<PAGE>
As filed with the Securities and Exchange Commission on August 15, 1997
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CHEVY CHASE BANK, F.S.B.
(Exact name of registrant as specified in its charter)
UNITED STATES 52-0897004
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(301) 986-7000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------------------------
Stephen R. Halpin, Jr.
Executive Vice President and
Chief Financial Officer
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(301) 986-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------------
COPY TO:
Gary D. Roth, Esq.
Shaw, Pittman, Potts & Trowbridge
1675 Broadway
New York, New York 10019
(212) 603-6800
--------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C>
Title of each class of securities to be registered Amount to be Proposed Proposed maximum Amount of
registered (1) maximum offering aggregate offering registration fee
price per unit (1) price (1)
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Asset Backed Securities $1,000,000 100% $1,000,000 $303.03
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</TABLE>
<PAGE>
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registrations Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
DATED AUGUST 15, 1997
Version #1
----------
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ___________, 1997)
$_______________
[CHEVY CHASE][CAPITAL] HOME EQUITY LOAN TRUST 199_
Home Equity Loan Asset-Backed Certificates, Series 199_-_
Chevy Chase Bank, F.S.B.
as Transferor and Servicer
Each Home Equity Loan Asset-Backed Certificate, Series 199_
(collectively, the "Certificates") will represent an undivided interest in the
[Chevy Chase][Capital] Home Equity Trust 199_ (the "Trust") to be formed
pursuant to a Pooling and Servicing Agreement among Chevy Chase Bank, F.S.B., as
Transferor and as Servicer, and [_______________], as Trustee (the "Agreement").
The property of the Trust will include certain home equity revolving credit line
loans (the "Mortgage Loans") secured primarily by second deeds of trust or
mortgages on residential properties that are primarily one- to four-family
properties, the collections in respect of such Mortgage Loans, and certain other
property relating to such Mortgage Loans, including the benefit of a [Letter of
Credit] [Surety Bond] as described more fully herein. The Servicer will service
the Mortgage Loans, and the Transferor initially will own the undivided interest
in the Trust not represented by the Certificates.
Interest at the [variable] rate described herein (the "Certificate
Rate") will be distributed on the [__] day of each month, or, if such [____] day
is not a business day, the next succeeding business day (each a "Distribution
Date"), commencing in [_________]. Principal will be distributed on each
Distribution Date commencing in [______], or, in certain limited circumstances,
earlier, as more fully described herein.
[The Certificates initially will be represented by physical
certificates registered in the name of Cede & Co., the nominee of The Depository
Trust Company ("DTC"). The interests of the beneficial owners of the
Certificates ("Certificate Owners") will be represented by book-entries on the
records of DTC and participating members thereof. Definitive Certificates will
be available only under the limited circumstances described herein.]
There currently is no market for the Certificates offered hereby.
____________________ (the "Underwriter") intends to make a secondary market in
the Certificates but is under no obligation to do so. There can be no assurance
that a secondary market for the Certificates will develop or, if it does
develop, that it will continue.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE
INFORMATION SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE S-13 HEREIN AND ON
PAGE 16 IN THE PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE TRANSFEROR OR ANY AFFILIATE THEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
S-1
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The Certificates will be purchased by the Underwriter from the
Transferor and will be offered by the Underwriter from time to time to the
public in negotiated prices or otherwise at varying prices to be determined at
the time of sale. The aggregate proceeds to the Transferor from the sale of the
Certificates are expected to be $_________, before deducting expenses payable by
the Transferor, estimated to be $________ .
The Certificates offered hereby are offered by the Underwriter,
subject to prior sale, to withdrawal, cancellation or modification of the offer
without notice, to delivery to and acceptance by the Underwriter and certain
further conditions. It is expected that delivery of the Certificates will be
made in [book-entry form through the facilities of The Depository Trust Company]
on or about _____________, 199_.
_________________________
_________________, 199_
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<PAGE>
Until ninety 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 Supplement and
Prospectus. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments or subscriptions.
_________________________
The Certificates offered hereby constitute part of a separate Series
of Asset-Backed Certificates and are being offered by the Transferor from time
to time pursuant to its Prospectus dated ______________, 1997. This Prospectus
Supplement does not contain complete information about the offering of the
Certificates. Additional information is contained in the Prospectus and
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 both this Prospectus Supplement and the Prospectus.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in the Prospectus Supplement or in the
Prospectus. Reference is made to the Glossary of Terms in the Prospectus for
the definitions of certain capitalized terms.
Trust.................... [Chevy Chase][Capital] Home Equity Loan Trust (the
"Trust") will be formed pursuant to a pooling and
servicing agreement to be dated as of
_______________, 199_ (the "Agreement") among Chevy
Chase Bank, F.S.B. ("Chevy Chase"), as transferor,
(the "Transferor"), as servicer (together with any
successor in such capacity, the "Servicer"), and [ ],
as trustee (the "Trustee"). The property of the Trust
will include certain home equity loans (the "Mortgage
Loans") originated by Chevy Chase in the ordinary
course of its business, and secured primarily by
second deeds of trust or mortgages (the "Mortgages")
on residential properties that are primarily one- to
four-family properties (the "Mortgaged Properties"),
the collections in respect of such Mortgage Loans,
the Mortgages on the properties securing the Mortgage
Loans, including any properties acquired by
foreclosure or deed in lieu of foreclosure or
otherwise, the benefits of the [Letter of Credit]
[Surety Bond], rights under certain hazard insurance
policies covering the Mortgaged Properties, and
certain other property relating to the Mortgage
Loans, as described more fully herein. The Trust
property will include the principal balances (the
"Loan Balances") of the Mortgage Loans upon their
transfer to the Trust and any additions to such Loan
Balances due to new draws by the borrowers
("Additional Balances") funded by Chevy Chase under
the loan agreements (the "Loan Agreements") relating
to the Mortgage Loans during the life of the Trust.
See "THE MORTGAGE POOL" herein and "THE TRUST FUNDS"
in the Prospectus.
Securities Offered....... Each of the Trust's Home Equity Loan Asset-Backed
Certificates offered hereby (the "Certificates")
represents an undivided interest in the Trust. Each
Certificate represents the right to receive payments
of interest at the [variable] rate described below
(the "Certificate Rate"), payable monthly, and
monthly payments of principal during the Amortization
Period, as defined herein, funded from a percentage
of the payments received with respect to the Mortgage
Loans or, in certain circumstances, from draws on the
[Letter of Credit] [Surety Bond]. The aggregate
undivided interest (the "Investor Interest") in the
Trust represented by the Certificates will initially
represent $ of principal (the initial
"Certificate Principal Balance"), which will decline
as principal is paid to the Certificateholders during
the Amortization Period, except as otherwise provided
herein. The Transferor initially will hold the
remaining undivided
S-4
<PAGE>
interest (the "Transferor Interest") in the Trust not
represented by the Certificates. The Certificates
will be issued pursuant to the Agreement. See
"DESCRIPTION OF THE CERTIFICATES" herein and in the
Prospectus.
The Mortgage Loans....... The Mortgage Loans arise under Loan Agreements and
are secured by deeds of trust or mortgages (which are
primarily second deeds of trust or mortgages) on
residential properties located primarily in [ ]
that are primarily one-to four-family residential
properties. As of ____________, 199_ (the "Cut-off
Date) the aggregate of the Loan Balances of the
Mortgage Loans was $ (the "Cut-off Date Pool
Balance"), of which approximately % of the
Mortgage Loans are secured by properties located in
[ ]. The remaining Mortgage Loans are
secured by properties located in states,
with no single state accounting for more than %
of the Cut-off Date Pool Balance. The combined
loan-to-value ratio of a Mortgage Loan, computed at
the maximum amount the borrower was permitted to draw
down under the Loan Agreement (the "Credit Limit")
and taking into account the amounts of any related
senior mortgage loans (the "Combined Loan-to-Value
Ratio"), based upon a valuation (as described under
"THE CHEVY CHASE HOME EQUITY LENDING PROGRAM") of the
Mortgaged Property obtained by the Bank at the time
of execution of the loan agreement governing such
Home Equity Credit Line, generally did not exceed
%, subject to exceptions deemed appropriate by
the Transferor. The weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans, as
described under "THE MORTGAGE POOL," was
approximately % as of the Cut-off Date. See
"THE CHEVY CHASE HOME EQUITY LENDING PROGRAM --
Underwriting Procedures" herein.
Interest on each Mortgage Loan is payable monthly and
computed on the average daily outstanding Loan
Balance for each billing cycle at a variable rate per
annum (the "Loan Rate") equal at any time (subject to
minimum and maximum rates, as described herein under
"THE CHEVY CHASE HOME EQUITY LENDING PROGRAM--Loan
Terms," and further subject to applicable usury
limitations) to the sum of (i) the [prime rate
published in the "Money Rates" section of the Wall
Street Journal on the ___ calendar day of each month
(or, if no rate is published on the ___, then on the
next succeeding calendar day on which a prime rate is
published)] and (ii) a margin, currently %. See
"THE LOAN AGREEMENTS" herein and "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS -- Applicability of
Usury Laws" in the Prospectus. Principal amounts may
be drawn down by the borrower under the Loan
Agreement from time to time, subject to the
borrower's Credit Limit. A borrower
S-5
<PAGE>
may repay principal at any time. The Cut-off Date
Loan Balances of the Mortgage Loans ranged from $0.00
to $ and averaged $ . Credit Limits under
the Loan Agreement as of the Cut-off Date ranged from
approximately $ to $ and averaged
$ . Each Loan Agreement was originated in the period
from _____ to __________, 199_, and, as of the Cut-
off Date, the weighted average loan utilization rate
was approximately %. See "THE HOME CHEVY CHASE
EQUITY LENDING PROGRAM" and "THE MORTGAGE POOL"
herein.
During the term of the Trust, all Additional Balances
will be property of the Trust. The aggregate amount
of the Loan Balances at any time (the "Pool Balance")
will fluctuate from day to day because the amount of
draws by borrowers and the amount of principal
payments will usually differ on each day. Because the
Transferor Interest represents the interest in the
Trust not represented by the Certificates, the amount
of the Transferor Interest will fluctuate from day to
day as draws are made and principal is paid under the
Mortgage Loans.
The aggregate undivided interest in the Loan Balances
in the Trust evidenced by the Certificates will never
exceed the Certificate Principal Balance regardless
of the amount of the Pool Balance at any time.
Denominations............ The Certificates will be offered for purchase in
denominations of [$1,000] and integral multiples
thereof. The interest evidenced by a Certificate in
the Certificateholders' undivided interest in the
Trust (the "Percentage Interest") will be equal to
the percentage derived by dividing the denomination
of such Certificate by the Initial Certificate
Principal Balance.
Registration of
Certificates............. [The Certificates will initially be represented by
physical certificates registered in the name of Cede
& Co. ("Cede"), as the nominee of The Depository
Trust Company ("DTC"). No person acquiring a
beneficial ownership interest in the Certificates (a
"Certificate Owner") will be entitled to receive a
definitive certificate representing such person's
interest, except in the event that Definitive
Certificates are issued under the limited
circumstances described herein. All references herein
to Certificateholders shall refer to Certificate
Owners, except as otherwise specified herein. See
"DESCRIPTION OF THE CERTIFICATES --Registration of
Certificates."]
Transferor and Servicer.. Chevy Chase Bank, F.S.B. ("Chevy Chase"), a federally
chartered stock savings bank, with its principal
executive offices located at 8401 Connecticut Avenue,
Chevy Chase, Maryland 20815, and a telephone number
of (301) 986-7000.
S-6
<PAGE>
See "THE TRANSFEROR" herein and in the Prospectus.
Collections.............. All collections on the Mortgage Loans will be
allocated by the Servicer in accordance with the Loan
Agreements between amounts collected in respect of
interest ("Interest Collections") and amounts
collected in respect of principal ("Principal
Collections"). All such amounts will then be
allocated in accordance with the respective interests
of the Certificateholders and the Transferor in such
Interest Collections and Principal Collections. The
Servicer will generally deposit net collections on
the Mortgage Loans allocable to the Investor Interest
and distributable to the Certificateholders in an
account established for such purpose under the
Agreement (the "Collection Account"). See
"DESCRIPTION OF THE CERTIFICATES -- Payments on
Mortgage Loans; Deposits to Collection Account"
herein and "SERVICING OF LOANS -- Deposits to and
Withdrawals from the Collection Account or the
Certificate Account" in the Prospectus.
Interest................. Interest will be distributed monthly on the ___ day
of each month or, if such day is not a business day,
on the next succeeding business day (each, a
"Distribution Date"), commencing in ________, at the
Certificate Rate for the related Interest Period (as
defined below). The Certificate Rate for a
Distribution Date will equal [the arithmetic mean of
London Interbank offered quotations for one-month
Eurodollar deposits ("LIBOR") determined as specified
herein, as of the second London business day prior to
the immediately preceding Distribution Date (or as of
___________, 199_, in the case of the first
Distribution Date) plus _____ basis points, subject
to a maximum rate described under "DESCRIPTION OF THE
CERTIFICATES -- Distributions on the Certificates"
herein] [___% per annum]. 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 "Interest
Period") on the basis of the [actual number of days
in the Interest Period and a 360-day year]. Interest
payments will be funded from the portion of the
Interest Collections collected during the immediately
preceding calendar month (or, in the case of the
initial Distribution Date, the period from
__________, 199_ through the last day of the calendar
month immediately preceding such Distribution Date)
(the "Collection Period") allocable to the Investor
Interest and, if necessary, from draws on the [Letter
of Credit] [Surety Bond]. See "DESCRIPTION OF THE
CERTIFICATES" herein and "RISK FACTORS --
Enhancement" in the Prospectus.
S-7
<PAGE>
Revolving Period......... In order to maintain the Certificate Principal
Balance at $___________ (except in certain limited
circumstances) for a period of approximately
______________ months from the first day of the month
in which the Certificates are issued or for such
shorter period as may result from the occurrence of
an Early Amortization Event, as described herein (the
"Revolving Period"), Principal Collections allocable
to the Investor Interest will be paid to the
Transferor rather than the Certificateholders so that
the Certificateholders maintain the same Investor
Interest in the Trust. Unless earlier terminated by
the occurrence of an Early Amortization Event, the
Revolving Period will end on _________. See
"DESCRIPTION OF THE CERTIFICATES" herein.
Principal Payments;
Amortization Period...... Unless an Early Amortization Event shall have earlier
occurred, during the period beginning ____________
and ending when the Certificate Principal Balance has
been reduced to zero or when the Trust otherwise
terminates (the "Amortization Period"), Principal
Collections allocated to the Investor Interest will
no longer be paid to the Transferor but instead will
be distributed monthly to the Certificateholders as
provided herein on each Distribution Date beginning
with the Distribution Date in the month following the
month in which the Amortization Period commences. See
"DESCRIPTION OF THE CERTIFICATES -- Early
Amortization Events" herein for a discussion of the
events which might lead to the early commencement of
the Amortization Period. During the Amortization
Period, the amount of Principal Collections allocable
to the Investor Interest (the "Principal Allocation")
will equal the ratio of the Certificate Principal
Balance to the Pool Balance, in each case as of the
end of the last day of the Revolving Period (the
"Investor Percentage" for such period) multiplied by
the Principal Collections received during the related
Collection Period.
Allocations based upon the Investor Percentage during
the Amortization Period may result in distributions
of principal with respect to any Collection Period to
Certificate-holders in amounts that are greater
relative to the declining balance of the Certificate
Principal Balance than would be the case if no fixed
Investor Percentage were used to determine the
percentage of Principal Collections distributed in
respect of the Investor Interest. See "DESCRIPTION OF
THE CERTIFICATES -- Payments on Mortgage Loans;
Deposits to Collection Account" herein.
[Letter of Credit]
[Surety Bond]
Issuer................. ______________ (the "[Letter of Credit] [Surety Bond]
Issuer"). See "THE [LETTER OF CREDIT] [SURETY]
S-8
<PAGE>
BOND ISSUER" herein.
[Letter of Credit]
[Surety Bond].......... On the Closing Date, the [Letter of Credit] [Surety
Bond] Issuer will issue a [letter of credit] [surety
bond] (the "[Letter of Credit] [Surety Bond]") in
favor of the Trustee on behalf of the Trust. In the
event that, on any Distribution Date, available
amounts on deposit in the Collection Account with
respect to the preceding Collection Period are
insufficient to provide for the payment of the amount
required to be distributed to the Certificateholders
and the Servicer on such Distribution Date, the
Trustee will draw on the [Letter of Credit] [Surety
Bond], to the extent of the [Letter of Credit]
[Surety Bond] Amount for such Distribution Date, in
an amount equal to such deficiency. On each
Distribution Date, any amounts remaining in the
Collection Account with respect to the preceding
Collection Period, after all other distributions have
been made as described above, will be distributed to
the [Letter of Credit] [Surety Bond] Issuer. See
"DESCRIPTION OF THE CERTIFICATES -- The [Letter of
Credit] [Surety Bond]" and "--Distributions on the
Certificates" herein and "RISK FACTORS -- Limited
Protection Against Losses" and "ENHANCEMENT" in the
Prospectus.
[Letter of Credit]
[Surety Bond]
Amount................. The amount available under the [Letter of Credit]
[Surety Bond] (the "[Letter of Credit] [Surety Bond]
Amount") for the initial Distribution Date will be
$__________. For each Distribution Date thereafter,
the [Letter of Credit] [Surety Bond] Amount will
equal the lesser of (i) ____% of the Pool Balance as
of the first day of the preceding Collection Period
(after giving effect to any amounts distributed with
respect to principal of the Mortgage Loans on the
Distribution Date occurring in such preceding
Collection Period) and (ii) the [Letter of Credit]
[Surety Bond] Amount as of the first day of the
preceding Collection Period, minus any amounts drawn
under the [Letter of Credit] [Surety Bond] during
such preceding Collection Period, plus any amounts
paid to the [Letter of Credit] [Surety Bond] Issuer
on the Distribution Date occurring in such preceding
Collection Period up to the amount of any previous
draws on the [Letter of Credit] [Surety Bond].
S-9
<PAGE>
Record Date.............. The [last day of the month] preceding a Distribution
Date.
Servicing................ The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. The Servicer will deposit collections
allocable to the Investor Interest into the
Collection Account as described herein. On the
_______ business day, but no later than the _______
calendar day, of each month (the "Determination
Date"), the Servicer will calculate, and instruct the
Trustee regarding, the amounts to be paid, as
described herein, with respect to the related
Collection Period to the Certificateholders. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions on
the Certificates" herein. The Servicer will receive a
monthly servicing fee in the amount of ___% per annum
(the "Servicing Fee Rate"), of the related Pool
Balance and certain other amounts, as servicing
compensation from the Trust. See "THE CHEVY CHASE
HOME EQUITY LOAN PROGRAM-- Servicing Compensation and
Payment of Expenses" herein. In certain limited
circumstances, the Servicer may resign or be removed,
in which event either the Trustee or a third-party
servicer will be appointed as successor Servicer. See
"SERVICING OF LOANS -- Certain Matters Regarding the
Servicer" and "THE TRUST AGREEMENTS -- Events of
Default" and "--Rights Upon Events of Default" in the
Prospectus.
Final Payment of
Principal;
Termination.............. The Trust will terminate on the Distribution Date
following the earlier of (i) the reduction of the
Certificate Principal Balance to zero and after which
there is no unreimbursed Certificate Principal
Balance Loss Deduction Amount and (ii) the final
payment or other liquidation of the last Mortgage
Loan in the Trust. The Investor Interest will be
subject to optional retransfer to the Transferor on
any Distribution Date after the Certificate Principal
Balance is reduced to an amount less than or equal to
$____________ ([5]% of the initial Certificate
Principal Balance). The retransfer price will be
equal to the sum of the outstanding Certificate
Principal Balance and accrued and unpaid interest
thereon at the Certificate Rate through the day
preceding the final Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES -- Optional
Termination" herein and "DESCRIPTION OF THE
CERTIFICATES -- Optional Termination" and "THE TRUST
AGREEMENTS -- Termination" in the Prospectus.
Trustee.................. [ ] (the "Trustee") will act as Trustee on
behalf of the Certificateholders.
S-10
<PAGE>
Mandatory Retransfer
of Certain Mortgage
Loans and Private
Securities............... The Transferor will make certain representations and
warranties in the Agreement with respect to the
Mortgage Loans in its capacity as Transferor. If the
Transferor breaches certain of its representations
and warranties with respect to any Mortgage Loan and
such breach, materially and adverse affects the
interests of the Trust, the Certificateholders or the
[Letter of Credit] [Surety Bond] Issuer and is not
cured within the specified period, the Mortgage Loan
will be removed from the Trust after the expiration
of a specified period from the date on which the
Transferor becomes aware or receives notices of such
breach and will be reassigned to the Transferor. See
"DESCRIPTION OF THE CERTIFICATES -- Assignment of
Mortgage Loans" herein.
Federal Tax
Considerations........... [Special tax counsel to the Transferor is of the
opinion that, under existing law, the Certificates
are properly characterized as debt of the Transferor
for federal income tax purposes. Under the Agreement,
the Transferor and the Certificateholders will agree
to treat the Certificates as indebtedness of the
Transferor for federal, state and local income and
franchise tax purpose. See "FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus for additional
information concerning the applicable federal income
tax laws.]
ERISA Considerations..... A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974;
as amended ("ERISA"), or the Code should carefully
review with its legal advisors whether the purchase
or holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA CONSIDERATIONS"
in the Prospectus.
Certificate Rating....... It is a condition to the issuance of the Certificates
that they be rated in the [ ] highest rating category
by at least one nationally recognized statistical
rating organization (the "Rating Agency"). See
"RATING" herein and "RISK FACTORS -- Ratings Are Not
Recommendations" in the Prospectus.
S-11
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following risk
factors in connection with the purchase of the Certificates.
[Delinquent Mortgage Loans. The Trust will include Mortgage Loans
which are days or fewer delinquent. As of the Cut-off Date, the aggregate
Loan Balance of such delinquent Mortgage Loan was $ . [In addition, the
Mortgage Loans in all likelihood include obligations of borrowers who are or are
about to become bankrupt or insolvent.] If there are not sufficient funds from
Interest Collections allocated to the Investor Interest to cover the Liquidation
Loss Amount for any Collection Period and the [Letter of Credit] [Surety Bond]
Amount has been reduced to zero, the Certificate Principal Balance will be
reduced which (unless otherwise later reimbursed) would result in a reduction in
the aggregate amount of principal returned to the Certificateholders and in the
amount of Interest Collections allocable to the Investor Interest and available
to provide protection against defaults in subsequent Collection Periods.]
Prepayment Considerations. All of the Mortgage Loans may be prepaid
in whole or in part at any time without penalty. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and the Transferor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including generally economic condition, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loans. To the extent permitted by applicable
law, such assumption will not release the original borrower from its obligation
under any such Mortgage Loan.
[Servicer's Ability to Change the Terms of the Loan Agreements. The
Servicer may permit an increase in the Credit Limit under a Loan Agreement if
the new Credit Limit under the Loan Agreement, plus the outstanding principal
balance of any related senior loans, does not exceed (i) ___% (___% for a
condominium, townhouse, duplex, or vacation condo/house), if the market value of
the Mortgaged Property is $__________ or less, or ___% (___% for a condominium,
townhouse, duplex, or vacation condo/house), and if the market value of the
Mortgaged Property exceeds $_________, based upon an appraisal or the tax
assessed value of the Mortgaged Property at the time the increase was requested.
An increase in the Credit Limit under a Loan Agreement in accordance with the
previous sentence may be made without the consent of the Trustee. Additional
Balances arising under a Mortgage Loan as a result of an increase in the Credit
Limit will be treated the same as Additional Balances arising under a Mortgage
Loan for which there has been no increase in the Credit Limit. In addition to
such changes, the Servicer may agree to other changes in the terms of a Loan
Agreement, provided that such changes (i) do not materially adversely affect the
interest of the Certificateholders, (ii) are consistent with prudent business
practice, (iii) are also being applied to the comparable segment of home equity
credit lines being held for the Servicer's own account, and (iv) do not change
the terms of the Loan Agreement so as to change the terms for the amortization
of principal. There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not result
in changes in the terms of the Loan Agreements. The Servicer may also extend
the period during which draws under the Loan Agreements may be made.]
Legal Considerations. The Mortgage Loans are secured by deeds of
trust or mortgages (which generally are second deeds of trust or mortgages).
With respect to Mortgage Loans that are secured by first mortgages, the Servicer
has the power under certain circumstances to consent to a new mortgage lien on
the
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Mortgaged Property having priority over such Mortgage Loan. Mortgage Loans
secured by second mortgages are entitled to proceeds that remain from the sale
of the related Mortgage Property after any related senior mortgage loan and
prior statutory liens have been satisfied. In the event that such proceeds are
insufficient to satisfy such loans and prior liens in the aggregate [and the
[Letter of Credit] [Surety Bond] provider is unable to perform its obligations
under the [Letter of Credit] [Surety Bond] is exhausted] the Trust and,
accordingly, the Holders, bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment cannot be obtained or is not realized upon. See
"CERTAIN LEGAL ASPECTS OF THE LOANS" in the Prospectus.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Holders from appointing a successor Servicer.
Book-Entry Securities. 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 securities.
Since transactions in the Certificates can be effected only through
DTC, participating organizations, indirect participants and certain banks, the
ability of a Certificate Owner to pledge a Certificate to persons or entitles
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 security
representing the Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See "DESCRIPTION OF THE CERTIFICATES-
- - Registration of Certificates" herein.
[Taxation. In the opinion of special tax counsel to the Transferor,
the Certificates are properly characterized as debt of the Transferor for
Federal income tax purposes. If the IRS were to contend successfully that the
Certificates were not debt obligations of the Transferor 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 Mortgage Loans. See "FEDERAL
INCOME TAX CONSIDERATIONS" in the Prospectus.]
Certificate Rating Not a Recommendation. The rating of the
Certificates will depend primarily on assessment by the Rating Agencies of the
Mortgage Loans [and upon the claims-paying ability of the [Letter of Credit]
[Surety Bond] provider]. [Any reduction in a rating assigned to the claims-
paying ability of the [Letter of Credit] [Surety Bond] provider 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 place for any
given period of time or the ratings will not be lowered or withdrawn by the
Rating Agencies. In general, the ratings address credit risk and do not address
the likelihood of prepayments.
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to ____________ ("___________")
has been furnished by ____________________.
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[DESCRIPTION OF LC/SURETY ISSUER]
THE CHEVY CHASE HOME EQUITY LENDING PROGRAM
Chevy Chase has originated variable-rate home equity revolving lines of
credit since 1983. At ________ __, 199_, Chevy Chase had approximately $_____
million aggregate principal amount of outstanding home equity revolving credit
line loans. All of such home equity revolving credit line loans are serviced by
Chevy Chase.
UNDERWRITING PROCEDURES
Prior to approving a home equity revolving credit line 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 balance of the first mortgage loan, if any; (iv) obtaining
and reviewing a written title report to ensure that all liens (including
property taxes), except for the first mortgage lien, if any, 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 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
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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 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, 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 75% which is determined based upon a detailed analysis
of their credit history. Borrowers under such program may draw on their line of
credit for the first five years during which no payment of principal is
required. Thereafter, no draws are permitted and the loan will begin to
amortize.
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). 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 investor properties (other than
such single-family rental properties) or 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 with a combined loan-to-value ratio
greater than 80% also 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.)
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% ("CreditLine 100") with credit limits ranging from $7,500 to $25,000.
Under this program, Chevy Chase utilizes a credit scoring model developed and
validated by Fair, Isaac & Co. ("FICO"). An applicant must have a minimum FICO
score of 700 and a debt-to-income ratio less than 41% to be considered for the
CreditLine 100 program. Applicants with a FICO score of at
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<PAGE>
least 650 and a debt-to-income ratio less than 36% are considered under the
CreditLine 100 program only if approved 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%.
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 the Transferor's Executive Loan Committee or two
officers at the level of Senior Vice President or above.
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 38% and must have owned the property for at least 90 days.
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.
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 up to $50,000 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 bank 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 Base Rate 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"). A borrower is required to make a minimum payment for a
Mortgage Loan each month in an amount equal to the amount of interest accrued
during the related billing cycle plus any administrative charges and credit
insurance charges and 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 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. 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.
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The Base Rate for loans which have their interest rates adjusted quarterly
is the rate of interest publicly announced from time to time as the "prime" or
"base" rate of interest or any successor rate of interest charged by the index
bank specified in the related loan agreement as in effect at the close of
business on the last day of the last full calendar month of the immediately
preceding quarter; the Base Rate 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 Base Rate, 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 Base Rate 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 following the date 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 have been offered settlement without closing costs and a
4.9% introductory rate for the first six months after settlement. Beginning in
April 1995, customers opening a loan with a combined loan-to-value greater than
80% but less than 90% are offered settlement without closing costs and a 5.9%
introductory rate for the first six months after settlement. Customers approved
under the Sub-Prime Lending Program are offered an introductory rate for the
first six months after settlement equal to the prime rate published in the
"Money Rates" section of The Wall Street Journal. 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.
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
any amortization of principal that may occur during the amortization period of
loans in the Sub-Prime Lending Program and as a result of the required monthly
minimum payments, there are no required payments of principal until maturity.
For home equity revolving credit line loans originated prior to November 7,
1990, 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 Base Rate 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 deed of trust; if the 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
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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 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 first 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 home equity revolving credit line loans
on the 15th day of each month (the "Cycle Date"). Payments are due 15 days
after the Cycle Date. On the 16th day after the Cycle Date, Chevy Chase deems
the borrower to be one day late. If payment has not been received within five
days after the due date, a system-generated reminder notice is sent to the
customer. If complete payment has not been received within 15 days after the
due date, Chevy Chase charges a late fee equal to 10% of the total amount due
(5% in the case of loans originated prior to July 1, 1986) or $25, whichever is
greater, and sends a system-generated late fee notice to the customer. A second
system-generated late notice, or a preprinted contact letter, is sent to the
customer if payment has not been received within 30 days after the payment due
date. If payment of the account 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 security property, verifies the status of any first trust loan
and sends a breach letter to the customer requiring that the home equity loan
and any such first trust 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.
The following tables set forth the delinquency and loss experience for each
of the periods shown for Chevy Chase's portfolio of home equity revolving credit
line loans. 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
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shown below in "THE MORTGAGE 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,
-----------------------------------
199__ 199__ 199__ 199__
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of Mortgage Loans Serviced...............................
Aggregate Loan Balances of Mortgage
Loans Serviced.................................................
Loan Balance of Mortgage Loans 30-59 Days
Past Due(2)....................................................
Loan Balance of Mortgage Loans 90 or More
Days Past Due(2)...............................................
Total Delinquencies as a Percentage of Aggregate
Loan Balances of Mortgage Loans Serviced.......................
</TABLE>
____________________
(1) All amounts are as of period end. Delinquency figures do not include past
due amounts of $50.00 or less.
(2) Contractually past due.
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MORTGAGE LOAN LOSS EXPERIENCE
CHEVY CHASE PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------------------
199__ 199__ 199__ 199__
----- ----- ----- -----
<S> <C> <C> <C> <C>
Average Principal Balance of Mortgage Loans Serviced...................
Gross Charge Offs(1)...................................................
Recoveries on Loans Previously Charged Off(1)..........................
Net Charge Offs(1).....................................................
Gross Charge Offs(1) as a Percentage of Average
Principal Balance.....................................................
Net Charge Offs(1) as Percentage of Average Principal
Balance...............................................................
</TABLE>
____________________
(1) The term "charge off" refers to an actual liquidated loss incurred on a
mortgaged property. A charge offs recognized when a property is sold and
the loss actually is incurred by Chevy Chase.
(2) Annualized.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Mortgage Loans will be paid to it from
Interest Collections at the time such collections are received or from amounts
drawn on the [Letter of Credit] [Surety Bond] and will be equal to ___% per
annum, (the "Servicing Fee Rate") of the Pool Balance. The Investor Percentage
of such servicing fee (the "Investor Servicing Fee") will be paid as described
under "DESCRIPTION OF THE CERTIFICATES -- Distributions on the Certificates --
Distribution of Interest Collections and Draw Amounts" herein. All assumption
fees, late payment charges and other fees and charges, to the extent collected
from borrowers, will be retained by the Servicer as additional servicing
compensation.
[The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Certificate
Registrar and any paying agent.] In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Certificateholders to
receive any related Liquidation Proceeds.
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<PAGE>
THE MORTGAGE POOL
The Trust will be formed in accordance with the laws of the State of
New York pursuant to the Agreement. The Transferor will transfer the Mortgage
Loans to the Trust, without recourse, in exchange for the Certificates and a
certificate initially to be held by it representing the Transferor's interest in
the Trust (the "Transferor Certificate"). The property of the Trust will
consist of the Mortgage Loans, all proceeds of the Mortgage Loans, all monies on
deposit in the Collection Account and the Distribution Account, the Mortgages on
the properties securing the Mortgage Loans, including any properties acquired by
foreclosure or deed in lieu of foreclosure, the benefits of the [Letter of
Credit] [Surety Bond], and the proceeds on any insurance policies covering the
Mortgage Loans or Mortgaged Properties or any obligors on the Mortgages.
[Pursuant to the Agreement, the Transferor will be required to transfer Eligible
Additional Mortgage Loans (to the extent available) to the Trust, in order to
avoid the occurrence of an Early Amortization Event resulting from a decline in
the Transferor's Interest, and otherwise will be allowed to transfer Eligible
Additional Mortgage Loans to the Trust (subject to certain limitations and
conditions) from time to time. See "DESCRIPTION OF THE CERTIFICATES --
Transfers of Eligible Additional Mortgage Loans to the Trust" herein.] In
addition, the Transferor may, subject to certain limitations and conditions
specified in the Agreement, cause the retransfer from the Trust to it of certain
Mortgage Loans. See "DESCRIPTION OF THE CERTIFICATES -- Optional Retransfers of
Mortgage Loans to the Transferor" herein.
The Mortgage Loans to be transferred to the Trust (collectively, the
"Pool") are evidenced by loan agreements (each, a "Loan Agreement") secured by
credit line deeds of trust or mortgages (which are primarily second deeds of
trust or mortgages on Mortgaged Properties, approximately ___% of which are
located in ________ and approximately ___% of which are located in other states,
with no single state accounting for more than ___% of the Cut-off Date Pool
Balance (the "Mortgage Loans"). [Because the Mortgage Loans include the loans
generated under substantially all the Loan Agreements and because the Loan
Balances will include all amounts payable by borrowers under such Loan
Agreements, some of the Mortgage Loans will be generated under recently
solicited, unseasoned Loan Agreements [and the Pool will include delinquent
Mortgage Loans and may include obligations of borrowers who are or are about to
become bankrupt or insolvent]]. Many of the Mortgage Loans are less than the
Credit Limit under the corresponding Loan Agreement. Additional Balances on
such Mortgage Loans will be property of the Trust and will increase the Pool
Balance. The amount of the [Letter of Credit] [Surety Bond] was determined
taking into account, among other considerations, the nature of the Loan
Agreements and the Mortgage Loans.
Each Mortgage Loan included in the Pool was generated under a Loan
Agreement that, as of the Cut-off Date, was an Eligible Loan. An "Eligible
Loan" is defined in the Agreement as any home equity credit line that:
[selection criteria of Loans to be added]. Each Mortgage Loan was originated
between ________ and the Cut-off Date in the ordinary course of Chevy Chase's
home equity revolving credit line loan program. Substantially all of the
Mortgaged Properties were one- to four-family residential properties. As of the
Cut-off Date, the weighted average loan utilization rate was approximately ___%.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date:
S-21
<PAGE>
CUT-OFF DATE LOAN BALANCES
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Cut-Off Date Equity Loan by Aggregate
Loan Balances Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
$ to $................................ $ %
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................ ____________ ________ _____________
Total............................................. $ %
=============
</TABLE>
CUT-OFF DATE LOAN RATES
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Cut-Off Date Equity Loan by Aggregate
Loan Balances Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
$ to $................................ $ %
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................ ____________ ________ _____________
Total............................................. $ %
=============
</TABLE>
S-22
<PAGE>
CUT-OFF DATE MARGIN RANGES -- PRIME INDEXED MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Margin Credit Lines Balances Loan Balances
- ------ ------------ -------- -------------
<S> <C> <C> <C>
%...................................................... $ %
%......................................................
------------ -------- -------------
Total................................................. $ %
=============
</TABLE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Credit Limit Equity Loan by Aggregate
Utilization Rates Credit Lines Balances Loan Balances
- ----------------- ------------ -------- -------------
<S> <C> <C> <C>
0.00% to 5.00%............................................... $ %
5.01% to 10.00%..............................................
10.01% to 15.00%..............................................
15.01% to 20.00%..............................................
20.01% to 25.00%..............................................
25.01% to 30.00%..............................................
30.01% to 35.00%..............................................
35.01% to 40.00%..............................................
40.01% to 45.00%..............................................
45.01% to 50.00%..............................................
50.01% to 55.00%..............................................
55.01% to 60.00%..............................................
60.01% to 65.00%..............................................
65.01% to 70.00%..............................................
70.01% to 75.00%..............................................
75.01% to 80.00%..............................................
80.01% to 85.00%..............................................
85.01% to 90.00%..............................................
90.01% to 95.00%..............................................
95.01% to 100.00%.............................................
------------ -------- -------------
%
Total..................................................... $ =============
</TABLE>
S-23
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS/1/
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Combined Loan-to- Equity Loan by Aggregate
Value Ratios Credit Lines Balances Loan Balances
- ------------ ------------ -------- -------------
<S> <C> <C> <C>
0.00% to 5.00%............................................... $ %
5.01% to 10.00%..............................................
10.01% to 15.00%..............................................
15.01% to 20.00%..............................................
20.01% to 25.00%..............................................
25.01% to 30.00%..............................................
30.01% to 35.00%..............................................
35.01% to 40.00%..............................................
40.01% to 45.00%..............................................
45.01% to 50.00%..............................................
50.01% to 55.00%..............................................
55.01% to 60.00%..............................................
60.01% to 65.00%..............................................
65.01% to 70.00%..............................................
70.01% to 75.00%..............................................
75.01% to 80.00%..............................................
80.01% to 85.00%..............................................
85.01% and above.............................................. ------------ -------- -------------
Total..................................................... $ %
=============
</TABLE>
MORTGAGE LOAN INTEREST RATE FLOORS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Interest Equity Loan by Aggregate
Rate Floors Credit Lines Balances Loan Balances
- ----------- ------------ -------- -------------
<S> <C> <C> <C>
None..........................................................
%.........................................................
%.........................................................
------------ -------- -------------
Total..................................................... $ %
=============
</TABLE>
- --------------------------
/1/ The information in this table is as of the Cut-Off Date.
S-24
<PAGE>
MORTGAGE LOAN INTEREST RATE CEILINGS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Interest Equity Loan by Aggregate
Rate Ceilings Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
%.......................................................
%.......................................................
None.........................................................
------------ -------- -------------
Total................................................... $ %
=============
</TABLE>
PROPERTY USE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Property Use Credit Lines Balances Loan Balances
- ------------ ------------ -------- -------------
<S> <C> <C> <C>
Owner Occupied.............................................
Non-Owner Occupied.........................................
Unknown....................................................
------------ -------- -------------
Total.................................................. $ %
============
</TABLE>
LIEN PRIORITY OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Lien Priority Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
First Mortgage.............................................
Second Mortgage............................................
Third Mortgage.............................................
Unknown....................................................
Total ------------ -------- -------------
$ %
============
</TABLE>
S-25
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
State Credit Lines Balances Loan Balances
- ----- ------------ -------- -------------
<S> <C> <C> <C>
_______....................................................
_______....................................................
------------ -------- -------------
Total.................................................. $ %
===========
</TABLE>
PROPERTY TYPE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Number of Units Credit Lines Balances Loan Balances
- --------------- ------------ -------- -------------
<S> <C> <C> <C>
Single Family Detached.....................................
Single Family Attached.....................................
2-4 Family.................................................
Condominium................................................
Cooperative................................................
Unknown....................................................
------------ -------- -------------
Total.................................................. $ %
============
</TABLE>
S-26
<PAGE>
ORIGINATION YEAR OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Origination Year Credit Lines Balances Loan Balances
- ---------------- ------------ -------- -------------
<S> <C> <C> <C>
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
------------ -------- -------------
Total.................................................. $ %
===========
</TABLE>
DAYS DELINQUENT AS OF CUT-OFF DATE
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Days Delinquent Credit Lines Balances Loan Balances
- --------------- ------------ -------- -------------
<S> <C> <C> <C>
30-59......................................................
60-89......................................................
------------ -------- -------------
Total.................................................. $ %
===========
</TABLE>
No assurance can be given that the values of the Mortgaged Properties as of
the dates of origination of the related Mortgage Loans have remained or will
remain constant or have not declined. For information concerning possible
declines in value of the Mortgaged Properties, see "RISK FACTORS -- Property
Values May Be Insufficient" in the Prospectus.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement provides that the Certificateholders will not receive
payments of principal until the Distribution Date on _____________ (i.e., the
first Distribution Date after the first Collection Period following the end of
the Revolving Period) or, if earlier, the Distribution Date in the month after
the first Collection Period of an Early Amortization Event. During the
Amortization Period, Certificateholders will be entitled to receive on each
Distribution Date the Investor Percentage described herein of the Principal
Collections received in the preceding Collection Period until the Certificate
Principal Balance is reduced to zero. Allocations of Principal Collections
based on the Investor Percentage (which is fixed for the Amortization Period to
equal the percentage derived from dividing the Certificate Principal Balance by
the Pool Balance, in each case at the end of the Revolving Period) may result in
distributions of principal to the Certificateholders greater than those that
would result from distributions of principal based upon the proportion that the
declining Certificate Principal Balance bears to the Pool Balance. [The
Agreement permits the Transferor, at its option, but subject to the satisfaction
of certain conditions specified in the
S-27
<PAGE>
Agreement, including the conditions described herein, to remove Mortgage Loans
from the Trust at any time during the life of the Trust (including the
Amortization Period), so long as the Pool Balance after such removal is not less
than the Pool Balance at the Closing Date. The Transferor may also, under
certain circumstances, add Eligible Additional Mortgage Loans to the Trust. Such
removals and additions may affect the rate at which principal is distributed to
Certificateholders. See "DESCRIPTION OF THE CERTIFICATES -- Transfers of
Eligible Additional Mortgage Loans to the Trust" and "--Optional Retransfers of
Mortgage Loans to the Transferor."]
All of the Mortgage Loans may be prepaid without penalty in full or in
part at any time. The prepayment experience with respect to the Mortgage Loans
will affect the life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Home equity credit lines such as the Mortgage Loans have been originated in
significant volume only during the past ten 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 credit lines are not viewed by borrowers
as permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans will amortize as described herein, the absence of
voluntary borrower prepayments could cause rates of principal payment to be
slower than, those of traditional fully-amortizing first mortgages. The
prepayment experience of the Trust with respect to the Mortgage Loans may be
affected by a wide variety of factors, including general economic conditions,
economic conditions in ___________, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility, the frequency and
amount of any future draws on the 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 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
actual rate of prepayment on the Mortgage Loans is different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for such month or as high as the entire principal outstanding
balance plus accrued interest and the fees and charges thereon. It is possible
that borrowers may fail to make scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
Because the Mortgage Loans have a variable interest rate and a fixed payment,
changes in underlying interest rates will vary the allocation of payments
between interest and principal.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "DESCRIPTION OF
THE SECURITIES -- Weighted Average Life of the Certificates" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. A form of
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
S-28
<PAGE>
GENERAL
The Certificates will be issued in denominations of [$1,000] and
integral multiples thereof and will evidence specified undivided interests in
the Trust. [Definitive] Certificates[, if issued,] will be transferable and
exchangeable at the corporate trust office of the Trustee, which will initially
act as Certificate Registrar. See "--Registration of Certificates" below. No
service charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The outstanding principal amount of the Certificates ("Certificate
Principal Balance") will be equal to the initial principal amount of the
Certificates, minus the amount of principal payments paid to the
Certificateholders, and minus the amount of Certificate Principal Balance Loss
Deduction Amounts, if any, which have not been reimbursed as provided herein.
See "--Distributions on the Certificates" below. Each Certificate represents
the right to receive payments of interest at the Certificate Rate and payments
of principal during the Amortization Period funded from Interest Collections and
Principal Collections, respectively, allocated to the investor interest and
draws on the [Letter of Credit] [Surety Bond].
The Transferor initially will own the interest (the "Transferor
Interest") not represented by the Certificates. The Transferor Interest will
represent an undivided interest in the Trust, including the right to receive
certain percentages (the "Transferor Percentage") of Interest Collections and
Principal Collections. The initial amount of the Transferor Interest was
determined on the basis of, among other factors, the size required to absorb
reductions in the aggregate amount of Loan Balances in the Trust without causing
an Early Amortization Event, which would result in the early commencement of the
Amortization Period. There can be no assurance that the Transferor Interest
will be sufficient for such purpose. [While the Transferor is obligated
(subject to certain conditions and limitations) to transfer Eligible Additional
Mortgage Loans (to the extent available) to the Trust, there can be no assurance
that sufficient Eligible Additional Mortgage Loans will be available.]
During the Revolving Period, the Certificate Principal Balance will
remain constant except in certain limited circumstances. See "--Distributions
on the Certificates" below. The Pool Balance, however, will vary each day as
principal is paid on the Mortgage Loans, liquidation losses are incurred,
Additional Balances are drawn down by borrowers under the Loan Agreements,
Mortgage Loans are retransferred to the Transferor or Eligible Additional
Mortgage Loans are transferred to the Trust. Consequently, the amount of the
Transferor Interest will fluctuate each day to reflect the changes in the Pool
Balance. During the Amortization Period, the Certificate Principal Balance will
decline as the Investor Percentage of Principal Collections is distributed to
the Certificateholders. As a result, during the Amortization Period, the
Transferor Interest may increase each month to reflect the reductions in the
Certificate Principal Balance but may change each day to reflect the variations
in the Pool Balance.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Transferor will
transfer to the Trust all of its right, title and interest in and to each
Mortgage Loan conveyed by it to the Trust, including all principal (including
Net Liquidation Proceeds) and interest received on or with respect to each such
Mortgage Loan on or after the Cutoff Date. The Trustee, concurrently with such
transfer, will deliver the Certificates and the Transferor Interest to the
Transferor. Each Mortgage Loan assigned to the Trust will be identified in a
schedule appearing as an exhibit to the Agreement.
The Transferor will deliver the files containing, among other things,
the Loan Agreement, the Mortgage Note and the Mortgage relating to each Mortgage
Loan (the "Mortgage Files") to the Trustee (or a custodian on its behalf) on the
Closing Date. The Trustee (or a custodian on its behalf) will review each
Mortgage
S-29
<PAGE>
File within ________ days of receipt thereof. If any such document is found not
to have been executed or received or to be unrelated to the Mortgage Loan or to
have not been recorded as required by the Agreement, the Trustee (or custodian
on its behalf) will notify the Transferor, which shall have a period of ___ days
after such notice to correct or cure such defect. If the defect cannot be cured
within the ____ day period, the Transferor will be obligated to accept the
retransfer of such Mortgage Loan from the Trust. Upon such retransfer, the Loan
Balance of such Mortgage Loan will be deducted from the Pool Balance, thus
reducing the amount of the Transferor Interest by the same amount. If the
deduction would cause the Transferor Interest to become less than zero, the
Transferor will be obligated to make a deposit in the Collection Account in the
amount ("Retransfer Deposit Amount") by which the Transferor Interest is less
than zero. Notwithstanding the foregoing, however, no such retransfer shall be
considered to have occurred unless such deposit is actually made. The obligation
of the Transferor to accept a retransfer of a defective Mortgage Loan and, if
applicable, pay the Retransfer Deposit Amount, is the sole remedy regarding any
defects in the Mortgage Files available to the Trustee or the
Certificateholders.
The 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 Mortgage Loan including combined Loan-to-Value
Ratio and minimum Loan Rate. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the interests
of the Trust, the Certificateholders or the [Letter of Credit] [Surety Bond]
Issuer in the related Mortgage Loan, the Transferor will have a period of ___
days after discovery or notice of the breach to effect a cure. If the breach
cannot be cured within the ___ day period, the Transferor will be obligated to
accept a retransfer of the Mortgage Loan from the Trust. The same procedure and
limitations that are set forth in the preceding paragraph for the retransfer of
a Mortgage Loan respecting which there is a defect in the Mortgage File will
apply to the retransfer of a Mortgage Loan that is required to be retransferred
because of a breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
Any Mortgage Loan required to be retransferred to the Transferor as
described in the preceding two paragraphs is referred to as a "Defective
Mortgage Loan."
The Transferor may, but is not obligated to, retransfer a Defective
Mortgage Loan to the Trust within ___ days of the transfer of such Defective
Mortgage Loan to the Transferor if all defects in respect of such Defective
Mortgage Loan have been cured and such Defective Mortgage Loan satisfies the
applicable representations and warranties in the Agreement at the time of such
retransfer to the Trust.
[TRANSFERS OF ELIGIBLE ADDITIONAL MORTGAGE LOANS TO THE TRUST
If, for each of five consecutive business days during the Revolving
Period, the Transferor Interest for each such date is less than [10%] of the
Pool Balance, then not later than the first business day of the calendar month
beginning at least ten business days after such fifth business day thereafter
the Transferor will be obligated to transfer to the Trust Eligible Additional
Mortgage Loans (but only to the extent available in the Transferor's portfolio),
which may be generated under home equity credit lines in any billing cycle, so
that, after giving effect to such transfer, the Transferor Interest will equal
at least [10%] of the Pool Balance on such date. An Eligible Additional
Mortgage Loan is a home equity loan that was originated under a Loan Agreement
that, as of the date of notice by the Transferor to the Trustee, the Servicer
and the [Letter of Credit] [Surety Bond] Issuer of its transfer to the Trust
(the "Notice Date"), was an Eligible Loan and that, as of the Notice Date,
complies with the representations and warranties described under "Assignment of
Mortgage Loans" above. The Transferor must satisfy the following conditions,
among others, in order to transfer Eligible Additional Mortgage Loans to the
Trust: (i) the Pool Balance, after giving effect to such transfer, will not
exceed $ ; (ii) the Mortgage Files for such Eligible Additional Mortgage
Loans shall have been delivered to the Trustee (or a custodian on its behalf);
and (iii) the Transferor shall have given notice of the proposed transfer to the
Rating Agency and the Rating Agency has not notified the Transferor in writing
prior to the transfer date that such transfer will result in a reduction or
withdrawal of its then-current rating for the Certificates.
S-30
<PAGE>
In addition, the Transferor may, at its election, transfer Eligible
Additional Mortgage Loans subject to satisfaction of the conditions described
above.]
[OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, the Transferor
may, at its option, require the retransfer of one or more Mortgage Loans (which
may have been generated under a Loan Agreement in any billing cycle) from the
Trust to it on the last day of any Collection Period. The Pool Balance after
giving effect to such retransfer must not be less than the Pool Balance on the
Closing Date. The Transferor will be required to satisfy the following
conditions, among others: (i) the Transferor shall reasonably believe that such
retransfer will not cause an Early Amortization Event to occur; (ii) as of the
fifth business day prior to the proposed transfer, not more than 10% (based on
Loan Balances) of the Mortgage Loans (after giving effect to the proposed
transfer) are delinquent more than 30 days and the weighted average delinquency
of all of the Mortgage Loans (before and after giving effect to the proposed
transfer) is not more than 60 days; (iii) the Transferor shall have represented
that no selection procedures reasonably believed by the Transferor to be adverse
to the interests of the Certificateholders or the [Letter of Credit] [Surety
Bond] Issuer were used to select the Mortgage Loans to be removed; (iv) the
Transferor shall have received evidence satisfactory to it that the reassignment
will not, as of the date thereof, prevent the transfer of the Mortgage Loans
(including any Additional Balances) to the Trust from being recognized as a sale
under generally accepted accounting principles and shall have received no
evidence that such reassignment will, as of the date thereof, prevent such
transfer from being recognized as a sale for regulatory purposes; and (v) each
Rating Agency shall have been notified of the proposed retransfer and prior to
the date of retransfer has not notified the Transferor in writing that such
retransfer would result in a reduction or withdrawal of its then-current rating
of the Certificates.]
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Servicer will follow such collection procedures with respect to
the Mortgage Loans as it follows from time to time with respect to mortgage
loans in its servicing portfolio comparable to the Mortgage Loans. See
"SERVICING OF LOANS -- Collection Procedures; Escrow Accounts" in the
Prospectus.
The Servicer will establish and maintain a separate account in the
name of the Trustee for the benefit of the Certificateholders and the [Letter of
Credit] [Surety Bond] Issuer (the "Collection Account"). See "SERVICING OF
LOANS -- Deposits to and Withdrawals from the Collection Account" in the
Prospectus. [The Collection Account will be established initially with the
trust department of the Trustee.] Funds in the Collection Account may be
invested in Eligible Investments maturing in general not later than the business
day preceding the next Distribution Date. Eligible Investments consist of
certain investments acceptable to each Rating Agency for a structured
transaction having the rating initially assigned to the Certificates. All net
income and gain realized from any such investment will be paid to the Servicer.
Investor Percentage and Transferor Percentage. Pursuant to the
Agreement, the Servicer will allocate between the Investor Interest and the
Transferor Interest all amounts (including any Net Liquidation Proceeds)
collected under the Mortgage Loans on account of interest ("Interest
Collections"), all amounts (including Net Liquidation Proceeds) collected under
the Mortgage Loans on account of principal ("Principal Collections") and the
amount of the unrecovered Loan Balance of any Defaulted Mortgage Loan at the end
of the Collection Period in which such Defaulted Mortgage Loan became a
Defaulted Mortgage Loan (the "Liquidation Loss Amount"). A "Defaulted Mortgage
Loan" is a Mortgage Loan that has been written off as uncollectible by the
Servicer. The Collection Period for a Distribution Date is the calendar month
preceding such Distribution Date or, in the case of the first Distribution Date,
the period from the Cut-off Date through the last day of the calendar month
preceding the month in which such Distribution Date occurs. The Servicer will
make each allocation by reference to the Investor Percentage and the Transferor
Percentage applicable in each case during a Collection Period.
S-31
<PAGE>
For convenience, this Prospectus Supplement refers to the Investor
Percentage with respect to Interest Collections, Principal Collections and
Liquidation Loss Amounts as if the Investor Percentage were the same percentage
at all times in each case. The Investor Percentage may be a different
percentage for each Collection Period, and will vary primarily as a result of
changes in the Pool Balance.
The Investor Percentage will be calculated as follows:
Interest Collections and Liquidation Loss Amounts. When used with
respect to Interest Collections and Liquidation Loss Amounts at any time,
"Investor Percentage" means the percentage equivalent of a fraction the
numerator of which is the Certificate Principal Balance and the denominator of
which is the Pool Balance, in each case as of the end of the immediately
preceding Collection Period (or, in the case of the first Collection Period, as
of the Closing Date).
Principal Collections during the Revolving Period. When used with
respect to Principal Collections during the Revolving Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of which
is the amount of the Certificate Principal Balance and the denominator of which
is the Pool Balance, in each case as of the end of the immediately preceding
Collection Period (or in the case of the first Collection Period, as of the
Closing Date).
Principal Collections during the Amortization Period. When used with
respect to Principal Collections during the Amortization Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of which
is the amount of the Certificate Principal Balance and the denominator of which
is the Pool Balance, in each case as of the end of the Revolving Period.
The Transferor Percentage will, in all cases, be equal to 100% minus
the applicable Investor Percentage.
As a result of the calculations described above, Interest Collections
in each Collection Period will be allocated to the Certificateholders based on
the relationship of the Certificate Principal Balance to the Pool Balance (which
may fluctuate from month to month). As described above, the Investor Percentage
applied when allocating Principal Collections is expected to vary from month to
month during the Revolving Period, because the Certificate Principal Balance as
a percentage of the Pool Balance will fluctuate from month to month. During
the Amortization Period, however, the amount of Principal Collections allocated
to the Investor Interest will be determined by reference to a fixed percentage
which will be equal to the Investor Percentage with respect to Principal
Collections on the last day of the Revolving Period.
Deposits in the Collection Account and Payments to the Transferor. On
and after the Closing Date, the Servicer will, subject to the following
paragraph, deposit on a daily basis [within two business] days following receipt
thereof (i) during each Collection Period in the Revolving Period, the Investor
Percentage of Interest Collections and (ii) during each Collection Period in the
Amortization Period, the Investor Percentage of all Interest Collections and
Principal Collections. The Servicer will pay to the Transferor within two
business days of its receipt thereof (i) during each Collection Period in the
Revolving Period, the Transferor Percentage of all Interest Collections and, if
the Transferor Interest (after giving effect to any transfers of Additional
Balances or Eligible Additional Mortgage Loans to the Trust on such day) is
equal to or greater than zero, the Transferor Percentage of all Principal
Collections and the Investor Percentage of all Principal Collections and (ii)
during each Collection Period in the Amortization Period, the Transferor
Percentage of Interest Collections and, if the Transferor Interest (after giving
effect to any transfers of Additional Balances or Eligible Additional Mortgage
Loans to the Trust on such day) is greater than zero, the Transferor Percentage
of all Principal Collections.
The Trustee will establish and maintain a separate account (the
"Distribution Account"). On the
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business day preceding each Distribution Date the Servicer will transfer amounts
in the Collection Account for distribution to Certificateholders to the
Distribution Account.
The Trustee will deposit in the Distribution Account any amounts drawn
on the [Letter of Credit] [Surety Bond] as described below.
Any Principal Collections not paid to the Transferor because of the
limitations described above ("Unallocated Principal Collections"), will be
deposited and retained in the Collection Account for payment to the Transferor,
during the Revolving Period, if and when the Transferor Interest is greater than
zero and, during the Amortization Period, to the Certificateholders.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the Distribution Date occurring in ______________,
distributions on the Certificates will be made by the Trustee out of amounts on
deposit in the Distribution Account on each Distribution Date to the persons in
whose names such Certificates are registered at the close of business on the
[day prior to each Distribution Date] (the "Record Date"), except as provided in
"Registration of Certificates" below. The term "Distribution Date" means the
___ day of each month (or if such ___ day is not a business day the next
succeeding business day). Distributions will be made by check mailed (or upon
the request of a Certificateholder owning Certificates having denominations
aggregating at least $________, by wire transfer or otherwise) to the address of
the person entitled thereof [(which, in the case of Book-Entry Certificates,
will be DTC or its nominee)] as it appears on the Certificate Register in
amounts calculated as described herein on the _____ business day (but no later
than the _____ calendar day) of the month in which the related Distribution Date
occurs (the "Determination Date"). However, the final distribution in respect
of the Certificates will be made only upon presentation and surrender thereof at
the office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution.
Distributions of Interest Collections and Required Amounts. On each
Distribution Date, the Trustee, on behalf of the Trust, shall pay the following
amounts in the following order of priority to the following persons from the
Investor Interest of all Interest Collections collected during the related
Collection Period, together with the Required Amount, if any, drawn on the
[Letter of Credit] [Surety Bond] for such Distribution Date.
[(i) to the Certificateholders, interest at the Certificate Rate for
the Interest Period preceding such Distribution Date on the Certificate
Principal Balance outstanding immediately prior to such Distribution Date;
(ii) to the Certificateholders, any interest on the Certificates
accrued in accordance with clause (i) that has not been previously distributed
to Certificateholders plus, to the extent legally permissible, interest thereon
at the Certificate Rate applicable from time to time (an "Unpaid Interest
Shortfall");
(iii) to the Servicer, the Investor Servicing Fee for the related
Interest Period and all accrued and unpaid Investor Servicing Fees for previous
Interest Periods;
(iv) if such Distribution Date is in the Revolving Period, to the
Transferor, the Investor Percentage of the aggregate of all Liquidation Loss
Amounts incurred in the preceding Collection Period; provided that the
Transferor Interest (after giving effect to any transfers of Additional Balances
and Eligible Additional Mortgage Loans on such date and to the distribution of
such Liquidation Loans Amount) is equal to or greater than zero;
(v) if such Distribution Date is in the Amortization Period, to the
Certificateholders, the Investor Percentage of the aggregate of all Liquidation
Loss Amounts incurred in the preceding Collection Period;
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(vi) to the Certificateholders, the aggregate of the amounts
allocable pursuant to clause (v) that were not previously distributed pursuant
to such clause (each such undistributed amount being referred to herein as a
"Certificate Principal Balance Loss Deduction Amount"); and
(vii) to the Certificateholders, accrued and unpaid interest on each
unreimbursed Certificate Principal Balance Loss Deduction Amount (such interest
being calculated at the Certificate Rate for each Interest Period during which
such unreimbursed amount was outstanding.]
Any amounts remaining in the Collection Account collected during or
with respect to the preceding Collection Period, after all other distributions
have been made, will be distributed to the [Letter of Credit] [Surety Bond]
Issuer.
A Certificate Principal Balance Loss Deduction Amount represents a
loss of principal in respect of Defaulted Mortgage Loans allocable to the
Investor Interest and will arise when the Investor Percentage of Interest
Collections and the Required Amount are not sufficient to cover such loss, in
accordance with the priority of distributions described above. As described
under "General" above, any Certificate Principal Balance Loss Deduction Amounts
which have not been reimbursed, as provided herein, will reduce the Certificate
Principal Balance.
The Required Amount for each distribution Date will be the lesser of
(i) the [Letter of Credit] [Surety Bond] Amount and (ii) the amount, if any, by
which (a) the full amount distributable on such Distribution Date pursuant to
clauses (i) through (vii) above exceeds (b) the Investor Percentage of the
Interest Collections for the related Collection Period. The Required Amount
will be drawn on the [Letter of Credit] [Surety Bond].
Distributions of Principal. On each Distribution Date after the first
Collection Period in the Amortization Period, the Trustee will distribute to the
Certificateholders the Investor Percentage of Principal Collections received in
the preceding Collection Period. In addition, the Trustee will distribute to
Certificateholders on any Distribution Date during the Amortization Period any
Retransfer Deposit Amount (or draw on the [Letter of Credit] [Surety Bond] in
respect thereof) received in the preceding Collection Period and any Unallocated
Principal Collections then on deposit in the Distribution Account. The
aggregate distributions of principal to the Certificateholders will not exceed
the Initial Certificate Principal Balance.
[Calculation of Certificate Rate. With respect to the initial
Distribution Date, the Certificate Rate will equal __%. Thereafter, on each
Distribution Date, the Certificate Rate will be equal to LIBOR as of the second
London Business Day (as defined below) prior to the immediately preceding
Distribution Date plus ________ basis points. However, if the Certificate Rate
calculated as described in the preceding sentence for any such Distribution Date
is greater than the weighted average of the Net Loan Rates for the Mortgage
Loans for the preceding Collection Period, the Certificate Rate for any such
Distribution Date will be equal to the weighted average of the Net Loan Rates.
The Net Loan Rate for a Mortgage Loan is its Loan Rate less the Servicing Fee
Rate. Interest payable on any Distribution Date will accrue on the Certificates
from the preceding Distribution Date (or, in the case of the first Distribution
Date, from the Closing Date) through the day preceding such Distribution Date
(an "Interest Period"). All calculations of interest accrued on the
Certificates will be made on the basis of [the actual number of days in an
Interest Period and a year assumed to consist of 360 days.]
The term "Certificate Principal Balance" means (i) the original
principal amount of the Certificates less (ii) all amounts previously
distributed to Certificateholders under "-Distributions of Principal" above,
less (iii) the aggregate of all unreimbursed Certificate Principal Balance Loss
Deduction Amounts.
Calculation of LIBOR. "LIBOR" with respect to any Distribution Date
will be determined by the Trustee and will be equal to the offered rates for
deposits in United States dollars having a maturity of one month
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(the "Index Maturity") commencing on the second London Business Day (as defined
below) prior to the previous Distribution Date, which appear on the Reuters
Screen LIBO Page as of approximately 11:00 A.M., London time, on such date of
calculation. If at least two such offered rates appear on the Reuters Screen
LIBO Page, LIBOR will be the arithmetic mean (rounded upwards, if necessary, to
the nearest one-sixteenth of a percent) of such offered rates. If fewer than two
such quotations appear, LIBOR with respect to such distribution Date will be
determined at approximately 11:00 A.M., London time, on such determination date
on the basis of the rate at which deposits in the United States dollars having
the Index Maturity are offered to prime banks in the London interbank market by
four major banks in the London interbank market selected by the Trustee and in a
principal amount equal to an amount of not less than U.S. $1,000,000 and that is
representative for a single transaction in such market at such time. The Trustee
will request the principal London office of each of such banks to provide a
quotation of its rate. If at least two such quotations are provided, LIBOR will
be the arithmetic mean (rounded upwards as aforesaid) of such quotations. If
fewer than two quotations are provided, LIBOR with respect to such Distribution
Date will be the arithmetic mean (rounded upwards as aforesaid) of the rates
quoted at approximately 11:00 A.M., New York City time, on such determination
date by three major banks in New York, New York selected by the Trustee for
loans in United States dollars to leading European banks having the Index
Maturity and in a principal amount equal to an amount of not less than U.S.
$1,000,000 and that is representative for a single transaction in such market at
such time; provided, however, that if the banks selected as aforesaid by the
Trustee are not quoting as mentioned in this sentence, LIBOR in effect for the
applicable period will be LIBOR in effect for the previous period.]
[For purposes of calculating LIBOR, a "London Business Day" will be
any Business Day on which dealings in deposits in United States dollars are
transacted in the London interbank market and "Reuters Screen LIBO Page" will be
the display designated as page "LIBO" on the Reuters Monitor Money Rates Service
(or such other page as may replace the LIBO page on that service for the purpose
of displaying London interbank offered rates of major banks.)]
THE [LETTER OF CREDIT] [SURETY BOND]
On the Closing Date, the [Letter of Credit] [Surety Bond] Issuer will
issue the [Letter of Credit] [Surety Bond] in favor of the Trustee on behalf of
the Trust to support payments on the Certificates. On each Determination Date,
the Servicer will determine the amounts required to be drawn on the [Letter of
Credit] [Surety Bond], up to the [Letter of Credit] [Surety Bond] Amount, on the
related Distribution Date. On each Distribution Date, any amounts remaining in
the Collection Account with respect to the preceding Collection Period, after
all other distributions have been made as described above, will be distributed
to the [Letter of Credit] [Surety Bond] Issuer. See "Distributions on
Certificates" above.
The amount available under the [Letter of Credit] [Surety Bond] (the
"Letter of Credit] [Surety Bond] Amount") for the initial Distribution Date will
be $_________. For each Distribution Date thereafter, the [Letter of Credit]
[Surety Bond] Amount will equal the lesser of (i) ___% of the Pool Balance as of
the first day of the preceding Collection Period (after giving effect to any
amounts distributed with respect to principal of the Mortgage Loans on the
Distribution Date occurring in such preceding Collection Period) and (ii) the
[Letter of Credit] [Surety Bond] Amount as of the first day of the preceding
Collection Period, minus any amounts drawn under the [Letter of Credit] [Surety
Bond] during such preceding Collection Period, plus any amounts paid to the
[Letter of Credit] [Surety Bond] Issuer on the Distribution Date occurring in
such preceding Collection Period up to the amount of any previous draws on the
[Letter of Credit] [Surety Bond].
EARLY AMORTIZATION EVENTS
As described above, the Revolving Period will continue until the close
of business on the last day of __________ unless an Early Amortization Event
occurs prior thereto. The term "Early Amortization Event"
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refers to any of the following events:
[(a) failure on the part of the Transferor (i) to make any payment or
deposit on the date required under the Agreement within five business days after
such payment or deposit is required to be made, (ii) to record assignments when
required or (iii) to observe or perform in any material respect any other
covenants or agreements of the Servicer or the Transferor set forth in the
Agreement, which failure, in each case, materially and adversely affects the
interests of the Certificateholders and which, in the case of clause (iii),
continues unremedied for a period of 60 days after written notice and continues
to materially and adversely affect the interests of the Certificateholders or
the [Letter of Credit] [Surety Bond Issuer] for such period;
(b) any representation or warranty made by the Transferor in the
Agreement proves to have been incorrect in any material respect when made, as a
result of which the interests of the Certificateholders or the [Letter of
Credit] [Surety Bond] Issuer are materially and adversely affected, which
continues to be incorrect in any material respect for a period of 60 days after
written notice and which continues to materially and adversely affect the
interests of the Certificateholders for such period; provided, however, that an
Early Amortization Event shall not be deemed to occur thereunder if the
Transferor has accepted retransfer of the related Mortgage Loan or all such
Mortgage Loans, if applicable, during such period (or such longer period (not to
exceed an additional 60 days) as the Trustee may specify) in accordance with the
provisions of the Agreement;
(c) the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
(d) if the Transferor fails to transfer to the Trust Eligible
Additional Mortgage Loans by the time it is required to do so;
(e) an Event of Default under the Agreement (as described in the
Prospectus under "THE TRUST AGREEMENTS -- Events of Default") occurs;
(f) the occurrence of certain events of insolvency, receivership or
conservatorship relating to the Transferor;
(g) the [Letter of Credit] [Surety Bond] Amount is less the % of
the Certificate Principal Balance; or
(h) if the average of the Investor Percentage of Interest Collections
for any three consecutive Collection Periods is less than the amounts to be
distributed to Certificateholders as set forth in subsections (i) through (vii)
under "Distributions on the Certificates -- Distributions of Interest
Collections and Required Amounts" above for the three Distribution Dates
relating to such Collection Periods.]
[In the case of any event described in clauses (a), (b) or (e), an
Early Amortization Event will be deemed to have occurred only if, after the
expiration of the applicable grace period, if any, described in such clauses,
either the Trustee or holders of Certificates evidencing Percentage Interests
aggregating more than 51% or the [Letter of Credit] [Surety Bond] Issuer (but
only if the [Letter of Credit] [Surety Bond] is outstanding or the [Letter of
Credit] [Surety Bond] Issuer has not been fully reimbursed for all amounts paid
to the Trust by the [Letter of Credit] [Surety Bond] Issuer), by written notice
to the Transferor and the Servicer (and to the Trustee if given by the
Certificateholders or the [Letter of Credit] [Surety Bond] Issuer) declare that
an Early Amortization Event has occurred as of the date of such notice. In the
case of any event described in clauses (c), (d), (f) (g) or (h), an Early
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the Trustee or the Certificateholders or the [Letter of
Credit] [Surety Bond] Issuer immediately upon the occurrence of such event. On
the date on which an Early Amortization Event is deemed to have occurred, the
Amortization Period will commence. In such event, distributions of principal to
the Certificateholders will begin on the first Distribution
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Date following the month in which the Early Amortization Event occurs. If,
because of the occurrence of an Early Amortization Event, the Amortization
Period begins earlier than ____________, the date on which the Amortization
Period is scheduled to commence, Certificateholders will begin receiving
distributions of principal earlier than they would otherwise have been the case
under the Agreement, which may shorten the final maturity of the Certificates.]
OPTIONAL TERMINATION
The Transferor may effect a retransfer of the Certificateholders'
interest in each Mortgage Loan, and all property acquired in respect of any
Mortgage Loan, remaining in the Trust for an amount equal to the sum of the
Certificate Principal Balance plus accrued and unpaid interest thereon at the
applicable Certificate Rate through the day preceding the final Distribution
Date if the Certificate Principal Balance immediately prior to the final
Distribution Date is less than or equal to [5%] of the original Certificate
Principal Balance. The purchase price will be distributed to the
Certificateholders in lieu of the amount that would otherwise be distributed if
such option were not exercised, which will be applied as provided in the
Agreement.
[REGISTRATION OF CERTIFICATES
The Certificates will initially be registered in the name of Cede, the
nominee of DTC. DTC is a limited-purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilities the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Certificate Owners who are not Participants but desire to purchase,
sell or otherwise transfer ownership of the Certificates may do so only through
Participants (unless and until Definitive Certificates are issued). In
addition, Certificate Owners will receive all distributions of principal of and
interest on the Certificates from the Trustee through Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates are issued, it is anticipated
that the only Certificateholder of the Certificates will be Cede, as nominee of
DTC, and Certificate Owners will not be Certificateholders as that term is used
in the Agreement. Certificate Owners are only permitted to exercise the rights
of Certificateholders indirectly through Participants.
While the Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make book-
entry transfers among Participants on whose behalf it acts with respect to the
Certificates and is required to receive and transmit distributions of principal
of and interest on the Certificates. Participants with whom Certificate Owners
have accounts with respect to Certificates are similarly required to make book-
entry transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
Unless and until Definitive Certificates are issued, Certificate
Owners who are not Participants may transfer ownership of Certificates only
through Participants by instructing such Participants to transfer
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Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the respective Participants will make debits or credits, as
the case may be, on their records on behalf of the selling and purchasing
Certificates Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
Certificates will be issued in registered form to Certificate Owners,
or their nominees, rather than to DTC (such Certificates being referred to
herein as "Definitive Certificates"), only if (i) DTC or the Servicer advises
the Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the Certificates and
the Servicer or the Trustee is unable to locate a qualified successor, (ii) the
Servicer, at its sole option, advises the Trustee in writing that it elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Servicing Termination, DTC, at the direction of Certificate Owners
owing Certificates evidencing Percentage Interests aggregating at least 51%,
advises the Trustee in writing that the continuation of a book-entry system
through DTC (or a successor thereto) to the exclusion of any physical
certificates being issued to Certificate Owners is no longer in the best
interests of Certificate Owners. Upon the issuance of Definitive Certificates
to Certificate Owners, such Certificates will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions. If
Definitive Certificates are issued, the Record Date may be changed to the last
day of the month immediately preceding the related Distribution Date.
DTC has advised the Servicer and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose accounts with DTC the Certificates are credited. DTC
has advised the Servicer that DTC will take such action with respect to any
Percentage Interests of the Certificates only at the direction of and on behalf
of such Participants with respect to such Percentage Interests of the
Certificates. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.]
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.
At _________, 199_, the Transferor had consolidated assets of approximately
$____ billion, deposits of approximately $___ billion, and stockholders' equity
of approximately $_____ 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 the Financial Institution Reform, Recovery,
and Enforcement Act of 1989, as amended ("FIRREA"). At ________, 199_, the
Transferor's tangible, core, tier 1 risk-based and total risk-based regulatory
capital ratios were _____%, ______%, _______% and ________%, 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 ("FDICIA"). The
OTS has the discretion to treat a "well-capitalized" institution as an
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<PAGE>
"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 Bank,
to convert their charters to national or state bank charters and the House
Banking Committee approved a version of such legislation on June 20, 1997. In
the absence of appropriate "grandfather" provisions, such legislation could have
an adverse effect on the Bank 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 bill approved by the House Banking Committee contains grandfather provisions
that address many of these issues, the Bank 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 Bank or the Real Estate Investment Trust.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Transferor for general corporate purposes.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be
rated in the [highest] rating category of the Rating Agency, the Certificates
will not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"), because most of the Mortgages
securing the Mortgage Loans are not first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to invest in the
Certificates, which because they evidence interests in a pool that includes
junior mortgage loans are not "mortgage related securities" under SMMEA. See
"LEGAL INVESTMENT" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ______________, (the "Underwriting Agreement"), between the
Transferor and ____________________ (the "Underwriter"), the Transferor has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Transferor, all of the Certificates.
The Underwriting Agreement provides that the Underwriter's obligations
thereunder are subject to certain conditions precedent, and that the Underwriter
will be obligated to purchase all of the Certificates if any are purchased.
The distribution of the Certificates by the Underwriter will be
effected from time to time in one or more negotiated transactions or otherwise
at varying prices to be determined at the time of sale. The Underwriter may
effect such transactions by selling the Certificates to or through dealers, and
such dealers may receive from the Underwriter compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be
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<PAGE>
underwriters, and any discounts, commissions or concessions received by them,
and any profit on the resale of the Certificates purchased by them, may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Act").
The Underwriting Agreement provides that the Transferor will indemnify
the Underwriter against certain civil liabilities, including liabilities under
the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon by Shaw, Pittman, Potts & Trowbridge, New York, New York.
RATING
It is a condition to issuance that the Certificates be rated not lower
than _________ by Standard & Poor's Corporation and ________________ by Moody's
Investors Service Inc.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans to which they are
entitled. The rating takes into consideration the characteristics of the
Mortgage Loans and the structural, legal and tax aspects associated with the
Certificates. The ratings on the Certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the Mortgage
Loans or the possibility that Certificateholders might realize a lower than
anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
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<PAGE>
- --------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY, NOR AN OFFER OF SUCH
SECURITIES IN ANY STATE OR JURISDICTION IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION CONTAINED HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
TABLE OF CONTENTS
[Version 1]
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement
Summary of Terms S-4
Risk Factors S-13
The [Letter of Credit] [Surety Bond] Issuer S-15
The Chevy Chase Home Equity Lending Program S-15
The Mortgage Pool S-22
Maturity and Prepayment Considerations S-28
Description of the Certificates S-30
The Transferor S-40
Use of Proceeds S-41
Legal Investment Considerations S-41
Underwriting S-41
Legal Matters S-41
Rating S-42
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 58
Use of Proceeds 58
Federal Income Tax Consequences 58
State Tax Considerations 81
ERISA Considerations 81
Legal Investment 81
Plan of Distribution 81
Legal Matters 82
Glossary of Terms 83
</TABLE>
- --------------------------------------------------
- --------------------------------------------------
$
CHEVY CHASE BANK, F.S.B
Transferor and Servicer
ASSET BACKED CERTIFICATES,
Series 199_-__
PROSPECTUS SUPPLEMENT
_____ __, 199_
- --------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
DATED AUGUST 15, 1997
Version #2
----------
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _________, 1997)
$_____________
[CHEVY CHASE][CAPITAL] HOME EQUITY LOAN TRUST 199 -
$_________ Home Equity Loan Asset-Backed Notes, Series 199 -
$______ Home Equity Loan Asset-Backed Certificates, Series 199 -
The [Chevy Chase][Capital] Home Equity Loan Trust 199 - (the "Trust")
will be formed pursuant to a trust agreement to be dated as of __________, 199_
(the "Trust Agreement") and entered into by Chevy Chase Bank, F.S.B. (the
"Transferor") and _______________________, as owner trustee (the "Owner
Trustee"). The Trust will issue $_____________ aggregate principal amount of
Home Equity Loan Asset-Backed Notes, Series 199 - (the "Notes"). The Notes will
be issued pursuant to an indenture to be dated as of _________, 199_ (the
"Indenture"), between the Trust and _________, as indenture trustee (the
"Indenture Trustee"). The Trust will also issue $_____________ aggregate
principal amount of Home Equity Loan Asset-Backed Certificates, Series 199 -
(the "Certificates" and, together with the Notes, the "Securities").
The Trust will consist of certain [adjustable rate] [fixed rate] home
equity revolving credit line loans (the "Mortgage Loans") secured primarily by
second deeds of trust or mortgages on residential properties that are primarily
one- to four-family properties, the collections in respect of such Mortgage
Loans, and certain other property relating to such Mortgage Loans, including the
benefit of a [Letter of Credit] [Surety Bond] as described more fully herein.
Distributions of principal and interest on the Notes will be made on
the ________ day of each month or, if such date is not a Business Day, then on
the succeeding Business Day (each a "Distribution Date"), commencing in
______________, 199_ to the extent described herein. Interest will accrue on
the Notes at a rate (the "Note Rate") equal to ___% per annum from the Closing
Date to the first Distribution Date and at [a floating rate equal to LIBOR (as
defined herein) plus ___% per annum] [___% per annum] thereafter.
The Certificates will represent fractional undivided interests in the
Trust. Distribution of principal and interest on the Certificates will be made
on each Distribution Date to the extent described herein. Interest will accrue
on the Certificates at a rate (the "Pass-Through Rate") equal to ___% per annum
from the Closing Date to the first Distribution Date and at [a floating rate
equal to LIBOR plus ___% per annum] [___% per annum] thereafter.
Payments of interest and principal on the Notes will have equal
priority with payments of principal and interest (and will be made pro rata) on
the Certificates.
There is currently no market for the Securities offered hereby.
__________________ (the "Underwriter") intends to make a secondary market in the
Securities but is under no obligation to do so. There can be no assurance that
such a market will develop or if it does develop that it will continue.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE
INFORMATION SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE S-13 HEREIN AND ON
PAGE 16 IN THE PROSPECTUS.
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----------------------
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRANSFEROR, OWNER TRUSTEE,
INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED
HEREIN. THE SECURITIES ARE NOT INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY.
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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Securities offered hereby will be purchased by the Underwriter
from the Transferor and will be offered by the Underwriter from time to time to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The aggregate proceeds to the Transferor from
the sale of the Notes are expected to be $_______ and from the sale of the
Certificates are expected to be $_________ before deducting expenses payable by
the Transferor estimated to be $_________.
The Securities are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
the Notes will be delivered in book-entry form through the facilities of the
Depository Trust Company, [Cedel, S.A. and the Euroclear System] on or about
____________, 199_. [The Notes will be offered in Europe and the United States
of America.]
_________________________
_________________, 199_
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Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Securities, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
Prospectus to investors. This is in addition to the obligation of dealers acting
as Underwriters to deliver a Prospectus Supplement and Prospectus with respect
to their unsold allotments or subscriptions.
_________________________
Each Series of Securities offered hereby constitute part of a separate
Series of Asset-Backed Securities being offered by Chevy Chase Bank, F.S.B. from
time to time pursuant to its Prospectus dated ________ ___, 1997. This
Prospectus Supplement does not contain complete information about the offering
of the Securities. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Securities may not be consummated unless the purchaser has
received both this Prospectus Supplement and the Prospectus.
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<PAGE>
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Certain
capitalized terms used herein are defined elsewhere in the Prospectus Supplement
or in the Prospectus. Reference is made to the "GLOSSARY OF TERMS" in the
Prospectus for the definitions of certain capitalized terms.
Trust................... [Chevy Chase][Capital] Home Equity Loan Trust 199_
(the "Trust" or the "Issuer"), a Delaware business
trust established pursuant to the Trust Agreement (as
defined herein), dated as of __________, 199_ (the
"Cut-off Date"). The property of the Trust will
include: a pool of [adjustable] [fixed] rate home
equity loan revolving credit line loans (the
"Mortgage Loans"), under certain home equity
revolving credit line loan agreements (the "Loan
Agreements") and secured primarily by second deeds of
trust or mortgages on residential properties that are
primarily one- to four-family properties (the
"Mortgaged Properties"); the collections in respect
of the Mortgage Loans received on and after the Cut-
off Date; the Mortgages on the properties securing
the Mortgage Loans, including property that secured a
Mortgage Loan which has been acquired by foreclosure
or deed in lieu of foreclosure; [a surety bond or
letter of credit]; rights under certain hazard
insurance policies covering the Mortgaged Properties;
and certain other property, as described more fully
herein.
The Trust will include the unpaid principal balance
of each Mortgage Loan as of the Cut-off Date (the
"Cut-off Date Principal Balance") plus any additions
thereto as a result of new advances made pursuant to
the applicable Loan Agreement (the "Additional
Balances") during the life of the Trust. With respect
to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage
Loans as of such date. The "Principal Balance" of a
Loan (other than a Liquidated Loan) on any day is
equal to its Cut-off Date Principal 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 in accordance
with the related Loan Agreement prior to such day.
The Principal Balance of a Liquidated Loan after the
final recovery of related Liquidation Proceeds will
be zero.
Securities Offered...... $______ Home Equity Loan Asset-Backed Notes, Series
199 - (the "Notes"); and $_____ Home Equity Loan
Asset-Backed Certificates, Series 199- (the
"Certificates" and, together with the Notes, the
"Securities"). Each Security represents the right to
receive payments of interest at the variable rate
described below, payable monthly, and payments of
principal at such
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time and to the extent provided below.
Transferor and Servicer. Chevy Chase Bank, F.S.B. ("Chevy Chase"), a federally
chartered stock savings bank, with its principal
executive offices located at 8401 Connecticut Avenue,
Chevy Chase, Maryland 20815, and a telephone number
of (301) 986-7000. See "THE TRANSFEROR" herein and in
the Prospectus.
Indenture............... The Notes will be issued pursuant to an indenture
dated as of ___________, 199_ (the "Indenture")
between the Trust and ________________ in its
capacity as indenture trustee (the "Indenture
Trustee"). The Indenture Trustee will allocate
distributions of principal and interest to holders of
the Notes (the "Noteholders") in accordance with the
Indenture.
Trust Agreement......... Pursuant to a trust agreement dated as of
________________ , 199_ (the "Trust Agreement"),
among the Transferor, ___________ and
________________ in its capacity as owner trustee
(the "Owner Trustee"), the Trust will issue the
Certificates in an initial aggregate amount of
$____________. The Certificates will represent
fractional undivided interests in the Trust.
The Mortgage Loans...... The Mortgage Loans arise under Loan Agreements and
are secured by deeds of trust or mortgages (which are
primarily second deeds of trust or mortgages) on
residential properties located primarily in [ ] that
are primarily one- to four-family residential
properties. As of ___________, 199_ (the "Cut-off
Date"), the aggregate of the Loan Balances of the
Mortgage Loans was $ (the "Cut-off Date Pool
Balance"), of which approximately % of the Mortgage
Loans are secured by properties located in [ ]. The
remaining Mortgage Loans are secured by properties
located in states, with no single state accounting
for more than % of the Cut-off Date Pool Balance. The
combined loan-to-value ratio of a Mortgage Loan,
computed at the maximum amount the borrower was
permitted to draw down under the Loan Agreement (the
"Credit Limit") and taking into account the amounts
of any related senior mortgage loans (the "Combined
Loan-to-Value Ratio"), based upon a valuation (as
described under "THE CHEVY CHASE HOME EQUITY LENDING
PROGRAM") of the Mortgaged Property obtained by the
Bank at the time of execution of the loan agreement
governing such Home Equity Credit Line, generally did
not exceed %, subject to exceptions deemed
appropriate by the Transferor. The weighted average
Combined Loan-to-Value Ratio of the Mortgage Loans,
as described under "THE MORTGAGE POOL," was
approximately % as of the Cut-off Date. See "THE
CHEVY CHASE HOME EQUITY LENDING
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<PAGE>
PROGRAM" and "THE MORTGAGE POOL" herein.
Interest on each Mortgage Loan is payable monthly and
computed on the average daily outstanding Loan
Balance for each billing cycle at a variable rate per
annum (the "Loan Rate") equal at any time (subject to
minimum and maximum rates, as described herein under
"THE CHEVY CHASE HOME EQUITY LENDING PROGRAM," and
further subject to applicable usury limitations) to
the sum of (i) the [prime rate published in the
"Money Rates" section of the Wall Street Journal on
the ___ calendar day of each month (or, if no rate is
published on the ____, then on the next succeeding
calendar day on which a prime rate is published)] and
(ii) a margin, currently %. See "THE MORTGAGE POOL"
herein and "CERTAIN LEGAL ASPECTS OF THE LOANS --
Applicability of Usury Laws" in the Prospectus.
Principal amounts may be drawn down by the borrower
under the Loan Agreement from time to time, subject
to the borrower's Credit Limit. A borrower may repay
principal at any time. The Cut-off Date Loan Balances
of the Mortgage Loans ranged from $0.00 to $ and
averaged $ . Credit Limits under the Loan Agreements
as of the Cut-off Date ranged from approximately $ to
$ and averaged $ . Each Loan was originated in the
period from ______ to ___________, 199 , and, was of
the Cut-off Date, the weighted average loan
utilization rate was approximately %. See "THE CHEVY
CHASE HOME EQUITY LENDING PROGRAM" and "THE MORTGAGE
POOL" herein.
Collections............. All collections on the Mortgage Loans will be
allocated by the Servicer in accordance with the Loan
Agreements between amounts collected in respect of
interest ("Interest Collections") and amounts
collected in respect of principal ("Principal
Collections" and collectively with Interest
Collections, the "Collections"). The Servicer will
generally deposit Collections distributable to the
Holders in an account established for such purpose
under the Sale and Servicing Agreement (the
"Collection Account"). See "DESCRIPTION OF THE
SECURITIES -- Payments on Mortgage Loans; Deposits to
Collection Account" herein and "SERVICING OF LOANS --
Deposits to and Withdrawals from the Collection
Account or the Certificate Account" in the
Prospectus.
Description of
the Securities
A. Distributions..... On each Distribution Date, collections on the
Mortgage Loans will be applied in the following order
of priority:
(i) to the Servicer, the Servicing Fee;
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<PAGE>
(ii) as payment for the accrued interest due and
any overdue accrued interest (with interest
thereon) on the respective Security Balance of
the Notes and the Certificates;
(iii) as principal on the Securities, the excess of
Principal Collections over Additional Balances
created during the preceding Collection
Period, such amount to be allocated between
the Notes and Certificate, pro rata, based on
their respective Principal Balances;
(iv) as principal on the Securities, as payment for
any Liquidation Loss Amounts on the Mortgage
Loans;
(v) as payment for the premium on the [Letter of
Credit] [Surety Bond];
(vi) to reimburse prior draws made on the [Letter
of Credit] [Surety Bond]; and
(vii) any remaining amounts to the Transferor.
As to any Distribution Date, "Collection Period" is the
calendar month preceding the month of such
Distribution Date.
"Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan, the unrecovered Principal
Balance thereof at the end of the related Collection
Period in which such Mortgage Loan became a
Liquidated Mortgage Loan after giving effect to the
Net Liquidation Proceeds in connection therewith.
B. Note Rate............ Interest will accrue on the unpaid Principal Balance
of the Notes at the per annum rate (the "Note Rate")
equal to ____% per annum from the Closing Date to the
first Distribution Date and thereafter interest will
accrue on the Notes from and including the preceding
Distribution Date to but excluding such current
Distribution Date (each, an "Interest Actual Period")
at [a floating rate equal to LIBOR (as defined
herein) plus ____% [___%]. [Interest will be
calculated on the basis of the actual number of days
in each Interest Accrual Period divided by 360.] A
failure to pay interest on any Notes on any
Distribution Date that continues for five days
constitutes an Event of Default under the Indenture.
C. Pass-Through Rate.... Interest will accrue on the unpaid Principal Balance
of the Certificates at the per annum rate (the "Pass-
Through Rate") equal to ____% per annum from the
Closing Date to the first Distribution Date and
thereafter interest will accrue on the Certificates
for each Interest Accrual Period at [a floating rate
S-7
<PAGE>
equal to LIBOR (as defined herein) plus ____%
[____%]. [Interest will be calculated on the basis of
the actual number of days in each Interest Accrual
Period divided by 360.] A failure to pay interest on
any Certificates on any Distribution Date that
continues for five days constitutes an Event of
Default under the Trust Agreement.
D. Distribution Date.... The ___ day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing in _________, 199__. A "Business Day" is
any day other than a Saturday or Sunday or another
day on which banking institutions in New York, New
York [and_______] are authorized or obligated by law,
regulations or executive order to be closed.
E. Record Date.......... The last day preceding a Distribution Date or, if the
Securities are no longer Book-Entry Securities, the
last day of the month preceding a Distribution Date.
F. Final Scheduled
Distribution Dates...... With respect to the Certificates,___________. To the
extent not previously paid, the Principal Balance of
the Notes will be due on the Distribution Date in
___________, 199___. Failure to pay the full
principal balance of Notes on or before the
applicable Final Scheduled Distribution Dates
constitutes an Event of Default under the Indenture.
G. Forms and Registration. The Securities will initially be delivered in book-
entry form ("Book-Entry Notes"). Holders of such
Notes may elect to hold their interests through The
Depository Trust Company ("DTC"), [in the United
States, or Centrale de Livraison de Valeurs
Mobilieres S.A. ("Cedel") or the Euroclear System
("Euroclear"), in Europe]. Transfers within DTC [,
Cedel or Euroclear, as the case may be,] will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as the
Notes are Book-Entry Notes, such Notes will be
evidenced by one or more securities registered in the
name of Cede & Co. ("Cede"), as the nominee of DTC
[or one of the relevant depositories (collectively,
the "European Depositaries")]. Cross-market transfers
between persons holding directly or indirectly
through DTC[, on the one hand, and counterparties
holding directly or indirectly through Cedel or
Euroclear, on the other,] will be effected in DTC
through Citibank N.A. ("Citibank") or Morgan Guaranty
Trust Company of New York ("Morgan"), the relevant
depositaries of Cedel and Euroclear, respectively,
and each a participating member of DTC. The Notes
will initially be registered in the name of Cede. The
interests of such Holders will be represented by book
entries on the records of DTC and participating
members thereof. No Holder of a Note will be
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<PAGE>
entitled to receive a definitive note representing
such person's interest, except in the event that
Notes in fully registered, certificated form
("Definitive Notes") are issued under the limited
circumstances described in "DESCRIPTION OF THE
SECURITIES -Definitive Certificates" in the
Prospectus. All references in this Prospectus
Supplement to Notes reflect the rights of Holders of
such Notes only as such rights may be exercised
through DTC and its participating organizations for
so long as such Notes are held by DTC. See "RISK
FACTORS - Book-Entry Securities."
H. Denominations........ The Securities will be issued in the minimum
denominations of $1,000 and integral multiples of
$1,000 in excess thereof.
[Letter of Credit]
[Surety of Bond]
Issuer.................. ---------------- (the "[Letter of Credit] [Surety
Bond] Issuer"). See "THE [LETTER OF CREDIT] [SURETY
BOND] ISSUER" herein.
[Letter of Credit]
[Surety Bond]........... On the Closing Date, the [Letter of Credit] [Surety
Bond] Issuer will issue a [letter of credit] [surety
bond] (the "[Letter of Credit] [Surety Bond]") in
favor of the Owner Trustee on behalf of the Trust. In
the event that, on any Distribution Date, available
amounts on deposit in the Collection Account with
respect to the preceding Collection Period are
insufficient to provide for the payment of the amount
required to be distributed to the Holders and the
Servicer on such Distribution Date, the Owner Trustee
will draw on the [Letter of Credit] [Surety Bond], to
the extent of the [Letter of Credit] [Surety Bond]
Amount for such Distribution Date, in an amount equal
to such deficiency. See "DESCRIPTION OF THE
SECURITIES --Distributions" herein and "ENHANCEMENT"
in the Prospectus.
[Letter of Credit]
[Surety Bond]
Amount.................. The amount available under the [Letter of Credit]
[Surety Bond] (the "[Letter of Credit] [Surety Bond]
Amount") for the initial Distribution Date will be $
. For each Distribution Date thereafter, the [Letter
of Credit] [Surety Bond] Amount will equal the lesser
of (i) % of the Pool Balance as of the first day of
the preceding Collection Period (after giving effect
to any amounts distributed with respect to principal
of the Mortgage Loans on the Distribution Date
occurring in such preceding Collection Period) and
(ii) the [Letter of Credit] [Surety Bond] Amount as
of the first day of the preceding Collection Period,
minus any amounts drawn under the [Letter of Credit]
[Surety Bond] during such preceding Collection
Period, plus any amounts paid to the [Letter of
Credit] [Surety
S-9
<PAGE>
Bond] Issuer on the Distribution Date occurring in
such preceding Collection Period up to the amount of
any previous draws on the [Letter of Credit] [Surety
Bond].] See "RISK FACTORS--Limited Protection Against
Losses" and "ENHANCEMENT" in the Prospectus.
Servicing............... The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. On the __________ business day, but no later
than __________ calendar day, of each month (the
"Determination Date"), the Servicer will calculate,
and instruct the Trustee regarding, the amounts to be
paid, as described herein, with respect to the
related Collection Period to the Holders. See
"DESCRIPTION OF THE SECURITIES - Distributions"
herein. The Servicer will receive a monthly servicing
fee in the amount of _____% per annum (the "Servicing
Fee Rate"), of the Pool Balance and certain other
amounts, as servicing compensation from the Trust.
See "THE CHEVY CHASE HOME EQUITY LENDING PROGRAM -
Servicing Compensation and Payment of Expenses"
herein. In certain limited circumstances, the
Servicer may resign or be removed, in which event
either the Trustee or a third-party servicer will be
appointed as successor Servicer. See "SERVICING OF
LOANS--Certain Matters Regarding the Servicer" and
"THE AGREEMENTS -- Events of Default" and "--Rights
Upon Events of Default" in the Prospectus.
[Final Payment of Principal;
Termination............. The Trust will terminate on the Distribution Date
following the earlier of (i) ______________________
and (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust. The Mortgage
Loans will be subject to optional repurchase by the
Servicer on any Distribution Date after the Principal
Balance is reduced to an amount less than or equal to
$ ([5]% of the initial Principal Balance). The
repurchase price will be equal to the sum of the
outstanding Principal Balance and accrued and unpaid
interest thereon at the weighted average of the Loan
Rates through the day preceding the final
Distribution Date. See "DESCRIPTION OF THE
SECURITIES - Optional Termination" herein and
"DESCRIPTION OF THE SECURITIES - Optional
Termination" and "THE AGREEMENTS - Termination" in
the Prospectus.]
Certain Federal Income Tax
Consequences............ In the opinion of Federal Tax Counsel (as defined
herein), for federal income tax purposes, the Notes
will be characterized as indebtedness, and the Trust
should be characterized as an owner trust and will
not be characterized as an association (or publicly
traded partnership) taxable as a corporation. Each
Holder of a Security, by the acceptance of a
Security, will
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<PAGE>
agree to treat the Notes as indebtedness and the
Trust as an owner trust for federal, state and local
income and franchise tax purpose. See "FEDERAL INCOME
TAX CONSIDERATIONS" and "STATE TAX CONSIDERATIONS" in
the Prospectus.
Legal Investment........ Institutions whose investment activities are subject
to legal investment laws and regulations or to review
by certain regulatory authorities may be subject to
restrictions on investment in the Securities. See
"LEGAL INVESTMENT CONSIDERATIONS" herein.
ERISA................... Generally, plans that are subject to the requirements
of ERISA and the Code are permitted to purchase
instruments like the Notes that are debt under
applicable state law and have no "substantial equity
features" without reference to the prohibited
transaction requirements of ERISA. In the opinion of
Federal Tax Counsel, the Notes will be classified as
indebtedness without substantial equity features for
ERISA purposes. However, if the Notes are deemed to
be equity interests and no statutory, regulatory or
administrative exemption applies, the Trust will hold
plan assets by reason of a Plan's investment in the
Notes. Accordingly, any Plan fiduciary considering
whether to purchase the Notes on behalf of a Plan
should consult with its counsel regarding the
applicability of the provisions of ERISA and the Code
and the availability of any exemptions.
Under current law the purchase and holding of the
Certificates by or on behalf of any employee benefit
plan (a "Plan") subject to the fiduciary
responsibility provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"),
may result in a "prohibited transaction" within the
meaning of ERISA and the Code or other violation of
the fiduciary responsibility provisions of ERISA and
Section 4975 of the Code. [Consequently, Certificates
may not be transferred to a proposed transferee that
is a Plan subject to ERISA or that is described in
Section 4975(e)(1) of the Code, or a person acting on
behalf of any such Plan or using the assets of such
plan unless the Owner Trustee and the Transferor
receive the opinion of counsel reasonably
satisfactory to the Owner Trustee and the Transferor
to the effect that the purchase and holding of such
Certificate will not result in the assets of the
Trust being deemed to be "plan assets" for ERISA
purposes and will not be a prohibited transaction
under ERISA or Section 4975 of the Code.] See "ERISA
CONSIDERATIONS" in the Prospectus.
Rating.................. It is a condition to the issuance of the Notes that
they be rated in the highest and that the
Certificates be rated in the [ ] highest, rating
category by at least two nationally recognized
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statistical rating organizations (each a "Rating
Agency"). A security rating is not a recommendation
to buy, sell or hold securities. See "RATING" herein
and "RISK FACTORS -- Ratings Are Not Recommendations"
in the Prospectus.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following risk factors
in connection with the purchase of the Securities.
[Delinquent Mortgage Loans. The Trust will include Mortgage Loans which
are days or fewer delinquent. As of the Cut-off Date, the aggregate Loan
Balance of such delinquent Mortgage Loan was $_____. [In addition, the Mortgage
Loans in all likelihood include obligations of borrowers who are or are about to
become [bankrupt or insolvent.] If there are not sufficient funds from Interest
Collections allocated to the Investor Interest to cover the Liquidation Loss
Amount for any Collection Period and the [Letter of Credit] [Surety Bond] Amount
has been reduced to zero, the aggregate amount of principal returned to the
Securityholders would be reduced.]
Prepayment Considerations. All of the Mortgage Loans may be prepaid in
whole or in part at any time without penalty. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and the Transferor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including generally economic condition, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loans. To the extent permitted by applicable
law, such assumption will not release the original borrower from its obligation
under any such Mortgage Loan.
[Servicer's Ability to Change the Terms of the Loan Agreements. The
Servicer may permit an increase in the Credit Limit under a Loan Agreement if
the new Credit Limit under the Loan Agreement, plus the outstanding principal
balance of any related senior loans, does not exceed (i) ____% (___% for a
condominium, townhouse, duplex, or vacation condo/house), if the market value of
the Mortgaged Property is $_________ or less, or ___% (___% for a condominium,
townhouse, duplex, or vacation condo/house), and if the market value of the
Mortgaged Property exceeds $_______, based upon an appraisal or the tax assessed
value of the Mortgaged Property at the time the increase was requested. An
increase in the Credit Limit under a Loan Agreement in accordance with the
previous sentence may be made without the consent of the Trustee. Additional
Balances arising under a Mortgage Loan as a result of an increase in the Credit
Limit will be treated the same as Additional Balances arising under a Mortgage
Loan for which there has been no increase in the Credit Limit. In addition to
such changes, the Servicer may agree to other changes in the terms of a Loan
Agreement, provided that such changes (i) do not materially adversely affect the
interest of the Certificateholders, (ii) are consistent with prudent business
practice, (iii) are also being applied to the comparable segment of home equity
credit lines being held for the Servicer's own account, and (iv) do not change
the terms of the Loan Agreement so as to change the terms for the amortization
of principal. There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not result
in changes in the terms of the Loan Agreements. The Servicer may also extend
the period during which draws under the Loan Agreements may be made.]
Legal Considerations. The Mortgage Loans are secured by deeds of trust or
mortgages (which generally are second deeds of trust or mortgages). With
respect to Mortgage Loans that are secured by first mortgages, the Servicer has
the power under certain circumstances to consent to a new mortgage lien on the
Mortgaged Property having priority over such Mortgage Loan. Mortgage Loans
secured by second mortgages are entitled to proceeds that remain from the sale
of the related Mortgage Property after any related senior mortgage loan and
prior statutory liens have been satisfied. In the event that such proceeds are
insufficient to satisfy such loans and prior liens in the aggregate [and the
[Letter of
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<PAGE>
Credit] [Surety Bond] provider is unable to perform its obligations under the
[Letter of Credit] [Surety Bond] is exhausted] the Trust and, accordingly, the
Holders, bear (i) the risk of delay in distributions while a deficiency judgment
against the borrower is obtained and (ii) the risk of loss if the deficiency
judgment cannot be obtained or is not realized upon. See "CERTAIN LEGAL ASPECTS
OF THE LOANS" in the Prospectus.
