<PAGE>
Filed Pursuant to Rule 424(b)(2)
Under Registration No. 333-21707
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 17, 1997)
$153,615,935.94
CHEVY CHASE AUTO RECEIVABLES TRUST 1998-2
5.91% Auto Receivables Backed Certificates
[LOGO OF CHEVY CHASE BANK APPEARS HERE]
Seller and Servicer
Principal, and interest to the extent of the pass-through rate of 5.91% per
annum (the "Pass-Through Rate"), will be distributed to owners of the Certifi-
cates (the "Certificateholders") on the 15th day of each month (or, if such
15th day is not a Business Day, the next following Business Day) (as defined
herein), beginning July 15, 1998. The aggregate principal balance of the Re-
ceivables as of the Cut-Off Date is $153,615,935.94. The final scheduled dis-
tribution date of the Certificates will be the Distribution Date in December
2004 (the "Final Scheduled Distribution Date").
The 5.91% Auto Receivables Backed Certificates (the "Certificates") represent
fractional undivided interests in the assets of the Chevy Chase Auto Receiv-
ables Trust 1998-2 (the "Trust") to be formed pursuant to a Pooling and Ser-
vicing Agreement (the "Pooling Agreement"), dated as of June 1, 1998, among
Chevy Chase Bank, F.S.B. (the "Bank"), as seller and as servicer of the re-
ceivables (the "Seller" and the "Servicer," respectively), and U.S. Bank Na-
tional Association, as trustee (the "Trustee"). The assets of the Trust will
primarily consist of simple interest retail installment sales contracts and
installment loans (the "Receivables") secured by new and used automobiles,
light duty trucks and vans financed thereby (the "Vehicles"), certain payments
made thereunder on or after June 1, 1998 (the "Cut-Off Date"), security inter-
ests in the Vehicles and the proceeds thereof, all as more fully described
herein.
The Trustee will have the benefit of a financial guaranty insurance policy
(the "Certificate Insurance Policy") from MBIA Insurance Corporation (the
"Certificate Insurer"), which will unconditionally and irrevocably guarantee
payment of amounts due to the Certificateholders to the extent described here-
in.
(cover continued on next page)
[LOGO OF MBIA APPEARS HERE]
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE CERTIFICATES. THE UNDERWRITERS
INTEND TO MAKE A SECONDARY MARKET IN THE CERTIFICATES BUT HAVE NO OBLIGATION
TO DO SO. POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFOR-
MATION SET FORTH UNDER "RISK FACTORS" ON PAGE S-9 HEREIN AND UNDER "RISK FAC-
TORS" ON PAGE 12 IN THE ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE BANK OR ANY AFFILIATES OF THE
BANK. NEITHER THE CERTIFICATES NOR THE UNDERLYING RECEIVABLES OR ANY COLLEC-
TIONS THEREON ARE INSURED OR GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE
FUND, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- -------------------------------------------------------------
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO THE
PUBLIC (1) COMMISSIONS SELLER (1)(2)
- -------------------------------------------------------------
<S> <C> <C> <C>
Per Certificate 99.939167% 0.250000% 99.689167%
- -------------------------------------------------------------
Total $153,522,486.76 $384,039.84 $153,138,446.92
- -------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, at the Pass-Through Rate from June 15,
1998.
(2) Before deduction of expenses payable by the Bank estimated at $375,000.
The Certificates are offered by the several Underwriters when, as and if is-
sued by the Trust, delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that the
Certificates will be offered globally and delivered in book-entry form on or
about June 19, 1998 through the facilities of The Depository Trust Company,
Cedel Bank, societe anonyme and Euroclear System, against payment in immedi-
ately available funds.
J.P. MORGAN & CO. SALOMON SMITH BARNEY
The date of this Prospectus Supplement is June 15, 1998.
<PAGE>
(cover continued from previous page)
The Trustee will also have access to a Reserve Account and a Yield Maintenance
Account to be established for the benefit of the Certificateholders and the
Certificate Insurer.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
ACCOMPANYING PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN FULL. SALES OF THE
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. TO THE EXTENT ANY STATEMENTS IN
THIS PROSPECTUS SUPPLEMENT CONFLICT WITH STATEMENTS IN THE PROSPECTUS, THE
STATEMENTS IN THIS PROSPECTUS SUPPLEMENT SHALL CONTROL.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE BANK OR ANY UNDERWRITER. NEITHER THIS PROSPECTUS SUPPLEMENT
NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE BANK SINCE SUCH DATE OR THAT THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
UNTIL SEPTEMBER 14, 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
AND A PROSPECTUS SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS FOR PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary of Terms.................... S-3
Risk Factors........................ S-9
Formation of the Trust.............. S-9
The 1998-2 Trust Property........... S-10
Use of Proceeds..................... S-10
Prepayment and Yield
Considerations..................... S-10
The Receivables Pool................ S-11
The Seller and the Servicer......... S-15
The Certificates.................... S-18
The Certificate Insurer............. S-25
The Certificate Insurance Policy.... S-28
Certain Federal Income Tax
Consequences....................... S-30
ERISA Considerations................ S-33
Ratings............................. S-35
Underwriting........................ S-36
Experts............................. S-37
Legal Matters....................... S-37
Index of Defined Terms.............. S-38
</TABLE>
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Certain capitalized terms used in this Summary of Terms are defined
elsewhere in this Prospectus Supplement on the pages indicated in the Index of
Defined Terms and in the accompanying Prospectus on the pages indicated in the
Index of Terms.
Issuer...................... Chevy Chase Auto Receivables Trust 1998-2 (the
"Trust" or the "Issuer").
Seller/Servicer............. Chevy Chase Bank, F.S.B., a federally chartered
stock savings bank (the "Bank", the "Seller" and
the "Servicer"). See "The Seller and the
Servicer" herein.
Trustee..................... U.S. Bank National Association, a national
banking association. The corporate trust offices
of the Trustee are located at 180 East 5th
Street, St. Paul, Minnesota 55101, and the
telephone number of the Trustee is 1-800-934-6802
(bond holder services).
Cut-Off Date................ June 1, 1998 (the "Cut-Off Date").
Closing Date................ June 19, 1998 (the "Closing Date").
Securities Offered.......... The 5.91% Auto Receivables Backed Certificates in
an initial Certificate Principal Balance of
$153,615,935.94 (the "Certificates"). The
Certificates will evidence fractional undivided
ownership interests in the assets of the Trust.
The Certificates will be offered for purchase in
minimum denominations of $1,000 and integral
multiples thereof. See "The Certificates--
General." Each Certificateholder will also
purchase the right to receive a pro rata share of
amounts payable under the Yield Maintenance
Account established pursuant to the Pooling
Agreement (such amounts, "Yield Maintenance
Payments").
The Trust................... The Trust will be a trust established under the
laws of the State of New York. The activities of
the Trust are limited by the terms of the Pooling
Agreement to purchasing, owning and managing the
Receivables, issuing and making payments on the
Certificates and other activities related
thereto.
Trust Property.............. The assets of the Trust (the "Trust Property")
include (i) the Receivables, (ii) all monies
(including accrued interest) due or received on
or after the Cut-Off Date, (iii) all amounts and
property from time to time held in or credited to
the Collection Account (as defined herein) and
the Certificate Account (as defined herein), (iv)
all of the Seller's security interests in the
Vehicles, (v) all of the Seller's rights to
proceeds from claims on physical damage, theft,
vendor's single interest, credit life, disability
or hospitalization insurance policies, if any,
covering Vehicles or Obligors (as defined
herein), as the case may be, to the extent that
such insurance policies relate to the
Receivables, (vi) any proceeds from the sale of
repossessed Vehicles, (vii) all rights to receive
payments under certain circumstances from the
Reserve Account (as defined herein) and the Yield
Maintenance Account (as defined herein), (viii)
the
S-3
<PAGE>
right to receive payments under certain
circumstances from the Certificate Insurance
Policy and (ix) certain other property, as more
fully described herein. See "The 1998-2 Trust
Property" herein and "The Trust Property" in the
accompanying Prospectus.
The Receivables............. The Receivables consist of simple interest retail
installment sales contracts between dealers and
retail purchasers and installment loans which are
secured by the new and used automobiles, light
duty trucks and vans financed thereby. Each
Obligor's obligation under its Receivable is a
full recourse obligation. The "Obligor" is the
obligor under each Receivable including any
guarantor. The Receivables contain provisions
which unconditionally obligate the Obligor to
make all payments under the related Receivable.
As of the Cut-Off Date, 34.32% of the Receivables
(by aggregate principal balance of the
Receivables as of the Cut-Off Date) were
purchased or originated by the Bank and the other
65.68% of the Receivables were purchased or
originated by the Bank's wholly-owned subsidiary,
Consumer Finance Corporation ("CFC" together with
the Bank, the "Lenders"). The Receivables
purchased or originated by CFC are referred to
herein as the "CFC Receivables." See "The
Receivables Pool" herein.
Book-Entry Registration..... The Certificates will initially be available only
in book-entry form. See "Description of the
Securities--Book-Entry Registration" in the
accompanying Prospectus.
Pass-Through Rate........... 5.91% per annum, calculated on the basis of a
360-day year consisting of twelve 30-day months
(the "Pass-Through Rate").
Distribution Date........... The 15th day of each month (or, if such 15th day
is not a day on which banks located in New York,
New York, St. Paul, Minnesota or Chevy Chase,
Maryland are open for the purpose of conducting
commercial banking business (a "Business Day"),
the next following Business Day) (each a
"Distribution Date") beginning July 15, 1998.
Monthly Interest............ On each Distribution Date, the Trustee will
distribute pro rata to the Certificateholders of
record as of the close of business on the Record
Date (as defined herein) interest at one-twelfth
of the Pass-Through Rate on the Certificate
Principal Balance as of the immediately preceding
Distribution Date (after giving effect to
distributions of principal made on such
immediately preceding Distribution Date), or in
the case of the first Distribution Date, on the
Original Certificate Principal Balance (as
defined herein) (the "Monthly Interest"). To the
extent interest collections received by the Trust
are insufficient to pay such interest as a result
of the annual percentage rates ("APRs") on
certain of the Receivables on which such APRs are
less than the Required Rate (as defined herein),
the Certificateholders will be entitled to Yield
Maintenance Payments. The "Certificate Principal
Balance" shall equal, initially, $153,615,935.94
(the "Original Certificate Principal Balance")
and thereafter, the Original Certificate
Principal Balance, reduced by all amounts
previously distributed to Certificateholders and
allocable to principal. A
S-4
<PAGE>
"Collection Period" with respect to a
Distribution Date will be the calendar month
preceding the month in which such Distribution
Date occurs. A "Record Date" with respect to a
Distribution Date will be the close of business
on the day (whether or not a Business Day)
immediately preceding such Distribution Date (or,
if Definitive Securities are issued, the close of
business on the last day of the calendar month
immediately preceding the month of such
Distribution Date). See "The Certificates--Flow
of Funds" herein.
Monthly Principal........... On each Distribution Date, the Trustee will
distribute to Certificateholders, as of the
related Record Date, the Monthly Principal (as
defined herein) relating to such Distribution
Date. See "The Certificates--Flow of Funds"
herein.
Accounts.................... The Pooling Agreement will require that the
Trustee establish an account (the "Collection
Account") and that the Servicer deposit into the
Collection Account all collections (other than
the Servicing Fee and reimbursement of certain
expenses retained by the Servicer from such
collections as described herein) received by the
Servicer on the Receivables within two Business
Days following receipt of such amounts. With
respect to any Distribution Date and on the
related Determination Date, the Servicer shall
instruct the holder of the Collection Account to
deposit into an account established by the
Trustee (the "Certificate Account") all funds
collected on the Receivables during the most
recently completed Collection Period.
Credit Enhancement.......... The credit enhancement available for the benefit
of the Certificateholders will consist of the
Reserve Account and the Certificate Insurance
Policy.
A. Reserve Account.......... The Trustee will hold a Reserve Account (the
"Reserve Account") for the benefit of the
Certificateholders and the Certificate Insurer.
The Reserve Account will be created with an
initial deposit by the Seller of cash in an
amount required by the Pooling Agreement (the
"Reserve Initial Deposit"). The Reserve Initial
Deposit will be augmented on each Distribution
Date by the deposit in the Reserve Account of
amounts otherwise distributable to the Seller
from Excess Funds (as defined below) until the
amount in the Reserve Account reaches an amount
equal to the Specified Reserve Balance (as
defined herein). Thereafter, Excess Funds will be
deposited in the Reserve Account to the extent
necessary to maintain the amount in the Reserve
Account at an amount equal to the Specified
Reserve Balance. Amounts in the Reserve Account
(excluding any investment earnings thereon) on
any Distribution Date (after giving effect to all
distributions made on such Distribution Date) in
excess of the Specified Reserve Balance for such
Distribution Date generally will be released to
the Seller or its designee. Any investment
earnings in the Reserve Account will be paid to
the Seller or its designee on each Distribution
Date. With respect to any Distribution Date,
"Excess Funds" shall mean Available Funds
remaining after payment of fees due to the
Trustee, Monthly Interest, Monthly Principal,
premiums due to the Certificate Insurer and any
S-5
<PAGE>
interest thereon and the Reimbursement Amount (as
defined herein), as described under "The
Certificates--Flow of Funds" herein.
