of 28 currencies, including United
States dollars. Cedel provides to its Cedel Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the underwriters of any Certificates. 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.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("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. The Euroclear System 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. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium
office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, 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 the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters of any Certificates. Indirect access to the
Euroclear System is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator 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 the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance
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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 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 its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and "FEDERAL
INCOME TAX CONSIDERATIONS" in the Prospectus. Cedel or the Euroclear Operator,
as the case may be, will take any other action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Although DTC, 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.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Replacement Certificates"), only if (i) the Transferor advises the Trustee
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as nominee and depository with respect to the Certificates
and the Transferor is unable to locate a qualified successor, (ii) the
Transferor at its option advises the Trustee in writing that it elects to
terminate the book-entry system through DTC or (iii) after the occurrence of
an Event of Default, Certificate Owners having Certificates evidencing not
less than 51% of the Certificate Principal Balance together advise the Trustee
and DTC in writing that the continuation of a book-entry system through DTC
(or a successor thereto) to the exclusion of any physical certificates being
issued to Certificate Owners is no longer in the best interests of Certificate
Owners. Upon issuance of Replacement Certificates to Certificate Owners, such
Certificates will be transferable directly (and not exclusively on a book-
entry basis) and registered holders will deal directly with the Trustee with
respect to transfers, notices and distributions.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
LIMITATIONS ON LENDERS
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
ability of the secured lender to realize upon its security. For example, in a
proceeding under Chapter 11 of the federal Bankruptcy Code, if a court
determines that the value of real property is less than the principal balance
of the loan, the court may prevent a lender from foreclosing upon the real
property, and, as part of the rehabilitation plan, may reduce the amount of
the secured indebtedness to the value of the real property as it exists at the
time of the proceeding, leaving the lender as a general unsecured creditor for
the difference between that value and the amount of outstanding indebtedness
(unless the lender elected to be treated as fully secured). Moreover, a
bankruptcy court may grant the debtor a reasonable time within which to cure
accrued arrearages existing under the loan as of the date of bankruptcy, and
also may reduce the periodic payments due under the loan, change the rate of
interest and alter the loan repayment schedule.
Numerous federal and some state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination and the
servicing of mortgage loans. These laws include the Home Equity Loan Consumer
Protection Act of 1988, Truth in Lending Act, Equal Credit Opportunity Act,
Fair Credit Billing Act, Fair Credit Reporting Act, Real Estate Settlement
Procedures Act, the Americans with Disabilities Act and related statutes and
regulations. These federal laws impose specific statutory and regulatory
obligations upon lenders. In some cases, liability for failure to comply with
the statutes may affect assignees of such loans. See "CERTAIN LEGAL ASPECTS OF
THE LOANS--Anti-Deficiency Legislation and Other Limitations on Lenders" in
the Prospectus.
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DUE-ON-SALE CLAUSES
All of the deeds of trust and mortgages securing the Mortgage Loans contain
due-on-sale clauses. By virtue of the Garn-St Germain Act, a lender generally
may be permitted to accelerate any conventional loan that contains a "due-on-
sale" clause upon transfer of an interest in the security property. With
respect to any loan secured by a residence occupied or to be occupied by the
grantor, this ability to accelerate will not apply to certain types of
transfers, including (i) the granting of a leasehold interest that has a term
of three years or less and that does not contain an option to purchase, (ii) a
transfer to a relative resulting from the death of a grantor, or a transfer
where the spouse or any child becomes an owner of the property (in each case
where the transferee will occupy the property), (iii) a transfer resulting
from a decree of dissolution of marriage, legal separation agreement or an
incidental property settlement agreement by which the spouse becomes an owner
of the property, (iv) the creation of a lien or other encumbrance subordinate
to the lender's security instrument that does not relate to a transfer of
rights of occupancy in the property (provided that such lien or encumbrance is
not created pursuant to a contract for deed), (v) a transfer by devise,
descent or operation of law on the death of a joint tenant or tenant by the
entirety and (vi) other transfers as set forth in the Garn-St Germain Act and
the regulations thereunder.See "CERTAIN LEGAL ASPECTS OF THE LOANS--Due-on-
Sale Clauses in Mortgage Loans" in the Prospectus.