In the event of a bankruptcy or insolvency of the Servicer, the bankruptcy
trustee or receiver may have the power to prevent the Trustee or the Holders
from appointing a successor Servicer.
Book-Entry Securities. Issuance of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Since transactions in the Securities can be effected only through DTC,
[CEDEL, Euroclear,] participating organizations, indirect participants and
certain banks, the ability of a Security Owner to pledge a Security to persons
or entitles that do not participate in the DTC, CEDEL or Euroclear] system or
otherwise to take actions in respect of such Securities, may be limited due to
lack of a physical security representing the Securities.
Security Owners may experience some delay in their receipt of distributions
of interest and principal on the Securities since such distributions will be
forwarded by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants (as defined herein) which will thereafter credit
them to the accounts of Security Owners either directly or indirectly through
indirect participants. See "DESCRIPTION OF THE SECURITIES--Book-Entry
Securities" herein.
Security Rating Not a Recommendation. The rating of the Securities will
depend primarily on assessment by the Rating Agencies of the Mortgage Loans [and
upon the claims-paying ability of the [Letter of Credit] [Surety Bond]
provider]. [Any reduction in a rating assigned to the claims-paying ability of
the [Letter of Credit] [Surety Bond] provider below the rating initially given
to the Securities may result in a reduction in the rating of the Securities.]
The rating by the Rating Agencies of the Securities is not a recommendation to
purchase, hold or sell the Securities, 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 place for any given period of time or
the ratings will not be lowered or withdrawn by the Rating Agencies. In
general, the ratings address credit risk and do not address the likelihood of
prepayments. The ratings of the Securities do not address the possibility of
the imposition of the United States withholding tax with respect to non-U.S.
persons.
THE TRUST
GENERAL
The Issuer, [Chevy Chase][Capital] Home Equity Loan Trust 199__, is a
business trust formed under the laws of the State of Delaware pursuant to the
Trust Agreement for the transactions described in this Prospectus Supplement.
The Trust Agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to the business trusts. After its formation, the
Issuer will not engage in any activity other than (i) acquiring, holding and
managing the Mortgage Loans and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments on
the Notes and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The property of the Trust will consist of: (i) each of the Mortgage Loans;
(ii) collections on the Mortgage Loans received on and after the Cut-off Date;
(iii) Mortgaged Properties relating to the Mortgage Loans that are acquired by
foreclosure or deed in lieu of foreclosure; (iv) the Collection Account and the
Distribution Account
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(excluding net earnings thereon); and (v) the [Letter of Credit] [Surety Bond].
The Trust's principal offices are in __________________, Delaware, in care
of__________________________, as Owner Trustee, at [ ].
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER]
The following information with respect to ____________ ("___________")
has been furnished by ____________________.
[DESCRIPTION OF LC/SURETY ISSUER]
THE CHEVY CHASE HOME EQUITY LENDING PROGRAM
Chevy Chase has originated variable-rate home equity revolving lines of
credit since 1983. At _________ __, 199_, Chevy Chase had approximately $_____
million aggregate principal amount of outstanding home equity revolving credit
line loans. All of such home equity revolving credit line loans are serviced by
Chevy Chase.
UNDERWRITING PROCEDURES
Prior to approving a home equity revolving credit line 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 balance of the first mortgage loan, if any; (iv) obtaining
and reviewing a written title report to ensure that all liens (including
property taxes), except for the first mortgage lien, if any, 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 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.
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<PAGE>
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 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, 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 75% which is determined based upon a detailed analysis
of their credit history. Borrowers under such program may draw on their line of
credit for the first five years during which no payment of principal is
required. Thereafter, no draws are permitted and the loan will begin to
amortize.
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). Prior to April 1990, Chevy Chase extended loans secured by single-
family rental properties at a maximum combined loan-to-value ration 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 investor properties (other
than such single-family rental properties) or 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-
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value ratio of 90%. Loans approved by Chevy Chase with a combined loan-to-value
ratio greater than 80% also 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.)
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% ("CreditLine 100") with credit limits ranging from $7,500 to $25,000.
Under this program, Chevy Chase utilizes a credit scoring model developed and
validated by Fair, Isaac & Co. ("FICO"). An applicant must have a minimum FICO
score of 700 and a debt-to-income ratio less than 41% to be considered for the
CreditLine 100 program. Applicants with a FICO score of at least 650 and a
debt-to-income ratio less than 36% are considered under the CreditLine 100
program only if approved 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%.
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 the Transferor's Executive Loan Committee or two
officers at the level of Senior Vice President or above.
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 38% and must have owned the property for at least 90 days.
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.
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 up to $50,000 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 bank 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 Base Rate 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"). A borrower is required to make a minimum
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payment for a Mortgage Loan each month in an amount equal to the amount of
interest accrued during the related billing cycle plus any administrative
charges and credit insurance charges and 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 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 Limited. 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 Base Rate for loans which have their interest rates adjusted quarterly
is the rate of interest publicly announced from time to time as the "prime" or
"base" rate of interest or any successor rate of interest charged by the index
bank specified in the related loan agreement as in effect at the close of
business on the last day of the last full calendar month of the immediately
preceding quarter; the Base Rate 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 Base Rate, 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 Base Rate 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 following the date 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 have been offered settlement without closing costs and a
4.9% introductory rate for the first six months after settlement. Beginning in
April 1995, customers opening a loan with a combined loan-to-value greater than
80% but less than 90% are offered settlement without closing costs and a 5.9%
introductory rate for the first six months after settlement. Customers approved
under the Sub-Prime Lending Program are offered an introductory rate for the
first six months after settlement equal to the prime rate published in the
"Money Rates" section of The Wall Street Journal. 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.
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
any amortization of principal that may occur during the amortization period of
loans in the Sub-prime Lending Program and as a result of the required monthly
minimum payments, there are no required payments of principal until maturity.
For home equity revolving credit line loans originated prior to November 7,
1990, 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 Base Rate 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
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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 deed of trust; if the 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 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 first 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 MORTGAGE 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 home equity revolving credit line loans
on the 15th day of each month (the "Cycle Date"). Payments are due 15 days
after the Cycle Date. On the 16th day after the Cycle Date, Chevy Chase deems
The borrower to be one day late. If payment has not been received within five
days after the due date, a system-generated reminder notice is sent to the
customer. If complete payment has not been received within 15 days after the
due date, Chevy Chase charges a late fee equal to 10% of the total amount due
(5% in the case of loans originated prior to July 1, 1986) or $25, whichever is
greater, and sends a system-generated late fee notice to the customer. A second
system-generated late notice, or a preprinted contact letter, is sent to the
customer if payment has not been received within 30 days after the payment due
date. If payment of the account 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 security property, verifies the status of any first trust loan
and sends a breach letter to the customer requiring that the home equity loan
and any such first trust 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,
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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.
The following tables set forth the delinquency and loss experience for each
of the periods shown for Chevy Chase's portfolio of home equity revolving credit
line loans. 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
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,
--------------------------------
199_ 199_ 199_ 199_
----- ----- ----- -----
<S> <C> <C> <C> <C>
Number of Mortgage Loans Serviced..................
Aggregate Loan Balances of Mortgage
Loans Serviced....................................
Loan Balance of Mortgage Loans 30-59 Days
Past Due(2).......................................
Loan Balance of Mortgage Loans 90 or More
Days Past Due(2)..................................
Total Delinquencies as a Percentage of Aggregate
Loan Balances of Mortgage Loans Serviced..........
</TABLE>
____________________
(1) All amounts are as of period end. Delinquency figures do not include past
due amounts of $50.00 or less.
(2) Contractually past due.
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MORTGAGE LOAN LOSS EXPERIENCE
CHEVY CHASE PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------------------
199_ 199_ 199_ 199_
----- ----- ----- -----
<S> <C> <C> <C> <C>
Average Principal Balance of Mortgage Loans Serviced................
Gross Charge Offs(1)................................................
Recoveries on Loans Previously Charged Off(1).......................
Net Charge Offs(1)..................................................
Gross Charge Offs(1) as a Percentage of Average
Principal Balance..................................................
Net Charge Offs(1) as Percentage of Average Principal
Balance............................................................
</TABLE>
____________________
(1) The term "charge off" refers to an actual liquidated loss incurred on a
mortgaged property. A charge offs recognized when a property is sold and
the loss actually is incurred by Chevy Chase.
(2) Annualized.
THE MORTGAGE POOL
The Trust will be formed in accordance with the laws of the State of
Delaware pursuant to the Trust Agreement. The Transferor will transfer the
Mortgage Loans to the Trust, without recourse, in exchange for the Certificates
and a certificate initially to be held by it representing the Transferor's
interest in the Trust (the "Transferor Certificate"). The property of the Trust
will consist of the Mortgage Loans, all proceeds of the Mortgage Loans, all
monies on deposit in the Collection Account and the Distribution Account, the
Mortgages on the properties securing the Mortgage Loans, including any
properties acquired by foreclosure or deed in lieu of foreclosure, the benefits
of the [Letter of Credit] [Surety Bond], and the proceeds on any insurance
policies covering the Mortgage Loans or Mortgaged Properties or any obligors on
the Mortgages. [Pursuant to the Agreement, the Transferor will be required to
transfer Eligible Additional Mortgage Loans (to the extent available) to the
Trust, in order to avoid the occurrence of an Early Amortization Event resulting
from a decline in the Transferor's Interest, and otherwise will be allowed to
transfer Eligible Additional Mortgage Loans to the Trust (subject to certain
limitations and conditions) from time to time. See "DESCRIPTION OF THE
CERTIFICATES --Transfers of Eligible Additional Mortgage Loans to the Trust"
herein.] In addition, the Transferor may, subject to certain limitations and
conditions specified in the Agreement, cause the retransfer from the Trust to it
of certain Mortgage Loans. See "DESCRIPTION OF THE CERTIFICATES -- Optional
Retransfers of Mortgage Loans to the Transferor" herein.
The Mortgage Loans to be transferred to the Trust (collectively, the
"Pool") are evidenced by loan agreements (each, a "Loan Agreement") secured by
credit line deeds of trust or mortgages (which are primarily second deeds of
trust or mortgages on Mortgaged Properties, approximately ___% of which are
located in ________ and approximately ___% of which are located in other states,
with no single state accounting for more than ___% of
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the Cut-off Date Pool Balance (the "Mortgage Loans"). Because the Mortgage Loans
include the loans generated under substantially all the Loan Agreements and
because the Loan Balances will include all amounts payable by borrowers under
such Loan Agreements, some of the Mortgage Loans will be generated under
recently solicited, unseasoned Loans [and the Pool will include delinquent
Mortgage Loans and may include obligations of borrowers who are or are about to
become bankrupt or insolvent]. Many of the Mortgage Loans are less than the
Credit Limit under the corresponding Loan Agreement. Additional Balances on such
Mortgage Loans will be property of the Trust and will increase the Pool Balance.
The amount of the [Letter of Credit] [Surety Bond] was determined taking into
account, among other considerations, the nature of the Loan Agreements and the
Mortgage Loans.
Each Mortgage Loan included in the Pool was generated under a Loan
Agreement that, as of the Cut-off Date, was an Eligible Loan. An "Eligible
Loan" is defined in the Agreement as any home equity credit line that:
[selection criteria of Loans to be added]. Each Mortgage Loan was originated
between ________. Substantially all of the Mortgaged Properties were one- to
four-family residential properties. As of the Cut-off Date, the weighted
average loan utilization rate was approximately ___%.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date:
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LOAN POOL STATISTICS
CUT-OFF DATE LOAN BALANCES
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Cut-Off Date Equity Loan by Aggregate
Loan Balances Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
$ to $............................... $ %
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
$ to $...............................
------------ -------- -------------
Total.................................................... $ %
=============
</TABLE>
CUT-OFF DATE LOAN RATES
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Cut-Off Date Equity Loan by Aggregate
Loan Balances Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
$ to $................................ $ %
$ to $................................
$ to $................................
$ to $................................
$ to $................................
$ to $................................ ____________ ________ _____________
Total............................................. $ %
=============
</TABLE>
S-23
<PAGE>
CUT-OFF DATE MARGIN RANGES -- PRIME INDEXED MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Margin Credit Lines Balances Loan Balances
- ------ ------------ -------- -------------
<S> <C> <C> <C>
%...................................................... $ %
%......................................................
------------ -------- -------------
Total................................................. $ %
=============
</TABLE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Credit Limit Equity Loan by Aggregate
Utilization Rates Credit Lines Balances Loan Balances
- ----------------- ------------ -------- -------------
<S> <C> <C> <C>
0.00% to 5.00%............................................... $ %
5.01% to 10.00%..............................................
10.01% to 15.00%..............................................
15.01% to 20.00%..............................................
20.01% to 25.00%..............................................
25.01% to 30.00%..............................................
30.01% to 35.00%..............................................
35.01% to 40.00%..............................................
40.01% to 45.00%..............................................
45.01% to 50.00%..............................................
50.01% to 55.00%..............................................
55.01% to 60.00%..............................................
60.01% to 65.00%..............................................
65.01% to 70.00%..............................................
70.01% to 75.00%..............................................
75.01% to 80.00%..............................................
80.01% to 85.00%..............................................
85.01% to 90.00%..............................................
90.01% to 95.00%..............................................
95.01% to 100.00%.............................................
------------ -------- -------------
Total..................................................... $ %
=============
</TABLE>
S-24
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS/1/
<TABLE>
<CAPTION>
Range of Number of Home Aggregate % of Pool
Combined Loan-to- Equity Loan by Aggregate
Value Ratios Credit Lines Balances Loan Balances
- ------------ ------------ -------- -------------
<S> <C> <C> <C>
0.00% to 5.00%............................................... $ %
5.01% to 10.00%..............................................
10.01% to 15.00%..............................................
15.01% to 20.00%..............................................
20.01% to 25.00%..............................................
25.01% to 30.00%..............................................
30.01% to 35.00%..............................................
35.01% to 40.00%..............................................
40.01% to 45.00%..............................................
45.01% to 50.00%..............................................
50.01% to 55.00%..............................................
55.01% to 60.00%..............................................
60.01% to 65.00%..............................................
65.01% to 70.00%..............................................
70.01% to 75.00%..............................................
75.01% to 80.00%..............................................
80.01% to 85.00%..............................................
85.01% and above..............................................
------------ -------- -------------
%
Total..................................................... $ =============
</TABLE>
MORTGAGE LOAN INTEREST RATE FLOORS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Interest Equity Loan by Aggregate
Rate Floors Credit Lines Balances Loan Balances
- ----------- ------------ -------- -------------
<S> <C> <C> <C>
None..........................................................
%......................................................
%......................................................
------------ -------- -------------
Total................................................. $ %
=============
</TABLE>
- --------------------------
/1/ The information in this table is as of the Cut-Off Date.
S-25
<PAGE>
MORTGAGE LOAN INTEREST RATE FLOORS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Interest Equity Loan by Aggregate
Rate Ceilings Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
%.......................................................
%.......................................................
None.........................................................
------------ -------- -------------
Total................................................... $ %
=============
</TABLE>
PROPERTY USE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Property Use Credit Lines Balances Loan Balances
- ------------ ------------ -------- -------------
<S> <C> <C> <C>
Owner Occupied.............................................
Non-Owner Occupied.........................................
Unknown....................................................
------------ -------- -------------
Total.................................................. $ %
============
</TABLE>
LIEN PRIORITY OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Lien Priority Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
<S> <C> <C> <C>
First Mortgage.............................................
Second Mortgage............................................
Third Mortgage.............................................
Unknown....................................................
Total ------------ -------- -------------
$ %
============
</TABLE>
S-26
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
State Credit Lines Balances Loan Balances
- ----- ------------ -------- -------------
<S> <C> <C> <C>
_______....................................................
_______....................................................
------------ -------- -------------
Total.................................................. $ %
===========
</TABLE>
PROPERTY TYPE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Number of Units Credit Lines Balances Loan Balances
- --------------- ------------ -------- -------------
<S> <C> <C> <C>
Single Family Detached.....................................
Single Family Attached.....................................
2-4 Family.................................................
Condominium................................................
Cooperative................................................
Unknown....................................................
------------ -------- -------------
Total.................................................. $ %
============
</TABLE>
S-27
<PAGE>
ORIGINATION YEAR OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Origination Year Credit Lines Balances Loan Balances
- ---------------- ------------ -------- -------------
<S> <C> <C> <C>
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
...........................................................
------------ -------- -------------
Total.................................................. $ %
===========
</TABLE>
DAYS DELINQUENT AS OF CUT-OFF DATE
<TABLE>
<CAPTION>
Number of Home Aggregate % of Pool
Equity Loan by Aggregate
Days Delinquent Credit Lines Balances Loan Balances
- --------------- ------------ -------- -------------
<S> <C> <C> <C>
30-59......................................................
60-89......................................................
------------ -------- -------------
Total.................................................. $ %
===========
</TABLE>
No assurance can be given that the values of the Mortgaged Properties as of
the dates of origination of the related Mortgage Loans have remained or will
remain constant or have not declined. For information concerning possible
declines in value of the Mortgaged Properties, see "RISK FACTORS -- Property
Values May Be Insufficient" -- in the Prospectus.
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT
The Servicer will establish and maintain on behalf of the Owner Trustee an
account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account (as defined herein). Subject to
the investment provision described in the following paragraphs, upon receipt by
the Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Sale and Servicing Agreement) maturing
no later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies. Not later than the
[fifth] Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will notify the Owner Trustee and the Indenture Trustee of the
amount of such deposit to be included in funds available for the related
Distribution Date.
S-28
<PAGE>
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Distribution Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to Holders on a
Distribution Date. The Distribution Account will be an Eligible Account.
Amounts on deposit therein will be invested in Eligible Investments maturing on
or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution which accounts are fully insured by
either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation established by such
fund with a minimum long-term unsecured debt rating of [Baa3], (iii) a
segregated trust account maintained with the Owner Trustee or an Affiliate of
the Owner Trustee in its fiduciary capacity or (iv) otherwise acceptable to each
Rating Agency as evidenced by a letter from each Rating Agency to the Owner
Trustee, without reduction or withdrawal of their then current ratings of the
Securities.
Eligible Investments are specified in the Sale 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
Securities.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Loan Agreements between amounts collected in respect of
interest and amounts collected in respect of principal. As to any Distribution
Date, "Interest Collections" will be equal to the aggregate of the amounts
collected during the related Collection Period, including Net Liquidation
Proceeds (as defined below), allocated to interest pursuant to the terms of the
Loan Agreements.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
Net Liquidation Proceeds, and allocated to principal pursuant to the terms of
the Loan Agreements and (ii) any Substitution Adjustment Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the aggregate
of all amounts received upon liquidation of such Mortgage Loan, including,
without limitation, insurance proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal Balance
of the Mortgage Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan plus accrued and unpaid interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Loan Agreement prior to such day. The Principal Balance of a Liquidated
Mortgage Loan after final recovery of related Liquidation Proceeds will be zero.
HAZARD INSURANCE
The Sale and Servicing Agreement provides that the Servicer is required to
maintain or to cause the related Obligor to maintain certain hazard insurance on
the Mortgaged Properties relating to the Mortgage Loans. While the terms of the
related Loan Agreements generally require borrowers to maintain certain hazard
insurance, the Servicer will not monitor the maintenance of such insurance.
The Sale and Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to
S-29
<PAGE>
a Mortgage Loan acquired upon foreclosure of a Mortgage Loan, or by deed in lieu
of such foreclosure, hazard insurance with extended coverage in an amount equal
to the lesser of (a) the maximum insurable value of such Mortgaged Property or
(b) the outstanding balance of such Mortgage Loan plus the outstanding balance
on any mortgage loan senior to such Mortgage Loan at the time of foreclosure or
deed in lieu of foreclosure, plus accrued interest and the Servicer's good faith
estimate of the related liquidation expenses to be incurred in connection
therewith. The Sale and Servicing Agreement provides that the Servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on such Mortgaged Properties. If such
blanket policy contains a deductible clause, the Servicer will be obligated to
deposit in the Collection Account the sums which would have been deposited
therein but for such clause. The Servicer will initially satisfy these
requirements by maintaining a blanket policy. As set forth above, all amounts
collected by the Servicer (net of any reimbursements to the Servicer) under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property) will ultimately be deposited.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when in accordance with applicable servicing procedures under the Sale
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities
for similar loans, provided the Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders or the Transferor. "Net
Liquidation Proceeds" with respect to a Mortgage Loan is the amount received
upon liquidation of such Mortgage Loan reduced by related expenses, which may
include the amount advanced in respect of a senior mortgage, up to the unpaid
Principal Balance of the Mortgage Loan plus accrued and unpaid interest thereon.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Servicer will receive from interest collections in respect of the
Mortgage Loans a portion of such interest collections as a monthly Servicing Fee
in the amount equal to __% per annum ("Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as of the first day of each such
Collection Period. All assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the
Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Sale
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Holders to receive any
related Net Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of _____, 199_,
between the Trust and _____, as Indenture Trustee. The Certificates will be
issued pursuant to the Trust Agreement dated as of _____, 199_,
S-30
<PAGE>
between the Transferor, and _____, as Owner Trustee. The following summaries
describe certain provisions of the Securities, Indenture and Trust Agreement.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement. As
used herein, "Agreement" means either the Trust Agreement or the Indenture, as
the context requires.
BOOK-ENTRY SECURITIES
The Securities will be book-entry Securities (the "Book-Entry Securities").
Persons acquiring beneficial ownership interests in the Securities ("Security
Owners") may elect to hold their Securities through the Depository Trust Company
("DTC") in the United States[, or CEDEL or Euroclear (in Europe) if they are
participants of such systems,] or indirectly through organizations which are
participants in such systems. The Book-Entry Securities will be issued in one
or more certificates which equal the aggregate principal balance of the
Securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. [CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary or Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries").] Investors
may hold such beneficial interests in the Book-Entry Securities in minimum
denominations representing Security Principal Balances of $1,000 and in integral
multiples in excess thereof. Except as described below, no person acquiring a
Book-Entry Securities (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Security (a "Definitive Security").
Unless and until Definitive Securities are issued, it is anticipated that the
only "Holder" of the Securities will be Cede & Co., as nominee of DTC. Security
Owners will not be Holders as that term is used in the Agreement. Security
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant [and on
the records of CEDEL or Euroclear, as appropriate).]
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security
Owners have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interests.
Security Owners will not receive or be entitled to receive Securities
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by book-
entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
S-31
<PAGE>
[Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of sales of securities by or through a CEDEL Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant CEDEL or Euroclear cash account only as of the business day
following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to affect 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 European Depositaries.]
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Securities will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
[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, checkering corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty
S-32
<PAGE>
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian Banking
Commission. Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.]
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the beneficial owners of the Book-
Entry Securities that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the beneficial owners of the Book-Entry Securities that it
represents.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to CEDE. [Distributions with respect to Securities
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations.] Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Securities to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book Entry Securities, may
be limited due to the lack of physical certificates for such Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Securities for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to CEDE,
as nominee of DTC, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the Book
Entry Securities of such beneficial owners are credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by the holders of the Book-Entry Securities under the Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. [CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by Holder under the Agreement on behalf of a
CEDEL Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such
S-33
<PAGE>
actions on its behalf through DTC.] DTC may take actions, at the direction of
the related Participants, with respect to some Securities which conflict with
actions taken with respect to other Securities.
Definitive Securities will be issued to beneficial owners of the Book-Entry
Securities, or their nominees, rather than to DTC, only if (a) DTC or the
Transferor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Securities and the Transferor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Default, beneficial owners having Percentage
Interests aggregating not less than 51% of the Security Principal Balance of the
Book-Entry Securities advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for re-
registration, the Trustee will issue Definitive Securities, and thereafter the
Trustee will recognize the holders of such Definitive Securities as Holders
under the Agreement.
[Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities 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.]
DISTRIBUTIONS
On each Distribution Date, collections on the Mortgage Loans will be
applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest (with interest thereon) on the respective Security Balance of
the Notes and the Certificates;
(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding Collection
Period, such amount to be allocated between the Notes and Certificates pro rata,
based on their respective Security Balances;
(iv) as principal on the Securities, as payment for any
Liquidation Loss Amounts on the Mortgage Loans;
(v) as payment for the premium for the [Letter of Credit]
[Surety Bond];
(vi) to reimburse prior draws made on the [Letter of Credit]
[Surety Bond]; and
(vii) any remaining amounts to the Transferor.
As to any Distribution Date, the "Collection Period" is the calendar month
preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the Collection
Period in which such Mortgage Loan became a Liquidated
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Mortgage Loan after giving effect to the Net Liquidation Proceeds received in
connection therewith.
INTEREST
Note Rate. Interest will accrue on the unpaid Principal Balance of the
Notes at the per annum rate (the "Note Rate") equal to __% per annum from the
Closing Date to the first Distribution Date and thereafter, interest will accrue
on the Notes from and including the preceding Distribution Date to but excluding
such current Distribution Date (each, an "Interest Accrual Period") at [a
floating rate equal to LIBOR (as defined herein) plus __%] [__%]. [Interest
will be calculated on the basis of the actual number of days in each Interest
Accrual Period divided by 360.] A failure to pay interest on any Notes on any
Distribution Date that continues for five days constitutes an Event of Default
under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Principal Balance of
the Certificates at the per annum rate (the "Pass-Through Rate") equal to __%
per annum from the Closing Date to the first Distribution Date and thereafter
interest will accrue on the Certificates for each Interest Accrual Period at [a
floating rate equal to LIBOR (as defined herein) plus __%] [__%]. [Interest
will be calculated on the basis of the actual number of days in each Interest
Accrual Period divided by 360. A failure to pay interest on any Certificates
on any Distribution Date that continues for five days constitutes an Event of
Default under the Trust Agreement.]
OPTIONAL TERMINATION
The Trust will terminate on the Distribution Date following the earlier of
(i) ______________ and (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust. The Mortgage Loans will be subject to optional
purchase by the Servicer on any Distribution Date after the Principal Balance is
reduced to an amount less than or equal to $ ([5]% of the initial Principal
Balance). The repurchase price will be equal to the sum of the outstanding
Principal Balance and accrued and unpaid interest thereon at the weighted
average of the Loan Rates through the day preceding the final Distribution Date.
MATURITY AND PREPAYMENT CONSIDERATIONS
On each Distribution Date, collections on the Mortgage Loans remaining
after the payment of the Servicing Fee and accrued interest on the Notes and the
Certificates will be distributed as principal of the Securities, to the extent
of the excess, if any, of Principal Collections over the Additional Balances
created during the related Collection Period. As a result, the rate and timing
of distributions of principal of the Securities will depend on the interaction
of the rate of Principal Collections and the rate at which Additional Balances
are created.
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 Notes and the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Home equity credit lines such as the Mortgage Loans have been originated in
significant volume only during the past ten 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 credit lines are not viewed by borrowers
as permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans will amortize as described herein, the absence of
voluntary borrower prepayments could cause rates of principal payment to be
slower than, or similar to, those of traditional fully-amortizing first
mortgages. The prepayment experience of the Trust with respect to the Mortgage
Loans may be affected by a wide variety of factors, including general economic
conditions, economic conditions in ___________, prevailing interest rate levels,
the availability of alternative financing and homeowner mobility, the frequency
and amount of any future draws on the Loan Agreements and changes affecting the
deductibility for Federal income tax
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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 in Mortgage Loans" in the
Prospectus.
The yield to an investor who purchases the Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
actual rate of prepayment on the Mortgage Loans is different than the rate
anticipated by such investor at the time such Securities were purchased.
Collections on the Mortgage Loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for such month or as high as the entire principal outstanding
balance plus accrued interest and the fees and charges thereon. It is possible
that borrowers may fail to make scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
Because the Mortgage Loans have a variable interest rate and a fixed payment,
changes in underlying interest rates will vary the allocation of payments
between interest and principal.
The rate and timing of creation of Additional Balances will be
affected by similar factors such as seasonal purchasing habits of the borrowers
and the remaining amount of credit available under the borrowers' Loan
Agreement.
No assurance can be given as to the level of prepayments or the
creation of Additional Balances that will be experienced by the Trust. It can
be expected that a portion of borrowers will not prepay their Mortgage Loans to
any significant degree and that a portion of the borrowers will not create any
Additional Balances.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such Noteholder's
address listed on the Note Register maintained with the Indenture Trustee, a
report setting forth certain amounts relating to the Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, "Events of Default" under the Indenture will
consist of: (i) a default for thirty days or more in the payment of any
principal of or interest on any Note; (ii) a default in the payment of the
principal of or any installment of the principal of any Note when the same
becomes due and payable; (iii) a default in the observance or performance of any
covenant or agreement of the Trust made in the Indenture and the continuation of
any such default for a period of 60 days after notice thereof is given to the
Trust by the Indenture Trustee or to the Trust and the Indenture Trustee by the
Holders of at least 25% in principal amount of the Notes then outstanding; (iv)
any representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 60 days after notice thereof is given to the Trust by the
Indenture Trustee by the Holders of at least 25% in principal amount of Notes
then outstanding; or (v) certain events of bankruptcy, insolvency, receivership
or liquidation of the Transferor or the Trust Fund. [The amount of principal
required to be
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paid to Noteholders under the Indenture will generally be limited to amounts
available to be deposited in the Collection Account. Therefore, the failure to
pay principal on the Notes generally will not result in the occurrence of an
Event of Default until the Final Scheduled Distribution Date for such Notes.] If
there is an Event of Default with respect to a Note due to late payment or
nonpayment of interest due on a Note, additional interest will accrue on such
unpaid interest at the interest rate on the Note (to the extent lawful) until
such interest is paid. Such additional interest on unpaid interest shall be due
at the time such interest is paid. If there is an Event of Default due to late
payment or nonpayment of principal on a Note, interest will continue to accrue
on such principal at the interest rate on the Note until such principal is paid.
If an Event of Default should occur and be continuing with respect to the Notes,
the Indenture Trustee or the Holders of a majority in principal amount of Notes
then outstanding may declare the principal of such Notes to be immediately due
and payable. Such declaration may, under certain circumstances, be rescinded by
the Holders of a majority in principal amount of the Notes then outstanding. If
the Notes are due and payable following an Event of Default with respect
thereto, the Indenture Trustee may institute proceedings to collect amounts due
or foreclose on Trust property or exercise remedies as a secured party. If an
Event of Default occurs and is continuing with respect to the Notes, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the Holders of
the Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the Holders of a majority in principal
amount of the Notes then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the Holders of the outstanding
Notes. No Holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such Holder previously has given the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
Holders of not less than 25% in principal amount of the outstanding Notes have
made written request to the Indenture Trustee to institute such proceeding in
its own name as Indenture Trustee, (iii) such Holder or Holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during the 60-day
period by the Holders of a majority in principal amount of the Notes. In
addition, the Indenture Trustee and the Noteholders, by accepting the Notes,
will covenant that they will not at any time institute against the Trust any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Trust, neither the Indenture
Trustee nor the Owner Trustee in its individual capacity, nor any Holder of a
Certificate representing an ownership interest in the Trust nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Trust contained in the
Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust may not consolidate with or merge
into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the ratings of the Securities then in effect would not be reduced or
withdrawn by any Rating Agency as a result of such merger or consolidation and
(v) the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Noteholder or Certificateholder. The Trust will not, among
other things, (i) except as expressly permitted by the Indenture, sell,
transfer, exchange or otherwise dispose of any of the assets of the Trust, (ii)
claim any credit on or make any deduction from the principal and interest
payable in respect of the Notes (other
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than amounts withheld under the Code or applicable state law) or assert any
claim against any present or former Holder of Notes because of the payment of
taxes levied or assessed upon the Trust, (iii) dissolve or liquidate in whole or
in part, (iv) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the Notes under the Indenture except as may be expressly
permitted thereby or (v) permit any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part thereof, or
any interest therein or the proceeds thereof. The Trust will not incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes and the Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all Noteholders
a report relating to any change in its eligibility and qualification to continue
as Indenture Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of any indebtedness owing
by the Trust to the Indenture Trustee in its individual capacity, any change in
the property and funds physically held by the Indenture Trustee as such and any
action taken by it that materially affects the Notes and that has not been
previously reported, but if no such changes have occurred, then no report shall
be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery to the Indenture Trustee for cancellation of all the
Notes or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the Holders of a majority of the outstanding Notes, the
Trust and the Indenture Trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. Without the consent of the Holder of each outstanding Note
affected thereby, however, no supplemental indenture will: (i) change the due
date of any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or the redemption
price with respect thereto or change any place of payment where or the coin or
currency in which any Note or any interest thereon is payable; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment; (iii) reduce the percentage of the aggregate amount
of the outstanding Notes, the consent of the holders of which is required for
any supplemental indenture or the consent of the holders of which is required
for any waiver of compliance with certain provisions of the Indenture or of
certain defaults thereunder and their consequences as provided for in the
Indenture; (iv) modify or alter the provisions of the Indenture regarding the
voting of Notes held by the Trust, the Transferor or an affiliate of any of
them; (v) decrease the percentage of the aggregate principal amount of Notes
required to amend the sections of the Indenture which specify the applicable
percentage of aggregate principal amount of the Notes necessary to amend the
Indenture or certain other related agreements; or (vi) permit the creation of
any lien ranking prior to or on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Note of the security afforded by
the lien of the Indenture. The Trust and the Indenture Trustee may also enter
into supplemental indentures, without obtaining the consent of the Noteholders,
for the purpose of, among other things, adding any provisions to or changing in
any manner or eliminating any of
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the provisions of the Indenture or of modifying in any manner the rights of the
Noteholders; provided that such action will not materially and adversely affect
the interest of any Noteholder.
VOTING RIGHTS
At all times, the voting rights of Noteholders under the Indenture will be
allocated among the Notes pro rata in accordance with their outstanding
principal balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE TRANSFEROR
Neither the Transferor, the Indenture Trustee nor any director, officer or
employee of the Transferor or the Indenture Trustee will be under any liability
to the Trust or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Transferor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by reason
of reckless disregard of obligations and duties under the Indenture. Subject to
certain limitations set forth in the Indenture, the Indenture Trustee and any
director, officer, employee or agent of the Indenture Trustee shall be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. Any such indemnification by the Trust will reduce
the amount distributable to the Noteholders. All persons into which the
Indenture Trustee may be merged or with which it may be consolidated or any
person resulting from such merger or consolidation shall be the successor of the
Indenture Trustee under the Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference.
REPORTS TO HOLDERS
Concurrently with each distribution to the Holders of the Certificates, the
Servicer will forward to the Owner Trustee for mailing to each Holder a
statement setting forth, among other things, the following items:
(i) the amount of interest included in such distribution and
the related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included in
such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
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(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding Collection
Period;
(ix) the number and aggregate Principal Balances of the
Mortgage Loans as to which the minimum monthly payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period; and
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (i), (iv) and (v)
above, the amounts will be expressed as a dollar amount per Security with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will be
required to forward to the Trustee a statement containing the information set
forth in clauses (i), (iv) and (vi) above aggregated for such calendar year.
AMENDMENT
The Trust Agreement may be amended by the Transferor and the Owner Trustee,
without consent of the Holders, to cure any ambiguity, to correct or supplement
any provision or for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions thereof or of modifying in any
manner the rights of such Holders; provided, however, that such action will not,
as evidenced by an opinion of counsel satisfactory to the Owner Trustee,
adversely affect in any material respect the interests of any Holders. The
Trust Agreement may also be amended by the Transferor and the Owner Trustee with
the consent of the Holders of Notes evidencing at least a majority in principal
amount of then outstanding Notes and Holders owning Voting Interests (as herein
defined) aggregating not less than a majority of the aggregate Voting Interests
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Trust Agreement or modifying in any
manner the rights of the Holders.
INSOLVENCY EVENT
"Insolvency Event" means, with respect to any Person, any of the following
events or actions: certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such Person and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust, the Owner Trustee will direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation
of the Mortgage Loans will be treated as collections on the Mortgage Loans and
deposited in the Collection Account. The Trust Agreement will provide that the
Owner Trustee does not have the power to commence a voluntary proceeding in
bankruptcy with respect to the Trust without the unanimous prior approval of all
Holders (including the Transferor) of the Trust and the delivery to the Owner
Trustee by each Holder (including the Transferor) of a certificate certifying
that the Holder reasonably believes that the Trust is insolvent.
LIABILITY OF THE TRANSFEROR
Under the Trust Agreement, the Transferor will agree to be liable directly
to an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Noteholder or a Holder in the
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capacity of an investor with respect to the Trust) arising out of or
based on the arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Transferor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so disregarded.
Certificates so owned that have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Owner Trustee
the pledgor's right so to act with respect to such Certificates and that the
pledgee is not the Issuer or its affiliates.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE TRANSFEROR
Neither the Transferor, the Owner Trustee nor any director, officer or
employee of the Transferor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Trust Agreement or for errors
in judgment; provided, however, that none of the Owner Trustee, the Transferor
and any director, officer or employee thereof will be protected against any
liability which would otherwise be imposed by reason of willful malfeasance, bad
faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Trust Agreement. Subject to
certain limitations set forth in the Trust Agreement, the Owner Trustee shall be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Trust
Agreement other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Trust Agreement or by reason of reckless disregard of its
obligations and duties under the Trust Agreement. Any such indemnification by
the Trust will reduce the amount distributable to the Holders. All persons into
which the Owner Trustee may be merged or with which it may be consolidated or
any person resulting from such merger or consolidation shall be the successor of
the Owner Trustee under the Trust Agreement.
ADMINISTRATION AGREEMENT
The ____________________, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[ ] is the Indenture Trustee under the Indenture. The mailing address of
the Indenture Trustee is [ ], Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. The mailing address
of the Owner Trustee is [ ], Attention: Corporate Trust Administration.
THE TRANSFEROR
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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.
At _________, 199_, the Transferor had consolidated assets of approximately
$____ billion, deposits of approximately $___ billion, and stockholders' equity
of approximately $_____ 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 the Financial Institution Reform, Recovery,
and Enforcement Act of 1989, as amended ("FIRREA"). At ________, 199_, the
Transferor's tangible, core, tier 1 risk-based and total risk-based regulatory
capital ratios were _____%, ______%, _______% and ________%, 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 ("FDICIA"). 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 Bank,
to convert their charters to national or state bank charters and the House
Banking Committee approved a version of such legislation on June 20, 1997. In
the absence of appropriate "grandfather" provisions, such legislation could have
an adverse effect on the Bank 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 bill approved by the House Banking Committee contains grandfather provisions
that address many of these issues, the Bank 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 Bank or the Real Estate Investment Trust.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Transferor for general corporate purposes.
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the securities will constitute legal investments for them. The
Transferor makes no representation as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Securities) may
adversely affect the liquidity of the Securities.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Transferor has agreed to sell to _____________ (the
"Underwriter"), and the Underwriter has agreed to purchase from the Transferor,
the Securities. The Underwriter is obligated to purchase all the Securities
offered hereby if any are purchased. Distribution of the Securities will be
made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Transferor are expected to be $_____________________ from the sale of the
Notes and $________________ from the sale of the Certificates, before deducting
expenses payable by the Transferor estimated to be $___________________. In
connection with the purchase and sale of the Securities, the Underwriter may be
deemed to have received compensation from the Transferor in the form of
underwriting discounts, concessions or commissions.
The Underwriting Agreement provides that the Transferor will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon by
Shaw, Pittman, Potts & Trowbridge, New York, New York.
RATING
It is a condition to issuance that each Class of the Notes be rated not
lower than _____ by [ ] and _____ by [ ]. It is a condition to issuance that the
Certificates be rated at least "_____" by [ ] and "___" by [ ]. A securities
rating addresses the likelihood of the receipt by Certificateholders and
Noteholders of distributions on the Mortgage Loans to which they are entitled.
The ratings take into consideration the structural, legal and tax aspects
associated with the Certificates and Notes. The ratings on the Securities do
not, however, constitute statements regarding the possibility that
Certificateholders or Noteholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently or
similar ratings on different securities.
S-43
<PAGE>
- --------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY, NOR AN OFFER OF SUCH
SECURITIES IN ANY STATE OR JURISDICTION IN WHICH,
OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION CONTAINED HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
TABLE OF CONTENTS
[VERSION 2]
- --------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms..............................S-4
Risk Factors..................................S-13
The Trust.....................................S-14
The [Letter of Credit] [Surety Bond] Issuer...S-15
The Chevy Chase Home Equity Lending Program...S-15
The Mortgage Pool.............................S-21
Description of the Sale and Servicing
Agreement...................................S-28
Description of the Securities.................S-31
Maturity and Prepayment Considerations........S-36
The Indenture.................................S-37
The Trust Agreement...........................S-40
Administration Agreement......................S-42
The Indenture Trustee.........................S-42
The Owner Trustee.............................S-42
The Transferor................................S-42
Use of Proceeds...............................S-43
Legal Investment Considerations...............S-43
Underwriting..................................S-43
Legal Matters.................................S-44
Rating........................................S-44
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................................ 58
Use of Proceeds............................... 58
Federal Income Tax Consequences............... 58
State Tax Considerations...................... 81
ERISA Considerations.......................... 81
Legal Investment.............................. 81
Plan of Distribution.......................... 81
Legal Matters................................. 82
Glossary of Terms............................. 83
</TABLE>
- --------------------------------------------------
- --------------------------------------------------
$
CHEVY CHASE BANK, F.S.B
Transferor and Servicer
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES,
Series 199_-__
PROSPECTUS SUPPLEMENT
---------------------
_____ __, 199_
- --------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 15, 1997
PROSPECTUS
HOME EQUITY AND HOME IMPROVEMENT LOAN TRUSTS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
----------------
CHEVY CHASE BANK, F.S.B.
(TRANSFEROR AND SERVICER)
----------------
The Asset-Backed Certificates (the "Certificates") and the Asset-Backed
Notes (the "Notes" and, collectively with the Certificates, the "Securities")
described herein may be sold from time to time in one or more series (each, a
"Series") in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). Each Series of Securities will include either one or more
classes of Certificates or, if Notes are issued as part of a Series, one or
more Classes of Notes and one or more Classes of Certificates, as set forth in
the related Prospectus Supplement.
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by Chevy Chase Bank, F.S.B. (the "Transferor")
pursuant to a Pooling and Servicing Agreement or a Trust Agreement, as
described herein. As specified in the related Prospectus Supplement, the Notes
of a Series will be issued and secured pursuant to an
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE TRANSFEROR, THE TRUSTEE, THE
SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE SPECIFIED
IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR ENTITY. THE
TRANSFEROR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH IN THE RELATED
AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR CERTAIN FACTORS TO BE CONSIDERED
IN PURCHASING THE SECURITIES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is ___________, 1997
<PAGE>
(continued from previous page)
Indenture and will represent indebtedness of the related Trust Fund. The Trust
Fund for a Series of Securities will include (a) Primary Assets, which may
include one or more pools of (i) closed-end and/or revolving credit line home
equity loans or certain balances thereof (collectively, the "Mortgage Loans"),
secured by mortgages on one- to four-family residential or mixed-use
properties, (ii) home improvement installment sales contracts and installment
loan agreements (the "Home Improvement Contracts") which are either unsecured
or secured by mortgages on one- to four-family residential or mixed-use
properties, or by purchase money security interests in the home improvements
financed thereby (the "Home Improvements") and (iii) securities ("Private
Securities") backed or secured by Mortgage Loans and/or Home Improvement
Contracts (the "Underlying Loans"), (b) certain monies received or due
thereunder on or after the date specified in the related Prospectus Supplement
(the "Cut-off Date") net, if and as provided in the related Prospectus
Supplement, of certain amounts payable to Chevy Chase Bank, F.S.B., as
servicer (the "Servicer") of the Mortgage Loans and/or Home Improvement
Contracts (collectively, the "Loans"), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding accounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. Amounts on deposit in a pre-
funding account for any Series will be used to purchase additional Loans
during the funding period specified in the related Prospectus Supplement in
the manner specified therein. The amount initially deposited in a pre-funding
account for a Series of Securities will not exceed 50% of the aggregate
principal amount of such Series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on the date or dates specified in the related Prospectus Supplement
(each, a "Distribution Date"), at the times, at the rates, in the amounts and
in the order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage (which may be 0%) and timing of distributions of
principal, interest or both and one or more Classes may be subordinated to
other Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Primary Assets and other assets
comprising the Trust Fund may be divided into one or more Asset Groups and
each Class of the related Series will evidence beneficial ownership of the
corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans or Underlying Loans relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain
limited circumstances described herein and in the related Prospectus
Supplement, a Series of Securities may be subject to termination or redemption
under the circumstances described herein and in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. See "FEDERAL INCOME TAX CONSIDERATIONS."
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it
will continue.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets; (iii) the terms of any Enhancement (as defined
herein) with respect to such Series; (iv) the terms of any insurance related
to the Primary Assets; (v) information concerning any other assets in the
related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date (as defined herein) of each Class of such Securities; (vii)
the method to be used to calculate the amount of interest and principal
required to be applied to the Securities of each Class of such Series on each
Distribution Date, the timing of the application of interest and principal and
the order of priority of the application of such interest and principal to the
respective Classes and the allocation of interest and principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) the amount, if any, deposited in the Pre-Funding Account
(as defined herein) available to purchase additional Loans, the length of the
Pre-Funding Period (as defined herein) or the Revolving Period (as defined
herein) and the criteria for determining which additional Loans (or balances
thereof) may become part of the Trust Fund; (x) additional information with
respect to the plan of distribution of such Securities; and (xi) whether a
REMIC election will be made with respect to some or all of the Trust Fund for
such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreements to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued
in book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such
reports will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may
be exercised indirectly through such participants. See "THE AGREEMENTS--
Reports to Holders."
AVAILABLE INFORMATION
The Transferor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do 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.
Each Trust Fund will be required to file certain reports with the Commission
pursuant to the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Transferor intends to cause each Trust Fund
to suspend filing such reports if and when such reports are no longer required
under the Exchange Act.
3
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of any offering of the Securities
issued by such Trust Fund shall be deemed to be incorporated by reference in
this Prospectus and to be a part of this Prospectus from the date of the
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for all purposes of this Prospectus to the extent that
a statement contained herein (or in the accompanying Prospectus Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Transferor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to
above that have been or may be incorporated by reference in this Prospectus
(not including exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates). Such requests should be
directed to the Transferor at 8401 Connecticut Avenue, Chevy Chase, Maryland
20815.
4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "GLOSSARY OF TERMS."
SECURITIES OFFERED.......... Asset-Backed Certificates (the "Certificates")
and Asset-Backed Notes (the "Notes"). Certifi-
cates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or
Trust Agreement. Each Certificate of a Series
will evidence an interest in the Trust Fund for
such Series, or in an Asset Group specified in
the related Prospectus Supplement. Notes are is-
suable from time to time in a Series pursuant to
an Indenture. Each Series of Securities will
consist of one or more Classes, one or more of
which may be Classes of Compound Interest Secu-
rities, Planned Amortization Class ("PAC") Secu-
rities, Variable Interest Securities, Zero Cou-
pon Securities, Principal Only Securities, In-
terest Only Securities, Participating Securi-
ties, Senior Securities or Subordinate Securi-
ties. Each Class may differ in, among other
things, the amounts allocated to and the prior-
ity of principal and interest payments, Final
Scheduled Distribution Dates, Distribution Dates
and interest rates. The Securities of each Class
will be issued in fully registered form in the
denominations specified in the related Prospec-
tus Supplement. If so specified in the related
Prospectus Supplement, the Securities or certain
Classes of such Securities offered thereby may
be available in book-entry form only.
TRANSFEROR AND SERVICER..... Chevy Chase Bank, F.S.B. ("Chevy Chase"), a fed-
erally chartered stock savings bank, with its
principal executive offices located at 8401 Con-
necticut Avenue, Chevy Chase, Maryland 20815,
and a telephone number of (301) 986-7000. See
"THE TRANSFEROR."
INTEREST PAYMENTS........... Interest payments on the Securities of a Series
entitled by their terms to receive interest will
be made on each Distribution Date, to the extent
set forth in, and at the applicable rate speci-
fied in (or determined in the manner set forth
in), the related Prospectus Supplement. The in-
terest rate on Securities of a Series may be
variable or change with changes in the rates of
interest on the related Loans or Underlying
Loans relating to the Private Securities, as ap-
plicable and/or as prepayments occur with re-
spect to such Loans or Underlying Loans, as ap-
plicable. Interest Only Securities may be as-
signed a "Notional Amount" set forth in the re-
lated Prospectus Supplement which is used solely
for convenience in expressing the calculation of
interest and for certain other purposes and does
not represent the right to receive any distribu-
tions allocable to principal. Principal Only Se-
curities may not be entitled to receive any in-
terest payments or may be entitled to receive
only nominal interest payments. Interest payable
on the Securities of a Series on a Distribution
Date will include all interest accrued
5
<PAGE>
during the period specified in the related Pro-
spectus Supplement. See "DESCRIPTION OF THE SE-
CURITIES--Payments of Interest."
PRINCIPAL PAYMENTS.......... All payments of principal of a Series of Securi-
ties will be made in an aggregate amount deter-
mined as set forth in the related Prospectus
Supplement and will be paid at the times and
will be allocated among the Classes of such Se-
ries in the order and amounts, and will be ap-
plied either on a pro rata or a random lot basis
among all Securities of any such Class, all as
specified in the related Prospectus Supplement.
REVOLVING PERIOD AND
AMORTIZATION PERIOD;
RETAINED INTEREST..........
If the related Prospectus Supplement so provides,
there may be a period commencing on the date of
issuance of a Class or Classes of Notes or Cer-
tificates of a Series and ending on the date set
forth in the related Prospectus Supplement (the
"Revolving Period") during which no principal
payments will be made to one or more Classes of
Notes or Certificates of the related Series as
are identified in such Prospectus Supplement.
All collections of principal otherwise allocated
to such Classes of Notes or Certificates may be
(i) utilized by the Trust Fund during such pe-
riod to acquire additional Loans (or additional
balances of existing Loans) which satisfy the
criteria described in the related Prospectus
Supplement, (ii) held in an account and invested
in Eligible Investments for later distribution
to Securityholders, (iii) applied to those Class
or Classes of Notes or Certificates, if any, of
the same or different Series as specified in the
related Prospectus Supplement as then are in am-
ortization, or (iv) otherwise applied as speci-
fied in the related Prospectus Supplement.
An "Amortization Period" is the period, if any,
specified as such in the related Prospectus Sup-
plement during which an amount of principal is
payable to holders of one or more Classes of a
Series of Securities. If so specified in the re-
lated Prospectus Supplement, during an Amortiza-
tion Period all or a portion of principal col-
lections on the Primary Assets may be applied as
specified above for a Revolving Period and, to
the extent not so applied, will be distributed
to the Classes of Notes or Certificates of the
same or different Series as specified in the re-
lated Prospectus Supplement as then being enti-
tled to payments of principal. In addition, if
so specified in the related Prospectus Supple-
ment, amounts deposited in certain accounts for
the benefit of one or more Classes of Notes or
Certificates may be released from time to time
or on a specified date and applied as a payment
of principal on such Classes of Notes or Certif-
icates. The related Prospectus Supplement will
set forth the circumstances which will result in
the commencement of an Amortization Period.