The "Specified Reserve Balance" with respect to
any Distribution Date means the amount so
specified in the Pooling Agreement. The Reserve
Account will be maintained with the Trustee as an
Eligible Deposit Account, and will not be part of
the Trust.
The Certificate Insurer may, at its option and
without notice to, or the consent of, the
Certificateholders, reduce the Specified Reserve
Balance.
B. The Certificate
Insurance Policy............ On or before the Closing Date, the Seller will
obtain the Certificate Insurance Policy (the
"Certificate Insurance Policy") which is
noncancelable, in favor of the Trustee on behalf
of the Certificateholders. On each Distribution
Date, the Certificate Insurer will be required to
make available to the Trustee the amount, if any,
by which the Required Payments on the
Certificates exceed the sum of (x) Available
Funds available for payment of such Required
Payments on such Distribution Date in accordance
with the priority of payments, as described under
"The Certificates--Flow of Funds", and (y) the
amount, if any, then on deposit in the Reserve
Account (excluding investment earnings thereon).
The Certificate Insurance Policy does not
guarantee to the Certificateholders any specified
rate of payment of principal. A payment by the
Certificate Insurer under the Certificate
Insurance Policy is referred to herein as an
"Insured Payment." See "The Certificate Insurance
Policy" and "The Certificate Insurer" herein.
The Trustee will (i) receive as attorney-in-fact
of each Certificateholder, any Insured Payment
from the Certificate Insurer and (ii) disburse
such Insured Payment to each Certificateholder in
accordance with the Pooling Agreement. The
Pooling Agreement will provide that to the extent
the Certificate Insurer makes Insured Payments,
either directly or indirectly (as by paying
through the Trustee), to the Certificateholders,
the Certificate Insurer will be subrogated to the
rights of such Certificateholders with respect to
such Insured Payments. The Certificate Insurer
will receive reimbursement for such Insured
Payments, but only from the sources and in the
manner provided in the Pooling Agreement. See
"The Certificates--Flow of Funds" herein. Such
subrogation and reimbursement will have no effect
on the Certificate Insurer's obligations under
the Certificate Insurance Policy.
Yield Maintenance Account... A yield maintenance account (the "Yield
Maintenance Account") will be established for the
benefit of the Certificateholders with respect to
those Receivables which have annual percentage
rates of interest ("APRs") which are less than
the sum of the Pass-Through Rate, the Servicing
Fee Rate (as defined herein) and the rates at
which the Certificate Insurer's premium and the
Trustee's fee are calculated (the sum of such
rates, the "Required Rate"). The Yield
Maintenance Account is a segregated trust account
into which the Seller will make a single deposit
on the Closing Date in an amount
S-6
<PAGE>
(the "Initial Yield Maintenance Amount")
necessary to fund Yield Maintenance Payments
resulting from shortfalls on interest collections
with respect to Receivables having an APR of less
than the Required Rate. After the Closing Date no
additional amounts will be deposited in the Yield
Maintenance Account. The Initial Yield
Maintenance Amount has been calculated assuming
no prepayments on the Receivables. On each
Determination Date, the Servicer is permitted to
recalculate the amount required to be on deposit
in the Yield Maintenance Account (the "Yield
Maintenance Amount"), which amount may decline as
Receivables having less than the Required Rate
prepay, or are otherwise removed from the Trust.
Any amounts in excess of the Yield Maintenance
Amount will be released to the Seller or its
designee. Amounts may be withdrawn from the Yield
Maintenance Account only with respect to the
interest shortfalls described above. See
"Description of the Trust Agreements--Yield
Maintenance Account and Yield Maintenance
Agreement" in the accompanying Prospectus.
Certificate Insurer......... MBIA Insurance Corporation and any successor
thereto.
Servicing................... The Servicer will be responsible for servicing,
managing, making collections on and otherwise
enforcing the Receivables, and will be entitled
to retain from collections on the Receivables a
monthly fee (the "Servicing Fee") equal to one-
twelfth of the product of (i) 2.30% (the
"Servicing Fee Rate") and (ii) the Pool Balance
as of the beginning of the immediately preceding
Collection Period. The Servicer may designate CFC
to act as sub-servicer with respect to the CFC
Receivables.
Optional Termination........ The Seller will have the option, subject to
certain conditions set forth in the Pooling
Agreement, including the deposit of the sum
specified in the Pooling Agreement, to remove
all, but not less than all, of the property in
the Trust, and thereby cause early retirement of
the Certificates as of any Distribution Date
following a Record Date on which the Pool Balance
is 5% or less of the Original Certificate
Principal Balance (such option, the "Optional
Termination"). In the event of such a removal,
the entire outstanding Certificate Principal
Balance, together with accrued and unpaid
interest thereon at the Pass-Through Rate, will
be required to be paid to the Certificateholders
on such Distribution Date. The Certificate
Insurance Policy will not insure payments to
Certificateholders resulting from an Optional
Termination. See "The Certificates--Optional
Termination" herein.
Certain Legal Aspects of
the Receivables............. Because of the administrative burden and expense
that would be entailed in doing so, the
certificates of title for the Vehicles will not
be endorsed or amended to identify the Trustee as
the secured party. If there are any Vehicles as
to which the applicable Lender failed to obtain a
perfected security interest, its security
interest would be subordinate to, among others,
subsequent purchasers of the Vehicles and holders
of perfected security interests. Pursuant to the
Pooling Agreement, the Seller will assign its
security interests in the
S-7
<PAGE>
Vehicles to the Trustee. Under the laws of
Virginia, Georgia and North Carolina, such an
assignment of security interests may not be, and
under the laws of Maryland will not be,
sufficient to convey to the Trustee perfected
security interests in the Vehicles. The Seller
will covenant in the Pooling Agreement to
repurchase any Receivable if, on the Closing
Date, a valid, subsisting and enforceable first
priority security interest in the related
Vehicle, which will have been assigned to the
Trust, has not been perfected (or is not in the
process of being perfected) in favor of the
applicable Lender. The Seller will also covenant
in the Pooling Agreement to repurchase any
Receivable if, after the Closing Date, a valid,
subsisting and enforceable first priority
security interest in the name of the applicable
Lender is not maintained on behalf of the Trust
in the related Vehicle. See "Certain Legal
Aspects of the Receivables" in the accompanying
Prospectus.
Certain Federal Tax
Considerations.............. In the opinion of Shaw Pittman Potts &
Trowbridge, special tax counsel to the Seller,
the Trust will be classified as a grantor trust
and not as an association taxable as a
corporation for federal income tax purposes. The
Beneficial Owners of the Certificates must report
their respective allocable shares of all income
earned on the Trust Property and may deduct their
respective allocable shares of reasonable
servicing fees and other fees paid or incurred by
the Trust. See "Certain Federal Income Tax
Consequences" herein.
ERISA Considerations........ Certificates may be purchased by or with the
assets of an employee benefit plan subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and the provisions of
Section 4975 of the Code. An acquisition of
Certificates by such an employee benefit plan is
subject to the general fiduciary standards of
ERISA and satisfaction of the conditions imposed
under the terms of prohibited transaction
exemptions granted to the Underwriters. See
"ERISA Considerations" herein.
Ratings..................... It is a condition of the original issuance of the
Certificates that the Certificates be rated in
the highest rating category by at least one of
Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("S&P") or Fitch
IBCA, Inc. ("Fitch") (Moody's, S&P and Fitch,
collectively, the "Rating Agencies"). The rating
of the Certificates will depend primarily on an
assessment by the Rating Agencies of the claims-
paying ability of the Certificate Insurer. Any
reduction in the rating assigned to the claims-
paying ability of the Certificate Insurer below
the rating initially given to the Certificates
would likely result in a reduction of the rating
of the Certificates. A security rating is not a
recommendation to buy, sell or hold securities,
and may be subject to revision or withdrawal at
any time by the assigning entity. See "Ratings"
herein.
Certain Legal Matters....... Certain legal matters relating to the issuance of
the Certificates will be passed upon for the
Seller and the Underwriters by Shaw Pittman Potts
& Trowbridge, New York, New York.
S-8
<PAGE>
RISK FACTORS
In addition to those factors described under "Risk Factors" in the
Prospectus, prospective Certificateholders should consider, among other
things, the following factors in connection with the purchase of the
Certificates:
Limited Liquidity. There currently is no secondary market for the
Certificates, and there is no assurance that one will develop or, if one does
develop, that it will continue until the Certificates are paid in full. The
Underwriters intend to make a market in the Certificates but have no
obligation to do so.
Yield And Prepayment Considerations. The weighted average life of the
Certificates will be reduced by full or partial prepayments on the
Receivables. The weighted average life of the Certificates may be extended by
delays in payments of Receivables, or if funds are not available from
collections and Liquidation Proceeds in respect of the Receivables, amounts
available from the Reserve Account or the Certificate Insurance Policy to pay
principal of the Certificates that has become due as a result of a Receivable
becoming a Defaulted Receivable. The Receivables will generally be prepayable
at any time without penalty. Prepayments (or, for this purpose, equivalent
payments to the Trust) may result from payments by Obligors, liquidations due
to default, the receipt of proceeds from physical damage, theft, vendor's
single interest, credit life, disability or hospitalization insurance policies
if any, covering Vehicles or Obligors (as defined herein) as the case may be,
to the extent that such insurance policies relate to the Receivables,
repurchases by the Seller as a result of certain uncured breaches of
representations and warranties made with respect to the Receivables, purchases
by the Servicer as a result of certain uncured breaches of the covenants made
by it with respect to the Receivables, or the exercise by the Seller of its
Optional Termination. See "Prepayment and Yield Considerations" herein.
The Seller can make no prediction as to the actual prepayment rates that
will be experienced on the Receivables. The Seller, however, believes that the
actual rate of prepayments will result in a shorter weighted average life of
the Receivables and therefore of the Certificates than the scheduled weighted
average life of the Receivables.
Geographic Concentration. As of the Cut-Off Date, based upon billing address
information provided to the Seller, the Obligors resided in 29 states and the
District of Columbia, four of which, Virginia, North Carolina, Georgia and
Maryland, account for 29.95%, 18.03%, 11.31% and 13.35%, respectively, of the
aggregate principal balance of the Receivables in the Trust. Adverse economic
conditions in Virginia, North Carolina, Georgia and Maryland could adversely
affect the delinquency, loan loss or repossession experience with respect to
the Receivables. Changes in these factors may also affect the rate of
principal payments on the Receivables.
FORMATION OF THE TRUST
The Seller will establish the Trust by selling and assigning the Receivables
and certain other Trust Property to the Trustee in exchange for the
Certificates. Prior to such sale and assignment, the Trust will have no assets
or obligations or any operating history. The Trust will not engage in any
business other than acquiring and holding the Trust Property, issuing the
Certificates and distributing payments on the Certificates.
The Seller, immediately prior to its transfer of the Receivables to the
Trust, will acquire the CFC Receivables from CFC.
The Servicer will hold the Receivables and the certificates of title or
ownership relating to the Vehicles as custodian for the Trustee. However, the
Receivables will not be marked or stamped to indicate that they have been sold
to the Trust, and the certificates of title or ownership for the Vehicles will
not be endorsed or otherwise amended to identify the Trust as the new secured
party. Under such circumstances and in certain jurisdictions, the Trust's
interest in the Receivables and the Vehicles may be defeated. See "Certain
Legal Aspects of the Receivables" in the accompanying Prospectus.
The Trust will not acquire any assets other than the Trust Property, and it
is not anticipated that the Trust will have any need for additional capital
resources. Because the Trust will have no operating history upon its
S-9
<PAGE>
establishment and will not engage in any business other than acquiring and
holding the Trust Property, issuing the Certificates and distributing payments
on the Certificates, no historical or pro forma financial statements or ratios
of earnings to fixed charges with respect to the Trust have been included
herein.
If the protection provided to the Certificateholders by the Certificate
Insurance Policy, the Reserve Account and the Yield Maintenance Account is
insufficient to pay principal and interest on the Certificates, the
Certificateholders would have to look principally to the Obligors on the
Receivables and to the proceeds from the repossession and sale of Vehicles
which secure Defaulted Receivables (as defined herein). In such event, certain
factors, such as the Trustee's failure to have perfected security interests in
the Vehicles in all states, may affect the Trust's ability to repossess and
sell the Vehicles securing the Receivables, and thus may reduce the proceeds
to be distributed to Certificateholders. See "The Certificates--Flow of Funds"
and "The Certificate Insurance Policy" herein, as well as "Certain Legal
Aspects of the Receivables" in the accompanying Prospectus.