ERISA CONSIDERATIONS
The Certificates may not be acquired or held by or on behalf of (i) an
employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to
Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code,
(iii) a governmental plan described in Section 3(32) of ERISA subject to any
federal, state or local law which is, to a material extent, similar to the
provisions of Section 406 of ERISA or Section 4975 of the Code or (iv) any
entity whose underlying assets include plan assets by reason of a plan's
investment in such entity. By its acceptance of a Certificate, except as
provided below for insurance company general accounts, each Certificate Owner
will be deemed to have represented and warranted that it is not subject to the
foregoing restriction.
The Small Business Job Protection Act of 1996 added new Section 401(c) of
ERISA relating to the status of the assets of insurance company general
accounts under ERISA and Section 4975 of the Code. Pursuant to Section 401(c),
the Department of Labor is required to issue final regulations (the "General
Account Regulations") not later than December 31, 1997 with respect to
insurance policies issued on or before December 31, 1998 which are supported
by an insurer's general account. The General Account Regulations are to
provide guidance on which assets held by the insurer constitute "plan assets"
for purposes of the fiduciary responsibility provisions of ERISA and Section
4975 of the Code. The assets of a general account which support insurance
policies (other than "guaranteed benefit policies" within the meaning of
Section 401(b)(2) of ERISA) (i) issued to employee benefit or other plans
subject to ERISA or Section 4975 of the Code after December 31, 1998 or (ii)
issued to such plans on or before December 31, 1998 for which the insurance
company does not comply with the General Account Regulations may be treated as
plan assets. However, except in the case of avoidance of the General Account
Regulations and actions brought by the Secretary of Labor relating to certain
breaches of fiduciary duties which also constitute breaches of state or
federal criminal law, until a date which is 18 months after the date the
General Account Regulations become final, no liability under the fiduciary
responsibility and prohibited transaction provisions of ERISA and Section 4975
of the Code may result on the basis of a claim that the assets of the general
account of an insurance company constitute the plan assets of any such plan.
The plan asset status of insurance company separate accounts are unaffected by
new Section 401(c) of ERISA and separate account assets continue to be treated
as the plan assets of any such plan invested in a separate account.
If the assets of a general account invested in Certificates are treated as
plan assets of any such plan or the protections of Section 401(c) of ERISA
become unavailable, certain violations of the prohibited transaction rules may
be deemed to occur as a result of the operation of the Trust. Insurance
companies contemplating the investment of general account assets in the
Certificates should consult with their legal advisors concerning the impact of
Section 401(c) of ERISA, including the status of assets of the general account
as plan assets of investing plans after December 31, 1998, and accordingly,
the general account's ability to continue to hold the
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Certificates after the date which is 18 months after the date the General
Account Regulations become final.The deemed representation and warranty
regarding the acquisition and holding of Certificates by any benefit plan, a
plan covered by Section 4975 of the Code or any entity whose underlying assets
constitute "plan assets" will not apply to the acquisition or holding of
Certificates with the assets of a general account of an insurance company to
the extent such acquisition or holding, respectively, is permitted by Section
401(c) of ERISA and final regulations thereunder or other exemption under
ERISA and does not result in the contemplated operations of the Trust being
treated as violations of the prohibited transaction rules.
See "ERISA CONSIDERATIONS" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Set forth below is a discussion of the material federal income tax
consequences of an investment in the Certificates prepared by Shaw Pittman
Potts & Trowbridge, federal tax counsel to the Transferor ("Tax Counsel").
This discussion does not address every aspect of the federal income tax laws
that may be relevant to holders of Certificates in light of their personal
investment circumstances or to certain types of Certificateholders subject to
special treatment under the federal income tax laws (for example, banks and
life insurance companies) and is generally limited to investors who will hold
Certificates as capital assets. Accordingly, investors should consult their
own tax advisors regarding federal, state, local and foreign and any other tax
consequences to them of an investment in the Certificates in their own
particular circumstances. This discussion is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
Regulations thereunder, and published rulings and court decisions in effect as
of the date hereof, all of which are subject to change, possibly
retroactively. No ruling on any of the issues discussed below will be sought
from the Internal Revenue Service (the "IRS") and no assurance can be given
that the IRS will not take contrary positions.
TREATMENT OF THE CERTIFICATES AS INDEBTEDNESS
Tax Counsel will upon issuance of the Certificates render an opinion,
subject to the assumptions set forth therein, to the effect that, although no
specific authority exists as to the characterization for federal income tax
purposes of securities having the same terms as the Certificates, the
Certificates, when issued, will be properly characterized for federal income
tax purposes as indebtedness.