6
<PAGE>
Each Trust Fund which has a Revolving Period may
also issue to the Transferor a certificate evi-
dencing an undivided beneficial interest (the
"Transferor Interest") in the Trust Fund not
represented by the other Securities issued by
such Trust Fund. As further described in the re-
lated Prospectus Supplement, the value of such
Transferor Interest will fluctuate as the amount
of the assets of the Trust Fund fluctuates and
the amount of Notes and Certificates of the re-
lated Series of Securities outstanding is re-
duced.
FINAL SCHEDULED
DISTRIBUTION DATE OF THE
SECURITIES.................
The Final Scheduled Distribution Date with re-
spect to each Class of Notes is the date no
later than the date on which principal thereof
will be fully paid and with respect to each
Class of Certificates is the date after which no
Certificates of such Class are expected to re-
main outstanding, in each case calculated on the
basis of the assumptions applicable to such Se-
ries described in the related Prospectus Supple-
ment. The Final Scheduled Distribution Date of a
Class may equal the maturity date of the Primary
Asset in the related Trust Fund which has the
latest stated maturity or will be determined as
described herein and in the related Prospectus
Supplement.
The actual final Distribution Date of the Securi-
ties of a Series will depend primarily upon the
rate of payment (including prepayments, liquida-
tions due to default, the receipt of proceeds
from casualty insurance policies and repur-
chases) of the Loans or Underlying Loans relat-
ing to the Private Securities, as applicable, in
the related Trust Fund. Unless otherwise speci-
fied in the related Prospectus Supplement, the
actual final Distribution Date of any Security
is likely to occur earlier and may occur sub-
stantially earlier or, with respect to a Class
of Certificates, may occur later than its Final
Scheduled Distribution Date as a result of the
application of prepayments to the reduction of
the principal balances of the Securities and as
a result of defaults on the Primary Assets. The
rate of payments on the Loans or Underlying
Loans relating to the Private Securities, as ap-
plicable, in the Trust Fund for a Series will
depend on a variety of factors, including cer-
tain characteristics of such Loans or Underlying
Loans, as applicable, and the prevailing level
of interest rates from time to time, as well as
on a variety of economic, demographic, tax, le-
gal, social and other factors. No assurance can
be given as to the actual prepayment experience
with respect to a Series. See "RISK FACTORS--
Yield May Vary" and "DESCRIPTION OF THE SECURI-
TIES--Weighted Average Life of the Securities."
OPTIONAL TERMINATION........ One or more Classes of Securities of any Series
may be redeemed or repurchased in whole or in
part, at the Transferor's or the Servicer's op-
tion, at such time and under the circumstances
spec-
7
<PAGE>
ified in the related Prospectus Supplement, at
the price set forth therein. If so specified in
the related Prospectus Supplement for a Series
of Securities, the Transferor, the Servicer, or
such other entity that is specified in the re-
lated Prospectus Supplement, may, at its option,
cause an early termination of the related Trust
Fund by repurchasing all of the Primary Assets
remaining in the Trust Fund on or after a speci-
fied date, or on or after such time as the ag-
gregate principal balance of the Securities of
the Series or the Primary Assets relating to
such Series, as specified in the related Pro-
spectus Supplement, is less than the amount or
percentage specified in the related Prospectus
Supplement. See "DESCRIPTION OF THE SECURITIES--
Optional Redemption, Purchase or Termination."
In addition, the Prospectus Supplement may pro-
vide other circumstances under which Holders of
Securities of a Series could be fully paid sig-
nificantly earlier than would otherwise be the
case if payments or distributions were solely
based on the payments of the related Primary As-
sets.
THE TRUST FUND.............. The Trust Fund for a Series of Securities will
consist of one or more of the assets described
below, as described in the related Prospectus
Supplement.
A. PRIMARY ASSETS......... The Primary Assets for a Series may consist of
any combination of the following assets, to the
extent and as specified in the related Prospec-
tus Supplement.
(1) LOANS.............. Primary Assets for a Series will consist, in
whole or in part, of Loans. Some Loans may be
delinquent or non-performing as specified in the
related Prospectus Supplement. The Loans will be
originated or acquired by the Transferor in the
ordinary course of its business. The Loans will
be conventional loans or contracts or loans or
contracts insured by the Federal Housing Admin-
istration ("FHA") or partially guaranteed by the
Veterans Administration ("VA"). See "THE TRUST
FUNDS--The Loans" for a discussion of such guar-
antees. To the extent provided in the related
Prospectus Supplement, additional Loans or addi-
tional balances may be periodically added to the
Trust Fund, or may be removed from time to time
if certain asset tests are met, all as described
in the related Prospectus Supplement.
The "Loans" for a Series will consist of (i)
closed-end and/or revolving credit line home eq-
uity loans or certain balances thereof (collec-
tively, the "Mortgage Loans") and (ii) home im-
provement installment sales contracts and in-
stallment loan agreements (the "Home Improvement
Contracts"). The Mortgage Loans and the Home Im-
provement Contracts are collectively referred to
herein as the "Loans." Loans may, as specified
in the related Prospectus Supplement, have vari-
ous payment characteristics, including balloon
or other irregular payment features, and may ac-
crue interest at a fixed rate or an adjustable
rate.
8
<PAGE>
As specified in the related Prospectus Supple-
ment, the Mortgage Loans will and the Home Im-
provement Contracts may be secured by mortgages
and deeds of trust or other similar security in-
struments creating a lien on a Mortgaged Proper-
ty, which may be subordinated to one or more se-
nior liens on such Mortgaged Property, as de-
scribed in the related Prospectus Supplement. As
specified in the related Prospectus Supplement,
Home Improvement Contracts may be unsecured or
secured by purchase money security interests in
the Home Improvements financed thereby. The
Mortgaged Properties and the Home Improvements
are collectively referred to herein as the
"Properties."
The related Prospectus Supplement will describe
certain characteristics of the Loans for a Se-
ries, including, without limitation, and to the
extent relevant: (a) the aggregate unpaid prin-
cipal balance of the Loans (or the aggregate un-
paid principal balance included in the Trust
Fund for the related Series); (b) the range and
weighted average Loan Rate on the Loans and in
the case of adjustable rate Loans, the range and
weighted average of the Current Loan Rates and
the Lifetime Rate Caps, if any; (c) the range
and the average outstanding principal balance of
the Loans; (d) the weighted average original and
remaining term-to-stated maturity of the Loans
and the range of original and remaining terms-
to-stated maturity, if applicable; (e) the range
of Combined Loan-to-Value Ratios or Loan-to-
Value Ratios, as applicable, of the Loans, com-
puted in the manner described in the related
Prospectus Supplement; (f) the percentage (by
principal balance as of the Cut-off Date) of
Loans that accrue interest at adjustable or
fixed interest rates; (g) any enhancement relat-
ing to the Loans; (h) the percentage (by princi-
pal balance as of the Cut-off Date) of Loans
that are secured by Mortgaged Properties, Home
Improvements or are unsecured; (i) the geo-
graphic distribution of any Mortgaged Properties
securing the Loans; (j) the use and type of each
Mortgaged Property securing a Loan; (k) the lien
priority of the Loans; (l) the credit limit uti-
lization rates of any Revolving Credit Line
Loans; and (m) the delinquency status and year
of origination of the Loans.
(2) PRIVATE Primary Assets for a Series may consist, in whole
SECURITIES......... or in part, of Private Securities which include
(a) pass-through certificates representing bene-
ficial interests in loans of the type that would
otherwise be eligible to be Loans (the "Under-
lying Loans") or (b) collateralized obligations
secured by Underlying Loans. Such pass-through
certificates or collateralized obligations will
have previously been (a) offered and distributed
to the public pursuant to an effective registra-
tion statement or (b) purchased in a transaction
not involving any public offering from a person
who is not an affiliate of the issuer of such
securities at the time of sale (nor an affiliate
thereof at any time during the three preceding
months); provided a period of two years has
elapsed since the later of the
9
<PAGE>
date the securities were acquired from the is-
suer or an affiliate thereof. Although individ-
ual Underlying Loans may be insured or guaran-
teed by the United States or an agency or in-
strumentality thereof, they need not be, and the
Private Securities themselves will not be so in-
sured or guaranteed. See "THE TRUST FUNDS--Pri-
vate Securities." Unless otherwise specified in
the Prospectus Supplement relating to a Series
of Securities, payments on the Private Securi-
ties will be distributed directly to the Trustee
as registered owner of such Private Securities.
The related Prospectus Supplement for a Series
will specify (such disclosure may be on an ap-
proximate basis, as described above and will be
as of the date specified in the related Prospec-
tus Supplement) to the extent relevant and to
the extent such information is reasonably avail-
able to the Transferor and the Transferor rea-
sonably believes such information to be reli-
able: (i) the aggregate approximate principal
amount and type of any Private Securities to be
included in the Trust Fund for such Series;
(ii) certain characteristics of the Underlying
Loans including (A) the payment features of such
Underlying Loans (i.e., whether they are fixed
rate or adjustable rate and whether they provide
for fixed level payments, negative amortization
or other payment features), (B) the approximate
aggregate principal amount of such Underlying
Loans which are insured or guaranteed by a gov-
ernmental entity, (C) the servicing fee or range
of servicing fees with respect to such Under-
lying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origina-
tion, (E) the lien priority and the credit uti-
lization rates, if any, of such Underlying
Loans, and (F) the delinquency status and year
of origination of such Underlying Loans; (iii)
the maximum original term-to-stated maturity of
the Private Securities; (iv) the weighted aver-
age term-to-stated maturity of the Private Secu-
rities; (v) the pass-through or certificate rate
or ranges thereof for the Private Securities;
(vi) the sponsor or depositor of the Private Se-
curities (the "PS Sponsor"), the servicer of the
Private Securities (the "PS Servicer") and the
trustee of the Private Securities (the "PS
Trustee"); (vii) certain characteristics of En-
hancement, if any, such as reserve funds, insur-
ance policies, letters of credit or guarantees,
relating to the Underlying Loans, or to such
Private Securities themselves; (viii) the terms
on which the Underlying Loans may, or are re-
quired to, be repurchased prior to stated matu-
rity; and (ix) the terms on which substitute Un-
derlying Loans may be delivered to replace those
initially deposited with the PS Trustee. See
"THE TRUST FUNDS--Private Securities--Additional
Information."
B. COLLECTION,
CERTIFICATE AND
DISTRIBUTION
ACCOUNTS............... Unless otherwise provided in the related Prospec-
tus Supplement, all payments on or with respect
to the Primary Assets for a Series will be re-
mitted by the Servicer within the period speci-
fied in the related Prospectus Supplement di-
rectly to an account (the "Col-
10
<PAGE>
lection Account" or the "Certificate Account")
to be established for such Series. Unless other-
wise provided in the related Prospectus Supple-
ment, the Trustee shall be required to apply a
portion of the amount in the Collection Account
or the Certificate Account to the payment of
certain amounts payable to the Servicer under
the related Agreement and any other person spec-
ified in the Prospectus Supplement, and to de-
posit a portion of the amount in the Collection
Account into one or more separate accounts
(each, a "Distribution Account") to be estab-
lished for such Series, each in the manner and
at the times established in the related Prospec-
tus Supplement. All amounts deposited in such
Distribution Account (or, if there is no Distri-
bution Account, amounts remaining in the Certif-
icate Account) will be available, unless other-
wise specified in the related Prospectus Supple-
ment, for (i) application to the payment of
principal of and interest on such Series of Se-
curities (or such Class or Classes specified in
the related Prospectus Supplement) on the next
Distribution Date, (ii) the making of adequate
provision for future payments on certain Classes
of Securities and (iii) any other purpose speci-
fied in the related Prospectus Supplement. After
applying the funds in the Collection Account or
the Certificate Account as described above, any
funds remaining in such Accounts may be paid
over to the Servicer, the Transferor, any pro-
vider of Enhancement with respect to such Series
(an "Enhancer") or any other person entitled
thereto in the manner and at the times estab-
lished in the related Prospectus Supplement.
C. PRE-FUNDING AND
CAPITALIZED INTEREST
ACCOUNTS...............
If specified in the related Prospectus Supple-
ment, a Trust Fund will include one or more seg-
regated trust accounts (each, a "Pre-Funding Ac-
count") for the related Series. If so specified,
on the closing date for such Series, a portion
of the proceeds of the sale of the Securities of
such Series (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding
Account and may be used to purchase additional
Primary Assets during the period of time speci-
fied in the related Prospectus Supplement (the
"Pre-Funding Period"). The Primary Assets to be
so purchased will be required to have certain
characteristics specified in the related Pro-
spectus Supplement. If any Pre-Funded Amount re-
mains on deposit in the Pre-Funding Account at
the end of the Pre-Funding Period, such amount
will be applied in the manner specified in the
related Prospectus Supplement to prepay the
Classes of Notes and/or the Certificates of the
applicable Series specified in the related Pro-
spectus Supplement. The amount initially depos-
ited in a Pre-Funding Account for a Series of
Securities will not exceed 50% of the aggregate
principal amount of such Series of Securities.
If a Pre-Funding Account is established, one or
more segregated trust accounts (each, a "Capi-
talized Interest Account") may be
11
<PAGE>
established for the related Series. On the clos-
ing date for such Series, a portion of the pro-
ceeds of the sale of the Securities of such Se-
ries may be deposited in the Capitalized Inter-
est Account and used to fund the excess, if any,
of (x) the sum of (i) the amount of interest ac-
crued on the Classes of Securities of such Se-
ries specified in the related Prospectus Supple-
ment and (ii) if specified in the related Pro-
spectus Supplement, certain fees or expenses
during the Pre-Funding Period such as Trustee
fees and credit enhancement fees, over (y) the
amount of interest available therefor from the
Primary Assets in the Trust Fund. If so speci-
fied in the related Prospectus Supplement,
amounts on deposit in the Capitalized Interest
Account may be released to the Transferor prior
to the end of the Pre-Funding Period subject to
the satisfaction of certain tests specified in
the related Prospectus Supplement. Any amounts
on deposit in the Capitalized Interest Account
at the end of the Pre-Funding Period that are
not necessary for such purposes will be distrib-
uted to the person specified in the related Pro-
spectus Supplement.
ENHANCEMENT................. If and to the extent specified in the related
Prospectus Supplement, enhancement with respect
to a Series or any Class of Securities may in-
clude any one or more of the following: a finan-
cial guaranty insurance policy,
overcollateralization, a letter of credit, a
cash reserve fund, insurance policies, one or
more Classes of Subordinate Securities, deriva-
tive products or other forms of credit enhance-
ment, or any combination thereof (collectively,
"Enhancement"). The Enhancement with respect to
any Series or any Class of Securities may be
structured to provide protection against delin-
quencies and/or losses on the Primary Assets,
against changes in interest rates, or other
risks, to the extent and under the conditions
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Pro-
spectus Supplement, any form of Enhancement will
have certain limitations and exclusions from
coverage thereunder, which will be described in
the related Prospectus Supplement. Further in-
formation regarding any Enhancer, including fi-
nancial information when material, will be in-
cluded in the related Prospectus Supplement. See
"ENHANCEMENT."
With respect to any Series of Securities includ-
ing one or more Classes of Notes, distributions
in respect of the Certificates may be subordi-
nated in priority of payment to payments on the
Notes, to the extent specified in the related
Prospectus Supplement.
SERVICING................... The Servicer will be responsible for servicing,
managing and making collections on the Loans for
a Series. In addition, the Servicer, if so spec-
ified in the related Prospectus Supplement, will
act as custodian and will be responsible for
maintaining custody of the Loans and related
documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal
and/or
12
<PAGE>
interest on a Loan ("Delinquency Advances") will
be made by the Servicer if and only to the ex-
tent described in the related Prospectus Supple-
ment. Such advances will be intended to provide
liquidity only and will be reimbursable to the
Servicer, to the extent specified in the related
Prospectus Supplement, from scheduled payments
of principal and/or interest, late collections,
or from the proceeds of liquidation of the re-
lated Loans or from other recoveries relating to
such Loans (including any insurance proceeds or
payments from other credit support) or, to the
extent specified in the related Prospectus Sup-
plement, from payments or proceeds from other
Loans. If and to the extent specified in the re-
lated Prospectus Supplement, the Servicer shall
be entitled to advance its own funds to pay for
any related expenses of foreclosure and disposi-
tion of any liquidated Mortgage Loan or related
Property (the "Servicer Advances"). See "SERVIC-
ING OF LOANS--Advances and Limitations Thereon."
The Servicer shall be entitled to be reimbursed
for any such Servicer Advances as specified in
the related Prospectus Supplement. In performing
these functions, the Servicer will exercise the
same degree of skill and care that it customar-
ily exercises with respect to similar Loans
owned or serviced by it. Under certain limited
circumstances, the Servicer may resign or be re-
moved, in which event either the Trustee or a
third-party servicer will be appointed as suc-
cessor servicer. The Servicer will receive a pe-
riodic fee as servicing compensation (the "Ser-
vicing Fee") and may, as specified herein and in
the related Prospectus Supplement, receive cer-
tain additional compensation. See "SERVICING OF
LOANS--Servicing Compensation and Payment of Ex-
penses."
FEDERAL INCOME TAX
CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES.............
If (i) an election is made to treat all or a por-
tion of a Trust Fund for a Series as a "real es-
tate mortgage investment conduit" (a "REMIC") or
(ii) so provided in the related Prospectus Sup-
plement, a Series of Securities will include one
or more Classes of taxable debt obligations un-
der the Internal Revenue Code of 1986, as
amended (the "Code"), stated interest with re-
spect to such Classes of Securities will be re-
ported by a Holder in accordance with the Hold-
er's method of accounting except that, in the
case of Securities constituting "regular inter-
ests" in a REMIC ("Regular Interests"), such in-
terest will be required to be reported on the
accrual method regardless of a Holder's usual
method of accounting. Securities that are Com-
pound Interest Securities, Zero Coupon Securi-
ties or Interest Only Securities will, and cer-
tain other Classes of Securities may, be issued
with original issue discount that is not de
minimis. In such cases, the Holder will be re-
quired to include original issue discount in
gross income as it accrues, which may be prior
to the receipt of cash attributable to such in-
come. If a Security is issued at a premium, the
Holder
13
<PAGE>
may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Secu-
rities may be treated as REMIC "residual inter-
ests" ("Residual Interest"). A Holder of a Re-
sidual Interest will be required to include in
its income its pro rata share of the taxable in-
come of the REMIC. In certain circumstances, the
Holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to
REMIC taxable income for a particular period in
excess of cash distributions for such period or
have an after-tax return that is less than the
after-tax return on comparable debt instruments.
In addition, a portion (or, in some cases, all)
of the income from a Residual Interest (i) ex-
cept in certain circumstances with respect to a
Holder classified as a thrift institution under
the Code, may not be subject to offset by losses
from other activities or investments, (ii) for a
Holder that is subject to tax under the Code on
unrelated business taxable income, may be
treated as unrelated business taxable income and
(iii) for a foreign holder, may not qualify for
exemption from or reduction of withholding. In
addition, (i) Residual Interests are subject to
transfer restrictions and (ii) certain transfers
of Residual Interests will not be recognized for
federal income tax purposes. Further, individual
holders are subject to limitations on the de-
ductibility of expenses of the REMIC. See "FED-
ERAL INCOME TAX CONSIDERATIONS."
B. NON-REMIC PASS-THROUGH
SECURITIES.............
If so specified in the related Prospectus Supple-
ment, the Trust Fund for a Series will be
treated as a grantor trust and will not be clas-
sified as an association taxable as a corpora-
tion for federal income tax purposes and Holders
of Securities of such Series ("Pass-Through Se-
curities") will be treated as owning directly
rights to receive certain payments of interest
or principal, or both, on the Primary Assets
held in the Trust Fund for such Series. All in-
come with respect to a Stripped Security (as de-
fined herein) will be accounted for as original
issue discount and, unless otherwise specified
in the related Prospectus Supplement, will be
reported by the Trustee on an accrual basis,
which may be prior to the receipt of cash asso-
ciated with such income.
C. OWNER TRUST If so specified in the Prospectus Supplement, the
SECURITIES............. Trust Fund will be treated as a partnership for
purposes of federal and state income tax. Each
Noteholder, by the acceptance of a Note of a
given Series, will agree to treat such Note as
indebtedness, and each Certificateholder, by the
acceptance of a Certificate of a given Series,
will agree to treat the related Trust Fund as a
partnership in which such Certificateholder is a
partner for federal income and state tax purpos-
es. Alternative characterizations of such Trust
Fund and such Certificates are possible, but
would not result in materially adverse tax con-
sequences to Certificateholders. See "FEDERAL
INCOME TAX CONSIDERATIONS."
14
<PAGE>
ERISA CONSIDERATIONS........ The eligibility of Notes and Certificates to be
acquired by employee benefit plans or with the
plan assets of employee benefit plans is subject
to the considerations discussed under "ERISA
CONSIDERATIONS" herein and in the related Pro-
spectus Supplement. The related Prospectus Sup-
plement will provide further information with
respect to the eligibility of a Class of Notes
or Certificates for purchase by employee benefit
plans.
A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Code
should carefully review with its own legal advi-
sors whether the purchase or holding of Securi-
ties could give rise to a transaction prohibited
or otherwise impermissible under ERISA or the
Code. See "ERISA CONSIDERATIONS" herein and in
the related Prospectus Supplement.
LEGAL INVESTMENT............ Unless otherwise specified in the related Pro-
spectus Supplement, Securities of each Series
offered by this Prospectus and the related Pro-
spectus Supplement will not constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). In-
vestors whose investment authority is subject to
legal restrictions should consult their own le-
gal advisors to determine whether and to what
extent the Securities constitute legal invest-
ments for them. See "LEGAL INVESTMENT."
RATINGS..................... It will be a requirement for issuance of any Se-
ries that each Class of Securities offered by
this Prospectus and the related Prospectus Sup-
plement be rated by at least one Rating Agency
in one of its four highest applicable rating
categories. The rating or ratings applicable to
Securities of each Series offered hereby and by
the related Prospectus Supplement will be as set
forth in the related Prospectus Supplement.
There is no assurance that the rating initially
assigned to such Securities will not be subse-
quently lowered or withdrawn by the Rating Agen-
cy. In the event the rating initially assigned
to any Securities is subsequently lowered for
any reason, no person or entity will be obli-
gated to provide any credit enhancement in addi-
tion to the Enhancement, if any, specified in
the related Prospectus Supplement.
A securities rating should be evaluated indepen-
dently of similar ratings on different types of
securities. A securities rating is not a recom-
mendation to buy, hold or sell securities and
does not address the effect that the rate of
prepayments on Loans or Underlying Loans relat-
ing to Private Securities, as applicable, for a
Series may have on the yield to investors in the
Securities of such Series. See "RISK FACTORS--
Ratings Are Not Recommendations."
15
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following risk factors in
connection with the purchase of the Securities.
No Secondary Market. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. See "PLAN OF DISTRIBUTION."
Primary Assets Are Only Source of Repayment. The Securities of a Series will
be payable solely from the assets of the Trust Fund for such Securities and
any related Enhancement. There will be no recourse to the Transferor or any
other person for any default on the Notes or any failure to receive
distributions on the Certificates except to the extent of the obligations, if
any, of the Transferor with respect to certain representations and warranties.
See "THE AGREEMENTS--Assignment of Primary Assets." Further, unless otherwise
stated in the related Prospectus Supplement, at the times set forth in the
related Prospectus Supplement, certain Primary Assets and/or any balance
remaining in the Collection Account, Certificate Account or Distribution
Account immediately after making all payments due on the Securities of such
Series and other payments specified in the related Prospectus Supplement, may
be promptly released or remitted to the Transferor, the Servicer, the Enhancer
or any other person entitled thereto and will no longer be available for
making payments to Holders. Consequently, Holders of Securities of each Series
must rely solely upon payments with respect to the Primary Assets and the
other assets constituting the Trust Fund for a Series of Securities,
including, if applicable, any amounts available pursuant to any Enhancement
for such Series, for the payment of principal of and interest on the
Securities of such Series.
Adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of payments of principal
and interest when due on the Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Loans. For
instance, if a Property secures a senior mortgage or deed of trust for an
adjustable-rate loan, and interest rates have increased since the origination
of the related Loan, the borrower's ability to pay the required monthly
payment on such Loan may be adversely affected by the increase in monthly
payments on the Loan and on such senior loan. Further, application of federal
and state bankruptcy and debtor relief laws would affect the interests of the
Securityholders in the Loans if such laws result in certain Loans being
uncollectible.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust
Fund in the case of a default with respect to such Notes and may not proceed
against any assets of the Transferor. There is no assurance that the market
value of the Primary Assets or any other assets for a Series will at any time
be equal to or greater than the aggregate principal amount of the Securities
of such Series then outstanding, plus accrued interest thereon. Moreover, upon
an event of default under the Indenture for a Series of Notes and a sale of
the assets in the Trust Fund or upon a sale of the assets of a Trust Fund for
a Series of Certificates, the Trustee, the Servicer, if any, the Enhancer and
any other service provider specified in the related Prospectus Supplement
generally will be entitled to receive the proceeds of any such sale to the
extent of unpaid fees and other amounts owing to such persons under the
related Agreement prior to distributions to Holders of Securities. Upon any
such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Securities of such Series. See "THE TRUST
FUNDS."
Limited Protection Against Losses. Although any Enhancement is intended to
reduce the risk of delinquent payments or losses to Holders entitled to the
benefit thereof, the amount of such Enhancement will be limited, as set forth
in the related Prospectus Supplement, and will decline and could be depleted
under certain circumstances prior to the payment in full of the related Series
of Securities, and as a result Holders may suffer losses. See "ENHANCEMENT."
16
<PAGE>
Yield May Vary. The yield to maturity experienced by a Holder of Securities
may be affected by the rate of payment of principal of the Loans or Underlying
Loans relating to the Private Securities, as applicable. The timing of
principal payments of the Securities of a Series will be affected by a number
of factors, including the following: (i) the extent of prepayments of the
Loans or Underlying Loans relating to the Private Securities, as applicable,
which prepayments may be influenced by a variety of factors; (ii) the manner
of allocating principal payments among the Classes of Securities of a Series
as specified in the related Prospectus Supplement; and (iii) the exercise by
the party entitled thereto of any right of optional termination. See
"DESCRIPTION OF THE SECURITIES--Weighted Average Life of the Securities."
Prepayments may also result from repurchases of Loans or Underlying Loans
relating to the Private Securities, as applicable, due to material breaches of
the Transferor's representations and warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each
Distribution Date, and the effective yield (at par) to Holders will be less
than the indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments
of Interest."
Status of Junior Liens; Property Values May Be Insufficient. If the Loans in
a Trust Fund are secured primarily by junior liens subordinate to the rights
of the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such Loans only to the extent
that the claims of such senior mortgagees or beneficiaries have been satisfied
in full, including any related foreclosure costs. In addition, a junior
mortgagee may not foreclose on the Property securing a junior mortgage unless
it forecloses subject to the senior mortgages, in which case it must either
pay the entire amount due on the senior mortgages to the senior mortgagees at
or prior to the foreclosure sale or undertake the obligation to make payments
on the senior mortgages in the event the mortgagor is in default thereunder.
The Trust Fund will not have any source of funds to satisfy the senior
mortgages or deeds of trust or make payments due to the senior mortgagees or
beneficiaries.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan (or the
balances thereof sold to a Trust Fund), together with any senior financing on
the Properties, would equal or exceed the value of the Properties. Among the
factors that could adversely affect the value of the Properties are an overall
decline in the residential real estate market in the areas in which the
Properties are located or a decline in the general condition of the Properties
as a result of failure of borrowers to maintain adequately the Properties or
of natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods. Any such decline could extinguish the value of a
junior interest in a Property before having any effect on the related senior
interest therein. If such a decline occurs, the actual rates of delinquencies,
foreclosure and losses on the junior Loans could be higher than those
currently experienced in the mortgage and home improvement lending industry in
general. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Junior Mortgages; Rights of
Senior Mortgages."
Pre-Funding and Additional Loans May Adversely Affect Investment. If a Trust
Fund includes a Pre-Funding Account and the principal balance of additional
Primary Assets delivered to the Trust Fund during the Pre-Funding Period is
less than the Pre-Funded Amount, the Holders of the Securities of the related
Series will receive a prepayment of principal as and to the extent described
in the related Prospectus Supplement. In addition, if so specified in the
related Prospectus Supplement, an Amortization Period may result from the
failure of the Transferor to sell additional Primary Assets (or balances
thereof) to the Trust Fund during the Revolving Period, thereby resulting in a
prepayment of the related Securities. Any such principal prepayment may
adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no
assurance that investors will be able to reinvest such a prepayment at yields
equaling or exceeding the yields on the related Securities. It is possible
that the yield on any such reinvestment will be lower, and may be
significantly lower, than the yield on the related Securities.
17
<PAGE>
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating
Agency (and/or any Enhancer) prior to the issuance of the related Series and
are designed to ensure that if such additional Primary Assets were included as
part of the initial Primary Assets, the credit quality of such assets would be
consistent with the initial rating of each Class of Securities of such Series.
The Transferor will certify to the Trustee that all conditions precedent to
the transfer of the additional Primary Assets, including the satisfaction of
the eligibility criteria to the Trust Fund, have been satisfied. It is a
condition to the transfer of any additional Primary Assets to the Trust Fund
that each Rating Agency, after receiving prior notice of the proposed transfer
of the additional Primary Assets to the Trust Fund, shall not have advised the
Transferor or the Trustee or any Enhancer that the conveyance of such
additional Primary Assets will result in a qualification, modification or
withdrawal of its then current rating of any Class of Notes or Certificates of
such Series. Following the transfer of additional Primary Assets to the Trust
Fund, the aggregate characteristics of the Primary Assets then held in the
Trust Fund may vary from those of the initial Primary Assets of such Trust
Fund. As a result, the additional Primary Assets may adversely affect the
performance of the related Securities. See "THE TRUST FUNDS--Accounts."
The ability of a Trust Fund to invest in additional Loans during the related
Pre-Funding Period and/or any Revolving Period will be dependant on the
ability of the Transferor to originate or acquire Loans that satisfy the
requirements for transfer to the Trust Fund specified in the related
Prospectus Supplement. The ability of the Transferor to originate or acquire
such Loans will be affected by a variety of social and economic factors,
including the prevailing level of market interest rates, unemployment levels
and consumer perceptions of general economic conditions.
Potential Liability For Environmental Conditions. Real property pledged as
security to a lender may be subject to certain environmental risks. Under the
laws of certain states, contamination of a property may give rise to a lien on
the property to assure the costs of clean-up. In several states, such a lien
has priority over the lien of an existing mortgage or owner's interest against
such property. In addition, under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA"), a lender may be liable, as an "owner" or "operator," for
costs of addressing releases or threatened releases of hazardous substances
that require remedy at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by a prior owner.
A lender also risks such liability on foreclosure of the Mortgaged Property.
See "SERVICING OF LOANS--Realization Upon Defaulted Loans."
Consumer Protection Laws May Affect Loans. Applicable state laws generally
regulate interest rates and other charges and require certain disclosures. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and
debt collection practices may apply to the origination, servicing and
collection of the Loans. Depending on the provisions of the applicable law and
the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Servicer to collect all
or part of the principal of or interest on the Loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject the
owner of the Loan to damages and administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation;
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(iv) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience; and
(v) for Revolving Credit Line Loans that were originated or closed after
November 7, 1989, the Home Equity Loan Consumer Protection Act of 1988,
which requires additional application disclosures, limits changes that may
be made to loan documents without the borrower's consent and restricts a
lender's ability to declare a default or to suspend or reduce a borrower's
credit limit to certain enumerated events.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the
obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The Holder
in Due Course Rules have the effect of subjecting any assignee of the seller
in a consumer credit transaction to all claims and defenses which the obligor
in the credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the ability
of the Servicer to collect all or part of the principal of or interest on the
Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. In addition, numerous other federal and state
statutory provisions, including the federal bankruptcy laws, the Soldiers' and
Sailors' Civil Relief Act of 1940 and state debtor relief laws, may also
adversely affect the Servicer's ability to collect the principal of or
interest on the Loans and also would affect the interests of the
Securityholders in such Loans if such laws result in the Loans being
uncollectible. See "CERTAIN LEGAL ASPECTS OF THE LOANS."
Contracts Will Not Be Stamped. Unless otherwise specified in the related
Prospectus Supplement, in order to give notice of the right, title and
interest of Securityholders to the Home Improvement Contracts that constitute
chattel paper, the Transferor will cause a UCC-1 financing statement to be
executed by the Transferor identifying the Trustee as the secured party and
identifying such Home Improvement Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, such Home Improvement
Contracts will not be stamped or otherwise marked to reflect their assignment
to the Trust Fund. Therefore, if, through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of such Home
Improvement Contracts without notice of such assignment, the interest of
Securityholders in such Home Improvement Contracts could be defeated. See
"CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement Contracts."
Ratings Are Not Recommendations. It will be a condition to the issuance of a
Series of Securities that each Class be rated in one of the four highest
rating categories by the Rating Agency identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the
adequacy of the value of the Primary Assets and any Enhancement with respect
to such Series. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the Rating Agency if in its judgment
circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary
Assets, such rating might also be lowered or withdrawn, among other reasons,
because of an adverse change in the financial or other condition of an
Enhancer or a change in the rating of such Enhancer's long term debt.
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the
related Prospectus Supplement as trustee (the "Trustee") with respect to such
Series. A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Certificates will also be
issued in Series pursuant to separate agreements (each, a "Pooling and
Servicing Agreement" or a "Trust Agreement") among the Transferor, the
Servicer, if the Series relates to Loans, and the Trustee. A form of Pooling
and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A Series may consist of both
Notes and Certificates.
The following summaries describe certain provisions in the Agreements common
to each Series of Securities. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of Securities,
one or more of which may be Compound Interest Securities, Variable Interest
Securities, PAC Securities, Zero Coupon Securities, Principal Only Securities,
Interest Only Securities or Participating Securities. A Series may also
include one or more Classes of Subordinate Securities. The Securities of each
Series will be issued only in fully registered form, without coupons, in the
authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer
of the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the
payment of any service charge other than any tax or governmental charge
payable in connection with such registration of transfer or exchange. If
specified in the related Prospectus Supplement, one or more Classes of a
Series may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the related Prospectus Supplement (which may
be different for each Class or for the payment of principal and interest) by
check mailed to Holders of such Series, registered as such at the close of
business on the record date specified in the related Prospectus Supplement
applicable to such Distribution Dates at their addresses appearing on the
security register, except that (a) payments may be made by wire transfer
(which, unless otherwise specified in the related Prospectus Supplement, shall
be at the expense of the Holder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b)
final payments of principal in retirement of each Security will be made only
upon presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be
made to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, all payments with respect to the Primary Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Enhancement will be
deposited directly into the Collection Account or the Certificate Account. If
provided in the related Prospectus Supplement, such amounts may be net of
certain amounts payable to the Servicer and any other person specified in the
Prospectus Supplement. Such amounts thereafter may be deposited into the
Distribution Account and will be available to make payments on the Securities
of such Series on the next applicable Distribution Date. See "THE TRUST
FUNDS--Accounts."
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VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will
be equal to the product of the Asset Value Percentage as set forth in the
Indenture and the lesser of (a) the stream of remaining regularly scheduled
payments on the Primary Assets, net, unless otherwise provided in the related
Prospectus Supplement, of certain amounts payable as expenses, together with
income earned on each such scheduled payment received through the day
preceding the next Distribution Date at the Assumed Reinvestment Rate, if any,
discounted to present value at the highest interest rate on the Notes of such
Series over periods equal to the interval between payments on the Notes, and
(b) the then principal balance of the Primary Assets. Unless otherwise
specified in the related Prospectus Supplement, the initial Asset Value of the
Primary Assets will be at least equal to the principal amount of the Notes of
the related Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety
bond, guaranteed investment contract, or other arrangement satisfactory to the
Rating Agency. If the Assumed Reinvestment Rate is so insured, the related
Prospectus Supplement will set forth the terms of such arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities
of a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
the Distribution Date for the payment of interest of a Class may be different
from, or occur more or less frequently than, the Distribution Date for the
payment of principal of such Class. The rate of interest on Securities of a
Series may be variable or may change with changes in the annual percentage
rates of the Loans or Underlying Loans relating to the Private Securities, as
applicable, included in the related Trust Fund and/or as prepayments occur
with respect to such Loans or Underlying Loans, as applicable. Principal Only
Securities may not be entitled to receive any interest distributions or may be
entitled to receive only nominal interest distributions. Any interest on Zero
Coupon Securities that is not paid on the related Distribution Date will
accrue and be added to the principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding
a Distribution Date, the effective yield to Holders will be reduced from the
yield that would otherwise be obtainable if interest payable on the Securities
were to accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective
Classes of a Series in the manner, at the times and in the priority (which
may, in certain cases, include allocation by random lot) set forth in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Distribution Date for the payment of principal of a Class may
be different from, or occur more or less frequently than, the Distribution
Date for the payment of interest for such Class.
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REVOLVING PERIOD AND AMORTIZATION PERIOD; TRANSFEROR INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (the "Revolving Period") during which no principal
payments will be made to one or more Classes of Notes or Certificates of the
related Series as are identified in such Prospectus Supplement. Some or all
collections of principal otherwise allocated to such Class or Classes of Notes
or Certificates may be (i) utilized by the Trust Fund during such period to
acquire additional Loans (or additional balances of existing Loans) which
satisfy the criteria described in the related Prospectus Supplement, (ii) held
in an account and invested in Eligible Investments for later distribution to
Securityholders, (iii) applied to those Class or Classes of Notes or
Certificates, if any, of the same or different Series as specified in the
related Prospectus Supplement as then are in amortization, or (iv) otherwise
applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period, if any, specified as such in the
related Prospectus Supplement during which an amount of principal is payable
to holders of one or more Classes of a Series of Securities. If so specified
in the related Prospectus Supplement, during an Amortization Period all or a
portion of principal collections on the Primary Assets may be applied as
specified above for a Revolving Period and, to the extent not so applied, will
be distributed to the Classes of Notes or Certificates of the same or
different Series as specified in the related Prospectus Supplement as then
being entitled to payments of principal. In addition, if so specified in the
related Prospectus Supplement, amounts deposited in certain accounts for the
benefit of one or more Classes of Notes or Certificates may be released from
time to time or on a specified date and applied as a payment of principal on
such Classes of Notes or Certificates. The related Prospectus Supplement will
set forth the circumstances which will result in the commencement of an
Amortization Period.
Each Trust Fund which has a Revolving Period may also issue to the
Transferor a certificate evidencing a Transferor Interest in the Trust Fund
not represented by the other Securities issued by such Trust Fund. As further
described in the related Prospectus Supplement, the value of such Transferor
Interest will fluctuate as the amount of the assets of the Trust Fund
fluctuates and the amount of the Notes and Certificates of the related Series
of Securities outstanding is reduced.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes is
the date no later than the date on which the principal thereof will be fully
paid and with respect to each Class of Certificates will be the date on which
the entire aggregate principal balance of such Class is expected to be reduced
to zero, in each case calculated on the basis of the assumptions applicable to
such Series described in the related Prospectus Supplement. The Final
Scheduled Distribution Date for each Class of a Series will be specified in
the related Prospectus Supplement. Since, except as described above under "--
Revolving Period and Amortization Period; Transferor Interest," payments on
the Primary Assets will be used to make distributions in reduction of the
outstanding principal amount of the Securities, it is likely that the actual
final Distribution Date of any such Class will occur earlier, and may occur
substantially earlier, than its Final Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See "--Weighted Average Life
of the Securities" below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes
of Securities of such Series may be subject to special redemption, in whole or
in part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Loans or
Underlying Loans, as applicable, relating to such Securities or
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low yields then available for reinvestment the entity specified in the related
Prospectus Supplement determines, based on assumptions specified in the
applicable Agreement, that the amount available for the payment of interest
that will have accrued on such Securities (the "Available Interest Amount")
through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have
accrued on such Securities to such date. In such event and as further
described in the related Prospectus Supplement, the Trustee will redeem a
principal amount of outstanding Securities of such Series as will cause the
Available Interest Amount to equal the amount of interest that will have
accrued through such designated interest accrual date for such Series of
Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Transferor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances,
if any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a
Series of Securities, the Transferor, the Servicer, or another entity
designated in the related Prospectus Supplement may, at its option, cause an
early termination of a Trust Fund by repurchasing all of the Primary Assets
from such Trust Fund on or after a date specified in the related Prospectus
Supplement, or on or after such time as the aggregate outstanding principal
amount of the Securities or Primary Assets, as specified in the related
Prospectus Supplement, is less than the amount or percentage specified in the
related Prospectus Supplement. In addition, if so specified in the related
Prospectus Supplement upon certain events of insolvency or receivership of the
Transferor or another affiliated entity specified in the related Prospectus
Supplement the related Primary Assets of the Trust Fund will be liquidated and
the Trust Fund will be terminated, subject to the conditions set forth in the
related Prospectus Supplement. In each such event, the Securities of the
related Series will experience a prepayment. The redemption, purchase or
repurchase price will be set forth in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, in the event that a REMIC
election has been made, the Trustee shall receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be
conducted so as to constitute a "qualified liquidation" under Section 860F of
the Code.
In addition, the Prospectus Supplement may provide other circumstances under
which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of a Class of the
Securities will be influenced by the rate at which the amount financed under
the Loans (or related balances thereof) or Underlying Loans relating to the
Private Securities, as applicable, included in the Trust Fund for a Series is
paid, which may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and
may contain tables setting forth the projected weighted average life of each
Class of Securities of such Series and the percentage of the original
principal amount of each Class of Securities of such Series that would be
outstanding on specified Distribution Dates for such Series based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Loans or Underlying Loans relating to the Private
Securities, as applicable, included in the related Trust Fund are made at
rates corresponding to various percentages of the prepayment standard or model
specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the
related Trust Fund will conform to any level of any prepayment standard
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or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or
industry, also may affect the rate of principal prepayments. Demographic and
social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
other borrowers. The deductibility of mortgage interest payments, servicing
decisions and other factors also affect the rate of principal prepayments. As
a result, there can be no assurance as to the rate or timing of principal
prepayments of the Loans or Underlying Loans either from time to time or over
the lives of such Loans or Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if
prevailing interest rates fall significantly below the interest rates on the
Loans or Underlying Loans relating to the Private Securities, as applicable,
for a Series, such loans are likely to prepay at rates higher than if
prevailing interest rates remain at or above the interest rates borne by such
loans. In this regard, it should be noted that the Loans or Underlying Loans,
as applicable, for a Series may have different interest rates. In addition,
the weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private
Securities, as applicable. If any Loans or Underlying Loans relating to the
Private Securities, as applicable, for a Series have actual terms-to-stated
maturity of less than those assumed in calculating the Final Scheduled
Distribution Date of the related Securities, one or more Classes of the Series
may be fully paid prior to their respective Final Scheduled Distribution Date,
even in the absence of prepayments.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each
Series will include (i) the Primary Assets, (ii) amounts available from the
reinvestment of payments on such Primary Assets at the Assumed Reinvestment
Rate, if any, specified in the related Prospectus Supplement, (iii) any
Enhancement or the rights thereto, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or
repossession and (v) the amount, if any, initially deposited in the Pre-
Funding Account, Capitalized Interest Account, Collection Account, Certificate
Account or Distribution Account for a Series as specified in the related
Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement
for a Series of Securities, unless otherwise specified in the related
Prospectus Supplement, will serve as collateral only for that Series of
Securities. Holders of a Series of Notes may only proceed against such
collateral securing such Series of Notes in the case of a default with respect
to such Series of Notes and may not proceed against any assets of the
Transferor or the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be transferred by the Transferor to the
Trust Fund. Loans relating to a Series will be serviced by the Servicer
pursuant to a Pooling and Servicing Agreement, with respect to a Series
consisting of only Certificates or a Sale and Servicing Agreement (each, a
"Sale and Servicing Agreement") among the Transferor, the Trust Fund and the
Servicer, with respect to a Series that includes Notes.
As used herein, "Agreement" means, with respect to a Series of Certificates,
the Pooling and Servicing Agreement or Trust Agreement, and with respect to a
Series that includes Notes, the Indenture and the Sale and Servicing
Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a
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trust agreement (each, a "Trust Agreement") between the Transferor and the
Trustee of such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other than
acquiring, managing and holding the related Primary Assets and other assets
contemplated herein and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or in
part, of closed-end and/or revolving credit line home equity loans or certain
balances thereof (the "Closed-End Loans" and "Revolving Credit Line Loans,"
respectively, and collectively, the "Mortgage Loans") secured by mortgages
primarily on Single Family Properties which may be subordinated to other
mortgages on the same Mortgaged Property. The Mortgage Loans may have fixed
interest rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, interest on each
Revolving Credit Line Loan, is computed and payable monthly on the average daily
outstanding principal balance of such loan. Principal amounts on the Revolving
Credit Line Loans may be drawn down (up to a maximum amount as set forth in the
related Loan Agreement) or repaid under each Revolving Credit Line Loan from
time to time. If specified in the related Prospectus Supplement, new draws by
borrowers under the Revolving Credit Line Loans will automatically become part
of the Trust Fund for a Series. As a result, the aggregate balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the Trust Fund and principal payments are applied to such
balances and such amounts will usually differ each day, as more specifically
described in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, a borrower under a Revolving Credit Line Loan
is obligated to pay either (i) only accrued interest and fees during the billing
cycle and principal at maturity, or (ii) accrued interest and fees and a Portion
of the outstanding principal during the billing cycle and the remaining
outstanding principal at maturity.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Closed-End Loan is advanced at origination of the loan
and generally is repayable in equal (or substantially equal) installments of
an amount sufficient to fully amortize such loan at its stated maturity. As
more fully described in the related Prospectus Supplement, interest on each
Closed-End Loan is calculated on the basis of the outstanding principal
balance of such loan multiplied by the Loan Rate thereon and further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on such loan. Unless otherwise described in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loans will not
exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four
residential dwelling units and space used for retail, professional or other
commercial uses. Such uses, which will not involve more than 50% of the space
in the structure, may include doctor, dentist or law offices, real estate
agencies, boutiques, newsstands, convenience stores or other similar types of
uses intended to cater to individual customers as specified in the related
Prospectus Supplement. The properties may be located in suburban or
metropolitan districts. Any such non-residential use will be in compliance
with local zoning laws and regulations. The Mortgaged Properties may
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consist of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and other
attached dwelling units. Each Single Family Property will be located on land
owned in fee simple by the borrower or on land leased by the borrower for a
term at least ten years (unless otherwise provided in the related Prospectus
Supplement) greater than the term of the related Loan. Attached dwellings may
include owner-occupied structures where each borrower owns the land upon which
the unit is built, with the remaining adjacent land owned in common or
dwelling units subject to a proprietary lease or occupancy agreement in a
cooperatively owned apartment building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Revolving Credit Line Loans secured by
Mortgaged Properties that are owner-occupied will be disclosed in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the sole basis for a representation that a given percentage of the
Loans are secured by Single Family Property that is owner-occupied will be the
making of a representation by either the Mortgagor at origination of the Loan
or, in the case of loans that are not originated by the Transferor, by the
seller of such loans to the Transferor, that the underlying Mortgaged Property
will be used by the Mortgagor for a period of at least six months every year or
that the Mortgagor intends to use the Mortgaged Property as a primary residence.
To the extent specified in the related Prospectus Supplement, the Mortgaged
Properties may include non-owner occupied investment properties and vacation and
second homes.
Unless otherwise specified in the related Prospectus Supplement, the initial
Combined Loan-to-Value Ratio of a Revolving Credit Line Loan is computed in
the manner described in the related Prospectus Supplement, taking into account
the amounts of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist, in
whole or part, of home improvement installment sales contracts and installment
loan agreements (the "Home Improvement Contracts") originated by a home
improvement contractor in the ordinary course of business. As specified in the
related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may
have fixed interest rates or adjustable interest rates and may provide for
other payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract, if determined, will be computed in the manner described in the
related Prospectus Supplement.
Additional Information. The selection criteria which will apply with respect
to the Loans will be specified in the related Prospectus Supplement. Such
criteria may include one or more of the following: the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, the geographical distribution of Loans and the Loan
Rates for such Loans.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that
do not have a specified stated maturity.
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Unless otherwise specified in the related Prospectus Supplement, the Loans
will be conventional contracts or contracts insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans Administration
("VA"). Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing Act
of 1937, as amended. Such Loans will be insured under various FHA programs.
These programs generally limit the principal amount and interest rates of the
mortgage loans insured. Loans insured by the FHA generally require a minimum
down payment of approximately 5% of the original principal amount of the loan.
No FHA-insured Loans relating to a Series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of origination
of such Loan.
The insurance premiums for Loans insured by the FHA are collected by lenders
approved by the Department of Housing and Urban Development ("HUD") and are
paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to HUD or upon assignment of the defaulted Loan to HUD.
With respect to a defaulted FHA-insured Loan, the Servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined, either by
the Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms
of forbearance plans with the mortgagor. Such plans may involve the reduction
or suspension of regular mortgage payments for a specified period, with such
payments to be made upon or before the maturity date of the mortgage, or the
recasting of payments due under the mortgage up to or beyond the maturity
date. In addition, when a default caused by such circumstances is accompanied
by certain other criteria, HUD may provide relief by making payments to the
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Servicer. With certain exceptions, at least three full
monthly installments must be due and unpaid under the Loan and HUD must have
rejected any request for relief from the mortgagor before the Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be
obligated to purchase any such debenture issued in satisfaction of such Loan
upon default for an amount equal to the principal amount of any such
debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid
prior to such date but in general only to the extent it was allowed pursuant
to a forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the Loan to HUD, the insurance payment includes
full compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure
to perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim,
in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act
of 1944, as amended, permits a veteran (or in certain instances the spouse of
a veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires
no down payment from the purchaser and permits the guarantee of mortgage loans
of up to 30 years' duration.