THE 1998-2 TRUST PROPERTY
Each Certificate will represent a fractional undivided interest in the
Trust. The Trust Property will include (i) the Receivables, (ii) all monies
(including accrued interest) due or received thereon on or after the Cut-Off
Date, (iii) all amounts and property from time to time held in or credited to
the Collection Account and the Certificate Account, (iv) all of the Seller's
security interests in the Vehicles, (v) all of the Seller's rights to proceeds
from claims on physical damage, theft, vendor's single interest, credit life,
disability or hospitalization insurance policies, if any, covering Vehicles or
Obligors, as the case may be, to the extent that such insurance policies
relate to the Receivables, (vi) any proceeds from the sale of repossessed
Vehicles, (vii) all rights to receive payments under certain circumstances
from the Reserve Account and the Yield Maintenance Account, (viii) the right
to receive payments under certain circumstances from the Certificate Insurance
Policy, (ix) all of the Seller's right to all documents contained in the
Receivable Files, (x) all of the Seller's rights in any proceeds from recourse
to Dealers relating to the Receivables, (xi) all property (including the right
to receive future Liquidation Proceeds (as defined herein)) that secures a
Receivable and that shall have been acquired by or on behalf of the Trustee
and (xii) all proceeds of the foregoing. The Pooling Agreement does not permit
the Trust to acquire any additional assets. The Yield Maintenance Account will
hold certain amounts relating to the provision of the Yield Maintenance
Payments. The Trustee will hold the Certificate Insurance Policy.
USE OF PROCEEDS
A portion of the net proceeds to be received by the Seller from the sale of
the Certificates will be used by the Seller to purchase the CFC Receivables
from CFC; the remainder of such net proceeds will be used by the Seller for
general corporate purposes.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Certificates will be directly related
to the rate of principal payments on the underlying Receivables. If the
Certificates are purchased at a price other than at par, the yield to maturity
on the Certificates also will be affected by the rate of principal payments.
The principal payments on the Receivables may be in the form of scheduled
principal payments, prepayments or liquidations due to default, casualty and
the like. Any such payments (other than scheduled principal payments) will
result in distributions to the Certificateholders of amounts which would
otherwise have been distributed over the remaining term of the Receivables. In
general, the rate of such payments may be influenced by a number of other
factors, including general economic conditions.
The effective yield to the Certificateholders will depend upon, among other
things, the price at which such Certificates are purchased, the amount of
principal, including both scheduled and nonscheduled payments thereof, which
is paid to the Certificateholders and the rate at which such principal is
paid.
S-10
<PAGE>
Interest on the Receivables will be passed through to Certificateholders on
each Distribution Date in an amount equal to one-twelfth of the Pass-Through
Rate applied to the Certificate Principal Balance as of the immediately
preceding Distribution Date (after giving effect to distributions of principal
made on such immediately preceding Distribution Date), or in the case of the
first Distribution Date, on the Original Certificate Principal Balance. See
"The Certificates--Flow of Funds" herein.
THE RECEIVABLES POOL
GENERAL
The Receivables in the pool were purchased or originated by Chevy Chase Bank
F.S.B. (the "Bank") or its wholly-owned subsidiary, CFC ("CFC," together with
the Bank, the "Lenders"). Of the aggregate principal balance of the
Receivables as of the Cut-Off Date, 34.32% were purchased or originated by the
Bank (the "Bank Receivables") and 65.68% were purchased or originated by CFC
(the "CFC Receivables").
Of the Bank Receivables as of the Cut-Off Date, 97.59% by aggregate
principal balance were purchased by the Bank from dealers ("Dealers") in new
and used automobiles, light duty trucks and vans in the ordinary course of
business and 2.41% were originated directly by the Bank at or through its
deposit branches. Approximately 35.89% of the aggregate principal balance of
the Bank Receivables represents financing of new automobiles, light duty
trucks and vans, and approximately 64.11% represents financing of used
automobiles, light duty trucks and vans.
All of the CFC Receivables as of the Cut-Off Date were purchased from
Dealers. Approximately 12.86% of the aggregate principal balance of such CFC
Receivables represents financing of new automobiles, light duty trucks and
vans, and approximately 87.14% represents financing of used automobiles, light
duty trucks and vans.
UNDERWRITING PROCEDURES
Each Receivable was originated or purchased by the Lenders after a review by
the Lenders in accordance with their established underwriting procedures. Each
Lender has its own underwriting procedures.
The underwriting procedures of each Lender are designed to provide a basis
for assessing the Obligor's ability and willingness to repay the loan. In
conducting this assessment, the Lenders consider the Obligor's ratio of debt
to income and evaluate the Obligor's credit history through a review of a
credit report compiled by a recognized consumer credit reporting bureau. The
Obligor's equity in the collateral and the terms of the loan are of secondary
importance in the Lenders' analysis. For the Obligor's purchase of a vehicle,
the Bank's guidelines provide for financing up to 115% of the dealer cost for
new vehicles and of the Trade-In Value (as published by the National
Automobile Dealers Association, a standard reference source for dealers in
used vehicles, the "Trade-In Value") for used vehicles. CFC has two sets of
guidelines which vary based on the Obligor's credit history. For new vehicles,
CFC will finance up to 105% of dealer cost, plus sales taxes, license fees and
a maximum of $2,000 of rebatable warranties and insurance, or 130% of dealer
cost, inclusive of all additional expenses. For used vehicles, CFC will
finance up to 110% of the Trade-In Value, plus sales taxes, license fees and a
maximum of $2,000 of rebatable warranties and insurance, or 130% of the Trade-
In Value, inclusive of all additional expenses. The Lenders' guidelines are
intended only to provide a basis for lending decisions, and exceptions to such
guidelines may, within certain limits, be made based upon the credit judgment
of the lending officer. The Lenders periodically conduct quality audits to
ensure compliance with their established policies and procedures.
CFC's underwriting guidelines relate to a category of lending in which loans
may be made to applicants who have experienced certain adverse credit events
(and therefore would not necessarily meet all of the Bank's guidelines for its
traditional loan program) but who meet certain other creditworthiness tests.
Such loans
S-11
<PAGE>
generally experience higher rates of delinquencies, repossessions and losses,
especially under adverse economic conditions, as compared with loans
originated pursuant to the Bank's traditional lending program.
SELECTION CRITERIA
The Receivables were selected from the Lenders' portfolios on the basis of a
number of criteria, including the following: each Receivable (i) has an
original term to maturity of 18 to 72 months, (ii) has a maturity of not later
than June 3, 2004, (iii) except with respect to the Balloon Receivables (as
defined herein), provides for level monthly payments that fully amortize the
amount financed over the original term, (iv) with respect to Bank Receivables
was not more than 59 days past due as of the Cut-Off Date, (v) with respect to
CFC Receivables was not more than 29 days past due as of the Cut-Off Date,
(vi) has an unpaid principal balance of not less than $1,000 as of the Cut-Off
Date and (vii) if such Receivable was purchased or originated by CFC only, the
Obligor has made at least one payment with respect thereto as of the Cut-Off
Date. The weighted average remaining term (number of payments) of the
Receivables was 55.36 months as of the Cut-Off Date.
All the Receivables are prepayable at any time. The Seller makes no
prediction as to the actual prepayment experience on the Receivables. See also
"The Certificates--Optional Termination" herein regarding the Seller's option
to purchase the Receivables when the Pool Balance is 5% or less of the
Original Certificate Principal Balance.
The Receivables are simple interest installment sales contracts and
installment loans which provide for equal monthly payments, except for 0.08%
of the Receivables (as a percentage of the initial Pool Balance as of the Cut-
Off Date) with respect to which the last scheduled monthly payment of each
such Receivable is significantly larger than any prior scheduled monthly
payment (each such Receivable, a "Balloon Receivable"). As payments are
received under a simple interest Receivable, interest accrued to date is paid
first and the remaining payment is applied to reduce the unpaid principal
balance. Accordingly, if an obligor pays a fixed monthly installment before
its due date, the portion of the payment allocable to interest for the period
since the preceding payment will be less than it would have been had the
payment been made on the due date, and the portion of the payment applied to
reduce the principal balance will be correspondingly greater. Conversely, if
an obligor pays a fixed monthly installment after its due date, the portion of
the payment allocable to interest for the period since the preceding payment
will be greater than it would have been had the payment been made on the due
date, and the portion of the payment applied to reduce the principal balance
will be correspondingly less, in which case a larger portion of the principal
balance will be due on the final scheduled payment date. In the case of a
liquidation or repossession, amounts recovered are applied first to the
expenses of repossession, then to unpaid interest and finally to unpaid
principal.
The composition, distribution by APR and geographical distribution of the
Receivables as of the Cut-Off Date are as set forth in the following tables.
COMPOSITION OF THE RECEIVABLES AS OF THE CUT-OFF DATE
<TABLE>
<S> <C>
Initial Aggregate Principal Balance................. $153,615,935.94
Number of Receivables............................... 12,204
Average Original Principal Balance.................. $12,812.85
Range of Original Principal Balances............... $2,355.25 to $39,929.33
Average Remaining Principal Balance................. $12,587.34
Range of Remaining Principal Balances.............. $1,278.71 to $39,088.79
Weighted Average APR(1)............................. 16.61%
Range of APRs...................................... 6.75% to 31.00%
Weighted Average Original Term to Maturity(1)....... 57.11 months
Range of Original Terms to Maturity................ 18 months to 72 months
Weighted Average Remaining Term to Maturity(1)...... 55.36 months
Range of Remaining Terms to Maturity............... 12 months to 72 months
</TABLE>
- --------
(1) Weighted by remaining principal balance.
S-12
<PAGE>
DISTRIBUTION OF THE RECEIVABLES BY APR AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE AGGREGATE
RANGE OF APRS RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
6.00% to 6.99%................. 11 $ 147,711.63 .10%
7.00% to 7.99%................. 396 6,522,246.08 4.25%
8.00% to 8.99%................. 735 11,602,021.49 7.55%
9.00% to 9.99%................. 744 11,045,570.16 7.19%
10.00% to 10.99%................ 427 6,343,018.65 4.13%
11.00% to 11.99%................ 385 5,556,794.18 3.62%
12.00% to 12.99%................ 314 4,502,137.26 2.93%
13.00% to 13.99%................ 214 2,829,546.88 1.84%
14.00% to 14.99%................ 218 3,006,210.77 1.96%
15.00% to 15.99%................ 224 3,039,643.39 1.98%
16.00% to 16.99%................ 898 11,452,589.69 7.45%
17.00% to 17.99%................ 1,173 15,977,926.36 10.40%
18.00% to 18.99%................ 2,541 31,229,656.16 20.33%
19.00% to 19.99%................ 474 5,490,807.23 3.57%
20.00% to 20.99%................ 232 2,419,250.44 1.57%
21.00% to 21.99%................ 1,228 12,905,206.76 8.40%
22.00% to 22.99%................ 646 6,468,235.12 4.21%
23.00% to 23.99%................ 505 4,820,923.53 3.14%
24.00% to 24.99%................ 260 2,931,259.18 1.91%
25.00% to 25.99%................ 12 131,899.39 .09%
26.00% to 26.99%................ 229 2,200,718.43 1.43%
27.00% to 27.99%................ 190 1,718,878.34 1.12%
28.00% to 28.99%................ 37 340,690.38 .22%
29.00% to 29.99%................ 107 906,646.06 .59%
30.00% to 30.99%................ 2 13,279.40 .01%
31.00% to 31.99%................ 2 13,068.98 .01%
------ --------------- ------
Total....................... 12,204 $153,615,935.94 100.00%
====== =============== ======
</TABLE>
S-13
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE AGGREGATE
STATE(1)(2) RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C>
Florida......................... 906 $ 11,158,410.97 7.26%
Georgia......................... 1,338 17,369,381.67 11.31%
Maryland........................ 1,559 20,505,565.29 13.35%
North Carolina.................. 2,212 27,699,651.46 18.03%
Ohio............................ 938 10,235,145.96 6.66%
Pennsylvania.................... 833 10,091,912.22 6.57%
Virginia........................ 3,550 46,011,966.80 29.95%
Other........................... 868 10,543,901.57 6.87%
------ --------------- -------
Total....................... 12,204 $153,615,935.94 100.00%
====== =============== =======
</TABLE>
- --------
(1) Based upon the billing address of the Obligors.
(2) No other state represents more than 5% of the Receivables.