The Transferor and the Certificateholders will express in the Pooling and
Servicing Agreement the intent that, for federal, state and local income and
franchise tax purposes, and for the purposes of any other tax imposed on or
measured by income, the Certificates will be indebtedness secured by the Trust
Balances of the Mortgage Loans. The Transferor, by entering into the Pooling
and Servicing Agreement, each Certificateholder, by the acceptance of a
Certificate, and each Certificate Owner, by virtue of accepting a beneficial
interest in a Certificate, will agree to treat the Certificates (or the
beneficial interests therein) as indebtedness secured by the Trust Balances of
the Mortgage Loans for federal, state and local income and franchise tax
purposes and for the purposes of any other tax imposed on or measured by
income. However, because different criteria are used in determining the nontax
accounting treatment of a transaction, the Transferor will treat the Pooling
and Servicing Agreement for certain regulatory and financial accounting
purposes as a transfer of an ownership interest in the Trust Balances of the
Mortgage Loans and not as creating a debt obligation.
The economic substance of a transaction generally determines its federal
income tax consequences and the form of a transaction, while a relevant
factor, is generally not conclusive evidence of its economic substance. In
appropriate circumstances the courts have allowed taxpayers, as well as the
IRS, to treat a transaction in accordance with its economic substance,
notwithstanding that participants characterized the transaction
differently for nontax purposes. In some instances, however, courts have held
that a taxpayer is bound by the particular form it has chosen for a
transaction, even if the substance of the transaction does not accord with its
form. As discussed in its opinion, Tax Counsel believes that the rationale of
those cases will not apply to this transaction.
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The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether
the transferee has obtained the opportunity for gain if the property increases
in value, has assumed the risk of loss if the property decreases in value and,
in the case of accounts receivable such as the Mortgage Loans, whether the
transferee, at the time of transfer, has fixed interest in the proceeds of the
receivable when collected. Based upon its analysis of such factors and as set
forth in its opinion, Tax Counsel is of the view that the Certificates, when
issued, will be properly characterized for federal income tax purposes as
indebtedness secured by the Trust Balances of the Mortgage Loans. Contrary
characterizations that could be asserted by the IRS are described under
"Possible Characterizations of the Arrangement as a Partnership or an
Association Taxable as a Corporation" below. Except as otherwise expressly
indicated, the following discussion assumes that the Certificates are properly
treated as debt obligations for federal income tax purposes.
INTEREST INCOME TO CERTIFICATEHOLDERS
It is anticipated that the Certificates will be issued at par value (or at
an insubstantial discount from par value) and, although the matter is not free
from doubt, it appears that stated interest on the Certificates generally will
be taxable as ordinary income for Federal income tax purposes when received or
accrued by Certificateholders in accordance with their respective method of
tax accounting, and except as indicated, no original issue discount ("OID")
will arise with respect to the Certificates. It is possible, however, that
under regulations of the U.S. Treasury Department, interest payable on the
Certificates (or a portion of such interest), as well as any discount from par
value, will constitute OID. Such regulations treat interest as OID unless such
interest is "unconditionally payable." Because the Certificateholders do not
have available default remedies ordinarily available to holders of debt
instruments, the IRS could take the position that the interest payable on the
Certificates is not "unconditionally payable" within the meaning of such
regulations. In such case, all or a portion of the taxable income to be
recognized with respect to the Certificates would not, however, be includible
again when the interest is actually received. If the yield on the Certificates
is not materially different from the coupon, this treatment would have no
significant effect on Certificateholders using the accrual method of
accounting. However, cash method Certificateholders may be required to report
income with respect to the Certificates in advance of the receipt of cash
attributable to such income. The Certificateholders may be required to accrue
any Basis Risk Payment in income in advance of the receipt of cash with
respect to such Basis Risk Payment regardless of whether such
Certificateholders are on the cash or accrual method of accounting.