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The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guaranty exceed the amount of the original guaranty. The VA
may, at its option and without regard to the guaranty, make full payment to a
mortgage holder of unsatisfied indebtedness on a mortgage upon its assignment
to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for
the guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the range and
weighted average Loan Rate on the Loans, and, in the case of adjustable rate
Loans, the range and weighted average of the current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and average outstanding principal
balance of the Loans; (d) the weighted average original and remaining term-to-
stated maturity of the Loans and the range of original and remaining terms-to-
stated maturity, if applicable; (e) the range and weighted average of Combined
Loan-to-Value Ratios or Loan-to-Value Ratios for the Revolving Credit Line
Loans, as applicable; (f) the percentage (by outstanding principal balance as
of the Cut-off Date) of Loans that accrue interest at adjustable or fixed
interest rates; (g) any special hazard insurance policy or bankruptcy bond or
other enhancement relating to the Loans; (h) the percentage (by principal
balance as of the Cut-off Date) of Loans that are secured by Mortgaged
Properties, Home Improvements or are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the
percentage of Revolving Credit Line Loans (by principal balance as of the Cut-
off Date) that are secured by Single Family Properties, shares relating to
Cooperative Dwellings, Condominium Units, investment property and vacation or
second homes; (k) the lien priority of the Loans; (l) the credit limit
utilization rate of any Revolving Credit Line Loans; and (m) the delinquency
status and year of origination of the Loans. The related Prospectus Supplement
will also specify any other limitations on the types or characteristics of
Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Transferor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within
15 days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include (a) pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to
be Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant
to an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of two years
elapsed since the later of the date the securities were acquired from the
issuer or an affiliate thereof. Although individual Underlying
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Loans may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and servicing
agreement, a trust agreement or similar agreement (a "PS Agreement"). The
seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly
or by one or more sub-servicers who may be subject to the supervision of the
PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a financial
institution or other entity engaged generally in the business of lending; a
public agency or instrumentality of a state, local or federal government; or a
limited purpose corporation organized for the purpose of, among other things,
establishing trusts and acquiring and selling loans to such trusts, and
selling beneficial interests in such trusts. If so specified in the Prospectus
Supplement, the PS Sponsor may be an affiliate of the Transferor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PS Sponsor will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Securities issued under the PS
Agreement. Additionally, although the Underlying Loans may be guaranteed by an
agency or instrumentality of the United States, the Private Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the
PS Servicer. The PS Sponsor or the PS Servicer may have the right to
repurchase the Underlying Loans after a certain date or under other
circumstances specified in the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form of
Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The
type, characteristics and amount of credit support will be a function of
certain characteristics of the Underlying Loans and other factors and will
have been established for the Private Securities on the basis of requirements
of the nationally recognized statistical rating organization that rated the
Private Securities.
Additional Information. The Prospectus Supplement for a Series for which the
Primary Assets include Private Securities will specify (such disclosure may be
on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Transferor and the Transferor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the Underlying Loans, (D) the minimum and
maximum stated maturities of such Underlying Loans at origination, (E) the
lien priority and the credit utilization rates, if any, of such Underlying
Loans, and (F) the delinquency status and year of origination of such
Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor,
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the PS Servicer (if other than the PS Sponsor) and the PS Trustee for such
Private Securities; (vii) certain characteristics of credit support if any,
such as Reserve Funds, insurance policies, letters of credit or guarantees
relating to such Loans underlying the Private Securities or to such Private
Securities themselves; (viii) the terms on which Underlying Loans may, or are
required to, be purchased prior to their stated maturity or the stated
maturity of the Private Securities; and (ix) the terms on which Underlying
Loans may be substituted for those originally underlying the Private
Securities.
If information of the nature described above representing the Private
Securities is not known to the Transferor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the
additional information, if available, will be set forth in a Current Report on
Form 8-K to be available to investors on the date of issuance of the related
Series and to be filed with the Commission within 15 days of the initial
issuance of such Securities.
ACCOUNTS
A separate Collection Account or Certificate Account will be established for
each Series of Securities for receipt of the amount of cash, if any, specified
in the related Prospectus Supplement to be initially deposited therein by the
Transferor and/or the Servicer, all amounts received on or with respect to the
Primary Assets and, unless otherwise specified in the related Prospectus
Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement,
as provided in the related Prospectus Supplement, may be deposited in one or
more Distribution Accounts. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will invest the funds in the Collection,
Certificate and Distribution Accounts in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
Distribution Account and the Certificate Account, than the day preceding the
next Distribution Date for the related Series of Securities. "Eligible
Investments" include, among other investments, obligations of the United
States and certain agencies thereof, federal funds, certificates of deposit,
commercial paper, demand and time deposits and banker's acceptances, certain
repurchase agreements of United States government securities and certain
guaranteed investment contracts, in each case, acceptable to the Rating
Agency.
If specified in the related Prospectus Supplement, a Trust Fund will include
one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of
the sale of the Securities of such Series (such amount, the "Pre-Funded
Amount") may be deposited in the Pre-Funding Account and may be used to
purchase additional Primary Assets during the period of time specified in the
related Prospectus Supplement (the "Pre-Funding Period"). If any Pre-Funded
Amount remains on deposit in the Pre-Funding Account at the end of the Pre-
Funding Period, such amount will be applied in the manner specified in the
related Prospectus Supplement to prepay the Notes and/or the Certificates of
the applicable Series.
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating
Agency (and/or any Enhancer) prior to the issuance of the related Series and
are designed to ensure that if such additional Primary Assets were included as
part of the initial Primary Assets, the credit quality of such assets would be
consistent with the initial rating of the Securities of such Series. The
Transferor will certify to the Trustee that all conditions precedent to the
transfer of the additional Primary Assets, including the satisfaction of the
eligibility criteria to the Trust Fund, have been satisfied. It is a condition
to the transfer of any additional Primary Assets to the Trust Fund that each
Rating Agency, after receiving prior notice of the proposed transfer of the
additional Primary Assets to the Trust Fund, shall not have advised the
Transferor or the Trustee or any Enhancer that the conveyance of such
additional Primary Assets will result in a qualification, modification or
withdrawal of its then current rating of any Class of Notes or Certificates of
such Series. Following the transfer of additional Primary Assets to the Trust
Fund, the aggregate characteristics of the Primary Assets then held in the
Trust Fund may vary from those of the initial Primary Assets of such Trust
Fund. As a result, the additional Primary Assets may adversely affect the
performance of the related Securities.
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If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for
such Series, a portion of the proceeds of the sale of the Securities of such
Series will be deposited in the Capitalized Interest Account and used to fund
the excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust
Fund. If so specified in the related Prospectus Supplement, amounts on deposit
in the Capitalized Interest Account may be released to the Transferor prior to
the end of the Pre-Funding Period subject to the satisfaction of certain tests
specified in the related Prospectus Supplement. Any amounts on deposit in the
Capitalized Interest Account at the end of the Pre-Funding Period that are not
necessary for such purposes will be distributed to the person specified in the
related Prospectus Supplement.
ENHANCEMENT
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to a Series or any Class of Securities will be set
forth in the related Prospectus Supplement. If and to the extent provided in
the related Prospectus Supplement, enhancement may be in the form of a
financial guaranty insurance policy, overcollateralization, a letter of
credit, cash reserve fund, insurance policies, one or more Classes of
Subordinated Securities, derivative products, or other form of enhancement, or
any combination thereof, as may be described in the related Prospectus
Supplement (collectively, "Enhancement"). If specified in the applicable
Prospectus Supplement, Enhancement for any Series of Securities may cover one
or more Classes of Notes or Certificates, and accordingly may be exhausted for
the benefit of a particular Class of Notes or Certificates and thereafter be
unavailable to such other Classes of Notes or Certificates. Further
information regarding any provider of credit enhancement, including financial
information when material, will be included in the related Prospectus
Supplement.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Enhancement for a Class of Securities will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any Enhancement or which are not covered by any Enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of Enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
Enhancement will be exhausted by the claims of Securityholders of other
Classes.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Sale and Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent
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with the above, the Servicer may, in its discretion, (i) waive any assumption
fee, late payment charge, or other charge in connection with a Loan and (ii)
to the extent provided in the related Agreement, arrange with an obligor a
schedule for the liquidation of delinquencies by extending the Due Dates for
Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound
accounts ("Escrow Accounts") with respect to Loans in which payments by
obligors with respect to taxes, assessments, mortgage and hazard insurance
premiums, and other comparable items will be deposited. Loans may not require
such payments under the loan related documents, in which case the Servicer
would not be required to establish any Escrow Account with respect to such
Loans. Withdrawals from the Escrow Accounts are to be made to effect timely
payment of taxes, assessments and mortgage and hazard insurance, to refund to
obligors amounts determined to be overages, to pay interest to obligors on
balances in the Escrow Account to the extent required by law, to repair or
otherwise protect the property securing the related Loan and to clear and
terminate such Escrow Account. The Servicer will be responsible for the
administration of the Escrow Accounts and generally will make advances to such
accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT OR THE CERTIFICATE
ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or the Servicer will establish a separate account (the "Collection Account" or
the "Certificate Account") in the name of the Trustee. The Collection Account
and/or Certificate Account will be an account maintained (i) at a depository
institution, the long-term unsecured debt obligations of which at the time of
any deposit therein are rated by at least one Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency rating
the Securities or (ii) in an account or accounts the deposits in which are
insured to the maximum extent available by the Federal Deposit Insurance
Corporation (the "FDIC") or which are secured in a manner meeting requirements
established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account or the Certificate Account may be invested,
pending remittance to the Trustee, in Eligible Investments. If so specified in
the related Prospectus Supplement, the Servicer will be entitled to receive as
additional compensation any interest or other income earned on funds in the
Collection Account or Certificate Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Transferor or the Trustee will deposit into the Collection
Account or the Certificate Account for each Series on the Business Day
following the Closing Date any amounts representing payments received on or
after the related Cut-off Date and received by the Servicer on or before the
Closing Date, and thereafter, within the period specified in the related
Prospectus Supplement, the following payments and collections received or made
by it (other than, unless otherwise provided in the related Prospectus
Supplement, in respect of principal of and interest on the related Primary
Assets due or, in the case of simple interest Loans, received, on or before
such Cut-off Date):
(i) all payments on account of principal, including prepayments, on such
Primary Assets;
(ii) all payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account or the Certificate Account in accordance with the
related Agreement, the Servicing Fee in respect of such Primary Assets;
(iii) all amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
("Liquidation Proceeds"), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account or the Certificate Account in
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accordance with the related Agreement, the Servicing Fee, if any, in
respect of the related Primary Asset and, to the extent specified in the
related Prospectus Supplement, net of reimbursements for Servicer Advances;
(iv) all proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) all amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) all Delinquency Advances made by the Servicer required pursuant to
the related Agreement; and
(vii) all repurchase prices of any such Primary Assets repurchased by the
Servicer or the Transferor pursuant to the related Agreement.
If specified in the related Prospectus Supplement, each balance of a
Revolving Credit Line Loan may be conveyed to a separate Trust Fund and
payments and proceeds of such Revolving Credit Line Loan will be allocated
among such Trust Funds as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account or the Certificate Account for each Series for the
following purposes:
(i) to reimburse itself for Servicer Advances and Delinquency Advances
for such Series made by it pursuant to the related Agreement; the
Servicer's right to reimburse itself for Delinquency Advances is limited to
amounts received on or in respect of particular Loans (including, for this
purpose, Liquidation Proceeds and amounts representing proceeds of
insurance policies covering the related Property) which represent late
recoveries of Scheduled Payments respecting which any such Delinquency
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse itself
for any Delinquency Advances for such Series that the Servicer determines
in good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Delinquency Advance
was made or from Liquidation Proceeds or the proceeds of insurance
policies;
(iii) to reimburse itself for Servicer Advances to the extent provided in
the related Prospectus Supplement;
(iv) in the event it has elected not to pay itself the Servicing Fee out
of the interest component of any Scheduled Payment, late payment or other
recovery with respect to a particular Loan prior to the deposit of such
Scheduled Payment, late payment or recovery into the Collection Account or
the Certificate Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such Scheduled Payment, late
payment or such other recovery, to the extent permitted by the related
Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary Asset
or REO Property acquired in respect thereof that has been repurchased or
removed from the Trust Fund by the Transferor or the Servicer pursuant to
the related Agreement, all amounts received thereon and not distributed as
of the date on which the related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for deposit into the
Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account or the Certificate
Account pursuant to the related Agreement.
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In addition, if the Servicer deposits in the Collection Account or the
Certificate Account for a Series any amount not required to be deposited
therein, it may, at any time, withdraw such amount from such Collection
Account or the Certificate Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make advances with respect to delinquent
payments of principal and/or interest on Loans ("Delinquency Advances"). If
specified in the related Prospectus Supplement, the Servicer will be obligated
to make Delinquency Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Such advances are intended to provide liquidity and, except to the
extent specified in the related Prospectus Supplement, not to guarantee or
insure against losses. Accordingly, to the extent specified in the related
Prospectus Supplement, any funds advanced are recoverable by the Servicer out
of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Delinquency Advance was made or, to the extent
provided in the Prospectus Supplement, from payments or proceeds from other
Loans. If and to the extent specified in the related Prospectus Supplement,
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 Property (the "Servicer Advances"). The Servicer shall be entitled to
be reimbursed for any such Servicer Advances to the extent provided in the
Prospectus Supplement. If a Servicer Advance is made and subsequently
determined to be nonrecoverable from late collections, proceeds of insurance
policies, or Liquidation Proceeds from the related Loan, the Servicer may be
entitled to reimbursement from other funds in the Collection Account,
Certificate Account or Distribution Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified in
the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Real Estate Loan to maintain a hazard
insurance policy naming the Servicer as loss payee thereunder. Hazard
insurance policies for Real Estate Loans must include extended coverage in an
amount equal to the lesser of (a) the maximum insurable value of the
improvements securing such Real Estate Loan and (b) either (i) the principal
balance of the Real Estate Loan if it is a Home Improvement Contract or a
closed-end Mortgage Loan or (ii) the combined principal balance of the Real
Estate Loan and any mortgage loan senior to the Real Estate Loan if such Real
Estate Loan is a Revolving Credit Line Loan. 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 referred to below, or upon the extent to
which information in this regard is furnished to the Servicer by a borrower.
Except as described below, 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 Property or released to the borrower in
accordance with the Servicer's normal servicing procedures), will be deposited
in the Collection Account or the Certificate Account. If so specified in the
related Prospectus Supplement, the portion of such proceeds allocable to
Securityholders of a Series may be limited to the extent specified in the
related Prospectus Supplement in the event that more than one Trust Fund has
an interest in the balances of a Revolving Credit Line Loan. The 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
collateral securing the Real Estate Loans. If such blanket policy contains a
deductible clause, the Servicer will deposit into the Collection Account the
amount not otherwise payable under the blanket policy because of such
deductible clause. If so specified in the related Prospectus Supplement, the
amount so required to be deposited by the Servicer with respect to a
particular Series may be limited to the extent specified in the related
Prospectus Supplement in the event that more than one Trust Fund has an
interest in the balances of a Mortgage Loan.
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In general, the standard form of fire and extended coverage insurance policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from any of the following: war, revolution, governmental actions,
floods and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), nuclear reactions, wet or dry rot, vermin, rodents,
insects or domestic animals, theft and, in certain cases, vandalism. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all-inclusive. When a Mortgaged Property is located in a
federally designated special flood hazard area at the time of origination of
the related Real Estate Loan, the Agreement requires the Servicer to cause to
be maintained, for each such Real Estate Loan, flood insurance (to the extent
available) in an amount equal in general to the lesser of (a) the maximum
insurance available under the federal flood insurance program and (b) either
(i) the principal balance of the Real Estate Loan if it is a Home Improvement
Contract or a closed-end Mortgage Loan or (ii) the combined principal balance
of the Real Estate Loan and any mortgage loan senior to the Real Estate Loan
if such Real Estate Loan is a Revolving Credit Line Loan.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below
this specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation or (ii) such
proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will also maintain on REO Property that secured a defaulted Real
Estate Loan and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard insurance policy in an amount
that is equal to the maximum insurable value of such REO Property. No
earthquake or other additional insurance will be required of any obligor or
will be maintained on REO Property acquired in respect of a defaulted Real
Estate Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
If the amount of hazard insurance maintained on the Mortgaged Properties
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.
Under the terms of the Real Estate Loans, the borrowers generally are
required to present claims to insurers under hazard insurance policies
maintained on the Mortgaged Properties. The Servicer, on behalf of the Trustee
and Securityholders, is obligated to present claims under any blanket
insurance policy insuring against hazard losses on the Mortgaged Properties.
However, the ability of the Servicer to present such claims depends upon the
extent to which information in this regard is furnished to the Servicer by the
borrowers.
REALIZATION UPON DEFAULTED LOANS
Unless otherwise specified in the related Prospectus Supplement the Servicer
has the discretion to foreclose upon, repossess or otherwise comparably
convert the ownership of the Properties securing the related Loans as come
into and continue in default and as to which no satisfactory arrangements can
be made for collection of delinquent payments in the same manner it forecloses
upon, repossesses or otherwise converts the ownership of properties securing
loans in the applicable portfolio of Loans; provided that if the Servicer has
actual knowledge or reasonably believes that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, then the Servicer
will not cause a Trust to acquire title to such Mortgaged Property in a
foreclosure or similar proceeding if such acquisition in the reasonable
opinion of the Servicer is not commercially reasonable. In connection with such
foreclosure or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in
its servicing activities with respect to comparable
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loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer
will be required to liquidate any Property acquired through foreclosure within
two years after the acquisition of the beneficial ownership of such Property.
While the holder of a Property acquired through foreclosure can often maximize
its recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Transferor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a modification
of such Loan (a "Modification") to the extent provided in the related
Prospectus Supplement. Such Modifications may only be entered into if they
meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is being conveyed by the obligor, the Servicer will
have the option to exercise its rights to accelerate the maturity of the
related Loan under the applicable "due-on-sale" clause, if any, unless such
exercise is not permitted under applicable law. In such event, the Servicer is
authorized to accept from or enter into an assumption agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Loan. To the extent permitted by
applicable law, such assumption will not release the original borrower from
its obligation under the Loan. Any fee collected in connection with an
assumption will be retained by the Servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with an
assumption except to the extent specified in the related Prospectus
Supplement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as
specified in the related Prospectus Supplement. In addition, unless otherwise
specified in the related Prospectus Supplement, the Servicer will be entitled
to servicing compensation in the form of assumption fees, late payment charges
and similar items, or excess proceeds following disposition of Properties in
connection with defaulted Loans.
Except to the extent otherwise specified in the related Prospectus
Supplement, the Servicer will pay certain expenses incurred in connection with
the servicing of the Loans, including, without limitation, the payment of the
fees and expenses of the Trustee and independent accountants, payment of
insurance policy premiums and the cost of credit support, if any, and payment
of expenses incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent
provided in the related Prospectus Supplement in order that one or more
Classes of the Holders of a Series will not be adversely affected by any
resulting shortfall in interest, the amount of the Servicing Fee may be
reduced to the extent necessary to include in the Servicer's remittance to the
Trustee for distribution to Securityholders an amount equal to one month's
interest on the related Loan (less the Servicing Fee). If the aggregate amount
of such shortfalls in a month exceeds the Servicing Fee for such month, a
shortfall to Holders may occur.
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Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for Servicer Advances. The related
Holders will suffer no loss by reason of such Servicer Advances to the extent
expenses are covered under related insurance policies or from excess
Liquidation Proceeds. If claims are either not made or paid under the
applicable insurance policies or if coverage thereunder has been exhausted,
the related Holders will suffer a loss to the extent that Liquidation
Proceeds, after reimbursement of the Servicer Advances, are less than the
outstanding principal balance of and unpaid interest on the related Loan which
would be distributable to Holders. The Servicer is generally also entitled to
reimbursement from the Collection Account or the Certificate Account for
Servicer Advances. In addition, the Servicer will be entitled to reimbursement
for Delinquency Advances as described above under "--Advances and Limitations
Thereon."
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account or the
Certificate Account for a Series, whether as the Servicing Fee or other
compensation, or for the reimbursement of Advances, expenses or otherwise, are
not subordinate to the rights of Holders of such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that 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 Attestation
Program for Mortgage Bankers, has disclosed no items of non-compliance with
the provisions of the applicable 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.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for
such Series of an annual statement signed by an officer of the Servicer to the
effect that the Servicer has fulfilled its material obligations under such
Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
If an Event of Default occurs under either a Sale and Servicing Agreement or
a Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee
or a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially
similar to those described under "THE AGREEMENTS--Events of Default; Rights
Upon Event of Default--Pooling and Servicing Agreement; Sale and Servicing
Agreement."
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the
successor Servicer accepting such assignment or delegation (i) services
similar loans in the ordinary course of its business, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (iv) executes
and delivers to the Trustee and the Enhancer, if any, an agreement, in form
and substance reasonably satisfactory to the Trustee, and the Enhancer, if
any, which contains an assumption by such Servicer of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Servicer under the related Agreement from and after the date
of such agreement. No such assignment will become effective until the Trustee
or a successor Servicer has assumed the Servicer's obligations and duties
under the related Agreement. To the extent that the Servicer transfers its
obligations to a wholly-owned subsidiary or affiliate, such
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subsidiary or affiliate need not satisfy the criteria set forth above;
however, in such instance, the assigning Servicer will remain liable for the
servicing obligations under the related Agreement. Any entity into which the
Servicer is merged or consolidated or any successor corporation resulting from
any merger, conversion or consolidation will succeed to the Servicer's
obligations under the related Agreement provided that such successor or
surviving entity meets the requirements for a successor Servicer set forth
above.
The Servicer will not be under any liability to the Trust Fund or the
Securityholders for taking any action or for refraining from taking any action
in good faith pursuant to the 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. Except to the extent
otherwise provided therein, each 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 Fund and will be held harmless to the
extent provided in the Agreement against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
Securities, other than any loss, liability or expense related to any specific
Loan or Loans (or balances thereof) (except any such loss, liability or
expense otherwise reimbursable pursuant to the 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.
Each 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 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 Agreement and the rights and duties of the
parties thereto and the interest of the Securityholders and the Enhancer, if
any, 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 Fund and the Servicer will be entitled to be reimbursed therefor
to the extent provided in the 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
Securityholders or the Trust Fund 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, officer, employees and agents.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Transferor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Transferor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due or received on or with respect to the Primary
Assets on or after the Cut-off Date to the extent specified in the related
Prospectus Supplement (except for any Retained Interests). The Trustee will,
concurrently with such assignment, execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Transferor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus
Supplement, a custodian on behalf of the Trustee (the "Custodian"), the
Mortgage Note endorsed without
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recourse to the order of the Trustee or in blank, the original Mortgage with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office, in which case a copy of such Mortgage will
be delivered, together with a certificate that the original of such Mortgage
was delivered to such recording office) and an assignment of the Mortgage in
recordable form. The Trustee, or, if so specified in the related Prospectus
Supplement, the Custodian, will hold such documents in trust for the benefit
of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Transferor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home
Improvement Contract. In order to give notice of the right, title and interest
of Securityholders to the Home Improvement Contracts, the Transferor will
cause a UCC-1 financing statement to be executed by the Transferor identifying
the Trustee as the secured party and identifying all Home Improvement
Contracts as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trust Fund. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "CERTAIN LEGAL ASPECTS OF THE LOANS--The Home
Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Transferor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's
interest in the related Loans. If specified in the related Prospectus
Supplement, the Transferor will cause such assignments to be so recorded
within the time after issuance of the Securities as is specified in the
related Prospectus Supplement, in which event, the Agreement may, as specified
in the related Prospectus Supplement, require the Transferor to repurchase
from the Trustee any Loan the related Mortgage of which is not recorded within
such time, at the price described below with respect to repurchases by reason
of defective documentation. Unless otherwise provided in the related
Prospectus Supplement, the enforcement of the repurchase obligation would
constitute the sole remedy available to the Holders or the Trustee for the
failure of a Mortgage to be recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the "Loan Schedule"). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal
balance as of the Cut-off Date; the current interest rate; the current
Scheduled Payment of principal and interest; the maturity date, if any, of the
related Mortgage Note; if the Loan is an adjustable rate Loan, the Lifetime
Rate Cap, if any, and the current index.
Assignment of Private Securities. The Transferor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified
in the related Prospectus Supplement, the Trustee will not be in possession of
or be assignee of record of any underlying assets for a Private Security. See
"THE TRUST FUNDS--Private Securities." Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Transferor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained
in the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Transferor had good title thereto, and was the sole owner thereof (subject to
any Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such
Private Securities.
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Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in
the file relating to the Primary Assets delivered by the Transferor to the
Trustee (or Custodian) is found by the Trustee within 90 days of the execution
of the related Agreement (or promptly after the Trustee's receipt of any
document permitted to be delivered after the Closing Date) to be defective in
any material respect and the Transferor does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Transferor will, not later than 90 days or within such other
period specified in the related Prospectus Supplement, after the Trustee's
notice to the Transferor of the defect, repurchase the related Primary Asset
or any property acquired in respect thereof from the Trustee at a price equal
to, unless otherwise specified in the related Prospectus Supplement, the sum
of (a) the lesser of (i) the outstanding principal balance of such Primary
Asset and (ii) the Trust Fund's federal income tax basis in the Primary Asset
and (b) accrued and unpaid interest to the date of the repurchase/substitution
of such Primary Asset at the rate set forth in the related Agreement;
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to
the outstanding principal balance of such Primary Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Transferor, may,
rather than repurchase the Primary Asset as described above, remove such
Primary Asset from the Trust Fund (the "Deleted Primary Asset") and substitute
in its place one or more other Primary Assets (each, a "Qualifying Substitute
Primary Asset") provided, however, that with respect to a Trust Fund for which
a REMIC election is made, after a specified time period, the Trustee must have
received a satisfactory opinion of counsel that such substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution,
(i) an outstanding principal balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Primary Asset (the amount of any shortfall to
be deposited to the Collection Account in the month of substitution for
distribution to Holders), (ii) an interest rate not less than (and not more
than 2% greater than) the interest rate or Margin of the Deleted Primary
Asset, (iii) a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the Deleted Primary Asset, and will
comply with all of the representations and warranties set forth in the
applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the above-
described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Transferor will make representations and warranties with respect to
Primary Assets for a Series. If the Transferor or such entity cannot cure a
breach of any such representations and warranties in all material respects
within the time period specified in the related Prospectus Supplement after
notification by the Trustee of such breach, and if such breach is of a nature
that materially and adversely affects the value of such Primary Asset, the
Transferor is obligated to repurchase the affected Primary Asset or, if
provided in the related Prospectus Supplement, provide a Qualifying Substitute
Primary Asset therefor, subject to the same conditions and limitations on
purchases and substitutions as described above.
Unless otherwise provided in the related Prospectus Supplement, no Holder of
Securities of a Series, solely by virtue of such Holder's status as a Holder,
will have any right under the applicable Agreement for such Series to
institute any proceeding with respect to such Agreement, unless such Holder
previously has given to the Trustee for such Series written notice of default
and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
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REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series and set forth in the related Prospectus Supplement,
among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the remaining
amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund;
(viii) during the Pre-Funding Period, the remaining Pre-Funded Amount and
the portion of the Pre-Funding Amount used to acquire additional Primary
Assets since the preceding Distribution Date;
(ix) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(x) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Holder of record at any time
during such calendar year (a) the aggregate of amounts reported pursuant to
(i), (ii), and (iv)(d) above for such calendar year and (b) such information
specified in the related Agreement to enable Holders to prepare their tax
returns including, without limitation, the amount of original issue discount
accrued on the Securities, if applicable. Information in the Distribution Date
and annual statements provided to the Holders will not have been examined and
reported upon by an independent public accountant. However, the Servicer will
provide to the Trustee a report by independent public accountants with respect
to the Servicer's servicing of the Loans. See "SERVICING OF LOANS--Evidence as
to Compliance."
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will
not be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its
nominee which is the registered holder of the global certificate which
evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of such
entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Sale and Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement, Events of Default
under the Pooling and Servicing Agreement or Sale and Servicing Agreement for
each Series of Securities relating to Loans include (i) any failure by the
Servicer to deposit amounts in the Collection Account and/or Certificate
Account and/or Distribution Account required to be made thereunder, which
failure continues unremedied for the number of days specified in the related
Prospectus
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Supplement after the giving of written notice of such failure to the Servicer
by the Trustee for such Series, or to the Servicer and the Trustee by the
Enhancer or by the Holders of such Series evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series, (ii) any failure by
the Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the applicable Agreement which continues
unremedied for the number of days specified in the related Prospectus
Supplement after the giving of written notice of such failure to the Servicer
by the Trustee, or to the Servicer and the Trustee by the Enhancer or by the
Holders of such Series evidencing not less than 51% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans,
unless otherwise specified in the related Prospectus Supplement, the Trustee
for such Series or Holders of Securities of such Series evidencing not less
than 51% of the aggregate voting rights of the Securities for such Series
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, may terminate all of the rights and obligations of the Servicer as
servicer under the applicable Agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of such Agreement
which rights the Servicer will retain under all circumstances), whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of
the Servicer under such Agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be
entitled to reasonable servicing compensation in an amount not to exceed the
Servicing Fee as set forth in the related Prospectus Supplement, together with
the other servicing compensation in the form of assumption fees, late payment
charges or otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have
the right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred upon that Trustee. However, the Trustee will not be under
any obligation to pursue any such remedy or to exercise any of such trusts or
powers unless such Holders have offered the Trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred by
the Trustee therein or thereby. The Trustee may decline to follow any such
direction if the Trustee determines that the action or proceeding so directed
may not lawfully be taken or would involve it in personal liability or be
unjustly prejudicial to the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus Supplement,
Events of Default under the Indenture for each Series of Notes include: (i) a
default for 30 days or more in the payment of any principal of or interest on
any Note of such Series; (ii) failure to perform any other covenant of the
Transferor or the Trust Fund in the Indenture which continues for a period of
60 days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Transferor or the Trust Fund in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within 60
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Transferor or the Trust Fund;
or (v) any other Event of Default provided with respect to Notes of that
Series.
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If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, may declare the principal amount (or, if the Notes of that Series
are Zero Coupon Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled
by the Holders of a majority in aggregate outstanding amount of the Notes of
such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration
of acceleration if such collateral continues to provide sufficient funds for
the payment of principal of and interest on the Notes of such Series as they
would have become due if there had not been such a declaration. In addition,
unless otherwise specified in the related Prospectus Supplement, the Trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for 30 days or more,
unless (a) the Holders of 100% of the then aggregate outstanding amount of the
Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued
interest due and unpaid on the outstanding Notes of such Series at the date of
such sale or (c) the Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Trustee obtains the consent of the Holders of 66 2/8% of the
then aggregate outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for 30 days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders may be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for indemnification
and certain limitations contained in the Indenture, the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series shall
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Notes of such Series, and
the Holders of a majority of the then aggregate outstanding amount of the
Notes of such Series may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the Holders of the outstanding Notes of
such Series affected thereby.
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THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth
in the related Prospectus Supplement. The entity serving as Trustee may have
normal banking relationships with the Transferor. In addition, for the purpose
of meeting the legal requirements of certain local jurisdictions, the Trustee
will have the power to appoint co-trustees or separate trustees of all or any
part of the Trust Fund relating to a Series of Securities. In the event of
such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or co-
trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers,
duties and obligations solely at the direction of the Trustee. The Trustee may
also appoint agents to perform any of the responsibilities of the Trustee,
which agents will have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided
that the Trustee will continue to be responsible for its duties and
obligations under the Agreement. In the event a Series includes both Notes and
Certificates, a separate Trustee identified in the related Prospectus
Supplement will serve as Trustee for the Certificateholders and for the Notes.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or
related documents. If no Event of Default (as defined in the related
Agreement) has occurred, the Trustee is required to perform only those duties
specifically required of it under the Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be
furnished to it, the Trustee is required to examine them to determine whether
they are in the form required by the related Agreement. However, the Trustee
will not be responsible for the accuracy or content of any such documents
furnished to it by the Holders or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to
be taken by it in good faith in accordance with the direction of the Holders
in an Event of Default. The Trustee is not required to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties under the Agreement, or in the exercise of any of its rights or
powers, if it has reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Transferor, and if specified in
the related Prospectus Supplement, the Enhancer, if any, resign at any time,
in which event the Transferor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and
has accepted the appointment within the period specified in the Agreement
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for appointment of a successor
Trustee. The Trustee may also be removed at any time (i) if the Trustee ceases
to be eligible to continue as such under the Agreement, (ii) if the Trustee
becomes insolvent or (iii) by the Holders of Securities evidencing over 50% of
the aggregate voting rights of the Securities in the Trust Fund upon written
notice to the Trustee and to the Transferor. Any resignation or removal of the
Trustee and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Transferor, the Servicer and
the Trustee with respect to such Series, without notice to or consent of the
Holders, (i) to cure any ambiguity, (ii) to correct any defective provisions
or to correct or
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supplement any provision therein, (iii) to add to the duties of the
Transferor, the Trust Fund or the Servicer, (iv) to add any other provisions
with respect to matters or questions arising under such Agreement or related
Enhancement, (v) to add or amend any provisions of such Agreement as required
by a Rating Agency in order to maintain or improve the rating of the
Securities (it being understood that none of the Transferor, the Servicer or
the Trustee is obligated to maintain or improve such rating), or (vi) to
comply with any requirements imposed by the Code; provided that any such
amendment except pursuant to clause (vi) above will not materially and
adversely affect the interests of any Holders of such Series or, if specified
in the related Prospectus Supplement, the Enhancer, as evidenced by an opinion
of counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to withdraw or reduce the then current rating thereof. Unless
otherwise specified in the Prospectus Supplement, the Agreement for each
Series may also be amended by the Trustee, the Servicer, if applicable, and
the Transferor with respect to such Series with the consent of the Enhancer,
if specified in the related Prospectus Supplement or the Holders possessing
not less than 51% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 51% of the aggregate outstanding principal amount
of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of such Agreement or modifying in any manner the rights
of Holders of such Series; provided, however, that no such amendment may (a)
reduce the amount or delay the timing of payments on any Security without the
consent of the Holder of such Security; or (b) reduce the aforesaid percentage
of the aggregate outstanding principal amount of Securities of each Class, the
Holders of which are required to consent to any such amendment or (c) if
specified in the related Prospectus Supplement, adversely affect the interests
of the Enhancer, without, in the case of clauses (a) or (b), the consent of
the Holders of 100% of the aggregate outstanding principal amount of each
Class of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights
under the Agreement, which request is accompanied by a copy of the
communication which such Holders propose to transmit, the Trustee will afford
such Holders access during business hours to the most recent list of Holders
of that Series held by the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be the
Transferor or an affiliate of the Transferor.
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TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created by
the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure or repossession in respect of
any Primary Asset or (ii) the repurchase, as described below, by the Servicer
or other entity specified in the related Prospectus Supplement from the
Trustee for such Series of all Primary Assets and other property at that time
subject to such Agreement. The Agreement for each Series permits, but does not
require, the Servicer or other entity specified in the related Prospectus
Supplement to purchase from the Trust Fund for such Series all remaining
Primary Assets at a price equal to, unless otherwise specified in the related
Prospectus Supplement, 100% of the aggregate Principal Balance of such Primary
Assets plus, with respect to any property acquired in respect of a Primary
Asset, if any, the outstanding Principal Balance of the related Primary Asset
at the time of foreclosure, less, in either case, related unreimbursed
Servicer Advances (in the case of the Primary Assets, only to the extent not
already reflected in the computation of the aggregate Principal Balance of
such Primary Assets) and unreimbursed expenses (that are reimbursable pursuant
to the terms of the Pooling and Servicing Agreement) plus, in either case,
accrued interest thereon at the weighted average rate on the related Primary
Assets through the last day of the Due Period in which such repurchase occurs;
provided, however, that if an election is made for treatment as a REMIC under
the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of
such Primary Assets plus the fair market value of any property acquired in
respect of a Primary Asset and remaining in the Trust Fund. The exercise of
such right will effect early retirement of the Securities of such Series, but
such entity's right to so purchase is subject to the aggregate Principal
Balance of the Primary Assets at the time of repurchase being less than a
fixed percentage, to be set forth in the related Prospectus Supplement, of the
aggregate Principal Balance of the Primary Assets as of the Cut-off Date. In
no event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last survivor of certain persons
identified therein. For each Series, the Servicer or the Trustee, as
applicable, will give written notice of termination of the Agreement to each
Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice
of termination. If so provided in the related Prospectus Supplement for a
Series, the Transferor or another entity may effect an optional termination of
the Trust Fund under the circumstances described in such Prospectus
Supplement. See "DESCRIPTION OF THE SECURITIES--Optional Redemption, Purchase
or Termination."
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect
of the Notes of such Series (except for certain obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of such Series, to replace stolen, lost or mutilated Notes of such
Series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America
which, through the payment of interest and principal in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such Series
on the Final Scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
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CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state (other than, in some cases, the
states of Maryland, Virginia and the District of Columbia (the "Mortgage Loan
Jurisdictions") where it is anticipated most of the Properties will be
located), nor encompass the laws of all states in which the properties
securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to
secure debt (such Mortgage Loans and Home Improvement Contracts are
hereinafter referred to in this section as "mortgage loans"), depending upon
the prevailing practice in the state in which the property subject to a
mortgage loan is located. The filing of a mortgage, deed of trust or deed to
secure debt creates a lien or title interest upon the real property covered by
such instrument and represents the security for the repayment of an obligation
that is customarily evidenced by a promissory note and, with respect to Home
Improvement Contracts, the related contract. The priority of the liens is
important because, among other things, the foreclosure of a senior lien will
extinguish a junior lien, and because the holder of a senior lien generally
will have a right to receive insurance, condemnation or other proceeds before
the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with
the appropriate government records office. Priority also may be affected by
the express terms of the mortgage or deed of trust.
Although priority among liens on the same property generally depends in the
first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. The trustee's title under a deed of trust is not prior
to any liens for real estate taxes and assessments, certain federal liens
(including certain federal criminal liens, environmental liens and tax liens),
certain mechanics and materialmen's liens, and other liens given priority by
applicable law. For example, in some jurisdictions, if advances are made under
the deed of trust after another lien (such as a judgment or mechanics lien) is
filed, the advances made after the filing of the intervening lien may be
subordinate to the intervening lien. In addition, in Virginia, the priority of
a mechanics lien may relate back to a date that substantially precedes the
date on which the mechanics lien is actually filed. Therefore, since a title
report or title policy only is accurate as of the date it is issued, it
provides no assurance that a deed of trust will retain perpetually the lien
priority it had when it was filed. The mortgages and deeds of trust securing
the Real Estate Loans include a requirement that each borrower maintain the
lien priority of each deed of trust.
There are two parties to a mortgage: the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a
land trust, there are three parties because title to the property is held by a
land trustee under a land trust agreement of which the borrower/property owner
is the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. Under a deed of
trust, the homeowner or borrower, called the "grantor," grants the security
property to a third-party grantee, called the "trustee," for the benefit of
the lender, usually called the "beneficiary." The deed of trust gives the
trustee the authority, if the borrower defaults, to sell the security property
in a "foreclosure" or "trustee's sale" and to apply the sale proceeds to the
secured debt. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed
of trust, and, in some cases, in deed of trust transactions, the directions of
the beneficiary.
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FORECLOSURE ON MORTGAGES AND DEEDS OF TRUST
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed without a judicial proceeding,
pursuant to a power of sale provided in the mortgage. Foreclosure of a
mortgage by using an advertisement is essentially similar to foreclosure of a
deed of trust by nonjudicial power of sale.
If a borrower defaults under a loan secured by a deed of trust, the lender
generally may bring suit against the borrower. The lender generally also may
attempt to collect the loan by causing the deed of trust to be enforced
against the property it encumbers. Enforcement of a deed of trust is
accomplished in most cases by a trustee's sale in which the trustee, upon
default of the grantor, and subject to the expiration of applicable cure
periods, sells the security property at a public sale under the terms of the
loan documents and subject to the applicable procedural provisions of state
law.
In Maryland, a summary court proceeding must be commenced (and a bond must
be filed) to effect a trustee's sale, even under a deed of trust that includes
a power of sale. In Virginia and the District of Columbia, a trustee's sale
generally is non-judicial, although foreclosure may be accomplished by
judicial action in all of the Mortgage Loan Jurisdictions. The term
"foreclosure" often is used as a shorthand way of referring to a trustee's
sale as well as to judicial foreclosure.
In Maryland and the District of Columbia, prior to a trustee's sale, the
trustee must record a notice of sale in the public records. In all of the
Mortgage Loan Jurisdictions, the trustee must give notice of the sale to the
grantor and/or to any successor in interest to the grantor. The trustee also
generally will give notice of the sale to the beneficiary of any junior deed
of trust or other lien and to certain other interested persons. This notice to
junior lien holders is required in Maryland and Virginia. In the Mortgage Loan
Jurisdictions, in addition to the notice to the grantor and others described
above, notice of sale must be published periodically in a local newspaper for
a prescribed period prior to the trustee's sale.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located.
At the sale, the trustee generally requires a bidder to deposit with the
trustee a set amount or a percentage of the full amount of the bidder's final
bid in cash (or an equivalent thereto satisfactory to the trustee) prior to
and as a condition to recognizing such bid, and may conditionally accept and
hold these amounts for the duration of the sale. The beneficiary of the deed
of trust generally need not bid cash at the sale, but may instead make a
"credit bid" up to the extent of the total amount due under the deed of trust,
including costs and expenses actually incurred in enforcing the deed of trust,
as well as the trustee's fees and expenses. The trustee will sell the security
property to the highest proper bidder at the sale. Other than in Maryland,
judicial confirmation typically is not required after a sale conducted in
accordance with a power of sale in the Mortgage Loan Jurisdictions.
A sale conducted in accordance with the terms of the power of sale contained
in the deed of trust generally is presumed to be conducted regularly and
fairly, and, on a conveyance of the property by trustee's deed, confers
absolute legal title to the property to the purchaser, free of all junior
deeds of trust and free of all other liens and claims subordinate to the deed
of trust under which the sale is made. The purchaser's title, however, is
subject to all senior liens and other senior claims. Thus, if the deed of
trust being enforced is a junior deed of trust such as the deeds of trust
securing most of the Mortgage Loans, the trustee will convey title to the
property to the purchaser subject to the first deed of trust and any other
prior liens and claims. A trustee's sale or judicial foreclosure under a
junior deed of trust generally has no effect on any senior deed of trust, with
the possible exception of the right of a senior beneficiary to accelerate its
indebtedness under a default clause or a "due-on-sale" clause contained in the
senior deed of trust.
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Because a potential buyer at the sale may find it difficult to determine the
exact status of title and other facts about the security property, and because
the physical condition of the security property may have deteriorated, it
generally is more common for the lender, rather than an unrelated third party,
to purchase the security property at a trustee's sale or judicial foreclosure
sale. The lender (or other purchaser at the trustee's sale) will be subject to
the burdens of ownership, including the obligations to service any senior
mortgage or deed of trust, to obtain hazard insurance and to make such repairs
at its own expense as are necessary to render the security property suitable
for resale. The lender commonly will attempt to resell the security property
and obtain the services of a real estate broker and agree to pay the broker
commission in connection with the resale. Depending upon market conditions,
the ultimate proceeds of the resale of the security property may not be high
enough to equal the lender's investment. Property securing a Mortgage Loan
held by a Trust Fund for which a REMIC election has been made that is acquired
through a trustee's sale or judicial foreclosure must be sold by the Trustee
within two years after the date on which it is acquired, unless the IRS has
granted permission to sell such Property at a later date, in order to satisfy
certain Federal income tax requirements.
The proceeds received by the lender or trustee from the sale generally are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds generally are payable to the
holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority. Any balance remaining generally is payable to the
borrower or grantor. Following the sale, if there are insufficient proceeds to
repay the secured debt, the lender or beneficiary under the foreclosed lien
generally may obtain a deficiency judgment against the grantor.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under mortgages or deeds of
trust receive notices in addition to the statutorily prescribed minimum. For
the most part, the courts in these cases have upheld the notice provisions and
procedures described above.
An action to foreclose a mortgage or deed of trust is an action to recover
the secured debt by enforcing the mortgagee's or trustee's rights under the
mortgage or deed of trust. It is regulated by statutes and rules and subject
throughout to the court's equitable powers. Generally, a mortgagor or grantor
is bound by the terms of the related mortgage note and the mortgage or deed of
trust as made and cannot be relieved from his default if the mortgagee or
trustee has exercised its rights in a commercially reasonable manner. However,
since a foreclosure action historically was equitable in nature, the court may
exercise equitable powers to relieve a borrower of a default and deny the
foreclosure on proof that either the borrower's default was neither willful
nor in bad faith or the lender's action established a waiver, fraud, bad
faith, or oppressive or unconscionable conduct such as to warrant a court of
equity to refuse affirmative relief to the lender. Under certain circumstances
a court of equity may relieve the borrower from an entirely technical default
where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up
to several years to complete. Although historically, a borrower could challenge
a non-collusive, regularly conducted foreclosure sale as a fraudulent
conveyance on the theory that the sale was for less than fair consideration and
such sale occurred while the borrower was insolvent and within one year (or
within the state statute of limitations if the trustee in bankruptcy elects to
proceed under state fraudulent conveyance law) of the filing of bankruptcy, a
recent U.S. Supreme Court decision, BFP v. Resolution Trust Corporation, 511
U.S. 531 (1994), establishes that a non-collusive regularly conducted
foreclosure sale is prima facie valid and is therefore not subject to fraudulent
conveyance attack. Similarly, a suit against the debtor on the related mortgage
note may take several years and, generally (although not with respect to the
Mortgage Loan Jurisdictions), is a remedy alternative to foreclosure, the
mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee
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or referee for an amount which may be equal to the unpaid principal amount of
the mortgage note secured by the mortgage or deed of trust plus accrued and
unpaid interest and the expenses of foreclosure, in which event the borrower's
debt will be extinguished or the lender may purchase for a lesser amount in
order to preserve its right against a borrower to seek a deficiency judgment
in states where such a judgment is available. Thereafter, subject to the right
of the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance, paying taxes and making such repairs at its own expense as
are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal
the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure.
In other states, redemption may be authorized if the former borrower pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently the practical effect
of a right of redemption is to force the lender to retain the property and pay
the expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
In the District of Columbia, the debtor under a residential deed of trust
(or anyone on the debtor's behalf) may cure a default during a reinstatement
period by paying the entire amount of the debt then due, exclusive of amounts
due solely to acceleration upon default, plus costs and expenses actually
incurred in enforcing the obligation and statutorily limited attorneys' and
trustee's fees. In all of the Mortgage Loan Jurisdictions, the grantor (or the
grantor's successor), any beneficiary under a junior deed of trust or any
other persons having a subordinate lien or encumbrance may discharge the deed
of trust on the security property by paying the entire principal due as a
result of the acceleration, together with interest and costs, expenses and
fees.
When the lender under a junior mortgage or deed of trust cures the default
and reinstates or redeems the senior mortgage or deed of trust, the amount
paid by the beneficiary for such cure generally becomes a part of the
indebtedness secured by the junior deed of trust.
State laws may control the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender. In the Mortgage
Loan Jurisdictions, there generally is no right to redeem the security
property after the completion of a proper trustee's or foreclosure sale.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and
therefore the Holders), under a junior mortgage or deed of trust, are
subordinate to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or trustee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the mortgage loan to be sold upon default of the borrower, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee or
trustee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. A junior lender may satisfy a defaulted senior loan in full and, in
some states, may cure such default and bring the
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senior loan current, in either event adding the amounts expended to the
balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee. In addition, as described above, the rights of the Trust
Fund may be or become subject to liens for real estate taxes and other
obligations. Although the Transferor generally does not cure defaults under a
senior deed of trust or other lien, it is the Transferor's standard practice
to protect its interest by monitoring any such sale of which it is aware and
bidding for property if it determines that it is in the Transferor's best
interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that used by the Transferor, confers on the lender
the right both to receive all proceeds collected under any hazard insurance
policy and all awards made in connection with condemnation proceedings. The
lender generally has the right, subject to the specific provisions of the
mortgage or deed of trust securing its loan, to apply such proceeds and awards
to repair of any damage to the security property or to payment of any
indebtedness secured by the mortgage or deed of trust, in such order as the
lender may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under underlying senior
loans will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with
the condemnation and to apply the same to the indebtedness secured by the
senior mortgages or deeds of trust. If available, proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, will be applied to the
indebtedness of a junior mortgage.
The form of deed of trust or mortgage used by most institutional lenders
which make revolving home equity loans typically contains a "future advance"
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. In Maryland, a future advance may be entitled to
receive the same priority as amounts initially advanced under the deed of
trust, notwithstanding that there may be intervening junior deeds of trust and
other liens between the date of recording of the deed of trust and the date of
the future advance, and notwithstanding that the beneficiary had actual
knowledge of such intervening deeds of trust and other liens at the time of
the advance so long as the additional amounts are within the maximum principal
amount stated in the deed of trust. In Virginia and the District of Columbia,
an intervening lien may gain priority, even if the lender had no knowledge of
the intervening lien at the time of an additional advance. The priority of
future advances over intervening liens may be affected in some states by
whether the beneficiary is obligated to advance the additional amount or has
notice or actual knowledge of the intervening junior deeds of trust and other
liens. In Maryland, priority of advances under the clause rests on a statute
giving priority to all advances or readvances made under the loan agreement to
a "credit limit" amount stated in the recorded deed of trust.
Other provisions typically found in the form of the mortgage or deed of
trust used by institutional lenders obligate the grantor or mortgagor to pay
before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the grantor or mortgagor to perform any of these obligations, the
mortgagee, trustee or beneficiary is given the right under certain mortgages
and deeds of trust to perform the obligation itself, at its election, with the
mortgagor agreeing to reimburse any sums so expended. The mortgage or deed of
trust typically provides that all sums so expended by the mortgagee,
beneficiary or trustee become part of the indebtedness secured by the
mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal in most cases to the difference
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between the net amount realized upon the public sale of the real property and
the amount due to the lender. Other statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In certain other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting such security; however, in some of these states, the
lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the
security rather than bringing a personal action against the borrower. Finally,
other statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with
federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to
a loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the
lender accelerated the loan and the lender has taken all steps to realize upon
its security (provided no sale of the property has yet occurred) prior to the
filing of the debtor's Chapter 13 petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a loan default by
permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and
the outstanding balance of the loan. Federal bankruptcy law and limited case
law indicate that the foregoing modifications could not be applied to the
terms of a loan secured by property that is the principal residence of the
debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded from
foreclosing without authorization from the bankruptcy court. The lender's lien
may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted
to market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate due-
on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the lender's
security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the loan
if the borrower sells or transfers, whether voluntarily or involuntarily, all
or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of due-
on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other
than national banks, federal savings institutions and federal credit unions.
FHLMC has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of due-
on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure adequately to
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that, in cases involving the sale by a trustee under
a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or
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equivalent fee for or in connection with the acceleration of a loan by
exercise of a due-on-sale clause. A mortgagee to whom a prepayment in full has
been tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements
of such mortgage loans.
APPLICABILITY OF USURY LAWS
Each Mortgage Loan Jurisdiction has usury laws which limit the interest and
other amounts that may be charged under certain loans. Title V of the
Depository Institutions Deregulation and Monetary Control Act of 1980, enacted
in March 1980 ("Title V"), provides that state usury limitations shall not
apply to certain types of residential first mortgage loans originated by
certain lenders after March 31, 1980. Similar federal statutes were in effect
with respect to mortgage loans made during the first three months of 1980. The
OTS, as successor to the Federal Home Loan Bank Board, is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. Title V authorizes any state to reimpose interest rate limits by
adopting, before April 1, 1983, a state law, or by certifying that the voters
of such state have voted in favor of any provision, constitutional or
otherwise, which expressly rejects an application of the federal law. Any
contract which is secured by a first lien on certain kinds of consumer goods
would be covered if they satisfy certain conditions, among other things,
governing the terms of any prepayments, late charges and deferral fees and
requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit. Fifteen states adopted such a law prior to
the April 1, 1983 deadline. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts"), generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the
related Agreement, the Transferor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession of
the contracts as custodian for the Trustee. In addition, the Transferor will
make an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the contracts. Unless
otherwise specified in the related Prospectus Supplement, the contracts will
not be stamped or otherwise marked to reflect their assignment from the
Transferor to the Trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of such assignment, the Trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest
in such Home Improvements to secure all or part of the purchase price of such
Home Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and
the proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In
general, a security interest does not exist under the UCC in ordinary building
material incorporated into an improvement on land.