DISTRIBUTION OF THE RECEIVABLES BY REMAINING PRINCIPAL BALANCE AS OF THE CUT-
OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING PRINCIPAL BALANCES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
$ 00.00 to $ 4,999.99........ 113 $ 472,700.14 .31%
$ 5,000.00 to $ 9,999.99........ 3,226 26,933,601.09 17.53%
$10,000.00 to $14,999.99........ 6,244 76,839,647.76 50.02%
$15,000.00 to $19,999.99........ 1,921 32,496,787.20 21.15%
$20,000.00 to $24,999.99........ 486 10,658,038.82 6.94%
$25,000.00 to $29,999.99........ 143 3,865,588.82 2.52%
$30,000.00 to $34,999.99........ 55 1,761,341.19 1.15%
$35,000.00 to $39,999.99........ 16 588,230.92 .38%
------ --------------- ------
Total......................... 12,204 $153,615,935.94 100.00%
====== =============== ======
DISTRIBUTION OF THE RECEIVABLES BY REMAINING TERMS TO MATURITY AS OF THE CUT-
OFF DATE
<CAPTION>
PERCENTAGE OF
RANGE OF REMAINING TERMS TO MATURITY NUMBER OF AGGREGATE AGGREGATE
(MONTHS) RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ ----------- ----------------- -----------------
<S> <C> <C> <C>
1 to 12........................ 1 $ 1,536.01 .00%
13 to 24........................ 49 344,959.54 .22%
25 to 36........................ 477 3,777,452.05 2.46%
37 to 48........................ 2,631 26,161,499.32 17.03%
49 to 60........................ 8,677 115,679,606.63 75.31%
61 to 72........................ 369 7,650,882.39 4.98%
------ --------------- ------
Total......................... 12,204 $153,615,935.94 100.00%
====== =============== ======
</TABLE>
S-14
<PAGE>
THE SELLER AND THE SERVICER
GENERAL
The Seller, which is one of the Lenders, is a federally chartered stock
savings bank. The Seller's 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 Seller's telephone number
is (301) 986-7000. The Seller is subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision (the "OTS")
within the Department of the Treasury and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits at the Seller are fully insured up to
$100,000 per insured depositor by the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC.
Based on unaudited results, at March 31, 1998, the Bank had consolidated
assets of approximately $6.3 billion, deposits of approximately $5.0 billion,
and stockholders' equity of approximately $374.3 million. As a savings bank
chartered under the laws of the United States, the Bank is subject to certain
minimum regulatory capital requirements imposed under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, as amended
("FIRREA"). At March 31, 1998, the Bank's tangible, core, tier 1 risk-based
and total risk-based regulatory capital ratios were 6.52%, 6.52%, 6.30% and
12.18%, respectively. As of such date, the Bank'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.
However, the House of Representatives passed a financial modernization bill on
May 13, 1998, that would not require the Bank to convert its charter.
Nevertheless, if legislation were enacted that required the Bank to convert
its charter that lacked 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. 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.
The other Lender, CFC, is a wholly-owned subsidiary of the Seller, formed in
December 1994 for the purpose of providing automobile financing to applicants
who may have experienced certain adverse credit events. See "The Receivables
Pool" herein.
LITIGATION
The Seller is not involved in any legal proceedings, and is not aware of any
pending or threatened legal proceedings, that would have a material adverse
effect upon its financial condition or results of operations.
S-15
<PAGE>
DELINQUENCY AND DEFAULT EXPERIENCE
There can be no assurance that the levels of delinquency and loss experience
reflected in the tables below, are indicative of the performance of the
Receivables included in the Trust.
CHEVY CHASE BANK, F.S.B.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------- -------------------- -------------------- -------------------- --------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE DOLLAR PERCENTAGE DOLLAR PERCENTAGE DOLLAR PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
(000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(1).. $166,307 $299,096 $431,351 $714,320 $853,424
Delinquencies:(2)(3)
30-59 Days...... $ 1,210 0.73% $ 4,074 1.36% $ 2,491 0.58% $ 8,516 1.19% $ 9,212 1.08%
60-89 Days...... 223 0.13% 729 0.24% 742 0.17% 2,176 0.30% 3,256 0.38%
90 days or
more........... 226 0.14% 1,209 0.40% 1,667 0.39% 3,588 0.50% 9,188 1.08%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total
Delinquencies.. $ 1,659 1.00% $ 6,012 2.00% $ 4,900 1.14% $ 14,280 1.99% $ 21,656 2.54%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
<CAPTION>
AS OF MARCH 31,
--------------------
1998
--------------------
DOLLAR PERCENTAGE
AMOUNT OF TOTAL
(000) RECEIVABLES
-------- -----------
<S> <C> <C>
Receivables
Outstanding(1).. $805,958
Delinquencies:(2)(3)
30-59 Days...... $ 6,378 0.79%
60-89 Days...... 2,686 0.33%
90 days or
more........... 9,636 1.20%
-------- -----------
Total
Delinquencies.. $ 18,700 2.32%
======== ===========
</TABLE>
- -------
(1) "Receivables Outstanding" is the remaining principal balance.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Includes repossessions in inventory.
CHEVY CHASE BANK, F.S.B.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------- -------------------- -------------------- -------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
DOLLAR OF AVERAGE DOLLAR OF AVERAGE DOLLAR OF AVERAGE DOLLAR OF AVERAGE DOLLAR OF AVERAGE
AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES
(000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(2)
............... $116,475 $245,295 $363,845 $565,963 $832,700
Gross Charge-
offs(3)........ $ 627 0.54% $ 766 0.31% $ 2,120 0.58% $ 3,795 0.67% $ 8,303 1.00%
Recoveries(4) .. $ 115 0.10% $ 219 0.09% $ 275 0.07% $ 277 0.05% $ 770 0.09%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Net Losses ..... $ 512 0.44% $ 547 0.22% $ 1,845 0.51% $ 3,518 0.62% $ 7,533 0.91%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
<CAPTION>
FOR THE 3 MONTHS ENDED
MARCH 31,
-----------------------
1998
-----------------------
PERCENTAGE
DOLLAR OF AVERAGE
AMOUNT RECEIVABLES
(000) OUTSTANDING(1)
-------- --------------
<S> <C> <C>
Average
Receivables
Outstanding(2)
............... $822,526
Gross Charge-
offs(3)........ $ 2,467 1.20%
Recoveries(4) .. $ 290 0.14%
-------- --------------
Net Losses ..... $ 2,177 1.06%
======== ==============
</TABLE>
- -------
(1) Annualized.
(2) Equals the arithmetic average of the month-end balances.
(3) Gross Charge-offs represent the excess of the outstanding loan balance
over net liquidation proceeds where net liquidation proceeds are the
excess of liquidation proceeds over the sum of repossession, liquidation
and other related expenses.
(4) Includes current post-disposition recoveries on receivables previously
charged off.
S-16
<PAGE>
CONSUMER FINANCE CORPORATION
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------------- --------------------
1995(1) 1996 1997 1998
------------------- -------------------- -------------------- --------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE DOLLAR PERCENTAGE DOLLAR PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
(000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES
------- ----------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(2) ........ $49,375 $179,105 $464,518 $538,085
Delinquencies(3)(4):
30-59 Days ........... $ 2,528 5.12% $ 11,222 6.27% $ 32,282 6.95% $28,649 5.32%
60-89 Days ........... 609 1.23% 2,529 1.41% 10,127 2.18% 6,651 1.24%
90 days or more ...... 871 1.76% 5,547 3.10% 24,565 5.29% 24,149 4.49%
------- ---- -------- ----- -------- ----- -------- -----
Total Delinquencies
................... $ 4,008 8.11% $ 19,298 10.78% $ 66,974 14.42% $59,449 11.05%
======= ==== ======== ===== ======== ===== ======== =====
</TABLE>
- --------
(1) CFC was formed in December 1994.
(2) "Receivables Outstanding" is the remaining principal balance.
(3) The period of delinquency is based on the number of days payments are
contractually past due.
(4) Includes repossessions in inventory.
CONSUMER FINANCE CORPORATION
LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE 3 MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- -----------------------
1995(1) 1996 1997 1998
------------------- -------------------- -------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
DOLLAR OF AVERAGE DOLLAR OF AVERAGE DOLLAR OF AVERAGE DOLLAR OF AVERAGE
AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES
(000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING(2)
------- ----------- -------- ----------- -------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding(3)......... $21,383 $111,510 $322,757 $512,317
Gross Charge-offs(4) ... $ 144 0.67% $ 2,922 2.62% $ 15,538 4.81% $ 9,450 7.38%
Recoveries(5) .......... $ 0 0.00% $ 141 0.13% $ 613 0.19% $ 310 0.24%
------- ---- -------- ---- -------- ---- -------- ----
Net Losses ............. $ 144 0.67% $ 2,781 2.49% $ 14,925 4.62% $ 9,140 7.14%
======= ==== ======== ==== ======== ==== ======== ====
</TABLE>
- --------
(1) CFC was formed in December 1994.
(2) Annualized.
(3) Equals the arithmetic average of the month-end balances.
(4) Gross Charge-offs represent the excess of the outstanding loan balance
over net liquidation proceeds, where net liquidation proceeds are the
excess of liquidation proceeds over the sum of repossession, liquidation
and other related expenses.
(5) Includes current post-disposition recoveries on receivables previously
charged off.
CFC was formed in December 1994, and commenced originating loans in January
1995. Experience indicates that the loss and delinquency levels of a portfolio
of automobile loans typically will change as the portfolio ages, and that
statistics relating to a portfolio of relatively newly originated loans may
understate the loss and delinquency levels of such portfolio over its life.
Due to the relatively short history of CFC's program, together with the growth
in CFC's portfolio over the periods indicated, the loss and delinquency levels
of CFC's portfolio may be higher in future periods than those reflected in the
statistics presented herein.
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<PAGE>
THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling Agreement to be
entered into by the Servicer, the Seller and the Trustee. The Trustee will
provide a copy of the Pooling Agreement to Certificateholders without charge
on written request addressed to its Corporate Trust Department at 180 East 5th
Street, St. Paul, Minnesota 55101, Att: Structured Finance/Chevy Chase 1998-2.
The following summary describes certain terms of the Pooling Agreement, does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Pooling Agreement. Wherever provisions of the Pooling
Agreement are referred to, such provisions are hereby incorporated herein by
reference. The following summary supplements and, to the extent inconsistent
therewith, replaces, the description of the general terms and provisions of
the Certificates and the related Trust Agreement set forth in the accompanying
Prospectus, to which description reference is hereby made.
GENERAL
The Certificates will be offered for purchase in minimum denominations of
$1,000 and integral multiples thereof and will be represented initially by
physical certificates registered in the name of Cede as nominee of DTC. No
Beneficial Owner will be entitled to receive a definitive certificate
representing such person's interest in the Trust except in the event that
Definitive Securities are issued under the limited circumstances described in
the accompanying Prospectus under "Description of the Securities--Definitive
Securities". Unless and until Definitive Securities are issued, all references
to actions by Certificateholders shall refer to actions taken by DTC upon
instructions from DTC Participants and all references to distributions,
notices, reports and statements to Certificateholders shall refer to
distributions, notices, reports and statements to DTC. See "Description of the
Securities--Book-Entry Registration" and "--Definitive Securities" in the
accompanying Prospectus.
In general, it is intended that Certificateholders receive, on each
Distribution Date, an amount of principal equal to the decrease in the Pool
Balance from the beginning to the end of the related Collection Period, plus
interest at one-twelfth of the Pass-Through Rate on the Certificate Principal
Balance as of the immediately preceding Distribution Date (after giving effect
to the distribution of principal made on such immediately preceding
Distribution Date) or, in the case of the first Distribution Date, on the
Original Certificate Principal Balance. See "--Flow of Funds" herein.
Principal and interest to be distributed to Certificateholders may be provided
by payments made by or on behalf of Obligors, the payment of Purchase Amounts
(as defined herein) by the Seller or the Servicer, amounts, if any, from the
Reserve Account and the Yield Maintenance Account, proceeds from claims on
physical damage, theft, vendor's single interest, credit life, disability or
hospitalization insurance policies if any, covering Vehicles or Obligors (as
defined herein) as the case may be, to the extent that such insurance policies
relate to the Receivables, Liquidation Proceeds (net of certain Servicer
expenses) upon the repossession and sale of Vehicles and any Insured Payments
remitted by the Certificate Insurer under the Certificate Insurance Policy.
See "The Certificate Insurance Policy" herein.
Distribution of principal and interest on the Certificates with respect to
each Collection Period will be made on the Distribution Date immediately
succeeding such Collection Period, commencing on July 15, 1998. Each
Collection Period will be one calendar month.