If the Certificates were treated as being issued with OID, the following
rules would apply. The excess of the payments with respect to the Certificates
over their issue price (in this case, the first price at which a substantial
amount of the Certificates is sold, excluding sales to brokers or similar
persons acting in the capacity of underwriters, placement agents or
wholesalers) would constitute OID. A Certificateholder must include OID in
income as interest over the term of the Certificate under a constant yield
method. In general, OID must be included in income in advance of the receipt
of cash representing that income. In the case of a debt instrument as to which
the repayment of principal may be accelerated as a result of the prepayment of
other obligations securing the debt instrument, the periodic inclusion of OID
is determined under a special provision by taking into account prepayment
assumptions used in pricing the debt instrument and actual prepayment
experience. If this provision applies to the Certificate, the amount of OID
which will accrue in any given "accrual period" may either increase or
decrease depending upon the actual prepayment rate. In the event of a Basis
Risk Payment, an accrual basis taxpayer will likely be required to accrue the
amount of each Basis Risk Payment even though such Basis Risk Payment may not
be paid until a later time. The amount and rate of accrual of OID with respect
to securities similar to the Certificates are calculated based on a reasonable
assumed prepayment rate (the "Prepayment Assumption") and adjustments are made
in the amount and rate of accrual of such discount to reflect differences
between the actual prepayment rate and the Prepayment Assumption. It is
anticipated that future Treasury regulations will provide that the assumed
prepayment rate for securities such as the Certificates will be the rate used
in pricing the initial offering of the securities. The Prepayment Assumption
for the
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Certificates will be a 40% conditional prepayment rate ("CPR"), and a 25% draw
rate, but no representation is made that, in fact, the Mortgage Loans will be
prepaid at a rate based on the Prepayment Assumption or at any other rate or
that new draws will be made at the draw rate or any other rate. CPR is the
amount of principal of the pool of Mortgage Loans prepaid each month expressed
as an annualized percentage of the total principal of the pool of Mortgage
Loans outstanding at the beginning of each month and for this purpose all
payments of principal are considered to be prepayments.
A Certificateholder who purchases a Certificate at a market discount may be
subject to the "market discount" rules of the Code. These rules provide, in
part, for the treatment of gain attributable to accrued market discount as
ordinary income upon the receipt of partial principal payments or on the sale
or other disposition of the Certificate, and for the deferral of interest
deductions with respect to debt incurred to acquire or carry the market
discount Certificate.
If a Certificate is purchased by a Certificateholder at a premium, such
premium will be amortized as an offset to interest income (with a
corresponding reduction in the Certificateholder's basis) under a constant
yield method over the term of the Certificate if an election under Section 171
of the Code is made or was previously in effect.
DISPOSITION OF CERTIFICATES
If a Certificate is sold, exchanged or otherwise disposed of, a
Certificateholder generally will recognize gain or loss in an amount equal to
the difference between the amount realized on the sale, exchange or
disposition and the Certificateholder's adjusted basis in the Certificate. The
adjusted basis of a Certificate generally will equal the cost of the
Certificate to the Certificateholder, increased by any OID or market discount
previously includible in the Certificateholder's gross income, and reduced by
the portion of the basis of the Certificate allocable to payments on the
Certificate previously received by the Certificateholder and any amortized
premium. Subject to the market discount rules, gain or loss on the sale or
other disposition of a Certificate will be capital gain or loss if the
Certificate was held by the Certificateholder as a capital asset. Capital gain
or loss will be long-term if the Certificate is held by the Certificateholder
for more than eighteen months, mid-term if the Certificate is held by the
Certificateholder for more than one year but not more than eighteen months,
and otherwise short-term.
POSSIBLE CHARACTERIZATION OF THE ARRANGEMENT AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Although, as described above, Tax Counsel will render its opinion that the
Certificates are properly characterized as debt for federal income tax
purposes, such opinion is not binding on the IRS or the courts and no
assurance can be given that this characterization would prevail. If the IRS
were to contend successfully that the Certificates were not debt obligations
for federal income tax purposes, the arrangement among the Transferor and the
Certificateholders might be classified for federal income tax purposes as
either a partnership or an association taxable as a corporation that owns the
Trust Balances of the Mortgage Loans.
If the Certificates were treated as interests in a partnership, the
partnership would probably be treated as a "publicly traded partnership." A
publicly traded partnership is taxed in the same manner as a corporation
unless at least 90% of its gross income consists of specified types of
"qualifying income." Such qualifying income includes, among other things,
"interest income" that is "not derived in the conduct of a financial or
insurance business." If a deemed partnership between the Transferor and the
Certificateholders were to qualify for the foregoing exception from taxation
as a corporation, the deemed partnership would not be subject to federal
income tax but each item of income, gain, loss, and deduction generated as a
result of the ownership of the Trust Balances of the Mortgage Loans by the
partnership would be passed through to the Transferor and the
Certificateholders as partners in such a partnership according to their
respective interests therein.