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Home Improvement Contracts that finance lumber, bricks, other types of
ordinary building material or other goods that are deemed to lose such
characterization, upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the
Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which
varies from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to
resale of the unit so that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related contract.
INSTALLMENT SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract ("Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title
to the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the "borrower") for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good
condition and for paying real estate taxes, assessments and hazard insurance
premiums associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce
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the contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land
records, and an ejectment action may be necessary to recover possession. In a
few states, particularly in cases of borrower default during the early years
of an Installment Sales Contract, the courts will permit ejectment of the
buyer and a forfeiture of his or her interest in the property. However, most
state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under Installment Sales Contracts from the harsh
consequences of forfeiture. Under such statutes, a judicial or nonjudicial
foreclosure may be required, the lender may be required to give notice of
default and the borrower may be granted some grace period during which the
Installment Sales Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption
right. In other states, courts in equity may permit a borrower with
significant investment in the property under an Installment Sales Contract for
the sale of real estate to share in the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the lender's procedures for
obtaining possession and clear title under an Installment Sales Contract in a
given state are simpler and less time-consuming and costly than are the
procedures for foreclosing and obtaining clear title to a property subject to
one or more liens.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, and a growing number of state laws impose a
statutory lien for associated costs on property that is the subject of a
clean-up action on account of hazardous wastes or hazardous substances
released or disposed of on the property. Such a lien generally will have
priority over all subsequent liens on the property and, in certain of these
states, will have priority over prior recorded liens, including the lien of a
deed of trust. The priority of the environmental lien under federal law
depends on the time of perfection of the federal lien compared to the time of
perfection of any competing liens under applicable state law. In addition,
under federal environmental legislation and possibly under state law in a
number of states, a secured party that takes a deed in lieu of foreclosure or
acquires a property at a foreclosure sale may be liable for the costs of
cleaning up a contaminated site. Although such costs could be substantial,
they would probably not be imposed on a secured lender (such as the applicable
Trust Fund) if it promptly marketed the foreclosed property for resale. In the
event that a Trust Fund acquired title to a property securing a Mortgage Loan
and cleanup costs were incurred in respect of the property, payment to the
holders of the Securities might be adversely affected if such costs were
required to be paid by such Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii)
may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on such obligations entered into
prior to military service for the duration of military service and (iii) may
have the maturity of such obligations incurred prior to military service
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of military service. However, the benefits
of (i), (ii), or (iii) above are subject to challenge by creditors and if, in
the opinion of the court, the ability of a person to comply with such
obligations is not materially impaired by military service, the court may
apply equitable principles accordingly. If a borrower's obligation to repay
amounts otherwise due on a Loan included in a Trust Fund for a Series is
relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, none
of the Trust Fund, the Servicer, the Transferor nor the Trustee will be
required to advance such amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the Holders of the Securities of such
Series. Unless otherwise specified in the related Prospectus Supplement,
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any shortfalls in interest collections on Loans or Underlying Loans relating
to the Private Securities, as applicable, included in a Trust Fund for a
Series resulting from application of the Soldiers' and Sailors' Civil Relief
Act of 1940 will be allocated to each Class of Securities of such Series that
is entitled to receive interest in respect of such Loans or Underlying Loans
in proportion to the interest that each such Class of Securities would have
otherwise been entitled to receive in respect of such Loans or Underlying
Loans had such interest shortfall not occurred.
THE TRANSFEROR
The Transferor is a federally chartered stock savings bank. The Transferors
home office is located at 7926 Jones Branch Drive, McLean, Virginia 22102. The
Transferor's executive offices are located at 8401 Connecticut Avenue, Chevy
Chase, Maryland 20815, and the Transferor's telephone number is (301) 986-7000.
The Transferor is subject to comprehensive regulation, examination and
supervision by the 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, which is administered by
the FDIC. For further information regarding the Transferor, see "THE TRANSFEROR"
in the related Prospectus Supplement.
USE OF PROCEEDS
The Transferor will apply all or substantially all of the net proceeds from
the sale of each Series of Certificates for one or more of the following
purposes: (i) to establish any Reserve Fund, Pre-Funding Account or
Capitalized Interest Account, (ii) to pay costs of structuring and issuing
such Securities, including the costs of obtaining Enhancement and (iii) for
its general corporate purposes.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary is based on the opinion of Shaw, Pittman, Potts &
Trowbridge, special federal tax counsel to the Transferor ("Federal Tax
Counsel"), as to the material federal income tax consequences of the purchase,
ownership and disposition of Securities. The summary does not purport to deal
with all aspects of federal income taxation that may affect particular investors
in light of their individual circumstances, nor with certain types of investors
subject to special treatment under the federal income tax laws. This summary
focuses primarily upon investors who will hold Securities as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code"), but much of the
discussion is applicable to other investors as well. Because tax consequences
may vary based on the status or tax attributes of the owner of a Security,
prospective investors are advised to consult their own tax advisors concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Securities. For purposes of this tax
discussion (except with respect to information reporting, or where the context
indicates otherwise), any reference to the "Holder" means the beneficial owner
of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The
statutory provisions, regulations, and interpretations on which this
interpretation is based are subject to change, and such a change could apply
retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat the Trust Fund
(or certain assets of the Trust Fund) relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Code; (iii) the Securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the Trust Fund for a
Series; or (iv) for federal income
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tax purposes the Trust Fund relating to a particular Series of Certificates is
classified as a partnership. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
Interest and Acquisition Discount. Securities representing regular interests
in a REMIC ("Regular Interest Securities") are generally taxable to Holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the Regular Interest Securities will be taxable as ordinary income
and taken into account using the accrual method of accounting, regardless of
the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by a Holder thereof in accordance with its usual method of accounting.
Securities characterized as debt for federal income tax purposes and Regular
Interest Securities will be referred to hereinafter collectively as "Debt
Securities." For Certificates treated as debt for federal income tax purposes,
see "Certain Certificates Treated as Indebtedness."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount"
("OID"). The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued thereunder on February 2, 1994 (the "OID Regulations"). A
Holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder
of a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a prescribed method which takes into account an
economic accrual of the discount. In general, OID must be included in income
in advance of the receipt of the cash representing that income. The amount of
OID on a Debt Security will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a substantial
amount of Debt Securities of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of Debt Securities is sold for cash on or prior
to the Closing Date, the issue price for such class will be treated as the
fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if late payment of
interest (other than late payment that occurs within a reasonable grace
period) or nonpayment of interest is expected to be penalized or reasonable
remedies exist to compel payment. The meaning of "penalized" under the OID
Regulations is unclear particularly in the case of obligations based on other
debt obligations. Interest payments on Debt Securities which do not have
reasonable remedies to compel timely payment of interest may not be qualified
stated interest, and such Debt Securities may have original issue discount.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates
but ends prior to each Distribution Date. Any interest that accrues prior to
the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the Debt
Securities or (ii) as not included in the issue price or stated redemption
price. The OID Regulations provide a special application of the de minimis
rule for debt instruments with long first accrual periods where the interest
payable for the first period is at a rate which is effectively less than that
which applies in all other periods. In such cases, for the sole purpose of
determining whether original issue discount is de minimis, the OID Regulations
provide that the stated redemption price is equal to the instrument's
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issue price plus the greater of the amount of foregone interest or the excess
(if any) of the instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
Holders may elect to accrue all de minimis OID as well as market discount
under a constant interest method. See "--Election to Treat All Interest as
Original Issue Discount".
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which
are not subject to acceleration resulting from prepayments on the Loans, the
amount of OID includible in income of a Holder for an accrual period
(generally the period over which interest accrues on the debt instrument) will
equal the product of the yield to maturity of the Debt Security and the
adjusted issue price of the Debt Security, reduced by any payments of
qualified stated interest. The adjusted issue price is the sum of its issue
price plus prior accruals of OID, reduced by the total payments made with
respect to such Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a Holder of a debt instrument,
such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments
is to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding
at the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of OID required to be included in income by a
Holder to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero
for any period) the portions of OID required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
OID will be reported to Holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to Holders that Loans will be
prepaid at that rate or at any other rate.
The Transferor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the Loans,
although the OID Regulations do not provide for such adjustments. If the
Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
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Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such Holder in
that period. The Holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount
of distributions on the Securities is reduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest-Only Debt Securities. The Trust Fund intends to report income from
interest-only classes of Debt Securities to the Internal Revenue Service and
to Holders of interest-only Debt Securities based on the assumption that the
stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities Certificates will be treated as having original
issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are
subject to special rules. A Variable Rate Debt Security will qualify as a
"variable rate debt instrument" if (i) its issue price does not exceed the
total noncontingent principal payments due under the Variable Rate Debt
Security by more than a specified de minimis amount and (ii) it provides for
stated interest, paid or compounded at least annually, at (a) one or more
qualified floating rates, (b) a single fixed rate and one or more qualified
floating rates, (c) a single objective rate or (d) a single fixed rate and a
single objective rate that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for
purposes of the OID Regulations. However, a variable rate equal to (i) the
product of a qualified floating rate and a fixed multiple that is greater than
zero but not more than 1.35 or (ii) the product of a qualified floating rate
and a fixed multiple that is greater than zero but not more than 1.35,
increased or decreased by a fixed rate will constitute a qualified floating
rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate Debt Security will be treated as a single qualified floating
rate (a "Presumed Single Qualified Floating Rate"). Two or more qualified
floating rates with values within 25 basis points of each other as determined
on the Variable Rate Debt Security's issue date will be conclusively presumed
to be a Presumed Single Qualified Floating Rate. Notwithstanding the
foregoing, a variable rate that would otherwise constitute a qualified
floating rate, but which is subject to one or more restrictions such as a cap
or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the
Variable Rate Debt Security or the restriction will not significantly affect
the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
(i) one or more qualified floating rates, (ii) one or more rates where each
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rate would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate Debt Security is
denominated, (iii) either the yield or changes in the price of one or more
items of actively traded personal property or (iv) a combination of rates
described in (i), (ii) and (iii). The OID Regulations also provide that other
variable rates may be treated as objective rates if so designated by the
Internal Revenue Service in the future. Despite the foregoing, a variable rate
of interest on a Variable Rate Debt Security will not constitute an objective
rate if it is reasonably expected that the average value of such rate during
the first half of the Variable Rate Debt Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Variable Rate Debt Security's term. An
objective rate will qualify as a "qualified inverse floating rate" if such
rate is equal to a fixed rate minus a qualified floating rate, and variations
in the rate can reasonably be expected to reflect inversely contemporaneous
variations in the cost of newly borrowed funds. The OID Regulations also
provide that if a Variable Rate Debt Security provides for stated interest at
a fixed rate for an initial period of less than one year followed by a
variable rate that is either a qualified floating rate or an objective rate
and if the variable rate on the Variable Rate Debt Security's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed
as described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest and (ii) by assuming that the variable
rate on the Single Variable Debt Security is a fixed rate equal to: (a) in the
case of a Single Variable Rate Debt Security with a qualified floating rate or
a qualified inverse floating rate, the value of, as of the issue date, the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate Debt Security with an objective rate (other
than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Debt Security.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies
as a "variable rate debt instrument" will be converted into an "equivalent"
fixed rate debt instrument for purposes of determining the amount and accrual
of original issue discount and qualified stated interest on the Multiple
Variable Rate Debt Security. The OID Regulations generally require that such a
Multiple Variable Rate Debt Security be converted into an "equivalent" fixed
rate debt instrument by substituting any qualified floating rate or qualified
inverse floating rate provided for under the terms of the Multiple Variable Rate
Debt Security with a fixed rate equal to the value of the qualified floating
rate or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate Debt Security's issue date. Once the Multiple Variable Rate Debt
Security is converted into an "equivalent" fixed rate debt instrument, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the "equivalent" fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the "equivalent" fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
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The OID Regulations do not clearly address the treatment of a Variable Rate
Debt Security that is based on a weighted average of the interest rates on
underlying Loans. Under the OID Regulations, interest payments on such a
Variable Rate Debt Security may be characterized as qualified stated interest
which is includible in income in a manner similar to that described in the
previous paragraph. However, it is also possible that interest payments on
such a Variable Rate Debt Security would be treated as contingent interest
(possibly includible in income when the payments become fixed) or in some
other manner.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear
under current law how a Variable Rate Debt Security would be taxed if such
Debt Security were treated as a contingent payment debt obligation.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a
Debt Security with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Debt Security
over the purchaser's purchase price) will be required to include accrued
market discount in income as ordinary income in each month, but limited to an
amount not exceeding the principal payments on the Debt Security received in
that month and, if the Securities are sold, the gain realized. Such market
discount would accrue in a manner to be provided in Treasury regulations but,
until such regulations are issued, such market discount would in general
accrue either (i) on the basis of a constant yield (in the case of a Pay-
Through Security, taking into account a prepayment assumption) or (ii) in the
ratio of (a) in the case of Securities (or in the case of a Pass-Through
Security, as set forth below, the Loans underlying such Security) not
originally issued with original issue discount, stated interest payable in the
relevant period to total stated interest remaining to be paid at the beginning
of the period or (b) in the case of Securities (or, in the case of a Pass-
Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense
was incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a Pass-
Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security on a constant yield method. Although no
regulations addressing the computation of premium accrual on securities similar
to the Securities have been issued, the legislative
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history of the 1986 Act indicates that premium is to be accrued in the same
manner as market discount. Accordingly, it appears that the accrual of premium
on a Class of Pay-Through Securities will be calculated using the prepayment
assumption used in pricing such Class. If a Holder makes an election to
amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter
by such Holder, and will be irrevocable without the consent of the Internal
Revenue Service. Purchasers who pay a premium for the Securities should
consult their tax advisors regarding the election to amortize premium and the
method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt
Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Holder of the Debt Security acquires during the year
of the election or thereafter. Similarly, a Holder of a Debt Security that
makes this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt Security is irrevocable.
Sale or Exchange. A Holder's tax basis in its Debt Security is the price
such Holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized
on a sale, exchange, or redemption of a Debt Security, measured by the
difference between the amount realized and the Debt Security's basis as so
adjusted, will generally be capital gain or loss, assuming that the Debt
Security is held as a capital asset. In the case of a Debt Security held by a
bank, thrift, or similar institution described in Section 582 of the Code,
however, gain or loss realized on the sale or exchange of a Debt Security will
be taxable as ordinary income or loss. In addition, gain from the disposition
of a Regular Interest Security that might otherwise be capital gain will be
treated as ordinary income to the extent of the excess, if any, of (i) the
amount that would have been includible in the Holder's income if the yield on
such Regular Interest Security had equaled 110% of the applicable federal rate
as of the beginning of such Holder's holding period, over the amount of
ordinary income actually recognized by the Holder with respect to such Regular
Interest Security.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Federal Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Status of Regular Interest Securities as Real Property Loans. Regular
Interest Securities and Securities representing a residual interest in a REMIC
(both types of securities collectively referred to as "REMIC Securities") will
be "qualifying real property loans" within the meaning of Section 593(d) of
the Code, "real estate assets" for purposes of Section 856(c)(5)(A) of the
Code and assets described in Section 7701(a)(19)(C) of the Code (assets
qualifying under one or more of those sections, applying each section
separately, "qualifying assets") to the extent that the REMIC's assets are
qualifying assets. However, if at least 95% of the REMIC's
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assets are qualifying assets, then 100% of the REMIC Securities will be treated
as qualifying assets. Similarly, income on the REMIC Securities will be treated
as "interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the limitations of the
preceding two sentences. In addition to Loans, the REMIC's assets will include
payments on Loans held pending distribution to Holders of REMIC Securities,
amounts in reserve accounts (if any), other credit enhancements (if any) and
possibly buydown funds ("Buydown Funds"). The Loans generally will be qualifying
assets under all three of the foregoing sections of the Code. However, Loans
that are not secured by residential real property or real property used
primarily for church purposes may not constitute qualifying assets under Section
7701(a)(19)(C)(v) of the Code, and Loans that are not secured by improved real
property or real property which is to be improved using Loan proceeds will not
constitute qualifying assets under Section 593(d) of the Code. In addition, to
the extent that the principal amount of a Loan exceeds the value of the property
securing the Loan, it is unclear and Federal Tax Counsel is unable to opine
whether the Loans will be qualifying assets. The regulations under Sections 860A
through 860G of the Code (the "REMIC Regulations") treat credit enhancements as
part of the mortgage or pool of mortgages to which they relate, and therefore
credit enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid on Loans and
held pending distribution to Holders of Regular Interest Securities ("cash flow
investments") will be treated as qualifying assets. It is unclear whether
reserve funds or Buydown Funds would also constitute qualifying assets under any
of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into account
by Holders of the Residual Interest Securities. In the case of a "single class
REMIC," however, the expenses will be allocated, under Treasury regulations,
among the Holders of the Regular Interest Securities and the Holders of the
Residual Interest Securities on a daily basis in proportion to the relative
amounts of income accruing to each Holder on that day. In the case of a Holder
of a Regular Interest Security who is an individual or a "pass-through
interest Holder" (including certain pass-through entities but not including
real estate investment trusts), such expenses will be deductible only to the
extent that such expenses, plus other "miscellaneous itemized deductions" of
the Holder, exceed 2% of such Holder's adjusted gross income and such Holder
may not be able to deduct such fees and expenses to any extent in computing
such Holder's alternative minimum tax liability. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (for 1996, such
amount is $117,950 for all taxpayers except married taxpayers filing
separately, for whom such amount is $58,975) will be reduced by the lesser of
(i) 3% of the excess of adjusted gross income over the applicable amount, or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. The reduction or disallowance of this deduction may have a
significant impact on the effective after-tax yield of the Regular Interest
Security to such a Holder. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules. Unless otherwise stated in the
applicable Prospectus Supplement, the expenses of the REMIC will be allocated to
Holders of the related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon
the issuance of any such Series of Securities, counsel to the Transferor will
deliver its opinion
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generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of Regular Certificates
or Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income
produced by the REMIC's assets, including stated interest and any original
issue discount or market discount on loans and other assets, and (ii)
deductions, including stated interest and original issue discount accrued on
Regular Interest Securities, amortization of any premium with respect to
Loans, and servicing fees and other expenses of the REMIC. A Holder of a
Residual Interest Security that is an individual or a "pass-through interest
Holder" (including certain pass-through entities, but not including real
estate investment trusts) will be unable to deduct servicing fees payable on
the Loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's
other miscellaneous itemized deductions for that year, do not exceed 2% of
such Holder's adjusted gross income and such Holder may not be able to deduct
such fees and expenses to any extent in computing such holders alternative
minimum tax liability.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). Such aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans.
Subject to possible application of the de minimis rules, the method of accrual
by the REMIC of OID income on such loans will be equivalent to the method
under which Holders of Pay-Through Securities accrue original issue discount
(i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct OID on the Regular Interest Securities in
the same manner that the Holders of the Regular Interest Securities include
such discount in income, but without regard to the de minimis rules. See
"Taxation of Debt Securities (Including Regular Interest Securities)" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of
any qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC
pursuant to the Code; or (iv) the receipt of any fees or other compensation
for services rendered by the REMIC. It is anticipated that a REMIC will not
engage in any prohibited transactions in which
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it would recognize a material amount of net income. In addition, subject to a
number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the Startup Day. The Holders of Residual Interest
Securities will generally be responsible for the payment of any such taxes
imposed on the REMIC. To the extent not paid by such Holders or otherwise,
however, such taxes will be paid out of the Trust Fund and will be allocated
pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable
portion of the taxable income or net loss of the REMIC for such quarter, and
by allocating that amount among the Holders (on such day) of the Residual
Interest Securities in proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The
reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which the Loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. (If this occurs, it
is likely that cash distributions with respect to the Residual Interest Security
will exceed taxable income in later years.) In any event, because the Holder of
a residual interest is taxed on the net income of the REMIC, the taxable income
derived from a Residual Interest Security in a given taxable year will not be
equal to the taxable income associated with investment in a corporate bond or
stripped instrument having similar cash flow characteristics and pretax yield.
Therefore, the after-tax yield on the Residual Interest Security may be less
than that of such a bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account on a current basis is limited to the Holder's adjusted basis
at the end of the calendar quarter in which such loss arises. A Holder's basis
in a Residual Interest Security will initially equal such Holder's purchase
price, and will subsequently be increased by the amount of the REMIC's taxable
income allocated to the Holder, and decreased (but not below zero) by the sum of
(i) the amount of distributions made to the Holder and (ii) the amount of the
REMIC's net loss allocated to the Holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of Holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such Holders should consult their tax advisors.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in
the Residual Interest Security, however, the Holder will recognize gain
(treated as gain from the sale of the Residual Interest Security) to the
extent of such excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed
if the selling Holder acquires any residual interest in a REMIC or similar
mortgage pool within six months before or after such disposition.
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Excess Inclusions. The portion of the REMIC taxable income of a Holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. An exception applies to organizations to
which Code Section 593 applies (generally, certain thrift institutions);
however, such exception will not apply if the aggregate value of the Residual
Interest Securities is not considered to be "significant," as described below.
Further, if the Holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such Holder's excess inclusion income will be treated as unrelated business
taxable income of such Holder. In addition, under Treasury regulations yet to
be issued, if a real estate investment trust, a regulated investment company,
a common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person, excess inclusion
income is subject to tax at a rate of 30% which may not be reduced by treaty,
is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "Tax Treatment of Foreign Investors."
Regulations provide that a Residual Interest Security has significant value
only if (i) the aggregate issue price of the Residual Interest Security is at
least 2% of the aggregate of the issue prices of all Regular Interest
Securities and Residual Interest Securities in the REMIC and (ii) the
anticipated weighted average life of the Residual Interest Securities is at
least 20% of the weighted average life of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to
a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup
Date multiplied by (ii) the adjusted issue price of such Residual Interest
Security at the beginning of such quarterly period. The adjusted issue price
of a Residual Interest Security at the beginning of each calendar quarter will
equal its issue price (calculated in a manner analogous to the determination
of the issue price of a Regular Interest Security), increased by the aggregate
of the daily accruals for prior calendar quarters, and decreased (but not
below zero) by the amount of loss allocated to a Holder and the amount of
distributions made on the Residual Interest Security before the beginning of
the quarter.
Under the REMIC Regulations, in certain circumstances, transfers of Residual
Interest Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As a
condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a
rural electric or telephone cooperative described in Section 1381(a)(2)(C) of
the Code, or any entity exempt from the tax imposed by Sections 1-1399 of the
Code, if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at
the time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any
person holding as nominee an interest in a pass-through entity) that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
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The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35%, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from
the REMIC, at or after the time at which taxes on such excess inclusion
accrue, sufficient to pay the taxes thereon. A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of
the transfer, either knew or should have known (had "improper knowledge") that
the transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. A transferor will be presumed not to have
improper knowledge if (i) the transferor conducts, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor finds that
the transferee has historically paid its debts as they came due and finds no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future, and (ii) the transferee represents
to the transferor that (A) the transferee understands that it might incur tax
liabilities in excess of any cash received with respect to the residual
interest and (B) the transferee intends to pay the taxes associated with
owning the residual interest as they come due. A different formulation of this
rule applies to transfers of Residual Interest Security by or to foreign
transferees. See "Tax Treatment to Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
should be aware that the Internal Revenue Service recently finalized regulations
(the "Mark-to-Market Regulations") which provide that any REMIC Residual
Interest acquired after January 3, 1995 cannot be marked to market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject
to the procedural and administrative rules of the Code
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applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC income, gain, loss, deduction, or credit,
by the IRS in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement, if a REMIC or
partnership election is not made and the Certificates are not treated as debt
for federal income tax purposes, in the opinion of Federal Tax Counsel, the
Trust Fund relating to a Series of Securities will be classified for federal
income tax purposes as a grantor trust under Subpart E, Part 1 of Subchapter J
of the Code and not as an association taxable as a corporation (the Securities
of such Series, "Pass-Through Securities"). Accordingly, each Holder of a
Pass-Through Security is treated for federal income tax purposes as the owner
of an undivided interest in the Loans included in the Trust Fund. As further
described below, each Holder of a Pass-Through Security therefore must report
on its federal income tax return the gross income from the portion of the
Loans that is allocable to such Pass-Through Security and may deduct the
portion of the expenses incurred or accrued by the Trust Fund that is
allocable to such Pass-Through Security, at the same time and to the same
extent as such items would be reported by such Holder if it had purchased and
held directly such interest in the Loans and received or accrued directly its
share of the payments on the Loans and incurred or accrued directly its share
of expenses incurred or accrued by the Trust Fund when those amounts are
received, incurred or accrued by the Trust Fund.
A Holder of a Pass-Through Security that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum
of those expenses and the Holder's other miscellaneous itemized deductions
exceeds 2% of such Holder's adjusted gross income. Moreover, a Holder of a
Pass-Through Security that is not a corporation cannot deduct such expenses
for purposes of the alternative minimum tax (if applicable). Such deductions
will include servicing, guarantee and administrative fees paid to the servicer
of the Loans. As a result, the Trust Fund will report additional taxable
income to Holders of Pass-Through Securities in an amount equal to their
allocable share of such deductions, and individuals, estates, or trusts
holding Pass-Through Securities may have taxable income in excess of the cash
received.
Status of the Pass-Through Securities as Real Property Loans. The Pass-
Through Securities will be "qualifying real property loans" within the meaning
of Section 593(d) of the Code, "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code (assets
qualifying under one or more of those sections, applying each section
separately, "qualifying assets") to the extent that the Trust Fund's assets
are qualifying assets. The Pass-Through Securities may not be qualifying
assets under any of the foregoing sections of the Code to the extent that the
Trust Fund's assets include Buydown Funds, reserve funds, or payments on
mortgages held pending distribution to Holders of Pass-Through Securities.
Further, the Pass-Through Securities may not be "qualifying real property loans"
to the extent Loans held by the Trust Fund are not secured by improved real
property or real property which is to be improved using the Loan proceeds, may
not be "real estate assets" to the extent Loans held by the trust are not
secured by real property, and may not be "loans . . . secured by an interest in
real property" to the extent Loans held by the trust are not secured by
residential real property or real property used primarily for church purposes.
In addition, to the extent that the principal amount of a Loan exceeds the value
of the property securing the Loan, it is unclear and Federal Tax Counsel is
unable to opine whether the Loans will be qualifying assets.
Taxation of Pass-Through Securities Under Stripped Bond Rules. The federal
income tax treatment of the Pass-Through Securities will depend on whether
they are subject to the rules of Section 1286 of the Code (the "stripped bond
rules"). The Pass-Through Securities will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the Internal Revenue Service
may contend that the stripped bond rules apply on the ground that the
Servicer's servicing fee, or other amounts, if any, paid to (or retained by)
the Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Loans and should be characterized for federal income tax purposes as an
ownership interest in the Loans. The Internal Revenue
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Service has taken the position in Revenue Ruling 91-46 that a retained
interest in excess of reasonable compensation for servicing is treated as a
"stripped coupon" under the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Securities will be subject to
the OID rules and/or the market discount rules. A Holder of a Pass-Through
Security generally will account for any discount on the Pass-Through Security
that is attributable to a Loan that is secured by real property as market
discount rather than OID if either (i) the amount of OID attributable to such
Loan was treated as zero under the OID de minimis rule when such Loan was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off from such Loan.
If neither of the above exceptions applies, the OID rules will apply to such
discount. Discount attributable to an unsecured Loan will not be eligible for
treatment as market discount, and it is unclear whether discount attributable
to a stripped Loan the principal amount of which exceeds the value of real
property securing the Loan will be eligible for treatment as market discount.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income
from the Pass-Through Security in each taxable year equal to the income that
accrues on the Pass-Through Security in that year calculated under a constant
yield method based on the yield of the Pass-Through Security (or, possibly,
the yield of each Loan underlying such Pass-Through Security) to such Holder.
Such yield would be computed at the rate (assuming monthly compounding) that,
if used in discounting the Holder's share of the payments on the Loans, would
cause the present value of those payments to equal the price at which the
Holder purchased the Pass-Through Security. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that OID be
accrued based on a prepayment assumption determined in a manner prescribed by
forthcoming regulations. It is unclear whether such regulations would apply
this rule to the Pass-Through Securities, whether Section 1272(a)(6) might
apply to the Pass-Through Securities in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles, and Federal Tax
Counsel is unable to opine with respect to this issue. If required to report
interest income on the Pass-Through Securities to the Internal Revenue Service
under the stripped bond rules, it is anticipated that the Trustee will
calculate the yield of the Pass-Through Securities based on a representative
initial offering price of the Pass-Through Securities and a reasonable assumed
rate of prepayment of the Loans (although such yield may differ from the yield
to any particular Holder that would be used in calculating the interest income
of such Holder). The Prospectus Supplement for each series of Pass-Through
Securities will describe the prepayment assumption that will be used for this
purpose, but no representation is made that the Loans will prepay at that rate
or at any other rate.
Assuming that Holders are not taxed as directly owning the Loans, in the
case of a Pass-Through Security acquired at a price equal to the principal
amount of the Loans allocable to the Pass-Through Security, the use of a
reasonable prepayment assumption would not have any significant effect on the
yield used in calculating accruals of interest income. In the case, however,
of a Pass-Through Security acquired at a discount or premium (that is, at a
price less than or greater than such principal amount, respectively), the use
of a reasonable prepayment assumption would increase or decrease such yield,
and thus accelerate or decelerate the reporting of interest income,
respectively.
If a Loan is prepaid in full, the Holder of a Pass-Through Security acquired
at a discount or premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Loan that is allocable to the Pass-Through Security and the portion of the
adjusted basis of the Pass-Through Security (see "Sales of Pass-Through
Securities" below) that is allocable to the Loan. The method of allocating
such basis among the Loans may differ depending on whether a reasonable
prepayment assumption is used in calculating the yield of the Pass-Through
Securities for purposes of accruing OID. It is not clear whether any other
adjustments would be required to reflect differences between the prepayment
rate that was assumed in calculating yield and the actual rate of prepayments.
Pass-Through Securities of certain series ("Variable Rate Pass-Through
Securities") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Loans held by the Trust Fund,
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which interest rates may be fixed or variable. In the case of a Variable Rate
Pass-Through Security that is subject to the OID rules, the daily portions of
OID generally will be calculated under the principles discussed in "--Taxation
of Debt Securities (Including Regular Interest Securities)--Variable Rate Debt
Securities."
Taxation of Pass-Through Securities If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Pass-Through Security, then the
Holder will be required to include in income its share of the interest
payments on the Loans in accordance with its tax accounting method. In
addition, if the Holder purchased the Pass-Through Security at a discount or
premium, the Holder will be required to account for such discount or premium
in the manner described below. The treatment of any discount will depend on
whether the discount is OID as defined in the Code and, in the case of
discount other than OID, whether such other discount exceeds a de minimis
amount. In the case of OID, the Holder (whether a cash or accrual method
taxpayer) will be required to report as additional interest income in each
month the portion of such discount that accrues in that month, calculated
based on a constant yield method. In general it is not anticipated that the
amount of OID to be accrued in each month, if any, will be significant
relative to the interest paid currently on the Loans. However, OID could arise
with respect to a Loan ("ARM") that provides for interest at a rate equal to
the sum of an index of market interest rates and a fixed number. The OID for
ARMs generally will be determined under the principles discussed in "Taxation
of Debt Securities (Including Regular Interest Securities)--Variable Rate Debt
Securities."
If discount other than OID exceeds a de minimis amount (described below),
the Holder will also generally be required to include in income in each month
the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Loan, to the amount of principal on such Loan received by the
Trust Fund in that month. Because the Loans will provide for monthly principal
payments, such discount may be required to be included in income at a rate
that is not significantly slower than the rate at which such discount accrues
(and therefore at a rate not significantly slower than the rate at which such
discount would be included in income if it were OID). The Holder may elect to
accrue such discount under a constant yield method based on the yield of the
Pass-Through Security to such Holder. In the absence of such an election, it may
be necessary to accrue such discount under a more rapid straight-line method.
Under the de minimis rule, market discount with respect to a Pass-Through
Security will be considered to be zero if it is less than the product of (i)
0.25% of the principal amount of the Loans allocable to the Pass-Through
Security and (ii) the weighted average life (in complete years) of the Loans
remaining at the time of purchase of the Pass-Through Security.
If a Holder purchases a Pass-Through Security at a premium, such Holder
generally may elect under Section 171 of the Code to amortize the portion of
such premium that is allocable to a Loan under a constant yield method based on
the yield of the Loan to such Holder.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Loans or taking account
of a reasonable prepayment assumption, and Federal Tax Counsel is unable to
opine on this issue.
If a Loan is prepaid in full, the Holder of a Pass-Through Security acquired
at a discount or premium will recognize ordinary income or loss equal to the
difference between the portion of the prepaid principal amount of the Loan
that is allocable to the Pass-Through Security and the portion of the adjusted
basis of the Pass-Through Security (see "Sales of Pass-Through Securities"
below) that is allocable to the Loan. The method of allocating such basis
among the Loans may differ depending on whether a reasonable prepayment
assumption is used in calculating the yield of the Pass-Through Securities for
purposes of accruing OID. Other adjustments might be required to reflect
differences between the prepayment rate that was assumed in accounting for
discount or premium and the actual rate of prepayments.
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MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original issue
discount on the Securities. This withholding generally applies if the Holder
of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails
to provide the Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its
correct number and that the Holder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain payments
made to Holders, including payments to certain exempt recipients (such as
exempt organizations) and to certain Nonresidents (as defined below). Holders
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each calendar
year the amount of any "reportable payments" during such year and the amount
of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds which are
treated as partnerships for federal income tax purposes and with respect to
Certificates treated as debt for federal income tax purposes, unless interest
(including OID) paid on a Security (other than a Residual Interest Security)
is considered to be "effectively connected" with a trade or business conducted
in the United States by a nonresident alien individual, foreign partnership or
foreign corporation ("foreign investors"), such interest will normally qualify
as portfolio interest (except where (i) the recipient is a Holder, directly or
by attribution, of 10% or more of the capital or profits interest in the
issuer, or (ii) the recipient is a controlled foreign corporation to which the
issuer is a related person) and will be exempt from federal income tax. See
"--Tax Consequences to Holders of the Certificates Issued by a Partnership-Tax
Consequences to Foreign Certificateholders" and "--Certain Certificates
Treated as Indebtedness-Foreign Investors". Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced or
eliminated by an applicable tax treaty) on, among other things, interest and
other fixed or determinable, annual or periodic income paid to Nonresidents.
Holders of Pass-Through Securities however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder and timely provide an IRS Form 4224. They will,
however, generally be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income
does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a Holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations which
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a
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Residual Interest Security has tax avoidance potential, a transfer of a
Residual Interest Security to a Nonresident will be disregarded for all
federal tax purposes. A Residual Interest Security has tax avoidance potential
unless, at the time of the transfer, the transferor reasonably expects that
the REMIC will distribute to the transferee residual interest Holder amounts
that will equal at least 30% of each excess inclusion, and that such amounts
will be distributed at or after the time at which the excess inclusions accrue
and not later than the calendar year following the calendar year of accrual.
If a Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor to avoid
tax on accrued excess inclusions, then the transfer is disregarded and the
transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See
"Taxation of Holders of Residual Interest Securities--Excess Inclusions."
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign
person is not present in the United States for 183 days or more in the taxable
year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund which is
intended to be a partnership for federal income tax purposes will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on Federal Tax Counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
has been structured as a private placement under an IRS safe harbor, so that
the Trust Fund will not be characterized as a publicly traded partnership
taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its
taxable income. The Trust Fund's taxable income would include all its income,
possibly reduced by its interest expense on the Notes. Any such corporate
income tax could materially reduce cash available to make payments on the Notes
and distributions on the Certificates, and Holders of Certificates could be
liable for any such tax that is unpaid by the Trust Fund. In addition, all
distributions to the Holders of Certificates would be taxable as dividends.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Holders of Notes will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Except as otherwise provided in the
related Prospectus Supplement, Federal Tax Counsel will advise the Transferor
that the Notes will be classified as debt for federal income tax purposes.
Consequently, Holders of Notes will be subject to taxation as described in
"Taxation of Debt Securities (Including Regular Interest Securities)" above for
Debt Securities which are not Regular Interest Securities.
Possible Alternative Treatments of the Notes. If, contrary to the opinion of
Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Federal Tax Counsel, the Trust
Fund might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse
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tax consequences to certain Holders. For example, income to foreign Holders
generally would be subject to U.S. federal income tax and U.S. federal income
tax return filing and withholding requirements, and individual Holders might
be subject to certain limitations on their ability to deduct their share of
the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Trust Fund as a Partnership. In the case of a Trust Fund
intended to qualify as a partnership for federal income tax purposes, the Trust
Fund and the Transferor will agree, and the Holders of Certificates will agree
by their purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust Fund, the partners of the partnership being the
Holders of Certificates and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust
Fund, the Certificates, the Notes, the Trust Fund and the Servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Holders of Certificates as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
have interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Holder of a Certificate will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest and OID accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Holders of Certificates will be allocated taxable income of
the Trust Fund for each month equal to the sum of (i) the interest that accrues
on the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Holders of Certificates for such
month; and (iv) any other amounts of income payable to the Holders of
Certificates for such month. Such allocation will be reduced by any amortization
by the Trust Fund of premium on Loans that corresponds to any excess of the
issue price of Certificates over their principal amount. All remaining taxable
income of the Trust Fund will be allocated to the Transferor. Based on the
economic arrangement of the parties, this approach for allocating Trust Fund
income should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to Holders of Certificates. Moreover, even under the foregoing
method of allocation, Holders of Certificates may be allocated income equal to
the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Holders of Certificates
may become liable for taxes on Trust Fund income even
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if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Holders of Certificates but such Holders may be purchasing
Certificates at different times and at different prices, such Holders may be
required to report on their tax returns taxable income that is greater or less
than the amount reported to them by the Trust Fund.
If Notes are also issued, all of the taxable income allocated to a Holder of a
Certificate that is a pension, profit sharing or employee benefit plan or other
tax-exempt entity (including an individual retirement account) will constitute
"unrelated business taxable income" generally taxable to such a Holder under the
Code.
An individual taxpayer's share of expenses of the Trust Fund (including fees
to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or
in part and might result in such Holder being taxed on an amount of income
that exceeds the amount of cash actually distributed to such Holder over the
life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Holders of Certificates on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Holders of Certificates.
Discount and Premium. It is believed that the Loans were not issued with OID
and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Holders of
Certificates.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, Holders of Certificates will be
treated as if they contributed their partnership interests to a new partnership,
and the original partnership liquidated, and distributed all of its assets to
the new partnership in liquidation. As a result, the Trust Fund may be subject
to certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust Fund might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Holder's tax basis in a Certificate will generally equal the Holder's cost
increased by the Holder's share of Trust Fund income (includible in income) and
decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificates and the amount realized on a
sale of a Certificate would include the Holder's share of the Notes and other
liabilities of the Trust Fund. A Holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated
as ordinary income to the Holder and would give rise to special
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tax reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Holder of Certificates is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust Fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Holders of Certificates
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction .
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Holders of Certificates.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Holder of Certificates sells its
Certificates at a profit (loss), the purchasing Holder will have a higher
(lower) basis in the Certificates than the selling Holder had. The tax basis of
the Trust Fund's assets will not be adjusted to reflect that higher (or lower)
basis unless the Trust Fund were to file an election under Section 754 of the
Code. In order to avoid the administrative complexities that would be involved
in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust Fund currently does not intend to
make such election. As a result, Holders of Certificates might be allocated a
greater or lesser amount of Trust Fund income than would be appropriate based on
their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return with the IRS for each taxable year of the Trust Fund and will
report the allocable share of items of Trust Fund income and expense for each
Holder of Certificates to the Holder and the IRS on Schedule K-1. The Trust Fund
will provide the Schedule K-1 information to nominees that fail to provide the
Trust Fund with the information statement described below and such nominees will
be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (x) the name, address and identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust
Fund. The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust Fund with
the information described above may be subject to penalties.
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The Transferor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Holders of Certificates in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Holders of
Certificates, and, under certain circumstances, a Holder of Certificates may be
precluded from separately litigating a proposed adjustment to the items of the
Trust Fund. An adjustment could also result in an audit of a Holder's returns
and adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Holders of Certificates. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Holders of Certificates pursuant to Section
1446 of the Code, as if such income were effectively connected to a U.S. trade
or business, at a rate of 35% for foreign Holders that are taxable as
corporations and 39.6% for all other foreign Holders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust Fund to change its withholding procedures.
Each foreign Holder might be required to file a U.S. individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Trust Fund's income. Each foreign Holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a Holder who
is a foreign person generally will be considered guaranteed payments to the
extent such payments are determined without regard to the income of the Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest probably will not be considered "portfolio
interest." As a result, foreign Holders will be subject to United States federal
income tax and withholding tax at a rate of 30%, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign Holder would only be
entitled to claim a refund for that portion of the taxes, if any, in excess of
the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds from
the sale of the Certificates will be subject to a "backup" withholding tax of
31% if, in general, the Holder of a Certificate fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of Certificates which are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below, the Certificates
will be characterized as indebtedness for federal income tax purposes of the
Transferor that is secured by the Loans. Opinions of counsel are not binding
on the Internal Revenue Service, however, and there can be no assurance that
the IRS could not successfully challenge this conclusion.
The Transferor will express in the Pooling and Servicing Agreement its
intent that the Certificates be indebtedness secured by the Loans for federal,
state and local income or franchise tax purposes. The Transferor, by entering
into the Pooling and Servicing Agreement, has agreed and each
Holder of a Certifcate, by the acceptance
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of a Certificate, will agree to treat the Certificates as indebtedness for
federal, state and local income or franchise tax purposes. However, because
different criteria are used to determine the non-tax accounting
characterization of the transactions contemplated by the Pooling and Servicing
Agreements, the Transferor expects to treat such transactions, for regulatory
and financial accounting purposes, as a transfer of an ownership interest in
the Loans and not as a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines the tax consequences. The form of a
transaction, while a relevant factor, is 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, as determined under federal income tax law,
notwithstanding that the participants characterize the transaction differently
for non-tax 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. Federal Tax
Counsel believes that the rationale of those cases will not apply to the
issuance of the Certificates.
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 and has assumed the risk of loss if the property decreases in value.
Based upon its analysis of such factors, Federal Tax Counsel will conclude
that the Holders of Certificates do not own or have an equity interest in the
Loans for federal income tax purposes. As a result, Federal Tax Counsel will
opine that the Certificates will properly be characterized for federal income
tax purposes as indebtedness. Contrary characterizations that could be asserted
by the IRS are described below under "--Possible Characterization of the
Transaction as a Partnership or as an Association Taxable as a Corporation." In
this regard, it should be noted that the IRS has recently issued a notice
stating that, upon examination, it will scrutinize instruments treated as debt
for federal income tax purposes but as equity for regulatory, rating agency or
financial accounting purposes to determine if their purported status as debt for
federal income tax purposes is appropriate.
Because Holders of Certificates own debt instruments for federal tax purposes,
such Holders will be taxed in the manner described above in "--Taxation of Debt
Securities (Including Regular Interest Securities)" for Debt Securities which
are not Regular Interest Securities.
Possible Characterization of the Transaction as a Partnership or as
Association Taxable as a Corporation. As stated above, the opinion of Federal
Tax Counsel with respect to the Certificates will not be binding on the courts
or the IRS, and no assurance can be given that the characterization of the
Certificates as debt would prevail. It is possible that the IRS would assert
that, for purposes of the Code, the transaction described herein constitutes a
transfer of the Loans (or an interest therein) to the Holders of Certificates
and that the proper classification of the legal relationship between the
Transferor and the Holders of Certificates resulting from the transaction is
that of a partnership, a publicly traded partnership taxed as a corporation, or
an association taxable as a corporation. Since Federal Tax Counsel will advise
that the Certificates will be treated as indebtedness for federal income tax
purposes, the Transferor generally will not attempt to comply with the federal
income tax reporting requirements that would apply if Certificates were treated
as interests in a partnership, a publicly traded partnership or a corporation.
If a partnership were deemed to be created between the Transferor and the
Holders of Certificates, the partnership itself would not be subject to federal
income tax (unless it were to be characterized as a publicly traded
partnership taxable as a corporation); rather, the partners of such
partnership, including the Holders of Certificates, would be taxed individually
on their respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deduction
of a Holder of Certificates could differ if the Certificates were held to
constitute partnership interests, rather than indebtedness. 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 2% of the individual's
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adjusted gross income, and would be subject to reduction under Section 68 of
the Code if the individual's adjusted gross income exceeded certain limits. As
a result, the individual might be taxed on a greater amount of income than
would be the case if the Certificates were treated as a debt instrument.
If it were determined that the transaction created an entity classified as
an association or as a publicly traded partnership taxable as a corporation,
the Trust Fund would be subject to federal income tax at corporate income tax
rates on the income it derives from the Loans, which would reduce the amounts
available for distribution to the Holders of Certificates. Such classification
may also have adverse state and local tax consequences that would reduce amounts
available for distribution to the Holders of Certificates. Moreover,
distributions on the Certificates would most likely not be deductible in
computing the entity's taxable income, and cash distributions to the Holders of
Certificates generally would be treated as dividends for tax purposes to the
extent of such entity's earnings and profits.
Foreign Investors. If the IRS were to contend successfully that the
Certificates are interests in a partnership and if such partnership were
considered to be engaged in a trade or business in the United States, the
partnership would be subject to a withholding tax on distributions to (or, at
its election, income allocable to) a foreign investor; and such Holder would
be credited for his or her share of the withholding tax paid by the
partnership. In such case, the Holder generally would be subject to United
States federal income tax at regular federal income tax rates, and possibly a
branch profits tax in the case of a corporate Holder.
Alternatively, although there may be arguments to the contrary, if such a
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Certificates is not otherwise
effectively connected with the conduct of a trade or business in the United
States by the foreign investor, the foreign investor would be subject to
United States federal income tax and withholding at a rate of 30% (unless
reduced by an applicable tax treaty) on the Holder's distributive share of the
partnership's interest income.
If the Trust Fund were taxable as a corporation, distributions to foreign
investors, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced or eliminated by
an applicable income tax treaty.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Considerations," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in
the Securities.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit pension, profit
sharing or other employee benefit plans, individual retirement accounts or
annuities, employee annuity plans and Keogh plans subject to ERISA or Section
4975 of the Code (each, a "Benefit Plan") from engaging in certain
transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan. ERISA also imposes certain duties and certain prohibitions on
persons who are fiduciaries of plans subject to ERISA. Under ERISA, generally
any person who exercises any authority or control with respect to the
management or disposition of the assets of a plan is considered to be a
fiduciary of such plan. A violation of these "prohibited transaction" rules
may generate excise tax and other liabilities under ERISA and the Code for
fiduciaries, "parties in interest," and "disqualified persons."
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<PAGE>
Unless a statutory, regulatory or administrative exemption is available, a
violation of these prohibited transaction rules could occur if any Notes or
Certificates were to be acquired by a Benefit Plan or with "plan assets" of
any Benefit Plan, and if any of the Transferor, the Trustee, any underwriter
of such Series or any of their affiliates were a "party in interest" or a
"disqualified person" with respect to such Benefit Plan. The Transferor, the
Trustee and any underwriters of a Series are likely to be "parties in
interest" or "disqualified persons" with respect to many Benefit Plans.
Certain transactions involving the related Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust Fund
were deemed to be plan assets of the Benefit Plan. Under a regulation issued
by the United States Department of Labor (the "Plan Assets Regulation"), the
assets of a Trust Fund would be treated as plan assets of a Benefit Plan for
the purposes of ERISA and the Code only if the Benefit Plan acquired an
"equity interest" in the Trust Fund and none of the exceptions contained in
the Plan Assets Regulation was applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no
substantial equity features. If Notes or Certificates are available for
purchase by Benefit Plans or the "plan assets" of Benefit Plans, the likely
treatment under the Plan Assets Regulation of Notes and Certificates will be
discussed in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
Additional information with respect to the eligibility of Notes or
Certificates for purchase by a Benefit Plan or "plan assets" of a Benefit Plan
is provided in the related Prospectus Supplement. A plan fiduciary considering
the purchase of Securities should consult its tax and/or legal advisors
regarding whether the assets of the Trust Fund would be considered plan
assets, the possibility of exemptive relief from the prohibited transaction
rules and other issues and their potential consequences.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the
meaning of SMMEA. Accordingly, investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether and to what extent the Securities constitute legal investments for
them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust Fund, the Transferor will
agree to sell to each of the underwriters named therein and in the related
Prospectus Supplement, and each of such underwriters will severally agree to
purchase from the Transferor, the principal amount of each Class of Securities
of the related Series set forth therein and in the related Prospectus
Supplement.
In each Underwriting Agreement, the several underwriters will agree, subject
to the terms and conditions set forth therein, to purchase all of the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of
a default by any such underwriter, each Underwriting Agreement will provide
that, in certain circumstances, purchase commitments of the nondefaulting
underwriters may be increased, or the Underwriting Agreement may be
terminated.
Each Prospectus Supplement will either (i) set forth the price at which each
Class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to
be determined at the time of such sale. After the initial public offering of
any Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that Chevy Chase will indemnify
underwriters against certain liabilities, including liabilities under the
Securities Act.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus
Supplement.
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LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Transferor by Shaw, Pittman, Potts & Trowbridge, counsel to the Transferor,
and for any underwriters, agents or dealers, by Shaw, Pittman, Potts &
Trowbridge. Unless otherwise specified in the related Prospectus Supplement,
certain federal income tax matters will be passed upon for the Transferor by
Shaw, Pittman, Potts & Trowbridge.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for
a Series generally provides a more complete definition of certain of the
terms. Reference should be made to the related Agreement for a Series for a
more complete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Agreement" means, with respect to a Series of Certificates, the Pooling and
Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Sale and Servicing Agreement, as the context
requires.
"Appraised Value" means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at
origination of the Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and
other assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any
fund or account for the Series.
"Available Distribution Amount" means the amount in the Distribution Account
(including amounts deposited therein from any reserve fund or other fund or
account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Certificate Account" or "Collection Account" means, with respect to a
Series, the account established for the deposit by the Servicer of payments
received from the Primary Assets.
"Class" means a class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal
Revenue Service promulgated thereunder.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into
account the amounts of any related senior mortgage loans on the related
Mortgaged Property.
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"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual Termination Date,
and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy specific units and which is described in Section 216 of the
Code.
"Cooperative Dwelling" means an individual housing unit in a building owned
by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for federal
income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the
related Due Date.
"Delinquency Advance" means cash advanced by the Servicer in respect of
delinquent payments of principal of and/or interest on a Loan to the extent
specified in the related Prospectus Supplement.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality
of any of the foregoing, a rural electric or telephone cooperative described
in section 1381(a)(2)(C) of the Code, or any entity exempt from the tax
imposed by sections 1-1399 of the Code, if such entity is not subject to tax
on its unrelated business income.
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<PAGE>
"Distribution Account" means, with respect to a Series, the account or
accounts established for the deposit of remittances from the Collection
Account for distribution to Securityholders.
"Distribution Date" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which
no Certificates of such Class will remain outstanding, in each case based on
the assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" or "Securityholder" means the person or entity in whose name a
Security is registered.
"Home Improvements" means the home improvements financed by a Home
Improvement Contract.