CONVEYANCE OF RECEIVABLES
On the Closing Date, the Seller will sell, transfer, assign, set over and
otherwise convey to the Trustee, without recourse (except as expressly set
forth in the Pooling Agreement), all of its right, title and interest in and
to the Receivables, including its security interests in the Vehicles and the
other Trust Property. CFC will convey the CFC Receivables to the Seller prior
to such sale and assignment. The Trustee will, concurrently with such sale and
assignment, execute, authenticate and deliver the definitive certificates
representing the Certificates to the Underwriters against payment to the
Seller of the net purchase price of the sale of the Certificates.
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<PAGE>
In the Pooling Agreement, the Seller will represent and warrant to the
Trustee, among other things, that (i) the information provided with respect to
Receivables is correct in all material respects; (ii) the Obligor on each
Receivable is required to obtain physical damage and theft insurance in
accordance with Seller's normal requirements; (iii) at the date of issuance of
the Certificates, the Receivables are free and clear of all security
interests, liens, charges, and encumbrances and no setoffs, defenses, or
counterclaims against the Seller have been asserted or threatened (other than
the interest of the Trustee); (iv) on the Closing Date, each of the
Receivables is or will be secured by a first priority perfected security
interest in the Vehicle in favor of the applicable Lender; and (v) each
Receivable, at the time it was originated, complied, and on the Closing Date
complies, in all material respects, with applicable federal and state laws,
including consumer credit, truth in lending, equal credit opportunity, and
disclosure laws. The only recourse the Trustee and the Certificateholders will
have against the Seller for breach or failure to be true of any of the
representations and warranties contained in the Pooling Agreement with respect
to a Receivable will be to require the Seller to repurchase the Receivable.
See "--Mandatory Repurchase of Receivables" herein.
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Trustee will appoint the Servicer as initial
custodian of the Receivables. The Servicer, in its capacity as custodian, will
hold the Receivables and all electronic entries, documents, instruments and
writings related thereto (each, a "Receivable File"), either directly or
through sub-servicers, on behalf of the Trustee for the benefit of
Certificateholders and the Certificate Insurer. The Receivables will not be
stamped or otherwise marked to reflect the sale and assignment of the
Receivables to the Trust and will not be segregated from other receivables
held by the Servicer or the subservicers. However, UCC financing statements
reflecting the sale and assignment of the Receivables by the Seller to the
Trust will be filed, and the Servicer's accounting records and computer
systems will be marked to reflect such sale and assignment. See "Certain Legal
Aspects of the Receivables" in the Prospectus. Pursuant to the terms of the
Pooling Agreement, the Servicer will be required to file continuation
statements relating to such UCC financing statements in order to maintain the
perfected security interest of the Trust in the Receivables. The Servicer may
designate CFC to act as custodian with respect to Receivables Files relating
to the CFC Receivables.
SERVICING PROCEDURES
The Receivables will be serviced by the Servicer pursuant to the Pooling
Agreement. The Servicer may designate CFC to act as subservicer with respect
to the CFC Receivables, although such designation will not relieve the
Servicer from its servicing obligations with respect to such CFC Receivables.
The Pooling Agreement requires that servicing of the Receivables by the
Servicer shall generally be carried out in the same manner in which it
services receivables and vehicles held for its own account. In performing its
duties thereunder, the Servicer will act on behalf and for the benefit of the
Trustee, the Certificateholders and the Certificate Insurer, subject at all
times to the provisions of the Pooling Agreement, without regard to any
relationship which the Servicer or any affiliate of the Servicer may otherwise
have with an Obligor.
The Servicer, as an independent contractor on behalf of the Trust and for
the benefit of the Certificateholders and the Certificate Insurer, will be
responsible for managing, servicing and administering the Receivables and
enforcing and making collections on the Receivables and any insurance policies
relating to the Vehicles and for enforcing any security interest in any of the
Vehicles, all as set forth in the Pooling Agreement. The Servicer's
responsibilities will include collecting and posting of all payments,
responding to inquiries of Obligors, investigating delinquencies, accounting
for collections, furnishing monthly and annual statements to the Trustee and
the Certificate Insurer with respect to distributions, providing appropriate
federal income tax information for use in providing information to
Certificateholders and attempting to maintain the perfected security interest
of the applicable Lender in the Vehicles.
The Pooling Agreement requires that on or before December 31 of each year,
beginning December 31, 1999, the Servicer will deliver an officers'
certificate to the Trustee and the Certificate Insurer stating (i) a review of
the activities of the Servicer during the preceding 12-month period ended
September 30 of such year (or such
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<PAGE>
longer or shorter period since the date of the Pooling Agreement) and of its
performance under the Pooling Agreement has been made under such officers'
supervision and (ii) to the best of such officers' knowledge, based on such
review, the Servicer has fulfilled all of its obligations under the Pooling
Agreement throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officers and the nature and status thereof.
The Pooling Agreement requires that the Servicer shall cause a firm of
independent certified public accountants (who may also render other services
to the Servicer) to deliver to the Trustee, with a copy to the Rating Agencies
and the Certificate Insurer, within 90 days following the end of each fiscal
year of the Servicer, beginning with the Servicer's fiscal year ending
September 30, 1999, a written statement to the effect that such firm has read
the monthly Servicer's Certificates delivered pursuant to the Pooling
Agreement with respect to each Collection Period during such one-year period
(or such longer or shorter period since the date of the Pooling Agreement) and
reviewed the servicing of the Receivables by the Servicer and that such review
(1) included tests relating to automobile, light duty truck and van loans
serviced for others in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, to the extent the procedures in such
program are applicable to the servicing obligations set forth in the Pooling
Agreement, and (2) except as described in the report, disclosed no exceptions
or errors in the records relating to automobile, light duty truck and van
loans serviced for others that, in the firm's opinion, paragraph four of such
program requires such firm to report.
SERVICER DEFAULT; WAIVER OF PAST DEFAULTS
Any of the following events will constitute a "Servicer Default" under the
Pooling Agreement: (i) any failure by the Servicer to deliver to the Trustee
on or before the Determination Date the Servicer's Certificate or to deliver
to the Trustee for distribution to the Certificateholders any proceeds or
payment required to be so delivered under the terms of the Pooling Agreement,
which failure continues unremedied for more than three Business Days after
written notice from (x) the Trustee or the Holders of Certificates evidencing
not less than 25% of the Certificate Principal Balance and, which notice, in
either case, shall be consented to by the Certificate Insurer is received by
the Servicer or (y) the Certificate Insurer is received by the Servicer; (ii)
any failure by the Servicer or the Seller duly to observe or perform in any
material respect any other covenant or agreement of the Servicer or the
Seller, as the case may be, in the Pooling Agreement, which failure materially
and adversely affects the rights of the Certificateholders (determined without
regard to the Certificate Insurance Policy) and which continues unremedied for
more than 30 days after the giving of written notice of such failure (x) to
the Servicer or the Seller, as the case may be, by the Trustee, which notice,
in either case, is consented to by the Certificate Insurer, (y) to the
Servicer or the Seller, as the case may be, and to the Trustee by the
Certificateholders evidencing not less than 25% of the Certificate Principal
Balance which notice is consented to by the Certificate Insurer or (z) to the
Servicer or the Seller, as the case may be, by the Certificate Insurer; and
(iii) any Insolvency Event. An "Insolvency Event" shall mean financial
insolvency, readjustment of debt, marshalling of assets and liabilities, or
similar proceedings with respect to the Servicer and certain actions by the
Servicer indicating its insolvency or inability to pay its obligations. See
"Description of the Trust Agreements--Removal of the Servicer" in the
Prospectus. Upon the occurrence of a Servicer Default, the Servicer may be
removed, with the consent of the Certificate Insurer, by the Trustee or by the
Majority Certificateholders, or by the Certificate Insurer.
The Majority Certificateholders, with the consent of the Certificate
Insurer, or the Certificate Insurer, may waive certain defaults by the
Servicer in the performance of its obligations under the Pooling Agreement.
See "Description of the Securities--Waiver of Past Defaults" in the
accompanying Prospectus.
"Majority Certificateholders" means, as of any date of determination,
Holders of Certificates representing a majority of the Certificate Principal
Balance as of such date.
If the Certificate Insurer shall have failed to pay any amount due and
payable under the Certificate Insurance Policy, which failure has not been
cured, any vote or action of the Trustee or the Majority Certificateholders
that
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<PAGE>
otherwise requires the consent of the Certificate Insurer may be taken without
such consent, and all rights of the Certificate Insurer to take or consent to
any action shall vest in the Majority Certificateholders until such failure
has been cured.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For its servicing of the Receivables, the Servicer will be entitled to
retain from collections on the Receivables a Servicing Fee equal to one-
twelfth of the product of (i) 2.30% and (ii) the Pool Balance as of the first
day of the immediately preceding Collection Period. A portion of such
Servicing Fee may be paid over by the Servicer to CFC with respect to its sub-
servicing of the CFC Receivables.
All costs of servicing each Receivable in the manner required by the Pooling
Agreement shall be borne by the Servicer, but the Servicer shall be entitled
to retain, out of any amounts actually recovered with respect to any Defaulted
Receivable or the Vehicles subject thereto, the Servicer's actual out-of-
pocket expenses reasonably incurred with respect to such Defaulted Receivable
or Vehicle.
MANDATORY REPURCHASE OF RECEIVABLES
In the event of a breach or failure to be true of any representation or
warranty with respect to the Receivables described in "--Conveyance of
Receivables" herein, which breach or failure materially and adversely affects
a Receivable or the interest of the Trust, the Certificateholders or the
Certificate Insurer in such Receivable, the Seller, unless such breach or
failure has been cured by the last day of the Collection Period following the
Collection Period during which the Seller becomes aware of, or receives
written notice from the Trustee, the Certificate Insurer or the Servicer of,
such breach or failure, will be required to repurchase, as of such day (or, at
Seller's option, as of the last day of the month in which such breach was
discovered), the Receivable from the Trustee for the Purchase Amount. The
Purchase Amount is payable on the Determination Date following such subsequent
Collection Period. The repurchase obligation will constitute the sole remedy
available to the Certificateholders, the Trustee or the Certificate Insurer
against the Seller for any such uncured breach or failure. See "Description of
the Trust Agreements--Mandatory Repurchase of Receivables" in the accompanying
Prospectus.
In the event of a breach of certain covenants of the Servicer in the Pooling
Agreement, the Servicer will be required to purchase the affected Receivables
from the Trust. The purchase obligation will constitute the sole remedy
available to the Certificateholders, the Trustee or the Certificate Insurer
against the Servicer for any such uncured breach. See "Description of the
Trust Agreements--Servicing Procedures" in the accompanying Prospectus.
The "Purchase Amount" of any Receivable means, with respect to any
Distribution Date an amount equal to the sum of (a) the outstanding principal
balance of such Receivable as of the last day of the preceding Collection
Period and (b) the amount of unpaid interest on such principal balance at the
related APR through the date such Receivable is purchased, and after giving
effect to the receipt of monies collected on such Receivable in such preceding
Collection Period.
ACCOUNTS
On the Closing Date, the Trustee will establish the Collection Account, into
which all payments (other than amounts representing the Servicing Fee and
other amounts payable to the Servicer as described in "--Servicing
Compensation and Payment of Expenses") made on or with respect to the
Receivables will be deposited, and the Certificate Account, from which all
distributions with respect to the Receivables and the Certificates will be
made. The Seller will establish the Reserve Account and the Yield Maintenance
Account with the Trustee. The Collection Account, the Certificate Account, the
Reserve Account and the Yield Maintenance Account are collectively referred to
as the "Accounts." The Certificate Account is a "Distribution Account"
described in the Prospectus. Each Account will be established in the name of
the Trustee on behalf of the Trust, the Certificateholders and the Certificate
Insurer. The Reserve Account and the Yield Maintenance Account will not
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<PAGE>
be assets of the Trust, although such accounts will be pledged to the Trust.
Any net investment earnings on the Yield Maintenance Account and the Reserve
Account will be released to the Seller or its designee on each Distribution
Date.
On each Distribution Date, as described under "--Flow of Funds" herein,
certain amounts are required to be deposited in the Reserve Account. No later
than the Claim Date, amounts, if any, on deposit in the Reserve Account will
be deposited in the Certificate Account to the extent that Required Payments
for the following Distribution Date exceed Available Funds available for such
payments in accordance with the priority of payments set forth below. Amounts
on deposit in the Reserve Account that are in excess of the Specified Reserve
Balance will be released to the Seller or its designee. The Certificate
Insurer may, at its option and without notice to, or the consent of, the
Certificateholders, reduce the Specified Reserve Balance.