The income reportable by the Certificateholders as partners could differ
from the income reportable by the Certificateholders as holders of debt
obligations of the Transferor. For example, a cash basis Certificateholder
might be required to report income when it accrued to the partnership rather
than when it is received by the
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Certificateholder. Moreover, an individual's share of expenses of the
partnership would be miscellaneous itemized deductions that, in the aggregate,
are allowed as deductions only to the extent they exceed two percent of the
individual's adjusted gross income. As a result, the individual might be taxed
on a greater amount of income than the stated rate on the Certificates.
If, alternatively, the arrangement created by the Agreement were treated as
either an association taxable as a corporation or a "publicly traded
partnership" taxable as a corporation, the resulting entity may be subject to
federal income taxes at corporate tax rates on its taxable income from the
Trust Balances of the Mortgage Loans. Such a tax might result in reduced
distributions to Certificateholders and Certificateholders might be liable for
a share of such a tax. Moreover, distributions by the entity would probably
not be deductible in computing the entity's taxable income and all or part of
the distributions to Certificateholders would generally be treated as dividend
income to the Certificateholders.
Since the Transferor will treat the Certificates as indebtedness for federal
income tax purposes, the Transferor will not comply with the tax reporting
requirements that would apply under these alternative characterizations of the
Certificates.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or a
portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated federal
income tax return with another corporation. Any entity (or a portion of any
entity) will be a taxable mortgage pool if (i) substantially all of its assets
consist of debt instruments, more than 50% of which are real estate mortgages,
(ii) the entity is the obligor under debt obligations with two or more
maturities, and (iii) under the terms of the entity's debt obligations (or an
underlying arrangement), payment on such debt obligations bear a relationship
to the debt instruments held by the entity.
Tax Counsel will render its opinion that the arrangement created by the
Agreement will not be a taxable mortgage pool under Section 7701(i) of the
Code because only one class of indebtedness secured by the Trust Balances is
being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully that the arrangement created by the Agreement
is a taxable mortgage pool, such arrangement would be subject to federal
corporate income tax on its net taxable income generated with respect to
ownership of the Trust Balances of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificateholders. The amount of such
tax would depend upon whether distributions to Certificateholders would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
FOREIGN INVESTORS
Subject to the discussion of backup withholding below, and assuming the
Certificates represent debt obligations for federal income tax purposes,
interest (including OID) paid to a nonresident alien individual, foreign
corporation or foreign estate or trust will be exempt from U.S. withholding
tax, provided that the Certificateholder complies with applicable
certification requirements (and does not actually or constructively own ten
percent or more of the voting stock of the Transferor and is not a controlled
foreign corporation related to the Transferor or its affiliates).
If the IRS were to contend successfully that the Certificates represent
interests in a partnership (not taxable as a corporation), a Certificateholder
that is a nonresident alien, foreign corporation or foreign estate or trust
might be required to file a U.S. individual or corporate income tax return and
pay tax on its share of partnership income at regular U.S. rates, including
the branch profits tax in the case of a corporation, and would be subject to
withholding tax on its share of partnership income. If the Certificates were
recharacterized as interests in an association taxable as a corporation or a
"publicly traded partnership" taxable as a corporation, to the extent
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distributions under the Agreement were treated as dividends, a nonresident
alien individual or foreign corporation would generally be subject to
withholding tax on the gross amount of such dividends as the rate of 30% (or
lower rate as provided by an applicable treaty). In either case, and assuming
the Certificates are recharacterized as partnership interests or equity
interests in a corporation, a Certificateholder that is a nonresident alien,
foreign corporation or foreign estate or trust might be subject to federal
income tax on any gain from the sale of the Certificates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Servicer will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is CEDE &
Co., as nominee for DTC, Certificateholders and the IRS will receive tax and
other information from DTC's direct or indirect participating organizations
rather than from the Servicer. (The Servicer, however, will respond to
requests for necessary information to enable DTC's direct or indirect
participating organizations and certain other persons to complete their
reports). Each nonexempt Certificateholder will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that
he or she is not subject to backup withholding. Should a nonexempt
Certificateholder fail to provide the required certification, the DTC's direct
or indirect participating organizations (or the Servicer or Paying Agent) will
be required to withhold 31% of the interest (and principal) otherwise payable
to the holder, and remit the withheld amount to the IRS as a credit against
the holder's federal income tax liability.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
STATE AND LOCAL TAXATION
The discussion above does not address the tax treatment of the Trust, the
Certificates or the Certificateholders under state or local tax laws.