"Home Improvement Contract" means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
a purchase money security interest in the Home Improvement financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
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"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate during
the life of each adjustable rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loans" mean Mortgage Loans and/or Home Improvement Contracts, collectively.
A Loan refers to a specific Mortgage Loan or Home Improvement Contract, as the
context requires.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined as
set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
"Modification" means a change in any term of a Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Loan" means a closed-end and/or revolving credit line home equity
loan or balance thereof secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means any real estate securing a Mortgage Loan and/or a
Home Improvement Contract.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"OTS" means the Office of Thrift Supervision.
"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the
underlying Primary Assets.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Transferor, the Servicer (if
such Series relates to Loans) and the Trustee.
"Primary Assets" means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset
refers to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of
any Deferred Interest added to such principal amount, reduced by all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary
Asset.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the
Prospectus Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
"PS Agreement" means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
"PS Servicer" means the servicer of the Underlying Loans.
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged
Properties are located duly authorized and licensed in such states to transact
the applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the
Transferor to rate the Securities upon the original issuance thereof.
"Real Estate Loans" means Mortgage Loans and Home Improvement Contracts
secured by Mortgaged Property.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to
serve as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be
in effect from time to time.
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"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund established
pursuant to the related Agreement.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement which is not
included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinated Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means Chevy Chase Bank, F.S.B., or the successors or assigns of
such Person.
"Single Family Property" means property securing a Loan consisting of one-
to four-family attached or detached residential housing, including Cooperative
Dwellings.
"Stripped Securities" means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
"Subordinated Securities" means a Class of Securities as to which the rights
of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
allocated losses and shortfalls prior to the allocation thereof to other
Classes of Securities, to the extent and under the circumstances specified in
the related Prospectus Supplement.
"Transferor" means Chevy Chase Bank, F.S.B.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held
for the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), rights to all
amounts in the Distribution Account, Collection Account, Certificate Account,
Pre-Funding Account, Capitalized Interest Account or Reserve Funds, if any,
distributions on the Primary Assets (net of servicing fees) and rights to any
Enhancement and all other property and interest held by or pledged to the
Trustee pursuant to the related Agreement for such Series.
"UCC" means the Uniform Commercial Code.
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"Underlying Loans" means loans of the type eligible to be Loans underlying
or securing Private Securities.
"Variable Interest Security" means a Security on which interest accrues at a
rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee.................................. $303.03
Printing and Engraving................................ $ *
Trustee's Fees........................................ $ *
Legal Fees and Expenses............................... $ *
Blue Sky Fees and Expenses............................ $ *
Accountant's Fees and Expenses........................ $ *
Rating Agency Fees.................................... $ *
Miscellaneous Fees and Expenses....................... $ *
-------
Total Expenses...................................... $ *
=======
</TABLE>
____________
* To be completed by amendment
Item 15. Indemnification of Directors and Officers
The directors and officers of Chevy Chase Bank, F.S.B. (the "Bank") are
insured (subject to certain exceptions and deductions) against civil liabilities
and related defense expenses that they may incur in their capacities as such
under a liability insurance policy.
The form of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides that the Bank will indemnify and reimburse the
Underwriter(s) and each controlling person of the Underwriter(s) with respect to
certain expenses and liabilities, including liabilities under the Securities Act
of 1933 or other federal or state regulations or under the common law, which
arise out of or are based on certain material misstatements or omissions in the
Registration Statement. In addition, the Underwriting Agreement provides that
the Underwriter(s) will similarly indemnify and reimburse the Bank and each
director, each officer who signed the Registration Statement and each
controlling person of the Bank with respect to certain material misstatements or
omissions in the Registration Statement which are based on certain written
information furnished by the Underwriter(s) for use in connection with the
preparation of the Registration Statement.
Item 16. Exhibits
(a) Financial Statements:
None.
(b) Exhibits:
<TABLE>
<S> <C>
1.1 --Form of Underwriting Agreement (incorporated by reference
to Exhibit 1.1 of Registration Statement No. 333-1682).
3.1 --Charter of the Bank, as amended.
3.2 --By-Laws of the Bank, as amended.
4.1 --Form of Indenture (incorporated by reference to Exhibit 4.1
of Registration Statement No. 333-1682).
4.2 --Form of Pooling and Servicing Agreement (incorporated by
reference to Exhibit 4.2 of Registration Statement No.
333-1682).
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4.3 --Form of Trust Agreement (incorporated by reference to
Exhibit 4.3 of Registration Statement No. 333-1682).
*5.1 --Opinion of Shaw, Pittman, Potts & Trowbridge with respect to
the securities being registered.
*8.1 --Opinion of Shaw, Pittman, Potts & Trowbridge with respect to
tax matters
10.1 --Form of Sale and Servicing Agreement (incorporated by
reference to Exhibit 10.1 of Registration Statement No.
333-1682).
*23.1 --Consent of Shaw, Pittman, Potts & Trowbridge (included as
part of Exhibit 5.1).
24.1 --Powers of Attorney of Directors and Officers of the Bank
(included on signature page).
*25.1 --Statement of Eligibility and Qualification of Trustee (Form
T-1).
</TABLE>
____________
* To be filed by amendment.
Item 17. Undertakings
The undersigned registrant (the "Registrant") hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended (the "Securities Act"), the information omitted from the
form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(4) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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<PAGE>
(5) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(6) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(7) For the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(8) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
The Registrant hereby undertakes to file an application for the purpose of
determining the eligibility of the trustee to act under subsection (a) of
Section 310 of the Trust Indenture Act of 1939 in accordance with the rules
and regulations prescribed by the Commission under Section 305(b)(2) of the
Trust Indenture Act of 1939.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Chevy Chase, State of Maryland, on August 15, 1997.
CHEVY CHASE BANK, F.S.B.
as Originator of the Trust and Registrant
By: /s/ B. Francis Saul II
-----------------------------
B. Francis Saul II
Chairman of the Board
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen R. Halpin, Jr. and Joel A. Friedman, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for and in his name, place and stead, in any
and all capacities to sign any or all amendments (including post-effective
amendments) to this Registration Statement and any or all other documents in
connection therewith, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as might or could be done in
person, hereby ratifying and confirming all said attorneys-in-fact and agents or
any of them, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on August 15, 1997 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Alexander R. M. Boyle Director
- --------------------------
Alexander R. M. Boyle
/s/ Vincent C. Burke, Jr. Director
- --------------------------
Vincent C. Burke, Jr.
Director
- --------------------------
Donald G. Conrad
/s/ Gavin Malloy Farr Director
- --------------------------
Gavin Malloy Farr
/s/ Joel A. Friedman Senior Vice President and Controller
- -------------------------- (Principal Accounting Officer)
Joel A. Friedman
/s/ Jack S. Griswold Director
- --------------------------
Jack S. Griswold
/s/ Gilbert M. Grosvenor Director
- --------------------------
Gilbert M. Grosvenor
/s/ Stephen R. Halpin, Jr. Executive Vice President
- -------------------------- (Principal Financial Officer)
Stephen R. Halpin, Jr.
/s/ Penne Percy Korth Director
- --------------------------
Penne Percy Korth
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
/s/ LaSalle D. Leffall Director
- --------------------------
LaSalle D. Leffall
/s/ William F. McSweeny Director
- --------------------------
William F. McSweeny
/s/ Garland P. Moore, Jr. Director
- --------------------------
Garland P. Moore, Jr.
/s/ George M. Rogers, Jr. Director
- --------------------------
George M. Rogers, Jr.
/s/ B. Francis Saul II Chairman of the Board
- -------------------------- (Principal Executive Officer)
B. Francis Saul II
/s/ Leonard L. Silverstein Director
- --------------------------
Leonard L. Silverstein
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<C> <S>
1.1 Form of Underwriting Agreement (incorporated by reference to Exhibit
1.1 of Registration Statement No. 333-1682).
3.1 Charter of the Bank, as amended.
3.2 By-Laws of the Bank, as amended.
4.1 Form of Indenture (incorporated by reference to Exhibit 4.1 of
Registration Statement No. 333-1682).
4.2 Form of Pooling and Servicing Agreement (incorporated by reference to
Exhibit 4.2 of Registration Statement No. 333-1682).
4.3 Form of Trust Agreement (incorporated by reference to Exhibit 4.3 of
Registration Statement No. 333-1682).
5.1 Opinion of Shaw, Pittman, Potts & Trowbridge with respect to the
securities being registered.*
8.1 Opinion of Shaw, Pittman, Potts & Trowbridge with respect to tax
matters.*
10.1 Form of Sale and Servicing Agreement (incorporated by reference to
Exhibit 10.1 of Registration Statement No. 333-1682).
23.1 Consent of Shaw, Pittman, Potts & Trowbridge (included as part of
Exhibit 5.1).*
24.1 Powers of Attorney of Directors and Officers of the Bank (included on
signature page).
25.1 Statement of Eligibility and Qualification of Trustee (Form T-1).*
</TABLE>
____________
* To be filed by amendment.
II-6
<PAGE>
EXHIBIT 3.1
OFFICE OF THRIFT SUPERVISION
Department of the Treasury
1700 G. Street, N.W., Washington, D.C. 20552 (202) 906-6000
June 9, 1997
CERTIFICATE OF CORPORATE EXISTENCE
----------------------------------
REFERENCE: Chevy Chase Bank, F.S.B.
McLean, Virginia
I, Nadine Y. Washington, Corporate Secretary, Office of Thrift Supervision,
hereby certify, according to the records of the Office of Thrift Supervision,
Department of the Treasury, Washington, DC.:
1. Chevy Chase Bank, F.S.B., McLean, Virginia, was chartered under the
laws of the United States to transact the business of a Federal savings bank;
2. The charter of Chevy Chase Bank, F.S.B., McLean, Virginia, is in
full force and effect;
3. The Office of Thrift Supervision has not appointed a conservator or
receiver for Chevy Chase Bank, F.S.B., McLean, Virginia; and
4. As of June 9, 1997, Chevy Chase Bank, F.S.B., McLean, Virginia, is
operating as a SAIF-insured financial institution.
/s/ Nadine Y. Washington
____________________________________
Nadine Y. Washington
Corporate Secretary
<PAGE>
OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
[SEAL OF OFFICE OF THRIFT SUPERVISION]
I certify that annexed hereto are true copies of documents described below
made from records of the Office of Thrift Supervision, Department of the
Treasury, successor to the Federal Home Loan Bank Board. Said records are in
the official custody of the Dissemination Branch, Records Management and
Information Policy Division, and are maintained in its offices at 1700 G Street,
Northwest, Washington, District of Columbia.
Copy of Charter Number 3950, in the form of Federal Stock
Charter, effective April 8, 1986, consisting of three (3) pages, an
Amendment consisting of two (2) pages, First Supplemental Section to
Section 15B consisting of fifteen (15) pages, Appendix A Amended
Section 5 consisting of nine (9) pages, letter of Change of Corporate
Title changing the name to Chevy Chase Bank, F.S.B., Montgomery
County, Maryland, consisting of one (1) page And amendment letter to
Section 2 changing the home office address to McLean, Virginia
consisting of one (1) page. Second Supplemental Section To Section 5B
of Charter of Chevy Chase Bank, F.S.B. consisting of eleven (11)
pages.
SIGNED IN WASHINGTON, DISTRICT OF
COLUMBIA, AND THE SEAL OF THE OFFICE OF
THRIFT SUPERVISION AFFIXED, THIS 9TH DAY
OF JUNE, 1997
/s/ Marilyn R. Abbott
______________________________
Marilyn R. Abbott
Manager, Dissemination Branch
Office of Thrift Supervision
<PAGE>
FEDERAL STOCK CHARTER
OF
CHEVY CHASE SAVINGS BANK, F.S.B.
Section 1. Corporate title. The full corporate title of the savings bank
---------------
is Chevy Chase Bank, F.S.B.
Section 2. Office. The home office shall be located in Montgomery County,
------
Maryland.
Section 3. Duration. The duration of the savings bank is perpetual.
--------
Section 4. Purpose and powers. The purpose of the savings bank is to
------------------
pursue any or all of the lawful objectives of a Federal savings bank chartered
under section 5 of the Home Owners' Loan Act and to exercise all of the express,
implied, and incidental powers conferred thereby and by all acts mandatory
thereof and supplemental thereto, subject to the Constitution and laws of the
United States as they are now in effect, or as they may hereafter be amended,
and subject to all lawful and applicable rules, regulations, and orders of the
Federal Home Loan Bank Board ("Board"). In addition, the savings bank may make
any investment and engage in any activity as may be specifically authorized by
action of the Board, including authorization by delegated authority, in
connection with action approving issuance of the charter.
Section 5. Capital stock. The total number of shares of all classes of
-------------
the capital stock which the savings bank has the authority to issue is ten
million (10,000,000), all of which shall be common stock of par value of one
dollar ($1.00) per share. The shares may be issued from time to time as
authorized by the board of directors without the approval of its shareholders,
except as otherwise provided in this Section 5 or to the extent that such
approval is required by governing law, rule, or regulation. The consideration
for the issuance of the shares shall be paid in full before their issuance and
shall not be less than the par value. Neither promissory notes or future
services shall constitute payment or part payment for the issuance of shares of
the savings bank. The consideration for the shares shall be cash, tangible or
intangible property (to the extent direct investment in such property would be
permitted to the savings bank), labor, or services actually performed for the
savings bank, or any combination of the foregoing. In the absence of actual
fraud in the transaction, the value of such property, labor, or services, as
determined by the board of directors of the savings bank, shall be conclusive.
Upon payment of such consideration, such shares shall be deemed to be fully paid
and nonassessable. In the case of a
<PAGE>
stock dividend, that part of the surplus of the savings bank which is
transferred to stated capital upon the issuance of shares as a share dividend
shall be deemed to be the consideration for their issuance.
No shares of capital stock (including shares issuable upon conversion,
exchange, or exercise of other securities) shall be issued, directly or
indirectly, to officers, directors, or controlling persons of the savings bank
other than as part of a general public offering or as qualifying shares to a
director, unless the issuance or the plan under which they would be issued has
been approved by a majority of the total votes eligible to be cast at a legal
meeting.
The holders of the common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to one vote for each
share held by such holder, except as to the cumulation of votes for the election
of directors. Subject to any provision for a liquidation account, in the event
of any liquidation, dissolution, or winding up of the savings bank, the holders
of the common stock shall be entitled, after payment of all debts and
liabilities of the savings bank, to receive the remaining assets of the savings
bank available for distribution, in cash or in kind. Each share of common stock
shall have the same relative rights as and be identical in all respects with all
the other shares of common stock.
Section 6. Preemptive rights. Holders of the capital stock of the savings
-----------------
bank shall not be entitled to preemptive rights with respect to any shares of
the savings bank which may be issued.
Section 7. Directors. The savings bank shall be under the direction of a
---------
board of directors. The authorized number of directors, as stated in the savings
bank's bylaws, shall not be fewer than seven nor more than fifteen except when a
greater number is approved by the Board.
Section 8. Amendment of charter. Except as provided in Section 5, no
--------------------
amendment, addition, alteration, change or repeal of this charter shall be made,
unless such is first proposed by the board of directors of the savings bank,
then preliminarily approved by the Board, which preliminarily approval may be
granted by the Board pursuant to regulations specifying preapproval charter
amendments, and thereafter approved by the shareholders by a majority of the
total votes eligible to be cast at a legal meeting. Any amendment, addition,
alteration,
-2-
<PAGE>
change, or repeal as acted upon shall be effective upon filing with the Board
in accordance with regulatory procedures or on such other date as the Board may
specify in its preliminary approval.
ATTEST: CHEVY CHASE SAVINGS BANK, F.S.B.
/s/ George M. Rogers By: /s/ B.F. Saul
- ---------------------------------- ----------------------------------
Secretary B.F. Saul, President
ATTEST: FEDERAL HOME LOAN BANK BOARD
/s/ Jeff Sconyers By: /s/ Edwin J. Gray
- ---------------------------------- ----------------------------------
Secretary to the Board Edwin J. Gray, Chairman
Declared effective this 8th day of April, 1986.
-3-
<PAGE>
WRITTEN CONSENT
IN LIEU OF SPECIAL MEETING OF STOCKHOLDERS
OF
CHEVY CHASE SAVINGS BANK, F.S.B.
Pursuant to Section 16 of Article II of the Bylaws of Chevy Chase Savings
Bank, F.S.B., a federal savings bank (the "Institution"), the undersigned,
constituting all of the stockholders of the Institution, do hereby consent in
writing to the adoption of the following resolutions, such resolutions to have
effect as if adopted at a duly held meeting of the stockholders of said
institution:
WHEREAS, the directors of the Institution have proposed that the
Federal Stock Charter of the Institution be amended by adding the following
paragraph as a new second paragraph of Section 7 of such Charter:
"At a meeting of stockholders called expressly for that purpose,
any director may be removed (a) for cause, by a vote of the holders of
a majority of the shares then entitled to vote at an election of
directors, or (b) without cause, by a vote of the holders of two-
thirds of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of
the directors may be removed if the votes cast against the removal
would be sufficient to elect a director if then cumulatively voted at
an election of the class of directors of which such director is a
part. Whenever the holders of the shares of any class are entitled to
elect one or more directors by the provisions of the charter or
supplemental sections thereto, the provisions of this section shall
apply, in respect to the removal of a director or directors so
elected, to the vote of the holders of the outstanding shares of that
class and not to the vote of the outstanding shares as a whole.
Removal for cause shall include removal because of the director's
personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to
perform stated duties, or willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or
final cease-and-desist order."
AND WHEREAS, the directors of the Institution have further proposed
that the Bylaws of the Institution be amended to conform with such
amendment to the Charter by amending
<PAGE>
the first sentence of Section 13 of Article 3 of such Bylaws to read in its
entirety as follows:
"At a meeting of stockholders called expressly for that purpose,
any director may be removed (a) for cause, by a vote of the
holders of a majority of the shares then entitled to vote at an
election of directors, or (b) without cause, by a vote of the holders
of two-thirds of the shares then entitled to vote at an election of
directors. Removal for cause shall include removal because of the
director's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, or willful violation of any law,
rule or regulation (other than traffic violations or similar offenses)
or final cease-and desist order."
AND WHEREAS, such proposed amendments have been granted preliminary
approval by the Federal Home Loan Bank Board, now therefore it is
RESOLVED, that the proposed amendments set forth above are hereby
approved and adopted as amendments to the Federal Stock Charter and Bylaws
of the Institution, respectively.
Dated: March 5, 1987
B.F. SAUL REAL ESTATE INVESTMENT TRUST FRANKLIN DEVELOPMENT CO., INC.
By: /s/ B.F. Saul By: /s/ B.F. Saul
----------------------------------- ---------------------------
DERWOOD INVESTMENT CORPORATION B.F. SAUL COMPANY EMPLOYEES
PROFIT SHARING RETIREMENT
TRUST
By: /s/ B.F. Saul By: /s/ B.F. Saul
----------------------------------- ---------------------------
B.F. SAUL COMPANY THE KLINGER CORPORATION
By: /s/ B.F. Saul By: /s/ B.F. Saul
----------------------------------- ---------------------------
<PAGE>
FIRST SUPPLEMENTAL SECTION TO
SECTION 15 OF CHARTER
OF
CHEVY CHASE SAVINGS BANK, F.S.B.
Certificate of Designation Establishing the Series and Fixing the Powers,
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights, and the Qualifications, Limitations and Restrictions, of
the 13% Noncumulative Perpetual Preferred Stock, Series A.
The undersigned duly authorized officer of CHEVY CHASE SAVINGS BANK,
F.S.B., a federal savings bank (the "Bank"), in accordance with the charter (as
amended, the "Charter") of the Bank and the rules and regulations of the Office
of Thrift Supervision (the "OTS"), DOES HEREBY CERTIFY:
WHEREAS, Section 5 of the Charter of the Bank authorizes the Bank to
issue up to 10,000,000 shares of serial preferred stock (collectively, the
"Preferred Stock"), and
WHEREAS, pursuant to the authority expressly granted to the Board of
Directors of the Bank under Section 5B of the Charter, on March 31, 1993 the
Board of Directors authorized the creation, issuance and sale by the Bank of
3,000,000 shares of Preferred Stock to be issued in one series, and on April 21,
1993 the Board of Directors adopted the following resolution creating a series
of 3,000,000 shares of Preferred Stock designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to the
Board of Directors by provisions in the Charter and the rules and regulations of
the OTS, the issuance of a series of the Preferred Stock, which shall consist of
3,000,000 shares of the 10,000,000 shares of Preferred Stock that the Bank now
has the authority to issue, be, and the same hereby is, authorized, and the
Board hereby fixes the powers, designations, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions, of the shares of such series (in addition to the
powers, designations, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions, set
forth in the Charter that may be applicable to such series) authorized by this
resolution as follows:
1.Designation
-------------
The series of shares of Preferred Stock authorized by this resolution shall
be designated as "13% Noncumulative Perpetual Preferred Stock, Series A" (the
"Series A Preferred Stock").
<PAGE>
Shares of Series A Preferred Stock shall have a par value of $0.01 per share.
The authorized number of shares of Series A Preferred Stock shall be
3,000,000. The number of authorized shares of Series A Preferred Stock may be
reduced from time to time, but not below the number of shares of Series A
Preferred Stock then outstanding, by further resolution duly adopted by the
Board of Directors and by the taking of such further action as shall be required
by the rules and regulations of the OTS. The number of authorized shares of
Series A Preferred Stock shall not be increased. Fractional shares of Series A
Preferred Stock, rounded to the nearest one-hundredth of a whole number, may be
issued.
2. Rank
----
(a) Dividend Rights. With respect to dividend rights, the Series A
---------------
Preferred Stock shall rank prior to common stock of all classes of the Bank
(collectively, the "Common Stock") and to all other classes and series of equity
securities of the Bank now or hereafter authorized, issued or outstanding other
than Parity Dividend Stock and Senior Dividend Stock. Parity Dividend Stock
shall mean any class or series of equity securities of the Bank expressly
designated as ranking, with respect to dividend rights, on a parity with the
Series A Preferred Stock and Senior Dividend Stock shall mean any class or
series of equity securities of the Bank expressly designated as ranking, with
respect to dividend rights, as senior to the Series A Preferred Stock.
(b) Liquidation Rights. With respect to rights upon the voluntary or
------------------
involuntary dissolution, liquidation or winding up of the Bank, the Series A
Preferred Stock shall rank prior to the Common Stock and to all other classes
and series of equity securities of the Bank now or hereafter authorized, issued
or outstanding other than Parity Liquidation Stock and Senior Liquidation Stock.
Parity Liquidation Stock shall mean any class or series of equity securities of
the Bank expressly designated as ranking, with respect to rights upon the
voluntary or involuntary dissolution, liquidation or winding up of the Bank, on
a parity with the Series A Preferred Stock and Senior Liquidation Stock shall
mean any class or series of equity securities of the Bank expressly designated
as ranking, with respect to rights upon the voluntary or involuntary
dissolution, liquidation or winding up of the Bank, as senior to the Series A
Preferred Stock.
(c) Creation of Parity Stock and Junior Stock. To the extent not expressly
-----------------------------------------
prohibited by the Charter, the Series A Preferred Stock shall be subject to the
creation of Parity Dividend Stock and Parity Liquidation Stock (collectively,
"Parity Stock") and of Common Stock and all other classes and series of equity
securities of the Bank ranking junior to the Series A Preferred
-2-
<PAGE>
Stock with respect to dividends rights ("Junior Dividend Stock") or rights upon
the voluntary or involuntary dissolution, liquidation or winding up of the Bank
("Junior Liquidation Stock" and, collectively with Junior Dividend Stock,
"Junior Stock").
3. Noncumulative Dividends; Priority
---------------------------------
(a) Payment of Cash Dividends. Holders of record of shares of Series A
-------------------------
Preferred Stock shall be entitled to receive, if, when and as declared by the
Board of Directors, out of funds legally available therefor, noncumulative cash
dividends at an annual rate of 13% of the $25.00 liquidation preference per
share ($3.25 per share per annum), and no more. If declared, such noncumulative
cash dividends shall be payable quarterly in equal amounts in arrears on
February 15, May 15, August 15 and November 15 in each year or, if such day is
not a Business Day (as defined in Section 9), on the next Business Day (each
such date, a "Dividend Payment Date"). The first Dividend Payment Date shall be
August 16, 1993. Each declared dividend shall be payable to holders of record of
the Series A Preferred Stock as they appear on the stock books of the Bank at
the close of business on such record dates, not more than forty-five (45)
calendar days nor less than ten (10) calendar days preceding the Dividend
Payment Date therefor, as determined by the Board of Directors (each such date,
a "Record Date"). The initial period for which dividends shall be paid (the
"Initial Dividend Period") shall commence on the date of initial issuance of the
Series A Preferred Stock (the "Issue Date") and shall end on June 30, 1993.
Thereafter, quarterly dividend periods (each, a "Dividend Period") shall
commence on and include January 1, April 1, July 1 and October 1 of each year
(each such date, a "Dividend Period Commencement Date") and shall end on and
include the date next preceding the Dividend Period Commencement Date of the
following Dividend Period.
Cash dividends on the Series A Preferred Stock shall be noncumulative, so
that if a cash dividend on the Series A Preferred Stock with respect to any
Dividend Period (including the Initial Dividend Period) is not declared by the
Board of Directors, the Bank shall have no obligation at any time to pay a cash
dividend on the Series A Preferred Stock with respect to such Dividend Period,
whether or not cash dividends are declared payable with respect to any future
Dividend Period. Except as provided in subsection (b) of this Section 3,
holders of the Series A Preferred Stock shall not otherwise be entitled to any
dividends, whether payable in cash, property or stock, in excess of the
noncumulative dividends declared by the Board of Directors, as set forth in this
subsection (a).
The amount of dividends payable on each share of the Series A Preferred
Stock for each full Dividend Period during which such share is outstanding shall
be $0.8125. The amount of dividends
-3-
<PAGE>
payable for the Initial Dividend Period and for any Dividend Period which is
less than a full three (3) months shall be computed on a basis of a 360-day year
composed of twelve thirty (30) day months and the actual number of days elapsed
in the Initial Dividend Period or such Dividend Period.
The Series A Preferred Stock shall not participate in dividends with the
Common Stock.
Holders of the Series A Preferred Stock shall not be entitled to any
interest, or any sum of money in lieu of interest, in respect of any dividend
payment or payments on the Series A Preferred Stock declared by the Board of
Directors which may be unpaid. Any cash dividend payment made on the Series A
Preferred Stock shall first be credited against the earliest declared but unpaid
cash dividend with respect to the Series A Preferred Stock.
(b) Payment of Stock Dividends. If, in accordance with subsection (a) of
--------------------------
this Section 3, the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any Dividend Period (including
the Initial Dividend Period), or the Bank does not pay the full amount of such
dividend if declared, the Board of Directors shall declare in lieu thereof
(subject to the restrictions and limitations on declaration and payment of
dividends specified in Section 11) a dividend, payable to each holder of Series
A Preferred Stock on the related Record Date, in shares of a new series of
noncumulative perpetual preferred stock of the Bank (the "PIK Preferred Stock").
The number of shares of PIK Preferred Stock payable on each share of Series A
Preferred Stock for such Dividend Period shall be the percentage equivalent of a
fraction (expressed as a non-dollar amount), the numerator of which shall equal
the amount of the cash dividend accrued on such share with respect to such
Dividend Period minus the amount of the cash dividend, if any, declared and paid
-----
on such share for such Dividend Period, and the denominator of which shall equal
the $25.00 liquidation preference per share. Fractional shares of PIK Preferred
Stock, rounded to the nearest one-hundredth of a whole number, may be issued.
Dividends payable in PIK Preferred Stock shall be noncumulative, so that if
a dividend in PIK Preferred Stock with respect to any Dividend Period (including
the Initial Dividend Period) is not declared by the Board of Directors by reason
of a restriction or limitation on declaration and payment of dividends specified
in Section 11, the Bank shall have no obligation at any time to pay a dividend
in PIK Preferred Stock with respect to such Dividend Period, whether or not
dividends in PIK Preferred Stock or cash are declared payable with respect to
any future Dividend Period.
-4-
<PAGE>
The Dividend Period, Dividend Period Commencement Date, Dividend Payment
Date, Record Date and other applicable terms of the payment of dividends in PIK
Preferred Stock shall be determined by reference to subsection (a) of this
Section 3.
(c) Terms of PIK Preferred Stock. The powers, preferences and relative,
----------------------------
participating, optional and other special rights, and the qualifications,
limitations and restrictions, of each series of PIK Preferred Stock shall be set
forth in a separate resolution by the Board of Directors creating such series,
and shall be as nearly identical as possible to the powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions, of shares of Series A Preferred
Stock, except as follows:
(i) Each series of PIK Preferred Stock shall be issued as of the
Dividend Payment Date for the applicable Dividend Period and shall accrue
dividends from such Dividend Payment Date.
(ii) The annual dividend rate of PIK Preferred Stock of any series
shall be equal to or grater than 13% of the $25.00 liquidation preferences
per share of PIK Preferred Stock; but not to exceed an annual dividend rate
of 20% of the $25.00 liquidation preference per share of PIK Preferred
Stock, as fixed by the Board of Directors in its discretion. The annual
dividend rate of any such series shall not be adjusted pursuant to
subsection (e) of this Section 3 or otherwise.
(iii) PIK Preferred Stock of any series may be redeemed by the Bank, at
its option, in whole or in part, at any time or from time to time after the
date of issuance of such series, at the redemption price of $25.00 per
share in cash, plus, in each case, an amount in cash equal to all accrued
and unpaid dividends thereon (whether or not declared) from the Dividend
Period Commencement Date next preceding the date fixed for redemption to,
but excluding, the date fixed for redemption.
Each series of PIK Preferred Stock shall constitute Parity Dividend Stock
and Parity Liquidation Stock.
With respect to dividend rights and rights upon the voluntary or
involuntary dissolution, liquidation or winding up of the Bank, the Series A
Preferred Stock shall rank on a parity with each series of PIK Preferred Stock.
(d) Priority as to Dividends. No full dividends shall be declared or paid
------------------------
or set apart for payment on any Parity Dividend
-5-
<PAGE>
Stock for any Dividend Period unless full dividends have been or
contemporaneously are declared and paid (or declared and a sum sufficient for
the payment thereof set apart for such payment) on the Series A Preferred Stock
for such Dividend Period. When dividends are not paid in full (or declared and a
sum sufficient for such full payment is not so set apart) for any Dividend
Period on the Series A Preferred Stock and any other Parity Dividend Stock,
dividends declared on the Series A Preferred Stock and other Parity Dividend
Stock shall only be declared pro rata, so that the amount of dividends declared
--- ----
per share on the Series A Preferred Stock and other Parity Dividend Stock shall
bear to each other the same ratio that, at the time of such declaration, all
accrued and payable but unpaid dividends for such Dividend Period per share on
shares of the Series A Preferred Stock and other Parity Dividend Stock bear to
each other. If dividends declared for any Dividend Period consist in part of
cash and in part of PIK Preferred Stock, dividends of each type shall be
declared pro rata in the ratio specified in the preceding sentence on the Series
--- ----
A Preferred Stock and other Parity Dividend Stock on which dividends in PIK
Preferred Stock may be paid.
The Bank shall not declare, pay or set apart funds for any dividends or
other distributions (other than in Common Stock or other Junior Stock) with
respect to any Common Stock or other Junior Dividend Stock of the Bank or
(except by conversion into or exchange for Junior Stock) repurchase, redeem or
otherwise acquire, or set apart funds for the repurchase, redemption or other
acquisition of, any Common Stock or other Junior Stock through a sinking fund or
otherwise, unless, with respect to each of the four (4) most recent preceding
Dividend Periods (or such lesser number of Dividend Periods during which shares
of Series A Preferred Stock have been outstanding), the Bank (i) shall have paid
(or set apart a sum sufficient for payment of) full cash dividends on the Series
A Preferred Stock or (ii) shall have redeemed (or set apart a sum sufficient for
redemption of) PIK Preferred Stock of any one or more series at an aggregate
redemption price for all such shares of PIK Preferred Stock at least equal to
the amount of the accrued and payable but unpaid cash dividend for such Dividend
Period. If a payment or redemption as specified in clause (i) or clause (ii)
above with respect to any such Dividend Period is effected prior to the date of
declaration, payment or setting apart of funds for payment of dividends or other
distributions with respect to any Common Stock or other Junior Dividend Stock or
prior to the date of any repurchase, redemption or other acquisition of Common
Stock or other Junior Stock, the condition specified in the preceding sentence
shall be satisfied with respect to such Dividend Period.
(e) Increase in Annual Dividend Rate. Following initial issuance of the
--------------------------------
Series A Preferred Stock, the Bank shall be obligated to file an Offering
Circular on Form OC (the "Form OC")
-6-
<PAGE>
with the OTS to register the Series A Preferred Stock under 12 C.F.R. Part 563g.
If the Form OC is not declared effective by the OTS on or before August 15,
1993, the annual dividend rate payable on the Series A Preferred Stock shall
increase to 13% for the "Increased Dividend Rate Period." The Increased Dividend
Rate Period shall commence on August 16, 1993 and shall end on the earlier to
occur of (i) the date on which the Form OC is declared effective by the OTS and
(ii) the second anniversary of the Issue Date. Commencing on the day next
succeeding the last day of the Increased Dividend Rate Period, the annual
dividend rate payable on the Series A Preferred Stock shall immediately and
without further action by any person decrease to 13% for so long as the Series A
Preferred Stock is outstanding. Upon any increase in the annual dividend rate of
the Series A Preferred Stock pursuant to this subsection (e), references herein
to 13% as the annual dividend rate payable on the Series A Preferred Stock shall
be deemed to mean 15% during the Increased Dividend Rate Period, and the
dividend amounts expressed in dollar terms in subsection (a) of this Section 3
shall be deemed to be adjusted in accordance with such increased annual dividend
rate.
(f) Any reference to "dividends" or "distributions" in this Section 3
shall not be deemed to include any distribution made (i) in connection with any
voluntary or involuntary dissolution, liquidation or winding up of the Bank or
(ii) by the Bank pursuant to the Tax Sharing Agreement dated June 28, 1990
between the Bank and affiliated entities of the Bank, as that Agreement may be
amended from time to time, or any successor tax sharing agreement to that
Agreement.
4. Optional Redemption
-------------------
(a) General. The shares of Series A Preferred Stock are not subject to
-------
mandatory redemption, and shall not be redeemable by the Bank prior to May 1,
2003. On or after May 1, 2003, shares of Series A Preferred Stock may be
redeemed by the Bank, at its option, in whole or in part, at any time or from
time to time, upon notice as provided in subsection (b) of this Section 4, by
resolution of the Board of Directors, at the redemption prices set forth below
in cash, plus, in each case, an amount in cash equal to all accrued and unpaid
dividends thereon (whether or not declared) from the Dividend Period
Commencement Date next preceding the date fixed for redemption (the "Redemption
Date") to, but excluding, the Redemption Date:
-7-
<PAGE>
<TABLE>
<CAPTION>
If Redeemed During the Redemption Price
13-month Period For Share of Series A
Beginning May 1, Preferred Stock
---------------------- ----------------------
<S> <C>
2003 ................................ $27,250
2004 ................................ 27.025
2005 ................................ 26.800
2006 ................................ 26.375
2007 ................................ 26.350
2008 ................................ 26.125
2009 ................................ 25.900
2010 ................................ 25.675
2011 ................................ 25.450
2012 ................................ 25.225
2013 and thereafter ................. 25.000
</TABLE>
The aggregate redemption price payable to each holder of record of Series A
Preferred Stock to be redeemed shall be rounded to the nearest cent ($0.01).
(b) Notice of Redemption. Notice of any redemption shall be given by first
--------------------
class mail, postage prepaid, mailed at least thirty (30) days but not more than
sixty (60) days prior to the Redemption Date to each holder of record of Series
A Preferred Stock to be redeemed at such holder's address as the same shall
appear on the stock books of the Bank. Each such notice shall set forth (i) the
Redemption Date; (ii) the redemption price; (iii) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (iv) a statement that dividends on the shares of Series A Preferred
Stock to be redeemed shall cease to accrue on the Redemption Date. If fewer than
all of the shares of Series A Preferred Stock held by the holder are to be
redeemed, such notice shall specify the number of shares thereof that are to be
redeemed. Neither failure to mail such notice, nor any defect therein or in the
mailing thereof, to any particular holder shall affect the sufficiency of the
notice or the validity of the proceedings for redemption with respect to the
other holders. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to have been duly given whether or not the holder
receives such notice.
On or after the Redemption Date, each holder of shares of Series A
Preferred Stock to be redeemed shall present and surrender the certificate or
certificates for such shares to the Bank at the place designated in the notice
given to such holder, and thereupon the redemption price of such shares shall be
paid to or on the order of the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
cancelled. If fewer than all the shares
-8-
<PAGE>
represented by any such certificate are redeemed, a new certificate representing
the unredeemed shares shall be issued to the holder of such shares.
If such notice of redemption shall have been so mailed, and if, on or
before the Redemption Date specified in such notice, all funds necessary for
such redemption shall have been set aside by the Bank separate and apart from
its other funds in trust for the account of the holders of shares of Series A
Preferred Stock to be redeemed (so as to be and continue to be available
therefor), then, on and after the Redemption Date, notwithstanding that any
certificates for shares of Series A Preferred Stock so called for redemption
shall not have been surrendered for cancellation, the shares of Series A
Preferred Stock so called for redemption shall be deemed to be no longer
outstanding and the holders of such shares shall cease to be shareholders of the
Bank and shall have no voting or other rights with respect to such shares,
except for the right to receive out of the funds so set aside in trust the
amount payable on redemption thereof, but without interest, upon surrender (and
endorsement or assignment for transfer, if required by the Bank) of their
certificates.
In the event that holders of shares of Series A Preferred Stock that shall
have been redeemed shall not, within two (2) years (or any longer period if
required by law) after the Redemption Date, claim any amount deposited in trust
with a bank or trust company for the redemption of such shares, such bank or
trust company shall, upon demand by the Bank and if permitted by applicable law,
pay over to the Bank any such unclaimed amount so deposited with it, and shall
thereupon be relieved of all responsibility in respect thereof, and thereafter
the holders of such shares shall, subject to applicable escheat laws, look only
to the Bank for payment of the redemption price thereof, but without interest
from the Redemption Date. Any interest accrued on funds deposited in trust as
aforesaid shall be paid to the Bank from time to time.
(c) Partial Redemption. If fewer than all of the outstanding shares of
------------------
Series A Preferred Stock are to be redeemed, the shares to be redeemed shall be
selected pro rata or by lot or such other method as the Board of Directors, in
--- ----
its discretion, determine to be equitable.
(d) Status of Shares Redeemed. Shares of Series A Preferred Stock
-------------------------
redeemed, purchased or otherwise acquired for value by the Bank shall, after
such acquisition, have the status of authorized and unissued shares of Preferred
Stock and may be reissued by the Bank at any time as shares of any series of
Preferred Stock other than as shares of Series A Preferred Stock.
-9-
<PAGE>
(e) No Sinking Fund. The Series A Preferred Stock shall not be subject to
---------------
the operation of any mandatory purchase, retirement or sinking fund.
5. Liquidation Preference.
----------------------
(a) Liquidating Distributions. In the event of any voluntary or
-------------------------
involuntary dissolution, liquidation or winding up of the Bank, the holders of
shares of Series A Preferred Stock shall be entitled to receive for each shares
thereof, out of the assets of the Bank legally available for distribution to
shareholders under applicable law, or the proceeds thereof, before any payment
or distribution of such assets or proceeds shall be made to holders of shares of
Common Stock or any other Junior Liquidation Stock, liquidating distributions in
the amount of $25.00 per share, plus an amount per share equal to all accrued
and unpaid dividends thereon from the Dividend Period Commencement Date next
preceding the date fixed for such dissolution, liquidation or winding up (the
"Liquidation Date") to, but excluding, the Liquidation Date; provided, however,
that holders of shares of Series A Preferred Stock and any Parity Liquidation
Stock shall be entitled to such liquidating distributions only after payment in
full of liquidating distributions to holders of shares of any Senior Liquidation
Stock. If the amounts available for distribution in respect of shares of Series
A Preferred Stock and any Parity Liquidation Stock are not sufficient to satisfy
the full liquidation rights of all of the outstanding shares thereof, the
holders of such outstanding shares of Series A Pre ferred Stock and such Parity
Liquidation Stock shall share ratably in any such distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of Series A Preferred Stock as
such shall not be entitled to any further participation in any distribution of
assets by the Bank. All distributions made in respect of the Series A Preferred
Stock in connection with such a dissolution, liquidation or winding up of the
Bank shall be made pro rata to the holders of the Series A Preferred Stock
--- ----
entitled thereto.
(b) Consolidation, Merger or Certain Other Actions. Neither the
----------------------------------------------
consolidation or merger of the Bank with or into any other entity, nor the
consolidation or merger of any other entity with or into the Bank, nor a sale,
transfer or lease of all or any part of the assets of the Bank shall be deemed
to be a dissolution, liquidation or winding up of the Bank within the meaning of
this Section 5.
-10-
<PAGE>
6. Voting Rights.
-------------
(a) General. Except as expressly provided in this Section 6, or as
-------
otherwise required by applicable law or regulation, holders of shares of Series
A Preferred Stock shall have no voting rights.
(b) Right of Elect Directors. The holders of shares of Series A Preferred
------------------------
Stock shall be entitled to exercise the voting rights provided for in this
subsection (b) (the "Election Right") upon the occurrence of a "Voting Trigger
Event." It shall be a Voting Trigger Event if the Bank shall have failed to make
a "Cash Dividend Distribution" with respect to each of any four (4) Dividend
Periods (including the Initial Dividend Period), whether consecutive or not. A
Cash Dividend Distribution shall mean, with respect to any Dividend Period, (i)
the payment of full cash dividends on the Series A Preferred Stock (or the
declaration of such full cash dividends and the setting apart of a sum
sufficient for payment thereof); (ii) if PIK Preferred Stock has been issued
with respect to any such Dividend Period in a dollar amount equal to the full
cash dividend accrued for such Dividend Period, the redemption of such PIK
Preferred Stock (or the mailing of a notice of such redemption and the setting
apart for payment of the sum sufficient for such redemption); or (iii) if
dividends paid on the Series A Preferred Stock for any such Dividend Period
consist in part of cash and in part of PIK Preferred Stock in a dollar amount
equal to the accrued and payable but unpaid cash dividend for such Dividend
Period, the payment of such partial cash dividend (or the declaration of such
partial cash dividend and the setting apart of a sum sufficient for payment
thereof) and the redemption of such PIK Preferred Stock (or the mailing of a
notice of such redemption and the setting apart for payment of a sum sufficient
for such redemption). Any Dividend Period with respect to which PIK Preferred
Stock has been issued and redeemed as provided in clause (ii) or clause (iii) of
the preceding sentence shall not be counted toward the limit of four (4)
Dividend Periods referred to above in this subsection (b). A Voting Trigger
Event shall be deemed to have occurred as of the Dividend Payment Date of the
Dividend Period that is the fourth (4th) Dividend Period for which a Cash
Dividend Distribution has not been made.
Upon the occurrence of a Voting Trigger Event, the maximum authorized
number of directors of the Bank shall be increased by two (2). Subject to
compliance with any requirement for regulatory approval of (or non-objection to)
persons serving as directors, the holders of shares of Series A Preferred Stock
and any other affected classes or series of Parity Stock upon which the same
election right has been conferred and is exercisable, shall have the exclusive
right, voting together as a single class, to elect the two (2) additional
directors at the Bank's next annual
-11-
<PAGE>
meeting of shareholders or at a special meeting of shareholders as provided
below and to re-elect two (2) directors at each subsequent annual meeting of
shareholders until the Election Right terminates, as provided in the last
paragraph of this subsection (b). At any time when the Election Right shall have
so vested, the Bank may, and upon the written request of the holders of record
of not less than 20% of the total number of shares of the Series A Preferred
Stock and such Parity Stock then outstanding shall, call a special meeting of
the holders of such shares to fill such newly created directorships for the
election of directors. In the case of such a written request, such special
meeting shall be held within ninety (90) days after the delivery of such request
and, in either case, at the place and upon the notice provided by law and in the
by-laws of the Bank, provided that the Bank shall not be required to call such a
special meeting if such request is received less than one hundred twenty (120)
days before the date fixed for the next ensuing annual meeting of shareholders
of the Bank, at which meeting such newly created directorships shall be filled
by the holders of such shares. If, prior to the end of the term of any director
elected as aforesaid, a vacancy in the office of such director shall occur by
reason of death, resignation, disability or disqualification, such vacancy shall
be filled for the unexpired term by the appointment by the remaining director
elected as aforesaid of a new director for the unexpired term of such former
director.
The holders of the Series A Preferred Stock and any Parity Stock referred
to in the preceding paragraph, voting together as a single class, shall have the
right at any time to remove without cause and replace any directors such holders
have elected pursuant to this Section 6.
The term of the directors elected to the Board of Directors pursuant to a
particular exercise of the Election Right shall terminate as of the Business Day
next succeeding the Dividend Payment Date for the fourth (4th) consecutive
Dividend Period after vesting of the Election Right on which the Bank shall have
made a Cash Dividend Distribution or shall have set apart funds sufficient to
make a Cash Dividend Distribution.
(c) Certain Voting Rights. So long as any shares of Series A Preferred
---------------------
Stock are outstanding, the Bank shall not, without the consent or vote of the
holders of at least two-thirds (2/3) of the outstanding shares of Series A
Preferred Stock, (i) amend, alter or repeal or otherwise change any provision of
the Charter, including, without limitation, this First Supplemental Section
thereto, if such amendment, alteration, repeal or change would materially and
adversely affect the rights, preferences, powers or privileges of the Series A
Preferred Stock or (ii) authorize, create or issue or increase the authorized or
issued amount of any class or series of Senior Dividend Stock or Senior
Liquidation Stock or any warrants,
-12-
<PAGE>
options or other rights convertible into a exchangeable for any class or series
of Senior Dividend Stock or Senior Liquidation Stock. With respect to any matter
specified in clause (i) above, the holders of shares of Series A Preferred Stock
and the holders of shares of PIK Preferred Stock shall vote together as a single
class. With respect to any matter specified in clause (ii) above, the holders of
shares of Series A Preferred Stock and the holders of shares of PIK Preferred
Stock shall vote together as a single class.
The creation or issuance of Parity Stock (including, without limitation,
any series of PIK Preferred Stock) or Junior Stock, or a merger, consolidation,
reorganization or other business combination in which the Bank is not the
surviving entity, or an amendment that substitutes the surviving entity in a
merger or consolidation for the Bank, shall not be deemed to be a material and
adverse change to the rights, preferences, powers or privileges of the Series A
Preferred Stock requiring a vote of the holders of shares of Series A Preferred
Stock pursuant to this subsection (c).
No vote of the Series A Preferred Stock shall be required if the Series A
Preferred Stock is to be redeemed in whole on a Redemption Date occurring on or
prior to the date of occurrence of any event otherwise requiring a class vote by
the Series A Preferred Stock.
(d) Quorum; Voting. Except as provided by law or regulation or the
--------------
provisions of this Charter, the presence at a meeting, in person or by proxy, of
shareholders entitled to cast a majority of the shares of Series A Preferred
Stock outstanding and entitled to vote on any matter shall constitute a quorum;
provided, however, if any matter shall require a vote of holders of shares of
Series A Preferred Stock and any other Parity Stock, voting together as a single
class, the presence at a meeting, in person or proxy, of shareholders entitled
to cast a majority of the shares of Series A Preferred Stock and such other
Parity Stock which is outstanding and entitled to vote on any matter shall
constitute a quorum. In connection with any matter on which holders of the
Series A Preferred Stock are entitled to vote as one class or otherwise pursuant
to law or regulation or the provisions of this Charter, each holder of Series A
Preferred Stock shall be entitled to one vote for each share of Series A
Preferred Stock held by such holder.
7. No Conversion, Preemptive or Subscription Rights
------------------------------------------------
The holders of shares of Series A Preferred Stock shall not have any rights
to convert such shares into shares of any other class or series of capital stock
or into any other securities of, or any interest in, the Bank. The Series A
Preferred Stock is
-13-
<PAGE>
not entitled to any preemptive or subscription rights with respect to any
securities of the Bank.
8. No Other Rights
---------------
The shares of Series A Preferred Stock shall not have any powers,
designations, preferences and relative, participating, optional and other
special rights except as set forth herein or in any other provision of the
Charter or as otherwise required by applicable law or regulation.
9. Business Day
------------
For purposes hereof, the term "Business Day" shall mean any day other than
a Saturday, a Sunday or a day on which banking institutions in Chevy Chase,
Maryland or in New York, New York are obligated or authorized by law or
executive order to be closed.
10. Actions by Committee of Board of Directors
------------------------------------------
To the extent permitted by the rules and regulations of the OTS or other
applicable law, any action specified herein as being authorized or required to
be taken by the Board of Directors may be taken by a duly authorized committee
thereof.
11. Compliance with Applicable Law and Other Restrictions
-----------------------------------------------------
Declaration by the Board of Directors and payment by the Bank of cash and
stock dividends to holders of the Series A Preferred Stock and repurchase,
redemption or other acquisition by the Bank of shares of Series A Preferred
Stock and PIK Preferred Stock shall be subject in all respect to any
restrictions and limitations placed on dividends, redemption or other
distributions by the Bank under (i) laws, regulations and regulatory conditions
or limitations applicable to or regarding the Bank from time to time, (ii)
agreements with federal banking authorities with respect to the Bank from time
to time in effect and (iii) contracts, indentures and other agreements from time
to time in effect to which the Bank is a party or by which the Bank or its
assets are bound.
-14-
<PAGE>
IN WITNESS WHEREOF, Chevy Chase Savings Banks, F.S.B. has caused this
instrument to be signed by B. Francis Saul II, its Chairman of the Board, and
attested by Mary Lou Mayes, its Assistant Secretary, this 21st day of April,
1993.
CHEVY CHASE SAVINGS BANK, F.S.B.
By: /s/ B. Francis Saul II
--------------------------------
B. Francis Saul II
Chairman of the Board
ATTEST:
- -----
By: /s/ Mary Lou Hayes
-----------------------------------
Mary Lou Hayes
Assistant Secretary
-15-
<PAGE>
APPENDIX A
----------
Section 5. Capital stock. The total number of shares of all classes of the
capital stock which the association has the authority to issue is twenty million
(20,000,000), of which ten million (10,000,000) shall be common stock of par
value of one dollar ($1.00) per share and of which ten million (10,000,000)
shall be preferred stock of par value of $0.01 per share. The shares may be
issued from time to time as authorized by the board of directors without further
approval of shareholders, except as otherwise provided in this section 5 or to
the extent that such approval is required by governing law, rule, or regulation.