FLOW OF FUNDS
On or before the earlier of the 8th Business Day or the 11th calendar day of
each month (the "Determination Date"), the Servicer will (x) instruct the
Trustee to withdraw from the Collection Account and deposit into the
Certificate Account the amount deposited to the Collection Account with
respect to the Receivables during or otherwise with respect to the related
Collection Period, including Liquidation Proceeds, (y) instruct the Trustee to
withdraw from the Yield Maintenance Account and deposit into the Certificate
Account the Yield Maintenance Payment for such Distribution Date and (z)
deliver to the Trustee, the Rating Agencies and the Certificate Insurer a
certificate (the "Servicer's Certificate") setting forth the information
needed to make payments and other distributions and transfers on the upcoming
Distribution Date.
If, in preparing the Servicer's Certificate, the Servicer determines that
the Required Payments exceed Available Funds available for such payments in
accordance with the priority of payments set forth below, the Servicer will
calculate the Insufficiency Amount (as defined herein) and notify the Trustee
and the Certificate Insurer thereof. Pursuant to the Pooling Agreement, the
Trustee will withdraw from the Reserve Account and deposit in the Certificate
Account an amount equal to the lesser of (x) such Insufficiency Amount and (y)
the amount then on deposit in the Reserve Account. Unless the Certificate
Insurer has otherwise caused the remaining Insufficiency Amount (after any
deposits from the Reserve Account) to be deposited in the Certificate Account
not later than 12:00 p.m. St. Paul, Minnesota time on the Claim Date preceding
any Distribution Date, the Trustee will deliver on such Claim Date a completed
Notice to the Certificate Insurer (with the Insufficiency Amount as of such
Claim Date, the amount withdrawn from the Reserve Account, the amount of the
Insured Payment, and any other data appropriately completed). The Certificate
Insurer will then pay such Insured Payment as provided under the terms of the
Certificate Insurance Policy.
On each Distribution Date, the Trustee is required to pay the entire amount
of money then on deposit in the Certificate Account (including the amount
withdrawn from the Reserve Account and deposited therein), other than amounts
deposited into the Certificate Account in error and Liquidation Proceeds from
Receivables purchased by the Seller or the Servicer, as the case may be, in
the following order of priority to the extent of the funds available from the
specified sources:
(a) to itself, the Trustee fee including any overdue Trustee fee, such
amount to be paid from Available Funds;
(b) to the Certificate Insurer, an amount equal to any premium owed to it
for such Distribution Date, such amount to be paid from Available Funds
(after giving effect to the application of Available Funds described in
clause (a) above);
(c) to the Certificateholders, pro rata, Monthly Interest including any
overdue Monthly Interest, such amount to be paid from Available Funds
(after giving effect to the application of Available Funds described in
clauses (a) and (b) above); and if such Available Funds are insufficient,
the Certificateholders will be entitled to receive such deficiency from
monies deposited into the Certificate Account from the Reserve Account;
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<PAGE>
(d) to the Certificateholders, pro rata, the Monthly Principal, including
any overdue Monthly Principal, such amount to be paid from Available Funds
(after giving effect to the application of Available Funds described in
clauses (a), (b) and (c) above); and if such Available Funds are
insufficient, from monies deposited into the Certificate Account from the
Reserve Account;
(e) to the Certificate Insurer, the Reimbursement Amount, if any, then
owed to the Certificate Insurer, such amount to be paid from Available
Funds (after giving effect to the application of Available Funds described
in clauses (a), (b), (c) and (d) above);
(f) to the Reserve Account, the difference, if any, between (x) the
Specified Reserve Balance as of such Distribution Date and (y) the amount
on deposit in the Reserve Account, such amount to be paid from Available
Funds (after giving effect to the application of Available Funds described
in clauses (a), (b), (c), (d) and (e) above);
(g) to the Servicer, the Trustee and the Certificate Insurer, certain
indemnification amounts to which they may be entitled, such amount to be
paid from Available Funds after giving effect to the application of
Available Funds described in clauses (a), (b), (c), (d), (e) and (f)
above); and
(h) to the Seller or its designee, the aggregate amount remaining in the
Certificate Account.
As used in this Prospectus Supplement, the following terms have the
following meanings:
"Available Funds" means, with respect to a Distribution Date, for the
related Determination Date, any and all amounts then held in the Collection
Account and deposited therein with respect to the Receivables during or
otherwise with respect to the related Collection Period (other than amounts
representing the Servicing Fee and other amounts payable to the Servicer as
described in "--Servicing Compensation and Payment of Expenses" herein for
such Collection Period), together with amounts to be transferred from the
Yield Maintenance Account to the Certificate Account with respect to such
Distribution Date. "Available Funds" does not include amounts, if any, on
deposit in or withdrawn from the Reserve Account or any amounts paid by the
Certificate Insurer under the Certificate Insurance Policy.
"Claim Date" means, with respect to a Distribution Date, the third Business
Day immediately preceding such Distribution Date.
"Defaulted Receivable" means, with respect to any Distribution Date, a
Receivable with respect to which the earlier of the following has occurred:
(i) the related Obligor is contractually delinquent for 180 days as of the end
of the most recently completed Collection Period (or, with respect to a
Receivable which the Servicer has determined to be either a "skip" or a
bankruptcy, such longer period of delinquency as may be permitted by the
Certificate Insurer) or (ii) as to which the Servicer has determined in
accordance with its customary servicing practices that eventual payment of the
scheduled payments is unlikely.
"Insufficiency Amount" means, with respect to any Distribution Date, the
excess, if any, of (x) the Required Payments over (y) Available Funds
available for such payments in accordance with the priority of payments
described under--"Flow of Funds".
"Late Payment Rate" means, with respect to any Distribution Date, the "Prime
Rate" of interest as published in The Wall Street Journal in New York, New
York, plus 2%. The Late Payment Rate shall be computed on the basis of a 360-
day year consisting of twelve 30-day months.
"Liquidation Proceeds" means, with respect to any Defaulted Receivable and
Collection Period, the monies collected with respect to such Defaulted
Receivable during such Collection Period from whatever source (other than
amounts paid by the Certificate Insurer under the Certificate Insurance Policy
or withdrawals from the Reserve Account or the Yield Maintenance Account), net
of the sum of (i) any amounts expended by the Servicer for the account of the
Obligor and (ii) any amount required by law to be remitted to the Obligor.
"Monthly Interest" for any Distribution Date will equal one-twelfth of the
product of the Pass-Through Rate and the Certificate Principal Balance as of
the close of business on the immediately preceding Distribution
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Date, after giving effect to the distribution of principal made on such
immediately preceding Distribution Date or, in the case of the first
Distribution Date, the Original Certificate Principal Balance.
"Monthly Principal" for any Distribution Date will equal the excess of (x)
the aggregate unpaid principal balances of the Receivables on the last day of
the second preceding Collection Period (or, in the case of the first
Distribution Date, the Original Certificate Principal Balance) over (y) the
aggregate unpaid principal balances of the Receivables on the last day of the
preceding Collection Period; provided, however, that Monthly Principal on the
Final Scheduled Distribution Date will equal the Certificate Principal Balance
on such date. For the purpose of determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a Purchased Receivable is
deemed to be zero on and after the last day of the Collection Period in which
such Receivable became a Defaulted Receivable or a Purchased Receivable. In no
event shall the Monthly Principal to be distributed exceed the Certificate
Principal Balance.
"Net Available Distribution Amount" means with respect to any Distribution
Date, the sum of (i) Available Funds (other than amounts deposited to the
Certificate Account in error and Liquidation Proceeds from Receivables
purchased by the Seller or the Servicer) net of amounts payable in respect of
the Trustee fee and the premium due to the Certificate Insurer in respect of
such Distribution Date plus (ii) amounts withdrawn from the Reserve Account
for deposit into the Certificate Account with respect to such Distribution
Date.
"Pool Balance" means, with respect to any date of determination, the
aggregate outstanding principal balance of all the Receivables as of the close
of business on such date.
"Purchased Receivable" means, with respect to a Distribution Date, a
Receivable purchased by the Seller or the Servicer on or prior to the
Determination Date immediately preceding such Distribution Date.
"Reimbursement Amount" means, with respect to any Distribution Date, the
aggregate of unreimbursed Insured Payments paid by the Certificate Insurer
under the Certificate Insurance Policy as of such Distribution Date plus the
amount of any unpaid premium owed to the Certificate Insurer, plus accrued
interest on each at the Late Payment Rate.
"Required Payments" means, with respect to any Distribution Date, the sum of
the Monthly Principal and Monthly Interest.
RESERVE ACCOUNT
The Reserve Account will be a segregated trust account held by the Trustee
for the benefit of the Certificateholders and the Certificate Insurer. The
Reserve Account will be funded by the Seller on the Closing Date with an
initial deposit by the Seller of cash in an amount required by the Pooling
Agreement. Thereafter, Available Funds will be deposited from time to time in
the Reserve Account as described under "--Flow of Funds" herein, to the extent
necessary to maintain the amount in the Reserve Account at the Specified
Reserve Balance.
Amounts held from time to time in the Reserve Account will be held for the
benefit of the Certificateholders and the Certificate Insurer. Funds on
deposit in the Reserve Account may be invested in certain Eligible Investments
provided for in the Pooling Agreement. Investment income on monies on deposit
in the Reserve Account, net of investment expenses and losses on such
investments, will not be available for distribution to the Certificateholders
or otherwise subject to any claims or rights of the Certificateholders, and
will be paid to the Seller or its designee on each Distribution Date.
Investment expenses and any loss on such investments in excess of earnings for
the related Collection Period will be charged to the Reserve Account on each
Distribution Date.
Amounts on deposit in the Yield Maintenance Account will not be available to
Certificateholders in the event that defaults or delinquencies in collections
on the Receivables result in shortfalls in amounts due to Certificateholders
or for any other purpose other than withdrawals in respect of specified
shortfalls on each Distribution Date. See "Description of the Trust
Agreements--Yield Maintenance Account and Yield Maintenance Agreement" in the
accompanying Prospectus.
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WITHHOLDING
The Trustee is required to comply with all federal income tax withholding
requirements respecting payments to Certificateholders of interest or original
issue discount with respect to the Certificates that the Trustee reasonably
believes are applicable under the Code. Foreign Beneficial Owners will be
subject to U.S. income and withholding tax unless they provide certain
certifications as described under "Certain Federal Income Tax Consequences--
Foreign Beneficial Owners" herein. The consent of neither the
Certificateholders nor the Beneficial Owners will be required for such
withholding. In the event that the Trustee does withhold or causes to be
withheld any amount from interest or original issue discount payments or
advances thereof to any Certificateholders pursuant to federal income tax
withholding requirements, the Trustee is required to indicate the amount
withheld in its monthly report to such Certificateholders. If any withholding
or other tax is imposed by any jurisdiction, neither the Certificateholders
nor the Beneficial Owners have any right to receive additional interest or
other amounts in consequence thereof.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will furnish or cause to be furnished
with each payment to Certificateholders, a statement (a "Monthly Report")
based on information in the Servicer's Certificate, setting forth the
following information for such Distribution Date:
(a) the amount of the distribution allocable to principal including any
overdue principal;
(b) the amount of the distribution allocable to interest including any
overdue interest;
(c) the aggregate amount of fees and compensation received by the
Servicer and the Trustee for the Collection Period;
(d) the amount, if any, of Insured Payments with respect to such
Distribution Date;
(e) the amount, if any, withdrawn from the Reserve Account and the Yield
Maintenance Account with respect to such Distribution Date;
(f) the aggregate net losses on the Receivables for the related
Collection Period;
(g) the Pool Balance and the Pool Factor as of the end of the related
Collection Period;
(h) the aggregate principal balance of all Receivables which were
delinquent 30 days or more as of the last day of the related Collection
Period; and
(i) the Certificate Principal Balance as of such Distribution Date (after
giving effect to the distributions on such Distribution Date).
OPTIONAL TERMINATION
The Pooling Agreement will provide that on any Distribution Date following
the Record Date on which the Pool Balance is 5% or less of the Original
Certificate Principal Balance, the Seller will have the option to acquire all
right, title and interest in all, but not less than all, Receivables held in
the Trust by paying into the Trust for retirement of the Certificates an
amount equal to the aggregate of the Purchase Amounts of the Receivables
together with any Reimbursement Amounts then owed to the Certificate Insurer.
THE CERTIFICATE INSURER
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not
obligated to pay the debts of or claims against the Certificate Insurer. The
Certificate Insurer is domiciled in the State of New York and licensed to do
business in and is subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
S-25
<PAGE>
Territory of Guam. The Certificate Insurer has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has
laws prescribing minimum capital requirements, limiting classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the
Certificate Insurer, changes in control and transactions among affiliates.