Certificateholders are urged to consult their own tax advisors with respect to
state and local tax consequences of the purchase, ownership or disposition of
an interest in the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category by at least one Rating Agency, the Certificates
will not constitute "mortgage related securities" for purposes of SMMEA
because most of the deeds of trust and mortgages securing the Mortgage Loans
are not first deeds of trust or mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the Certificates,
which, because they evidence interests in a pool that includes second and
third mortgage loans, are not "mortgage related securities" under SMMEA.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated November 20, 1997 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters") have severally but not jointly
agreed to purchase from the Transferor the following respective principal
amounts of the Certificates:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------------
<S> <C>
Smith Barney Inc............................................... $ 89,012,000
Credit Suisse First Boston Corporation......................... $ 89,012,000
------------
Total...................................................... $178,024,000
============
</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 Transferor 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 Supplement and
to certain dealers at such price less a concession of 0.18% of the principal
amount per Certificate, and the Underwriters and such dealers may allow a
discount of 0.125% 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 Transferor that they intend to act
as market maker 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 the trading market
for the Certificates.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Certificates in the open market after
the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Certificates originally sold by
such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Certificates
to be higher than it would otherwise be in the absence of such transactions.
The Transferor 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.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation as of
December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996 have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Transferor and for the Underwriters by Shaw Pittman Potts
& Trowbridge, New York, New York. George M. Rogers, Jr., whose professional
corporation is a member of Shaw Pittman Potts & Trowbridge, is a director of
the Transferor and a trustee of the parent of the Transferor.
S-73
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
DEFINITION PAGE
- ---------- ----
<S> <C>
Accrual Period.................................................. S-10, S-51
Additional Balances............................................. S-4
Alternative Principal Payment................................... S-11, S-52
APR............................................................. S-24
Basis Risk Payment.............................................. S-10, S-51
BIF............................................................. S-23, S-48
Business Day.................................................... S-49
Capitalized Interest Account.................................... S-9, S-49
Capitalized Interest Requirement................................ S-9, S-49
Cedel........................................................... S-65, A-1
Cedel Participants.............................................. S-65
Certificate Account............................................. S-8, S-47
Certificateholders.............................................. S-1, S-72
Certificateholders' Excess Interest............................. S-8, S-50
Certificateholders' Fixed Allocation Percentage................. S-7
Certificateholders' Floating Allocation Percentage.............. S-7, S-47
Certificate Insurance Policy.................................... S-1
Certificate Insurer............................................. S-1, S-38
Certificate Insurer Default..................................... S-54
Certificate Interest Collections................................ S-7, S-47
Certificate Owners.............................................. S-17
Certificate Principal Balance................................... S-3, S-43
Certificate Rate................................................ S-10, S-51
Certificates.................................................... S-1, S-3
Chevy Chase..................................................... S-1, S-3
Closing Date.................................................... S-10, S-51
Code............................................................ S-68
Collection Period............................................... S-10, S-51
Combined Loan-to-Value Ratio.................................... S-14
Commission...................................................... S-2, S-38
Common Mortgage Loans........................................... S-4, S-39
Cooperative..................................................... S-65
CPR............................................................. S-70
CreditLine 100 Program.......................................... S-25
Custodial Agent................................................. S-3, S-44
Cut-off Date.................................................... S-4
Cut-off Date Trust Balances..................................... S-4
Cycle Date...................................................... S-15, S-28
Daily Certificate Interest Collections.......................... S-7, S-47
Daily Certificate Principal Collections......................... S-48
Defective Mortgage Loan......................................... S-15
Depositories.................................................... S-63
Determination Date.............................................. S-48
Dissolution Distribution Date................................... S-54
Distribution Date............................................... S-1, S-10, S-49
Draws........................................................... S-11, S-52
DTC............................................................. S-1, A-1
DTC Participants................................................ S-63
Eligible Account................................................ S-48
Eligible Substitute Mortgage Loan............................... S-15
Euroclear....................................................... S-65, A-1
Euroclear Operator.............................................. S-65
Euroclear Participants.......................................... S-65
</TABLE>
S-74
<PAGE>
<TABLE>
<CAPTION>
DEFINITION PAGE
- ---------- ----
<S> <C>
Events of Default................................................ S-60
Exchange Act..................................................... S-2
FDIA............................................................. S-22
FDIC............................................................. S-22
FIRREA........................................................... S-22
Ford............................................................. S-29, S-30