The consideration for the issuance of the shares shall be paid in full before
their issuance and shall not be less than the par value. Neither promissory
notes nor future services shall constitute payment or part payment for the
issuance of shares of the association. The consideration for the shares shall
be cash, tangible or intangible property (to the extent direct investment in
such property would be permitted), labor, or services actually performed for the
association, or any combination of the foregoing. In the absence of actual
fraud in the transaction, the value of such
<PAGE>
property, labor, or services, as determined by the board of directors of the
association, shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the surplus of the association which is transferred
to stated capital upon the issuance of shares as a share dividend shall be
deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the
association from the mutual to the stock form of capitalization, no shares of
capital stock (including shares issuable upon conversion, exchange, or exercise
of other securities) shall be issued, directly or indirectly, to officers,
directors, or controlling persons of the association other than as part of a
general public offering or as qualifying shares to a director, unless their
issuance or the plan under which they would be issued has been approved by a
majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class of a series of capital stock to
-2-
<PAGE>
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors: Provided, That this
restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred stock,
voting as a class or series, to elect some members of the board of directors,
less than a majority thereof, in the event of default in the payment of
dividends on any class or series of preferred stock;
(ii) To any provision which would require the holders of preferred stock,
voting as a class or series, to approve the merger or consolidation of the
association with another corporation or the sale, lease, or conveyance (other
than by mortgage or pledge) of properties or business in exchange for securities
of a corporation other than the association if the preferred stock is exchanged
for securities of such other corporation: Provided, That no provision may
require such approval for transactions undertaken with the assistance or
pursuant to the direction of the Office, the Federal Deposit
-3-
<PAGE>
Insurance Corporation, or the Resolution Trust Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this section 5 (or in any
supplementary sections hereto), including any amendment which would create or
enlarge any class or series ranking prior thereto in rights and preferences. An
amendment which increases the number of authorized shares of any class or series
of capital stock, or substitutes the surviving association in a merger or
consolidation for the association, shall not be considered to be such an adverse
change.
A description of the different classes and series (if any) of the
association's capital stock and a statement of the designations, and the
relative rights, preferences, and limitations of the shares of each class of and
series (if any) of capital stock are as follows:
A. Common stock. Except as provided in this section 5 (or in any
supplementary sections thereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one vote for each
-4-
<PAGE>
share held by such holder, except as to the cumulation of votes for the election
of directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund, or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
association, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the association available for distribution remaining after: (i)
Payment or provision for payment of the association's debts and liabilities;
(ii) distributions or provision for distributions in settlement
-5-
<PAGE>
of its liquidation account; and (iii) distributions or provisions for
distributions to holders of any class or series of stock having preference over
the common stock in the liquidation, dissolution, or winding up of the
association. Each share of common stock shall have the same relative rights as
and be identical in all respects with all the other shares of common stock.
B. Preferred stock. The association may provide in supplementary sections
to its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and issued in
series, with each series separately designated so as to distinguish the shares
thereof from the shares of all other series and classes. The terms of each
series shall be set forth in a supplementary section to the charter. All shares
of the same class shall be identical except as to the following relative rights
and preferences, as to which there may be variations between different series;
(a) The distinctive serial designation and the number of shares
constituting such series;
-6-
<PAGE>
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions on which such shares may be
redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary of involuntary liquidation, dissolution, or winding up of the
association;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
-7-
<PAGE>
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the
association and, if so, the conversion price(s) or the rate(s) of exchange, and
the adjustments thereof, if any, at which such conversion or exchange may be
made, and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock
-8-
<PAGE>
into series, and, within the limitations set forth in this section and the
remainder of this charter, fix and determine the relative rights and preferences
of the shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the association
shall file with the Secretary to the Office a dated copy of that supplementary
section of this charter established and designating the series and fixing and
determining the relative rights and preferences thereof.
-9-
<PAGE>
[LETTERHEAD OF OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF TREASURY]
February 14, 1994
Docket No. 8145
Mr. C. Keith McLendon
Associate General Counsel
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
RE: CHANGE OF CORPORATE TITLE
Dear Mr. McLendon:
Our review of the amendment approved by Chevy Chase Savings Bank, F.S.B.'s
shareholders on February 1, 1994, indicates that the institution has fully
complied with the applicable provisions of its charter for amending Section 1.
In accordance with 12 C.F.R. Section 552.4, the institution's request to
amend Section 1 is approved to read as follows:
"1. The full corporate title of the savings bank is Chevy Chase Bank,
F.S.B."
The amendment will be considered effective as of February 9, 1994, the date
the amendment was filed with our office.
If you have any questions or if we may be of assistance, please call
Michele Brace at (404) 888-5343.
Sincerely,
/s/ Jean Rankin
Jean Rankin
Applications Manager
<PAGE>
[LETTERHEAD OF OFFICE OF THRIFT SUPERVISION]
January 17, 1996
Mr. Scott A. Anenberg, Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037-1128
RE: CHEVY CHASE BANK, FSB
MCLEAN, VIRGINIA (DOCKET NO. 8145)
-----------------------------------
CHARTER AMENDMENT
Dear Mr. Anenberg:
In accordance with 12 C.F.R. Section 552.4, final approval is granted to
Chevy Chase Bank, FSB's request to amend Section 2 of its Federal stock charter
to provide that its home office will be located in McLean, Virginia.
The proposed amendment, which received preliminary approval on December 28,
1995, is considered to be effective as of January 16, 1996, the date the
institution redesignated its branch office located at 8251 Greensboro Drive,
McLean, Virginia, as its home office.
If you have any further questions concerning this matter, please call
Applications Analyst Michele Brace at (404) 888-5343.
Sincerely,
/s/ Jean Rankin
---------------
Jean Rankin
Applications Manager
cc: Stephen R. Halpin, Jr.
Chevy Chase Bank, FSB
<PAGE>
SECOND SUPPLEMENTAL SECTION TO
SECTION 5B OF CHARTER
OF
CHEVY CHASE BANK, F.S.B.
Certificate of Designation Establishing the Series and Fixing the Powers,
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights, and the Qualifications, Limitations and Restrictions, of
the 10 3/8% Noncumulative Preferred Stock, Series B
The undersigned duly authorized officer of CHEVY CHASE BANK, F.S.B., a
federally chartered stock savings bank (the "Bank"), in accordance with the
charter (as amended, the "Charter") of the Bank and the rules and regulations of
the Office of Thrift Supervision (the "OTS"), DOES HEREBY CERTIFY:
WHEREAS, Section 5 of the Charter of the Bank authorizes the Bank to
issue up to 10,000,000 shares of serial preferred stock (collectively, the
"Preferred Stock");
WHEREAS, the Bank currently has outstanding 3,000,000 shares of 13%
Noncumulative Perpetual Preferred Stock, Series A (the "Series A Preferred
Stock");
WHEREAS, pursuant to the authority expressly granted to the Board of
Directors of the Bank under Section 5B of the Charter, on September 19, 1996 the
Board of Directors authorized the creation of a new series of Preferred Stock to
be issued, if ever, in connection with an automatic exchange for the 10 3/8%
Noncumulative Exchangeable Preferred Stock, Series A of Chevy Chase Preferred
Capital Corporation, a wholly owned subsidiary of the Bank; and
WHEREAS, on November 27, 1996 the Executive Committee of the Board of
Directors adopted the following resolution creating a series of up to 3,300,000
shares of Preferred Stock designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to the
Executive Committee of the Board of Directors by provisions in the Charter and
the rules and regulations of the OTS, the issuance of a series of the Preferred
Stock, which shall consist of up to 3,300,000 shares of the 7,000,000 authorized
but unissued shares of Preferred Stock that the Bank has the authority to issue,
be, and the same hereby is, authorized, and the Executive Committee hereby fixes
the powers, designations, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions, of
the shares of such series (in addition to the powers, designations, preferences
and relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions, set forth in the Charter that may
be applicable to such series) authorized by this resolution as follows:
<PAGE>
1. DESIGNATION
-----------
The series of shares of Preferred Stock authorized by this resolution shall
be designated as "10 3/8% Noncumulative Preferred Stock, Series B" (the "Series
B Preferred Stock"). Shares of Series B Preferred Stock shall have a par value
of $5.00 per share.
The authorized number of shares of Series B Preferred Stock shall be
3,300,000. The number of authorized shares of Series B Preferred Stock may be
reduced from time to time, but not below the number of shares of Series B
Preferred Stock then outstanding, by further resolution duly adopted by the
Board of Directors and by the taking of such further action as shall be required
by the rules and regulations of the OTS. The number of authorized shares of
Series B Preferred Stock shall not be increased. Fractional shares of Series B
Preferred Stock, rounded to the nearest one-hundredth of a whole number, may be
issued.
2. RANK
----
a) Dividend Rights. With respect to dividend rights, the Series B
---------------
Preferred Stock shall rank prior to common stock of all classes of the Bank
(collectively, the "Common Stock"), pari passu with the Series A Preferred Stock
and junior to all claims of the Bank's creditors, including the claims of the
Bank's depositors and holders of the Bank's outstanding subordinated debentures.
The Series B Preferred Stock shall be senior to all other classes and series of
equity securities of the Bank now or hereafter authorized, issued or outstanding
other than either Parity Dividend Stock or Senior Dividend Stock. Parity
Dividend Stock shall mean any class or series of equity securities of the Bank
expressly designated as ranking, with respect to dividend rights, on a parity
with the Series B Preferred Stock and Senior Dividend Stock shall mean any class
or series of equity securities of the Bank expressly designated as ranking, with
respect to dividend r ights, as senior to the Series B Preferred Stock.
b) Liquidation Rights. With respect to rights upon the voluntary or
------------------
involuntary dissolution, liquidation or winding up of the Bank, the Series B
Preferred Stock shall rank prior to the Common Stock, pari passu with the Series
A Preferred Stock and junior to all claims of the Bank's creditors, including
the claims of the Bank's depositors and holders of the Bank's outstanding
subordinated debentures. The Series B Preferred Stock shall be senior to all
other classes and series of equity securities of the Bank now or hereafter
authorized, issued or outstanding other than either Parity Liquidation Stock or
Senior Liquidation Stock. Parity Liquidation Stock shall mean any class or
series of equity securities of the Bank expressly designated as ranking, with
respect to rights upon the voluntary or involuntary dissolution, liquidation or
winding up of the Bank, on a parity with the Series B Preferred Stock and Senior
Liquidation Stock shall mean any class or series of equity securities of the
Bank expressly designated as ranking, with respect to rights upon the voluntary
or involuntary dissolution, liquidation or winding up of the Bank, on a parity
with the Series B Preferred Stock and Senior Liquidation Stock shall mean any
class or series of equity securities of the Bank expressly designated as
ranking, with respect to rights upon the voluntary or involuntary dissolution,
liquidation or winding up of the Bank, as senior to the Series B Preferred
Stock.
c) Creation of Parity Stock and Junior Stock. To the extent not expressly
-----------------------------------------
prohibited by the Charter, the Series B Preferred Stock shall be subject to the
creation of Parity Dividend Stock and Parity Liquidation Stock (collectively,
"Parity Stock") and of Common Stock and all
<PAGE>
other classes and series of equity securities of the Bank ranking junior to the
Series B Preferred Stock with respect to dividends rights ("Junior Dividend
Stock") or rights upon the voluntary involuntary dissolution, liquidation or
winding up of the Bank ("Junior Liquidation Stock" and, collectively with Junior
Dividend Stock, "Junior Stock").
3. NONCUMULATIVE DIVIDENDS: PRIORITY
----------------------------------
a) Payment of Cash Dividends. Holders of record of shares of Series B
-------------------------
Preferred Stock shall be entitled to receive, if, when and as declared by the
Board of Directors, out of funds legally available therefor, noncumulative cash
dividends at an annual rate of 10 3/8% of the $50.00 liquidation preference per
share ($5.1875 per share per annum), and no more. If declared, such
noncumulative cash dividends shall be payable quarterly in equal amounts in
arrears on January 15, April 15, July 15 and October 15 in each year or, if such
day is not a Business Day (as defined in Section 9), on the next Business Day
(each such date, a "Dividend Payment Date"). Each declared dividend shall be
payable to holders of record of the Series B Preferred Stock as they appear on
the stock books of the Bank at the close of business on such record dates, not
more than forty-five (45) calendar days preceding the Dividend Payment Date
therefor, as determined by the Board of Directors (each such date, a "Record
Date"). The initial period for which dividends shall be paid (the "Initial
Dividend Period") shall commence on the date of initial issuance of the Series B
Preferred Stock (the "Issue Date") and shall end on the immediately following
Dividend Period Commencement Date (as hereinafter defined). Thereafter,
quarterly dividend periods (each, a "Dividend Period") shall commence on and
include January 1, April 1, July 1 and October 1 of each year (each such date, a
"Dividend Period Commencement Date") and shall end on and include the date next
preceding the Dividend Period Commencement Date of the following Dividend
Period.
Cash dividends on the Series B Preferred Stock shall be noncumulative, so
that if a cash dividend on the Series B Preferred Stock with respect to any
Dividend Period (including the Initial Dividend Period) is not declared by the
Board of Directors, the Bank shall have no obligation at any time to pay a cash
dividend on the Series B Preferred Stock with respect to such Dividend Period,
whether or not cash dividends are declared payable with respect to any furture
Dividend Period. Holders of the Series B Preferred Stock shall not be entitled
to any dividends in excess of the noncumulative dividends declared by the Board
of Directors, as set forth in this subsection (a).
The Series B Preferred Stock is to be issued, if ever, in connection with
an exchange for the 10 3/8% Noncumulative Exchangeable Preferred Stock, Series A
(the "Preferred Capital Shares") of Chevy Chase Preferred Capital Corporation, a
wholly owned subsidiary of the Bank. Any accrued and unpaid dividends on the
Preferred Capital Shares at the time of the exchange will be deemed to be
accrued and unpaid dividends on the Series B Preferred Stock.
The amount of dividends payable on each share of the Series B Preferred
Stock for each full Dividend Period during which such share is outstanding shall
be $1.2969. The amount of dividends payable for the Initial Dividend Period and
for any Dividend Period which is less than a full three (3) months shall be
computed on a basis of a 360-day year composed of twelve thirty
-3-
<PAGE>
(30) day months and the actual number of days elapsed in the Initial Dividend
Period or such Dividend Period.
The Series B Preferred Stock shall not participate in dividends with the
Common Stock.
Holders of the Series B Preferred Stock shall not be entitled to any
interest, or any sum of money in lieu of interest, in respect of any dividend
payment or payments on the Series B Preferred Stock declared by the Board of
Directors which may be unpaid. Any cash dividend payment made on the Series B
Preferred Stock shall first be credited against the earliest declared but unpaid
cash dividend with respect to the Series B Preferred Stock.
b) Priority as to Dividends. No full cash dividends shall be declared or
------------------------
paid or set apart for payment on any Parity Dividend Stock for any Dividend
Period unless full cash dividends have been or contemporaneously are declared
and paid (or declared and a sum sufficient for the payment thereof set apart for
such payment on the Series B Preferred Stock for such Dividend Period. When cash
dividends are not paid in full (or declared and a sum sufficient for such full
payment is not so set apart) in any Dividend Period on the Series B Preferred
Stock and any other Parity Dividend Stock, cash dividends declared on the Series
B Preferred stock and any other Parity Dividend Stock shall only be declared pro
---
rata, so that the amount of cash dividends declared per share on the Series B
- ----
Preferred Stock and other Parity Dividend Stock shall bear to each other the
same ratio that, at the time of such declaration, all accrued and payable but
unpaid cash dividends for such Dividend Period per share on shares of the Series
B Preferred Stock and other Parity Dividend Stock bear to each other.
Holders of the Series A Preferred Stock are entitled to receive, in lieu of
payment of a cash dividend, a dividend payable in shares of a new series of
noncumulative perpetual, preferred stock of the Bank (the "PIK Preferred
Stock"). The payment of PIK Preferred Stock as a dividend on the Series A
Preferred Stock, or on any other Parity Dividend Stock on which dividends in PIK
Preferred Stock may be paid, shall not entitle the holders of Series B Preferred
Stock to any dividend payment, either in cash or PIK Preferred Stock, on such
Series B Preferred Stock. In the event the Board of Directors of the Bank
declares a dividend on the Series A Preferred Stock, or on any other Parity
Dividend Stock on which dividends in PIK Preferred Stock may be paid, payable in
part by cash and in part by PIK Preferred Stock, the holders of Series B
Preferred Stock shall be entitled to an equal dividend payment with respect to
the cash dividend paid on such stock.
If full dividends on the Series B Preferred Stock for any dividend period
shall not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no cash
dividends shall be declared or paid or set aside for payment and no other
distribution shall be declared or made upon the common Stock or any other
capital stock of the Bank ranking junior to or on a parity with the Series B
Preferred Stock as to dividends or amounts upon liquidation, nor shall any
Common Stock or any other capital stock of the Bank ranking junior to or on a
parity with the Series B Preferred Stock as to dividends or amounts upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any monies to be paid to or made available for a sinking fund for the
-4-
<PAGE>
redemption of any such stock) by the Bank (except by conversion into or exchange
for other capital stock of the Bank ranking junior to the Series B Preferred
Stock as to dividends and amounts upon liquidation), until such time as cash
dividends on all outstanding Series B Preferred Stock have been (i) declared and
paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period. If a payment as specified
above with respect to any such Dividend Period is effected prior to the date of
declaration, setting apart of funds for payment of dividends or other
distributions with respect to any Common Stock or other Junior Dividend Stock or
prior to the date of any repurchase, redemption or other acquisition of Common
Stock or other Junior Stock, the condition specified in the preceding sentence
shall be satisfied with respect to such Dividend Period.
c) Any reference to "dividends" or "distributions" in this Section 3 shall
not be deemed to include any distribution made (i) in connection with any
voluntary or involuntary dissolution, liquidation or winding up of the Bank or
(ii) by the Bank pursuant to the Tax Sharing Agreement dated June 28, 1990
between the Bank and affiliated entities of the Bank, as that Agreement may be
am ended from time to time, or any successor tax sharing agreement to that
Agreement.
4. OPTIONAL REDEMPTION
-------------------
a) General. The shares of Series B Preferred Stock are not subject to
-------
mandatory redemption and shall not be redeemable by the Bank prior to January
15, 2007. On or after such date, the Series B Preferred Stock may be redeemed by
the Bank, at its option, in whole or in part, at any time or from time to time,
upon notice as provided in subsection (b) of this Section 4, by resolution of
the Board of Directors, at the following redemption prices (expressed as a
percentage of the $50.00 liquidation preference), if redeemed during the 12-
month period beginning January 15 of the years indicated below, plus the
quarterly accrued and unpaid dividends to the date of redemption, if any,
thereon:
<TABLE>
<CAPTION>
Year Redemption Price
- ---- ----------------
<S> <C>
2007 ....................................................... 105.187%
2008 ....................................................... 104.150%
2009 ....................................................... 103.112%
2010 ....................................................... 102.075%
2011 ....................................................... 101.037%
</TABLE>
and thereafter at a redemption price of $50.00 per share, plus the quarterly
accrued and unpaid dividend, if any, to the date fixed for redemption (the
"Redemption Date").
The aggregate redemption price payable to each holder of record of Series B
Preferred Stock to be redeemed shall be rounded to the nearest cent ($0.01).
-5-
<PAGE>
b) Notice of Redemption. Notice of any redemption shall be given by first
--------------------
class mail, postage prepaid, mailed at least thirty (30) days but not more than
sixty (60) days prior to the Redemption Date to each holder of record of Series
B Preferred Stock to be redeemed at such holder's address as the same shall
appear on the stock books of the Bank. Each such notice shall set forth (i) the
Redemption Date; (ii) the redemption price; (iii) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (iv) a statement that dividends on the shares of Series B Preferred
Stock to be redeemed shall cease to accrue on the Redemption Date. If fewer than
all of the shares of Series B Preferred Stock held by the holder are to be
redeemed, such notice shall specify the number of shares thereof that are to be
redeemed. Neither failure to mail such notice, nor any defect therein or in the
mailing thereof, to any particular holder shall affect the sufficiency of the
notice or the validity of the proceedings for redemption with respect to the
other holders. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to have been duly given whether or not the holder
receives such notice.
On or after the Redemption Date, each holder of shares of Series B
Preferred Stock to be redeemed shall present and surrender the certificate or
certificates for such shares to the Bank at the place designated in the notice
given to such holder, and thereupon the redemption price of such shares shall be
paid to or on the order of the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
canceled. If fewer than all the shares represented by any such certificate are
redeemed, a new certificate representing the unredeemed shares shall be issued
to the holder of such shares.
If such notice of redemption shall have been so mailed, and if, on or
before the Redemption Date specified in such notice, all funds necessary for
such redemption shall have been set aside by the Bank separate and apart from
its other funds in trust for the account of the holders of shares of Series B
Preferred Stock to be redeemed (so as to be and continue to be available
therefor), then, on and after the Redemption Date, notwithstanding that any
certificates for shares of Series B Preferred Stock so called for redemption
shall not have been surrendered for cancellation, the shares of Series B
Preferred Stock so called for redemption shall be deemed to be no longer
outstanding and the holders of such shares shall cease to be shareholders of the
Bank and shall have no voting or other rights with respect to such shares,
except for the right to receive out of the funds so set aside in trust the
amount payable on redemption thereof, but without interest, upon surrender (and
endorsement or assignment for transfer, if required by the Bank) of their
certificates.
In the event that holders of shares of Series B Preferred Stock that shall
have been redeemed shall not, within two (2) years (or any longer period if
required by law) after the Redemption Date, claim any amount deposited in trust
with a bank or trust company for the redemption of such shares, such bank or
trust company shall, upon demand by the Bank and if permitted by applicable law,
pay over to the Bank any such unclaimed amount so deposited with it, and shall
thereupon be relieved of all responsibility in respect thereof, and thereafter
the holders of such shares shall, subject to applicable escheat laws, look only
to the Bank for payment of the redemption price thereof, but without interest
from the Redemption Date. Any
-6-
<PAGE>
interest accrued on funds deposited in trust as aforesaid shall be paid to the
Bank from time to time.
c) Partial Redemption. If fewer than all of the outstanding shares of
------------------
Series B Preferred Stock are to be redeemed, the shares to be redeemed shall be
selected pro rata or by lot or such other method as the Board of Directors, in
--- ----
its discretion, determines to be equitable.
d) Status of Shares Redeemed. Shares of Series B Preferred Stock
-------------------------
redeemed, purchased or otherwise acquired for value by the Bank shall, after
such acquisition, have the status of authorized and unissued shares of Preferred
Stock and may be reissued by the Bank at any time as shares of any series of
Preferred Stock other than as shares of Series B Preferred Stock.
e) No Sinking Fund. The Series B Preferred Stock shall not be subject to
---------------
the operation of any mandatory purchase, retirement or sinking fund.
5. LIQUIDATION PREFERENCE
----------------------
a) Liquidating Distributions. In the event of any voluntary or
-------------------------
involuntary dissolution, liquidation or winding up of the Bank, the holders of
shares of Series B Preferred Stock shall be entitled to receive for each share
thereof, out of the assets of the Bank legally available for distribution to
shareholders under applicable law, or the proceeds thereof, before any payment
or distribution of such assets or proceeds shall be made to holders of shares of
Common Stock or any other Junior Liquidation Stock, liquidating distributions in
the amount of $50.00 per share, plus an amount per share equal to all quarterly
accrued and unpaid dividends thereon from the Dividend Period Commencement Date
next preceding the date fixed for such dissolution, liquidation or winding up
(the "Liquidation Date") to, but excluding, the Liquidation Date; provided,
however, that holders of shares of Series B Preferred Stock and any Parity
Liquidation Stock, including the Series A Preferred Stock, shall be entitled to
such liquidating distributions only after payment in full of liquidating
distributions to holders of shares of any Senior Liquidation Stock. If the
amounts available for distribution in respect of shares of Series B Preferred
Stock and any Parity Liquidation Stock, including the Series A Preferred Stock,
are not sufficient to satisfy the full liquidation rights of all of the
outstanding shares thereof, the holders of such outstanding shares of Series B
Preferred Stock and such Parity Liquidation Stock shall share ratably in any
such distribution of assets in proportion to the full respective preferential
amounts to which they are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of shares of
Series B Preferred Stock as such shall not be entitled to any further
participation in any distribution of assets by the Bank. All distributions made
in respect to the Series B Preferred Stock in connection with such a
dissolution, liquidation or winding up of the Bank shall be made pro rata to the
--- ----
holders of the Series B Preferred Stock entitled thereto.
b) Consolidation, Merger or Certain Other Actions. Neither the
----------------------------------------------
consolidation or merger of the Bank with or into any other entity, nor the
consolidation or merger of any other entity with or into the Bank, nor a sale,
transfer or lease of all or any part of the assets of the
-7-
<PAGE>
Bank shall be deemed to be a dissolution, liquidation or winding up of the Bank
within the meaning of this Section 5.
6. VOTING RIGHTS
-------------
a) General. Except as expressly provided in this Section 6, or as
-------
otherwise required by applicable law or regulation, holders of shares of Series
B Preferred Stock shall have no voting rights.
b) Right to Elect Directors. The holders of shares of Series B Preferred
------------------------
Stock shall be entitled to exercise the voting rights provided for in this
subsection (b) (the "Election Right") upon the occurrence of a "Voting Trigger
Event." It shall be a Voting Trigger Event if, at the time of any annual meeting
of the Bank's stockholders for the election of directors, there is a default in
preference dividends on the Series B Preferred Stock. For purposes hereof, a
"default in preference dividends" on the Series B Preferred Stock shall be
deemed to have occurred whenever the Bank has failed to declare and set aside
for payment a quarterly dividend during any of the four preceding quarterly
dividend periods on the Series B Preferred Stock.
Upon the occurrence of a Voting Trigger Event, the maximum authorized
number of directors of the Bank shall be increased by two (2). Subject to
compliance with any requirement for regulatory approval of (or non-objection to)
persons serving as directors, the holders of shares of Series B Preferred Stock
and any other affected classes or series of Parity Stock upon which the same
election right has been conferred and is exercisable, shall have the exclusive
right, voting together as a single class, to elect the two (2) additional
directors at such annual meeting of shareholders or at a special meeting of
shareholders as provided below and to re-elect two (2) directors at each
subsequent annual meeting of shareholders until the Election Right terminates,
as provided in the last paragraph of this subsection (b). If, prior to the end
of the term of any director elected as aforesaid, a vacancy in the office of
such director shall occur by reason of death, resignation, disability or
disqualification, such vacancy shall be filled for the unexpired term by the
appointment by the remaining director elected as aforesaid of a new director for
the unexpired term of such former director.
The holders of the Series B Preferred Stock and any Parity Stock referred
to in the preceding paragraph, voting together as a single class, shall have the
right at any time to remove without cause and replace any directors such holders
have elected pursuant to this Section 6.
The term of the directors elected to the Board of Directors pursuant to a
particular exercise of the Election Right shall continue until the latter of (i)
the expiration of the term of such director or (ii) the payment of four
consecutive quarterly dividends on the Series B Preferred Stock.
c) Certain Voting Rights. So long as any shares of Series B Preferred
---------------------
Stock are outstanding, the Bank shall not, without the consent or vote of the
holders of at least two-thirds (2/3) of the outstanding shares of Series B
Preferred Stock, (i) amend, alter or repeal or otherwise change any provision of
the Charter, including, without limitation, this Second Supplemental
-8-
<PAGE>
Section thereto, if such amendment, alteration, repeal or change would
materially and adversely affect the rights, preferences, powers or privileges of
the Series B Preferred Stock or (ii) authorize, create or issue or increase the
authorized or issued amount of any class or series of Senior Dividend Stock or
Senior Liquidation Stock or any warrants, options or other rights convertible
into or exchangeable for any class or series of Senior Dividend Stock or Senior
Liquidation Stock. With respect to any matter specified in clause (i) above, the
holders of shares of Series B Preferred Stock shall vote together as a single
class. With respect to any matter specified in clause (ii) above, the holders of
shares of Series B Preferred Stock and any other affected classes or series of
Parity Stock upon which the same voting right has been conferred and is
exercisable shall vote together as a single class.
The creation or issuance of Parity Stock or Junior Stock, or a merger,
consolidation, reorganization or other business combination in which the Bank is
not the surviving entity, or an amendment that substitutes the surviving entity
in a merger or consolidation of the Bank, shall not be deemed to be a material
and adverse change to the rights, preferences, powers or privileges of the
Series B Preferred Stock requiring a vote of the holders of shares of Series B
Preferred Stock pursuant to this subsection 6(c).
No vote of the Series B Preferred Stock shall be required if the Series B
Preferred Stock is to be redeemed in whole on a Redemption Date occurring on or
prior to the date of occurrence of any event otherwise requiring a class vote by
the Series B Preferred Stock.
d) Quorum: Voting. The presence at a meeting, in person or by proxy, of
---------------
shareholders entitled to cast a majority of the shares of Series B Preferred
Stock outstanding and entitled to vote on any matter shall constitute a quorum.
If any matter shall require a vote of holders of shares of Series B Preferred
Stock and any other Parity Stock, voting together as a single class, the
presence at a meeting, in person or proxy, of shareholders entitled to cast a
majority of the shares of Series B Preferred Stock and such other Parity Stock
which is outstanding and entitled to vote on any matter shall constitute a
quorum. Approval of any matter at a meeting shall require the affirmative vote
of a majority of the shares present at such meeting, in person or by proxy, and
voting as a class. In connection with any matter on which holders of the Series
B Preferred Stock are entitled to vote as one class or otherwise pursuant to law
or regulation or the provisions of this Charter, each holder of Series B
Preferred Stock shall be entitled to one vote for each share of Series B
Preferred Stock held by such holder.
7. NO CONVERSION, PREEMPTIVE OR SUBSCRIPTION RIGHTS
------------------------------------------------
The holders of shares of Series B Preferred Stock shall not have any rights
to convert such shares into shares of any other class or series of capital stock
or into any other securities of, or any interest in, the Bank. The Series B
Preferred Stock is not entitled to any preemptive or subscription rights with
respect to any securities of the Bank.
-9-
<PAGE>
8. NO OTHER RIGHTS
---------------
The shares of Series B Preferred Stock shall not have any powers,
designations, preferences and relative, participating, optional and other
special rights except as set forth herein or in any other provision of the
Charter or as otherwise required by applicable law or regulation.
9. BUSINESS DAY
------------
For purposes hereof, the term "Business Day" shall mean any day other than
a Saturday, a Sunday or a day on which banking institutions in McLean, Virginia
or in New York, New York are obligated or authorized by law or executive order
to be closed.
10. ACTION BY COMMITTEE OF BOARD OF DIRECTORS
-----------------------------------------
To the extent permitted by the rules and regulations of the OTS or other
applicable law, any action specified herein as being authorized or required to
be taken by the Board of Directors may be taken by a duly authorized committee
thereof.
11. COMPLIANCE WITH APPLICABLE LAW AND OTHER RESTRICTIONS
-----------------------------------------------------
Declaration by the Board of Directors and payment by the Bank of cash
dividends to holders of the Series B Preferred Stock and repurchase, redemption
or other acquisition by the Bank of shares of Series B Preferred Stock shall be
subject in all respects to any restrictions and limitations placed on dividends,
redemptions or other distributions by the Bank under (i) laws, regulations and
regulatory conditions or limitations applicable to or regarding the Bank from
time to time, (ii) agreements with federal banking authorities with respect to
the Bank from time to time in effect and (iii) contracts, indentures and other
agreements from time to time in effect to which the Bank is a party or by which
the Bank or its assets are bound.
-10-
<PAGE>
IN WITNESS WHEREOF, Chevy Chase Bank, F.S.B., has caused this
instrument to be signed by Alexander R. M. Boyle, Vice Chairman, and attested by
Mary Lou Hayes, its Secretary, this 2nd day of December, 1996.
CHEVY CHASE BANK, F.S.B.
By: /s/ Alexander R.M. Boyle
---------------------------------
Alexander R.M. Boyle
Vice Chairman
ATTEST:
- ------
By: /s/ Mary Lou Hayes
--------------------------
Mary Lou Hayes
Secretary
-11-
<PAGE>
EXHIBIT 3.2
CHEVY CHASE BANK, FSB
BYLAWS (WITH AMENDMENTS)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
ARTICLE I HOME OFFICES.................................................... 1
ARTICLE II SHAREHOLDERS................................................... 1
Section 1. Place of Meetings......................................... 1
Section 2. Annual Meeting............................................ 1
Section 3. Special Meetings.......................................... 2
Section 4. Conduct of Meetings....................................... 2
Section 5. Notice of Meetings........................................ 2
Section 6. Fixing of Record Date..................................... 3
Section 7. Voting Lists.............................................. 3
Section 8. Quorum.................................................... 4
Section 9. Proxies................................................... 4
Section 10. Voting of Shares in the Name of Two or More Persons...... 5
Section 11. Voting of Shares by Certain Holders...................... 5
Section 12. Cumulative Voting........................................ 6
Section 13. Inspectors of Election................................... 6
Section 14. Nominating Committee..................................... 7
Section 15. New Business............................................. 8
Section 16. Informal Action by Shareholders.......................... 8
ARTICLE III BOARD OF DIRECTORS............................................ 9
Section 1. General Powers............................................ 9
Section 2. Number and Term........................................... 9
Section 3. Regular Meetings.......................................... 9
Section 4. Special Meetings.......................................... 9
Section 5. Notice.................................................... 10
Section 6. Quorum.................................................... 10
Section 7. Manner of Acting.......................................... 11
Section 8. Action Without a Meeting.................................. 11
Section 9. Resignation and Removal................................... 11
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Section 10. Vacancies................................................ 11
Section 11. Compensation............................................. 12
Section 12. Presumption of Assent.................................... 12
Section 13. Removal of Directors..................................... 12
ARTICLE IV EXECUTIVE AND OTHER COMMITTEES................................. 13
Section 1. Appointment............................................... 13
Section 2. Authority................................................. 13
Section 3. Tenure.................................................... 13
Section 4. Meetings.................................................. 14
Section 5. Quorum.................................................... 14
Section 6. Action Without a Meeting.................................. 14
Section 7. Vacancies................................................. 14
Section 8. Resignations and Removal.................................. 15
Section 9. Procedure................................................. 15
Section 10. Other Committees......................................... 15
ARTICLE V OFFICERS........................................................ 15
Section 1. Positions................................................. 15
Section 2. Election and Term of Office............................... 16
Section 3. Removal................................................... 16
Section 4. Vacancies................................................. 17
Section 5. Remuneration.............................................. 17
ARTICLE VI CONTRACTS, LOANS, CHECKS, AND DEPOSITS......................... 17
Section 1. Contracts................................................. 17
Section 2. Loans..................................................... 17
Section 3. Checks, Drafts, Etc....................................... 17
Section 4. Deposits.................................................. 18
ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER.................... 18
Section 1. Certificates for Shares................................... 18
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
Section 2. Transfer of Shares........................................ 19
ARTICLE VIII FISCAL YEAR; ANNUAL AUDIT.................................... 19
ARTICLE IX DIVIDENDS...................................................... 19
ARTICLE X CORPORATE SEAL.................................................. 20
ARTICLE XI AMENDMENTS..................................................... 20
</TABLE>
-iii-
<PAGE>
CHEVY CHASE SAVINGS BANK, F.S.B.
(A STOCK ASSOCIATION)
BY LAWS
-------
ARTICLE I
HOME OFFICES
------------
The home office of the savings bank shall be at 3251 Greensboro Dr.,
McLean, in the County of Fairfax in the State of Virginia.
ARTICLE II
SHAREHOLDERS
------------
Section 1. Place of Meetings. All annual and special meetings of
-----------------
shareholders shall be held at the home office of the savings bank or at such
other place in the State in which the principal place of business of the savings
bank is located as the board of directors may determine.
Section.2. Annual Meeting. A meeting of the shareholders of the savings
--------------
bank for the election of directors and for the transaction of any other business
of the savings bank shall be held annually within 120 days after the end of the
savings bank's fiscal year on the fourth Wednesday of January if not a legal
holiday, and if a legal holiday, then on the next day following which is not a
legal holiday, at 5:00 p.m., or at such other date and time within such 120-day
period as the board of directors may determine.
<PAGE>
Section 3. Special Meetings. Special meetings of the shareholders for any
----------------
purpose or purposes, unless otherwise prescribed by the regulations of the
Federal Home Loan Bank Board ("Board") (which as hereinafter used includes the
Federal Savings and Loan Insurance Corporation), may be called at any time by
the chairman of the board, the president, or a majority of the board of
directors, and shall be called by the chairman of the board, the president, or
the secretary upon the written request of the holders of not less than one-tenth
of all of the outstanding capital stock of the savings bank entitled to vote at
the meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the savings bank addressed
to the chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Board or these bylaws. The
board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day, and
------------------
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 10 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, or the secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the savings bank as of the record date prescribed in Section
6 of this Article II with postage prepaid. When any shareholders'
2
<PAGE>
meeting, either annual or special, is adjourned for 30 days or more, notice of
the adjourned meeting shall be given as in the case of an original meeting. It
shall not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
Section 6. Fixing of Record Date. For the purpose of determining
---------------------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
------------
shareholders, the officer or agent having charge of the stock transfer books for
shares of the savings bank shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the savings bank and
shall be subject to inspection by any shareholder at any time during usual
business hours for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the
3
<PAGE>
meeting and shall be subject to inspection by any shareholder during the entire
time of the meeting. The original stock transfer book shall constitute prima
facie evidence of the shareholders entitled to examine such list or transfer
books or to vote at any meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures prescribed in (S)552.6(d) of the Board's
regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the savings
------
bank entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. if less than a majority of the outstanding
shares is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to tome without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote
-------
by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall
4
<PAGE>
be valid more than eleven months from the date of its execution except for
a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------
ownership stands in the name of two or more persons, in the absence of written
directions to the savings bank to the contrary, at any meeting of the
shareholders of the savings bank any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or , in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a receiver
may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer into his name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
5
<PAGE>
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the savings bank nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the savings
bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Every shareholder entitled to vote at an
-----------------
election for directors shall have the right to vote, in person or by proxy, the
number of shares owned by the shareholder for as many persons as there are
directors to be elected and for whose election the shareholder has a right to
vote, or to cumulate the votes by giving one candidate as many votes as the
number of such directors to be elected multiplied by the number of shares shall
equal or by distributing such votes on the same principle among any number of
candidates.
Section 13. Inspectors of Election. In advance of any meeting of
----------------------
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
the number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three
6
<PAGE>
inspectors are to be appointed. In case any person appointed as inspector fails
to appear or fails or refuses to act, the vacancy may be filled by appointment
by the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by regulations of the Board, the duties of such
inspectors shall include: determining the number of shares and the voting power
of each share, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity and effect of proxies; receiving votes, ballots,
or consents; hearing and determining all challenges and questions in any way
arising in connection with the rights to vote; counting and tabulating all votes
or consents; determining the result; and such acts as may be proper to conduct
the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
--------------------
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the savings bank. No nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the secretary of the savings bank at least five days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the savings bank. Ballots bearing the
names of all persons nominated by the nominating committee and by shareholders
shall be
7
<PAGE>
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
------------
meeting shall be stated in writing and filed with the secretary of the savings
bank at least five days before the date of the annual meeting; and all business
so stated, proposed, and filed shall be considered at the annual meeting, but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at least
five days before the meeting, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business shall be
acted upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
-------------------------------
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
8
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
------------------
Section 1. General Powers. The business and affairs of the savings bank
--------------
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
---------------
seven members and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held without other notice than this bylaw immediately after, and at
the same place as, the annual meeting of shareholders. The board of directors
may provide, by resolution, the time and place, within the savings bank's
normal lending territory for the holding of additional regular meetings without
other notice than such resolution.
Section 4. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors, may fix any place, within the savings bank's normal
lending territory, as the place for holding any special meeting of the board of
directors called by such persons.
9
<PAGE>
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participations
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 11 of this Article.
Section 5. Notice. Written notice of any special meeting shall be given
------
to each director at least two days prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 6. Quorum. A majority of the number of directors fixed by
------
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 4 of this Article III.
10
<PAGE>
Section 7. Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Board
or by these bylaws.
Section 8. Action Without a Meeting. Any action required or permitted
------------------------
to be taken at or by the board of directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the directors.
Section 9. Resignation and Removal. Any director may resign at any time
-----------------------
by sending a written notice of such resignation to the home office of the
savings bank addressed to the chairman of the board or the president. Unless
otherwise specified, such resignation shall take effect upon receipt by the
chairman of the board or the president. More than three consecutive absences
from regular meetings of the board of directors, unless excused by resolution of
the board of directors, shall automatically constitute a resignation, effective
when such resignation is accepted by the board of directors.
Section 10. Vacancies. Any vacancy occurring on the board of directors
---------
may be filled by election by the affirmative vote of a majority of the remaining
directors, although less than a quorum of the board of directors. A director
elected to fill a vacancy shall be elected to serve until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
11
<PAGE>
Section 11. Compensation. Directors, as such, may receive a stated
------------
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
Section 12. Presumption of Assent. A director of the savings bank who is
---------------------
present at a meeting of the board of directors at which action on any savings
bank matter is taken shall be presumed to have assented to the action taken
unless his dissent or abstention shall be entered in the minutes of the meeting
or unless he shall file a written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the savings bank within five
days after the date a copy of the minutes of the meeting is received. Such right
of dissent shall not apply to a director who voted in favor of such action.
Section 13. Removal of Directors. If less than the entire board is to
--------------------
be removed, no one of the directors may be removed if the votes cast against the
removal would be sufficient to elect a director if then cumulatively voted at an
election of the class of directors of which such director is a part. Whenever
the holders of the shares of any class are entitled to elect one or more
directors by the provisions of the charter or supplemental sections thereto, the
provisions of this section shall apply, in respect to the removal of a director
or directors so elected, to the vote of
12
<PAGE>
the holders of the outstanding shares of that class and not to the vote of the
outstanding shares as a whole.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
------------------------------
Section 1. Appointment. The board of directors, by resolution adopted by
-----------
a majority of the full board, may designate the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of directors
---------
is not in session, shall have and may exercise all of the authority of the board
of directors except to the extent, if any, that such authority shall be limited
by the resolution appointing the executive committee; and except also that the
executive committee shall not have the authority of the declaration of
dividends; the amendment of the charter or bylaws of the savings bank, or
recommending to the stockholders a plan of merger, consolidation, or conversion;
the sale, lease or other disposition of all or substantially all of the property
and assets of the savings bank otherwise than in the usual and regular course of
its business; a voluntary dissolution of the savings bank; a revocation of any
of the foregoing; or the approval of a transaction in which any member of the
executive committee, directly or indirectly, has any material beneficial
interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
------
IV, each memmber of the executive committee shall hold office until the next
regular annual meeting of the board of
13
<PAGE>
directors following his or her designation and until a successor is designated
as a member of the executive committee.
Section 4. Meetings. Regular meetings of the executive committee may be
--------
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date and hour of the meeting, which notice may be given written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attend s in
person. The notice of a meeting of the executive committee need not state the
business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
------
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by executive committee at a meeting may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled
---------
by a resolution adopted by a majority of the full board of directors.
14
<PAGE>
Section 8. Resignations and Removal. Any member of the executive committee
------------------------
may be removed at any time with or without cause by resolution adopted by a
majority of the full board of directors. Any member of the executive committee
may resign from the executive committee at any time by giving written notice to
the president or secretary of the savings bank. Unless otherwise specified, such
resignation shall take effect upon its receipt; the acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
---------
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
----------------
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
savings bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V
OFFICERS
--------
Section 1. Positions. The officers of the savings bank shall be a
---------
president, one or more vice presidents, a secretary, and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer, unless the board of directors designates the chairman
of the board as chief executive officer. The president shall be a director of
the savings
15
<PAGE>
bank. The offices of the secretary and the treasurer may be held by
the same person and a vice president may also be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board of directors may
also elect or authorize the appointment of such other officers as the business
of the savings bank may require. The officers shall have such authority and
perform such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. Election and Term of Office. The officers of the savings bank
---------------------------
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the stockholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly elected
and qualified or until the officer's death, resignation or removal in the manner
hereinafter provided. Election or appointment of an officer, employee, or agent
shall not of itself create contractual rights. The board of directors may
authorize the savings bank to enter into an employment contract with any officer
in accordance with regulations of the Board; but no such contract shall impair
the right of the board of directors to remove any officer at any time in
accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of directors
-------
whenever in its judgment the best interests of the savings bank will be served
thereby, but such removal, other
16
<PAGE>
than for cause, shall be without prejudice to the contractual rights, if any,
of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death, resignation
---------
removal, disqualification, or otherwise may be filled by the board of directors
for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
------------
from time to time by the board of directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
--------------------------------------
Section 1. Contracts. To the extent permitted by regulations of the Board,
---------
and except as otherwise prescribed by these bylaws with respect to certificates
for shares, the board of directors may authorize any officer, employee, or agent
of the savings bank to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the savings bank. Such authority may
be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the savings
-----
bank and no evidences of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, Etc. All checks, drafts, or other orders for the
-------------------
payment of money, notes, or other evidences of indebtedness issued in the name
of the savings bank shall be
17
<PAGE>
signed by one or more officers, employees or agents of the savings bank in such
manner as shall from time to time be determined by board of directors.
Section 4. Deposits. All funds of the savings bank not otherwise employed
--------
shall be deposited from time to time to the credit of the savings bank in any
duly authorized depositories as the board of directors may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
------------------------------------------
Section 1. Certificates for Shares. Certificates representing shares of
----------------------
capital stock of the savings bank shall be in such form as shall be determined
by the board of directors and approved by the Board. Such certificates shall be
signed by the chief executive officer or by any other officer of the savings
bank authorized by the board of directors, attested by the secretary or an
assistant secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar,
other than the savings bank itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the
number of shares and the date of issue, shall be entered on the stock transfer
books of the savings bank. All certificates surrendered to the savings bank for
transfer shall be cancelled and no new certificate shall be issued until the
former certificate for a like number of shares has been surrendered and
cancelled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the savings bank as
the board of directors may prescribe.
18
<PAGE>
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
------------------
savings bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
savings bank. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the savings bank shall be deemed by the savings bank
to be the owner for all purposes.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
-------------------------
The fiscal year of the savings bank shall end on the 30th of September of
each year. The savings bank shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the board of directors. The appointment of such accountants shall be subject
to annual ratification by the shareholders.
ARTICLE IX
DIVIDENDS
---------
Subject to the terms of the savings bank's charter and the regulations and
orders of the Board, the board of directors may, from time to time, declare,
and the savings bank may pay, dividends on its outstanding shares of capital
stock.
19
<PAGE>
ARTICLE X
CORPORATE SEAL
--------------
The board of directors shall provide a savings bank seal which shall be two
concentric circles between which shall be the name of the savings bank. The
year of incorporation or an emblem may appear in the center.
ARTICLE XI
AMENDMENTS
----------
These bylaws may be amended in a manner consistent with regulations of the
Board at any time by a majority of the full board of directors or by a majority
of the votes cast by the stockholders of the savings bank at any legal meeting.
20
<PAGE>
CHEVY CHASE SAVINGS BANK, F.S.B.
AMENDMENT TO BYLAWS - ARTICLE III, SECTION 2, NUMBER AND TERM
-------------------------------------------------------------
(Adopted by Board of Directors, 7/21/93; approved by OTS 1/5/94)
1. Director Elections;
------------------
RESOLVED, that effective the earliest date permitted by the OTS,
The Honorable Penne Percy Korth, Dr. LaSalle D. Leffall, Jr., and Leonard
Silverstein, Esq. are elected to the Board to serve until the next election of
directors by the shareholders of the Bank; and be it further
2. Conditional Bylaw Amendments;
----------------------------
RESOLVED, that effective the later of (i) thirty days from the
date of the filing of the notification to the OTS of the Bylaw amendment or (ii)
the date upon which the last of each of the Additional Directors' election
becomes effective, Article III Section 2 of the Bylaws of the Bank be amended to
read as follows: "The board of directors shall consist of thirteen members and
shall be divided into three classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three years and until their
successors are elected and qualified. One class shall be elected by ballot
annually."; and be it further
RESOLVED, that effective the later of (i) thirty days from the
date of the filing of the notification to the OTS of the Bylaw amendment or (ii)
the date upon which the last of each of the Additional Directors' election
becomes effective, Article III Section 2 of the Bylaws of the Bank be amended to
read as follows: "The board of directors shall consist of fourteen members and
shall be divided into three classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three years and until their
successors are elected and qualified. One class shall be elected by ballot
annually."; and be it further
3. Notification:
------------
RESOLVED, that the Chairman of the Board, the Vice Chairman of
the Board, any Senior Vice President of the Bank, or any other officer of the
Bank authorized by them, be, and each of them hereby is, authorized and directed
in the name of and on behalf of the Bank to notify the OTS of these actions in
compliance with applicable rules and regulations of the OTS;
<PAGE>
WRITTEN CONSENT
IN LIEU OF SPECIAL MEETING OF STOCKHOLDERS
OF
CHEVY CHASE SAVINGS BANK, F.S.B.
Pursuant to Section 16 of Article II of the Bylaws of Chevy Chase Savings
Bank, F.S.B., a federal savings bank (the "Institution"), the undersigned,
constituting all of the stockholders of the Institution, do hereby consent in
writing to the adoption of the following resolutions, such resolutions to have
effect as if adopted at a duly held meeting of the stockholders of said
Institution:
WHEREAS, the directors of the Institution have proposed that the
Federal Stock Charter of the Institution be amended by adding the
following paragraph as a new second paragraph of Section 7 of such
Charter:
"At a meeting of stockholders called expressly for that purpose,
any director may be removed (a) for cause, by a vote of the
holders of a majority of the shares then entitled to vote at an
election of directors, or (b) without cause, by a vote of the
holders of two-thirds of the shares then entitled to vote at an
election of directors. If less than the entire board is to be
removed, no one of the directors may be removed if the votes
cast against the removal would be sufficient to elect a director
if then cumulatively voted at an election of the class of
directors of which such director is a part. Whenever the holders
of the shares of any class are entitled to elect one or more
directors by the provisions of the charter or supplemental
sections thereto, the provisions of this section shall apply, in
respect to the removal of a director or directors, so elected,
to the vote of the holders of the outstanding shares of that
class and not to the vote of the outstanding shares as a whole.
Removal for cause shall include removal because of the
director's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, or willful
violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist
order."
AND WHEREAS, the directors of the Institution have further
proposed that the Bylaws of the Institution be amended to conform with
such amendment to the Charter by amending the first sentence of Section
13 of Article 3 of such Bylaws to read in its entirety as follows:
"At a meeting of stockholders called expressly for that purpose,
any director may be removed (a) for cause, by a vote of the
holders of a majority of the shares then entitled to vote at an
election of directors, or (b) without cause, by a vote of the
holders
<PAGE>
of two-thirds of the shares then entitled to vote at an
election of directors. Removal for cause shall include removal
because of the director's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or willful
violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist
order."
AND WHEREAS, such proposed amendments have been granted
preliminary approval by the Federal Home Loan Bank Board; now,
therefore, it is
RESOLVED, that the proposed amendments set forth
above are hereby approved and adopted as amendments to the Federal
Stock Charter and Bylaws of the Institution, respectively.
Dated March 5, 1987
<TABLE>
<S> <C>
B.F. SAUL REAL ESTATE FRANKLIN DEVELOPMENT CO.,
INVESTMENT TRUST INC.
By: By:
------------------------------------ --------------------------
DERWOOD INVESTMENT B.F. SAUL COMPANY EMPLOYEES
CORPORATION PROFIT SHARING RETIREMENT
TRUST
By: By:
------------------------------------ ---------------------------
B.F. SAUL COMPANY THE KLINGER CORPORATION
By: _________________________________ By: _______________________
</TABLE>
2
<PAGE>
AMENDMENT - NOVEMBER 13, 1996
-----------------------------
Article I of the Bylaws was amended to read as follows:
"HOME OFFICES
------------
The home office of the savings bank shall be at 7926 Jones Branch
Drive, McLean, in the County of Fairfax, in the State of Virginia";