Additionally, the Certificate Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of
time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding stock
of Capital Markets Assurance Corporation ("CMAC") through a merger with its
parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks, (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Certificate Insurer. MBIA Inc. is not obligated to pay the
debts of or claims against CMAC.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997
and December 31, 1996 and for each of the three years in the period ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the
year ended December 31, 1997 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries as of March 31, 1998 and for the
periods ending March 31, 1998 and March 31, 1997 included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ending March 31, 1998, are
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
by reference herein shall be modified or superseded for purposes of this
Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this Prospectus Supplement and prior to the termination of the
offering of the Certificates shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the respective
dates of filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------------------
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................................ $5,256 $5,475
Liabilities.................................... 3,496 3,658
Capital and Surplus............................ 1,760 1,817
<CAPTION>
GAAP
--------------------------------
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets......................................... $5,988 $6,196
Liabilities.................................... 2,624 2,725
Shareholder's Equity........................... 3,364 3,471
</TABLE>
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Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1997 year-end
audited financial statements prepared in accordance with statutory accounting
practice are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policy and Certificate
Insurer set forth under the headings "The Certificate Insurer" and "The
Certificate Insurance Policy." Additionally, the Certificate Insurer makes no
representation regarding the Certificates or the advisability of investing in
the Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. rates the claims paying ability of the Certificate Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates the
claims paying ability of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of
the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the
Certificates. The Certificate Insurer does not guaranty the market price of
the Certificates nor does it guaranty that the ratings on the Certificates
will not be revised or withdrawn.
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<PAGE>
THE CERTIFICATE INSURANCE POLICY
The following information has been supplied by MBIA Insurance Corporation
(the "Certificate Insurer") for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below)
that an amount equal to each full and complete Insured Payment will be
received by the Trustee, or its successors, as trustee for the Owners, on
behalf of the Owners from the Certificate Insurer, for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Certificate Insurance
Policy with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee.
Insured Payments shall be made only at the time set forth in the Certificate
Insurance Policy and no accelerated Insured Payments shall be made regardless
of any acceleration of the Certificates, unless such acceleration is at the
sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii)
an assignment in such form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and
claims of the Owner relating to or arising under the Certificates against the
debtor which made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment
of the Certificate Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the
Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on
the later of the Distribution Date on which the related Deficiency Amount is
due or the third Business Day following receipt in New York, New York on a
Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for
the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time
on such Business Day, it will be deemed to be received on the following
Business Day. If any such Notice received by the Fiscal Agent is not in proper
form or is otherwise insufficient for the purpose of making claim under the
Certificate Insurance Policy it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer
or the Fiscal Agent, as the case may be, shall promptly so advise the Trustee
and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the Trustee on behalf
of the Owners by wire transfer of immediately available funds in the amount of
the Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured
Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent
or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Certificate
Insurance Policy.
S-28
<PAGE>
As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of June 1,
1998 among Chevy Chase Bank, F.S.B., as Seller and as Servicer, and the
Trustee, as trustee, without regard to any amendment or supplement thereto,
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City, Chevy Chase, Maryland or in the
city in which the Corporate Trust Office of the Trustee under the Agreement or
the Certificate Insurer is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means, with respect to any Distribution Date, the
excess, if any, of Required Payments over the Net Available Distribution
Amount for such Distribution Date.
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by fax substantially in the form of Exhibit A attached to the
Certificate Insurance Policy, the original of which is subsequently delivered
by registered or certified mail, from the Trustee specifying the Insured
Payment which shall be due and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the applicable
Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Certificates that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not otherwise
defined in the Certificate Insurance Policy shall have the respective meanings
set forth in the Agreement as of the date of execution of the Certificate
Insurance Policy, without giving effect to any subsequent amendment to or
modification of the Agreement, unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Fiscal Agent of the Certificate Insurer may be made at the address listed
below for the Fiscal Agent of the Certificate Insurer or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York,
New York 10006 Attention: Municipal Registrar and Paying Agency, or such other
address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of
the Certificates.
S-29
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences to the original holders of the Certificates of the purchase,
ownership and disposition of the Certificates. This summary is based upon
laws, regulations, rulings and decisions currently in effect, all of which are
subject to change, potentially prospectively or retroactively. The discussion
does not deal with all federal tax consequences applicable to all categories
of investors, some of which may be subject to special rules. In addition, this
summary is generally limited to investors who will hold the Certificates 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").
Investors should consult their own tax advisors to determine the federal,
state, local and other tax consequences of the purchase, ownership and
disposition of the Certificates. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS") with respect to any of the federal income tax consequences discussed
below, and no assurance can be given that the IRS will not take contrary
positions.
TAX STATUS OF THE TRUST
In the opinion of Shaw Pittman Potts & Trowbridge, special tax counsel to
the Seller, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for federal income tax purposes. Each
Beneficial Owner ("Beneficial Owner") will be treated as the owner of an
interest in the ordinary income and corpus portions of the Trust.
TAXATION OF BENEFICIAL OWNERS
For purposes of federal income tax, the Servicer will be deemed to have
retained a fixed portion of the interest due on a portion of the Receivables
(the "Retained Yield") equal to the difference between (x) the APR of such
Receivable and (y) the sum of the Pass-Through Rate and reasonable fees and
expenses payable by the Trust. The Retained Yield will be treated as a
"stripped coupon" within the meaning of Section 1286 of the Code. Accordingly,
each Beneficial Owner will be treated as owning an interest in the principal
of, and certain interest payable on, each Receivable (minus the portion of the
interest payable on such Receivable that exceeds the sum of the Pass-Through
Rate on the Certificates and the fees and expenses payable by the Trust) and
such ownership interest will be treated as a "stripped bond" within the
meaning of Section 1286 of the Code.
The Beneficial Owners of the Certificates and the related rights to receive
Yield Maintenance Payments from the Yield Maintenance Account will be treated
for tax purposes as owning two separate investments: (i) the respective
Certificates without the right to receive Yield Maintenance Payments and (ii)
the right to receive the Yield Maintenance Payments. The Beneficial Owners of
the respective Certificates must allocate the purchase price of their
Certificates between these two investments based on their relative fair market
values. The purchase price allocated to the first investment will be the issue
price of the respective Certificates for calculating accruals of original
issue discount (if any). See "--Discount and Premium" herein.
Although there is no precise authority, a Beneficial Owner of a Certificate
should be treated for federal income tax purposes with respect to its right to
receive Yield Maintenance Payments as having entered into a notional principal
contract on the date that it purchases its Certificates. Treasury Regulations
under Section 446 of the Code relating to notional principal contracts (the
"Notional Principal Contract Regulations") provide that taxpayers, regardless
of their method of accounting, generally must recognize the ratable daily
portion of a periodic payment for the taxable year to which that portion
relates. Any Yield Maintenance Payments will be periodic payments. Income with
respect to periodic payments under a notional principal contract for a taxable
year should constitute ordinary income. The purchase price allocated to the
right to receive the related Yield Maintenance Payments will be treated as a
nonperiodic payment under the Notional Principal Contract Regulations. Such a
nonperiodic payment may be amortized using several methods, including the
level payment method described in the Notional Principal Contract Regulations.
S-30
<PAGE>
With respect to a Beneficial Owner's interest in a Certificate without
regard to the right to receive Yield Maintenance Payments, each Beneficial
Owner is required to include in income for federal income tax purposes its
share of the gross income of the Trust, including interest and certain other
charges accrued on the Receivables and any gain upon collection or disposition
of the Receivables subject to the discussion below under the heading "--
Discount and Premium" herein. Such gross income attributable to interest on
the Receivables will exceed the Pass-Through Rate by an amount equal to the
Beneficial Owner's share of the reasonable expenses of the Trust for the
period during which it owns a Certificate. Each Beneficial Owner is entitled
to deduct its share of the amount used to pay expenses of the Trust to the
extent described below. Any amounts received by a Beneficial Owner from the
Reserve Account or from the Certificate Insurance Policy will be treated for
federal income tax purposes as having the same characteristics as the payments
they replace.
Each Beneficial Owner should report its share of the income of the Trust
under its usual method of accounting. Accordingly, interest may be included in
a Beneficial Owner's gross income when it accrues on the Receivables, or in
the case of Beneficial Owners who are cash basis taxpayers, when received by
the Servicer on behalf of the Beneficial Owners. Because (i) interest accrues
on the Receivables over differing monthly periods and is paid in arrears and
(ii) interest collected on a Receivable generally is paid to Beneficial Owners
in the following month, the amount of interest accruing to a Beneficial Owner
during any calendar month will not equal the interest distributed in that
month. Discount on any Certificate would be includible in income as described
below. The discussion herein is based on special tax counsel's advice that
each Beneficial Owner's interest in the Trust should be treated as an interest
in a single debt instrument bearing interest equal to the sum of the Pass-
Through Rate plus such Certificate's share of the expenses of the Trust. The
Trustee will report tax information consistent with such advice. Because the
Certificates are stripped bonds, alternative characterizations are possible.
Investors should consult their own tax advisors regarding the proper treatment
of the Certificates for federal income tax purposes.
Each Beneficial Owner will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust as provided in Section 162 or 212 of the Code.
If a Beneficial Owner is an individual, estate or trust, the deduction for
such Beneficial Owner's share of such fees will be allowed only to the extent
that all of such Beneficial Owner's miscellaneous itemized deductions,
including such Beneficial Owner's share of such fees, exceed 2% of such
Beneficial Owner's adjusted gross income. In addition, in the case of
Beneficial Owners who are individuals, certain otherwise allowable itemized
deductions will be reduced by an amount equal to 3% of such Beneficial Owner's
adjusted gross income in excess of a statutorily defined threshold, but not by
more than 80% of such itemized deductions. To the extent that any fee is
determined to be in excess of a reasonable amount (and hence not deductible),
such excess should be characterized as an additional ownership right that has
been stripped from the Receivables. Accordingly, the gross income of the
Beneficial Owners should not include any amount attributable to such excess
fee.
DISCOUNT AND PREMIUM
A Beneficial Owner that purchases a Certificate at a discount (i.e., for an
amount less than its face amount) must include such discount in income over
the life of the Certificate. The rate at which discount must be included in
income depends on whether it is greater or less than a statutorily defined de
minimis amount. Although not entirely certain, it would appear that the
determination of the amount of discount and the de minimis computation can be
made for each overall Certificate and need not be done on a Receivable-by-
Receivable basis. Generally, discount is treated as de minimis if it is less
than 1/4 of one percent of the principal amount of the Certificate times the
number of full years remaining to the weighted average maturity date of the
Certificate. It is not clear in calculating the weighted average maturity date
whether expected prepayments are taken into account.
If the discount is de minimis (which should be the case for original
purchasers of Certificates) it would appear that such discount is includible
in income as principal distributions are received on the Receivables and in
proportion to such principal distributions. Although not entirely clear, the
income attributable to de minimis discount should be treated as capital gain
if the Certificate was held as a capital asset.
S-31
<PAGE>
If the discount is more than a de minimis amount, such discount must be
included in income as it accrues on the basis of the yield to maturity of the
Certificate taking into account the prepayment assumption, to the particular
purchaser. Unless the Certificates are originally issued with more than a de
minimis amount of discount, the Trustee will not be providing any information
relating to the computation of the accruals of discount by subsequent
purchasers of Certificates.
In the event that a Certificate is treated as purchased at a premium (i.e.,
the purchase price exceeds the portion of the remaining Principal Balance of
the Receivables allocable to such Certificate), such premium will be
amortizable by a Beneficial Owner as an offset to interest income (with a
corresponding reduction in the Beneficial Owner's basis) under a constant
yield method over the term of the Receivable if an election under Section 171
of the Code is made (or was previously in effect) with respect to the
Certificates. Any such election will also apply to debt instruments held by
the taxpayer during the year in which the election is made and to all debt
instruments acquired thereafter.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale (other than amounts
attributable to accrued interest, which will be taxable as such) and the
Beneficial Owner's adjusted basis in the Receivables and any other assets held
by the Trust. A Beneficial Owner's adjusted basis will equal the Beneficial
Owner's cost allocated to the Certificate increased by any discount previously
included in income, and decreased by any payments received that are
attributable to accrued discount (or by any offset previously allowed for
accrued premium) and by the amount of principal distributions previously
received on the Receivables. Any gain or loss will be capital gain or loss if
the Certificate was held as a capital asset.