Ford Loans....................................................... S-30
General Account Regulations...................................... S-67
Global Securities................................................ A-1
Indirect Participants............................................ S-63
Initial Cut-off Date............................................. S-1, S-4
Initial Mortgage Loans........................................... S-3
Insolvency Event................................................. S-54
Insurance Agreement.............................................. S-12, S-54
Insurance Proceeds............................................... S-6
Interest Period.................................................. S-5
Invested Amount.................................................. S-3, S-43
IRS.............................................................. S-68
LIBOR............................................................ S-10
LIBOR Business Day............................................... S-52
Liquidated Mortgage Loan......................................... S-51
Liquidation Loss Amount.......................................... S-8, S-50
Liquidation Proceeds............................................. S-6, S-51
Loan Agreements.................................................. S-4, S-30
Loan Balance..................................................... S-5
Loan Rate........................................................ S-26
Managed Amortization Period...................................... S-11, S-52
Margin........................................................... S-26
Maximum Credit Limit............................................. S-14, S-24
Maximum Principal Payment........................................ S-11, S-52
Mortgaged Properties............................................. S-4
Mortgage Files................................................... S-44
Mortgage Loan Schedule........................................... S-47
Mortgage Loans................................................... S-1, S-4
Net Liquidation Proceeds......................................... S-6
Net Loan Rate.................................................... S-45
Net Trust Liquidation Proceeds................................... S-6, S-40
90-1 Mortgage Loans.............................................. S-9, S-48
92-1 Mortgage Loans.............................................. S-9, S-48
OID.............................................................. S-69
Original Certificate Principal Balance........................... S-3, S-43
Original Invested Amount......................................... S-3, S-43
Overall Minimum Amount........................................... S-47
Overfunded Interest Amount....................................... S-9, S-49
OTS.............................................................. S-23
Paying Agent..................................................... S-52
Permitted Investments............................................ S-48
Pool............................................................. S-3
Pool Balance..................................................... S-5, S-50
Pooling and Servicing Agreement.................................. S-3
Pre-Funded Amount................................................ S-1, S-8, S-48
Pre-Funding Account.............................................. S-8, S-48
Pre-Funding Period............................................... S-9, S-48
Premium Rate..................................................... S-10
</TABLE>
S-75
<PAGE>
<TABLE>
<CAPTION>
DEFINITION PAGE
- ---------- ----
<S> <C>
Prepayment Assumption............................................ S-69
Principal Collections............................................ S-6, S-7
Prior Trusts..................................................... S-4
Prospectus....................................................... S-2
Rapid Amortization Event......................................... S-53
Rapid Amortization Period........................................ S-53
Rating Agencies.................................................. S-16
Real Estate Investment Trust..................................... S-23
Reacquired 1991 Balance.......................................... S-4
Record Date...................................................... S-49
Reference Bank Rate.............................................. S-51
Removal Condition................................................ S-47
Replacement Certificate.......................................... S-66
Retransfer Date.................................................. S-46
Retransfer Deposit Amount........................................ S-45
Retransfer Notification Date..................................... S-46
SAIF............................................................. S-23, S-48
Scheduled Principal Collections Distribution Amount.............. S-11, S-52
Servicer......................................................... S-3
Servicer Advance................................................. S-58
Servicing Fee.................................................... S-14, S-58
Servicing Fee Rate............................................... S-14, S-58
SMMEA............................................................ S-17
Sold Balances.................................................... S-4
Spread Account................................................... S-13, S-55
Stated Maturity Date............................................. S-11
Sub-Prime Lending Program........................................ S-25
Subsequent Mortgage Loans........................................ S-1, S-4
Substitution Adjustment Amount................................... S-45
Tax Counsel...................................................... S-68
Telerate Page 3750............................................... S-51
Terms and Conditions............................................. S-65
Transferor....................................................... S-1, S-3
Transferor Interest.............................................. S-1, S-3, S-43
Trigger Event.................................................... S-60
Trust............................................................ S-3
Trust 1990....................................................... S-4
Trust 1991....................................................... S-4
Trust 1992....................................................... S-4
Trust 1993....................................................... S-4
Trust 1994....................................................... S-4
Trust 1995....................................................... S-48
Trust 1996....................................................... S-48
Trust Balance.................................................... S-4
Trust Fund....................................................... S-1, S-3
Trust Interest................................................... S-5, S-40
Trustee.......................................................... S-3
Trust Insurance Proceeds......................................... S-6
Trust Percentage................................................. S-40
Underwriters..................................................... S-73
Underwriting Agreement........................................... S-73
United Guaranty.................................................. S-25
U.S. Person...................................................... A-3
Weighted Average Loan Rate....................................... S-51
</TABLE>
S-76
<PAGE>
APPENDIX A
GLOBAL CLEARANCE SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Capitol
Revolving Home Equity Loan Asset Backed Certificates, Series 1997-1 (the
"Global Securities") will be available only in book-entry form. Investors in
the Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), Cedel Bank, societe anonyme ("Cedel") or
Euroclear. The Global Securities will be tradeable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Cedel and the Euroclear System ("Euroclear") will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of Cedel and Euroclear (in
such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
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 the
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 issues in
same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
accounts of a Cedel Participant or a Euroclear
A-1
<PAGE>
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 respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment date to and excluding the settlement
date, on the basis of actual days elapsed and a 360 day year. Payment will
then be made by the respective Depositary 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 Global
Securities credit will appear the next day (European time) and the cash debit
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value
date (i.e., the trade fails), the Cedel or Euroclear cash debit 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 pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each Cedel Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel to Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date on the basis of
actual days elapsed and a 360 day year. The payment will then be reflected in
the account of the Cedel Participant or Euroclear Participant the following
day, and receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the Cedel
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the
sale proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fall
A-2
<PAGE>
on the sale side unless affirmative action were taken. At lease three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Certificates
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status). If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a
country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless
the filer alternatively files Form W-8. Form 1001 may be filed by the
Certificate Owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate or trust the
income of which is includable in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
A-3
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CHEVY
CHASE OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Reports to Certificateholders.............................................. S-2
Available Information...................................................... S-2
Summary of Terms........................................................... S-3
Risk Factors............................................................... S-18
The Transferor............................................................. S-23
Formation of the Trust..................................................... S-23
Use of Proceeds............................................................ S-23
The Chevy Chase Home Equity Lending
Program................................................................... S-23
The Ford Portfolio......................................................... S-30
The Mortgage Loan Pool..................................................... S-30
Description of Certificate Insurer......................................... S-38
Allocations of Payments on the Common
Mortgage Loans............................................................ S-39
Maturity and Prepayment Considerations..................................... S-40
Description of the Certificates............................................ S-43
Certain Legal Aspects of the Mortgage Loans................................ S-66
ERISA Considerations....................................................... S-67
Certain Federal Income Tax Consequences.................................... S-68
State and Local Taxation................................................... S-72
Legal Investment Considerations............................................ S-72
Underwriting............................................................... S-73
Experts.................................................................... S-73
Legal Matters.............................................................. S-73
PROSPECTUS
Prospectus Supplement...................................................... 3
Reports to Holders......................................................... 3
Available Information...................................................... 3
Incorporation of Certain Documents
by Reference.............................................................. 4
Summary of Terms........................................................... 5
Risk Factors............................................................... 16
Description of the Securities.............................................. 20
The Trust Funds............................................................ 24
Enhancement................................................................ 31
Servicing of Loans......................................................... 32
The Agreements............................................................. 39
Certain Legal Aspects of the Loans......................................... 47
The Transferor............................................................. 57
Use of Proceeds............................................................ 57
Federal Income Tax Considerations.......................................... 58
State Tax Considerations................................................... 80
ERISA Considerations....................................................... 80
Legal Investment........................................................... 81
Plan of Distribution....................................................... 81
Legal Matters.............................................................. 81
Glossary of Terms.......................................................... 82
</TABLE>
UNTIL FEBRUARY 18, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS AND A PROSPECTUS SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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CAPITOL REVOLVING HOME EQUITY LOAN TRUST 1997-1
$178,024,000
CAPITOL REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1997-1
CHEVY CHASE BANK, F.S.B.
TRANSFEROR AND SERVICER
--------
PROSPECTUS SUPPLEMENT
NOVEMBER 20, 1997
--------
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
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