FOREIGN BENEFICIAL OWNERS
Interest attributable to Receivables which is received by a Beneficial Owner
who or which is not a United States person, as defined below (other than a
foreign bank and certain other persons), generally will not be subject to the
normal 30 percent United States withholding tax (or lower treaty rate) imposed
with respect to such payments, provided that such Beneficial Owner fulfills
certain certification requirements. Under such requirements, the holder must
certify, under penalties of perjury, that it is not a "United States person"
and provide its name and address. If income or gain with respect to a
Certificate is effectively connected with a United States trade or business
carried on by a Beneficial Owner who or which is not a United States person,
the 30 percent withholding tax will not apply but such Beneficial Owner will
be subject to United States federal income tax at graduated rates applicable
to United States persons. For this purpose, "United States person" means a
person who or which is for United States federal income tax purposes a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate that is subject to federal income
tax, regardless of the source of its income, or a trust if a court within the
United States can exercise primary supervision over its administration and at
least one United States fiduciary has the authority to control all substantial
decisions of the trust. Recent legislation has authorized the issuance of tax
regulations to determine whether partnerships are considered to be "United
States persons" by taking into account factors other than the state of
organization; however, the legislative history of the enacting legislation
indicates that those tax regulations should apply only to partnerships
organized after the publication of such regulations (or of the likely
content). Any person who or which is not a United States person is a "Foreign
Owner."
BACKUP WITHHOLDING
Backup withholding of federal income tax at a rate of 31 percent may apply
to payments made in respect of the Certificates as well as payments of
proceeds from the sale of Certificates, to Beneficial Owners that are not
"exempt recipients" and that fail to provide certain identifying information
(such as the taxpayer identification number of the Beneficial Owner) to the
Trustee or its agent in the manner required or, in the case of interest
payments, that fail to report all interest and dividends required to be shown
on their federal income tax returns. Individuals generally are not exempt
recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the Certificates must be
reported to the IRS, unless the recipient is an exempt recipient and
establishes an exemption. Any amounts withheld under the backup withholding
rules
S-32
<PAGE>
from a payment to a person would be allowed as a refund or a credit against
such person's United States federal income tax, provided that the required
information is furnished to the IRS. Furthermore, certain penalties may be
imposed by the IRS on a Beneficial Owner who is required to supply information
but who does not do so in the proper manner.
STATE AND LOCAL INCOME TAX CONSEQUENCES
State tax consequences to each Beneficial Owner will depend upon the
provisions of the state tax laws to which the Beneficial Owner is subject.
Most states modify or adjust the taxpayer's federal taxable income to arrive
at the amount of income potentially subject to state tax. Resident individuals
generally pay state tax on 100 percent of such state-modified income, while
corporations and other taxpayers generally pay state tax only on that portion
of state-modified income assigned to the taxing state under the state's own
apportionment and allocation rules.
Because each state's income tax laws vary, it is impossible to predict the
income tax consequences to the Beneficial Owners in all of the state taxing
jurisdictions in which they are already subject to tax. There can be no
assurance that other states will not claim that the Servicer has undertaken
activities in such states. If such a claim were made, no assurances can be
given as to the treatment of the Beneficial Owner by any particular state.
Beneficial Owners are urged to consult their own tax advisors with respect to
state and local taxes.
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CERTIFICATES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit pension, profit
sharing, or other employee benefit plans, individual retirement accounts or
annuities, employee annuity plans and Keogh plans subject to ERISA or Section
4975 of the Code (collectively referred to as "Benefit Plans") from engaging
in certain transactions involving "plan assets" with persons that are "parties
in interest" under ERISA or "disqualified persons" under the Code with respect
to the plan. ERISA also imposes certain duties on persons who are fiduciaries
of plans subject to ERISA. Under ERISA, any person who exercises any authority
or control respecting the management or disposition of the assets of a plan is
considered to be a fiduciary of such plan (subject to certain exceptions not
here relevant). A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code for
fiduciaries, "parties in interest" and "disqualified persons."
Unless a statutory, regulatory or administrative exemption is available, a
violation of the prohibited transaction rules could occur if any Certificates
were to be acquired by a Benefit Plan or with "plan assets" of any Benefit
Plan, and if any of the Seller, the Trustee, any Underwriters or any of their
affiliates were a "party in interest" or a "disqualified person" with respect
to such Benefit Plan. The Seller, the Trustee and the Underwriters are likely
to be "parties in interest" or "disqualified persons" with respect to many
Benefit Plans.
Pursuant to the Final Regulation issued by the U.S. Department of Labor
("DOL") concerning the definition of what constitutes the "plan assets" of a
Benefit Plan, the assets and properties of certain entities in which a Benefit
Plan makes an equity investment could be deemed to be assets of the Benefit
Plan unless certain exceptions under the Final Regulation apply or an
exemption is available. There can be no assurance that any of the exceptions
provided in the Final Regulation will apply. If the underlying assets of the
Trust were deemed to be plan assets by reason of the acquisition of
Certificates by Benefit Plans, the Seller, the Servicer the Trustee and other
persons who provide services with respect to the Trust might be subject to the
fiduciary responsibility provisions of Title I of ERISA and the operations of
the Trust could result in prohibited transactions.
S-33
<PAGE>
The DOL has granted to J.P. Morgan Securities Inc. and to Salomon Brothers
Inc administrative exemptions (Prohibited Transactions Exemption 90-23 and 89-
89), (the "Exemptions") which generally exempt from the application of the
prohibited transaction provisions of Section 406(a), Section 406(b)(1),
Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the Code, certain transactions
relating to the servicing and operation of asset pools, including pools of
motor vehicle installment obligations such as the Receivables and the
purchase, sale and holding of asset-backed pass-through certificates,
including pass-through certificates evidencing interests in certain
receivables, loans and other obligations, such as the Certificates, provided
that certain conditions set forth in the Exemptions are satisfied. Each
Exemption sets forth the following seven general conditions which must be
satisfied for a transaction to be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Benefit Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Benefit Plan as they would be in an arm's length transaction with an
unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Benefit Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) The Certificates acquired by the Benefit Plan have received a rating
at the time of such acquisition that is one of the three highest general
rating categories from either S&P, Moody's, Fitch or Duff & Phelps Credit
Rating Co.;
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Certificates represents not more
than reasonable compensation for their services. The sum of all payments
made and retained by the Seller pursuant to the assignment of the
Receivables to the Trust represents not more than the fair market value of
such Receivables. The sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for such person's
services under the Pooling Agreement and reimbursement of such person's
reasonable expenses in connection therewith;
(6) The Benefit Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act; and
(7) The transfer of additional receivables to the Trust after the Closing
Date in exchange for funds credited to a pre-funding account do not exceed
25% of the total principal amount of the Certificates and the transfers do
not occur later than 90 days after the Closing Date or the date provided
for in the Pooling Agreement or the date a default occurs under the Pooling
Agreement, if earlier; the transfer of additional receivables is also
subject to additional requirements regarding the term and conditions of
such receivables, the financial effect on the Trust, independent monitoring
and disclosure.
A fiduciary of a Benefit Plan considering whether to purchase any
Certificates should individually determine that the Benefit Plan satisfies the
conditions described in clauses (1) and (6) above. The Seller believes that
the Trust will satisfy the conditions described in the other clauses above.
If the general conditions of each Exemption are satisfied, such Exemption
provides an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(c)(1)(A)
through (D) of the Code) in connection with the direct or indirect sale,
exchange or transfer of Certificates by Benefit Plans in the initial issue of
Certificates, the holding of Certificates by Benefit Plans or the direct or
indirect acquisition or disposition in the secondary market of Certificates by
Benefit Plans. However, no exemption is provided from the restrictions of
Section 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Certificate on behalf of an Excluded Plan (as defined herein) by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Certificates,
an "Excluded Plan" is a Benefit Plan sponsored by (1) an Underwriter, (2) the
Certificate Insurer, (3) the Issuer, (4) the Seller, (5) the Servicer, (6) the
Trustee, (7) any Obligor with respect to Receivables constituting more than 5%
of the aggregate unamortized principal balance of the Receivables as of the
date of initial issuance and (8) any affiliate or successor of a person
described in (1) to (7) above (the "Restricted Group").
S- 34
<PAGE>
If the specific conditions of Section I.B. of each Exemption are also
satisfied, such Exemption provides an exemption from the restrictions imposed
by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in
connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates to a Benefit Plan when
the person who has discretionary authority or renders investment advice with
respect to the investment of plan assets in Certificates is (a) an Obligor
with respect to 5% or less of the fair market value of the Receivables or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Certificates by Benefit Plans and (3)
the holding of Certificates by Benefit Plans. Among the specific conditions
that must be satisfied is the condition that the Benefit Plan acquires no more
than 25% of the Certificates and immediately after the acquisition of the
Certificates no more than 25% of the assets of the Benefit Plan with respect
to which the person is a fiduciary are invested in certificates representing
an interest in a trust containing assets sold or serviced by the same entity.
As of the Cut-Off Date, the Seller believes no Obligor with respect to
Receivables included in the Trust is an Obligor with respect to 5% or more of
the aggregate unamortized principal balance of the Receivables.
If the specific conditions of Section I.C. of each Exemption are also
satisfied, such Exemption provides an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust. The specific conditions of Section I.C. are that (i) such
transactions are carried out in accordance with the terms of the Pooling
Agreement, and (ii) the Pooling Agreement (or a description of the material
terms thereof) is made available to investors prior to their investment in the
Trust. The Seller intends to comply with the foregoing conditions.
Section I.D of each Exemption provides an exemption from the restrictions
imposed by Section 406(a) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a "party in interest" or a
"disqualified person" with respect to an investing Benefit Plan by virtue of
providing services to the Benefit Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of such Benefit
Plan's ownership of Certificates.
Before purchasing a Certificate based on the Exemption, a fiduciary of a
Benefit Plan should itself confirm (1) that such Certificate constitutes a
"certificate" for purposes of the Exemption and (2) that the specific
conditions and other requirements set forth in such Exemption would be
satisfied.
Prospective Benefit Plan investors in the Certificates should consult with
their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemption, and the potential consequences in their
specific circumstances, prior to making an investment in the Certificates.
Moreover, each Benefit Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the Certificates is appropriate for the Benefit Plan, taking
into account the overall investment policy of the Benefit Plan and the
composition of the Benefit Plan's investment portfolio.
RATINGS
It is a condition to the issuance of the Certificates that they be rated in
the highest rating category by at least one of the Rating Agencies. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time. The ratings of Rating Agencies
assigned to Certificates address the likelihood of the receipt by the
Certificateholders of all distributions to which such Certificateholders are
entitled. The ratings do not address the timely or ultimate payment of any
withholding tax imposed. The ratings assigned to Certificates do not represent
any assessment of the likelihood that principal prepayments might differ from
those originally anticipated or address the possibility that
Certificateholders might suffer a lower than anticipated yield.
S-35
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated June 15, 1998 (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters") have agreed to purchase from the Seller the
following respective principal amounts of the Certificates:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER CERTIFICATES
----------- ---------------
<S> <C>
J.P. Morgan Securities Inc................................ $ 76,815,935.94
Salomon Brothers Inc...................................... $ 76,800,000.00
---------------
Total................................................. $153,615,935.94
===============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Certificates, if any are purchased.
The Seller has been advised by the Underwriters that the Underwriters
propose to offer the Certificates to the public initially at the public
offering price set forth on the cover page of this Prospectus Supplement and
to certain dealers at such price less a concession of 0.15% of the principal
amount per Certificate, and the Underwriters and such dealers may allow a
discount of 0.125% of such principal amount per Certificate on sales to
certain other dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
Underwriters.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the Certificates
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the Certificates originally
sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Certificates to be higher than it would otherwise be in the absence of such
transactions.
The Seller has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
Each Underwriter has represented and agreed that (a) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and the Public Offers of Securities Regulations 1995 (the "Regulations") with
respect to anything done by it in relation to the Certificates in, from or
otherwise involving the United Kingdom; (b) it has only issued or passed on
and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the Certificates if
that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or
is a person to whom such document may otherwise lawfully be issued or passed
on; and (c) it has not offered or sold and, during the period of six months
from the date hereof, will not offer or sell any Certificates to persons in
the United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing, or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Regulations.
In the ordinary course of its business, each Underwriter and its respective
affiliates have engaged and may in the future engage in commercial banking and
investment banking transactions with Chevy Chase Bank, F.S.B. and its
affiliates.
S-36
<PAGE>
EXPERTS
The MBIA Insurance Corporation and Subsidiaries' consolidated balance sheets
as of December 31, 1997 and 1996 and the consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997 incorporated by reference in this
Prospectus Supplement have been incorporated herein in reliance on the report
of Coopers & Lybrand, L.L.P., independent accountants, given on the authority
of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Seller and the Underwriters by Shaw Pittman Potts &
Trowbridge, New York, New York. George M. Rogers, Jr., whose professional
corporation is a member of Shaw Pittman Potts and Trowbridge, is a director of
the Bank and a trustee of the parent of the Bank.
S-37
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Accounts................................................................... S-21
Agreement.................................................................. S-29
APRs....................................................................... S-4
Available Funds............................................................ S-23
Balloon Receivable......................................................... S-12
Bank....................................................................... S-1
Bank Receivables........................................................... S-11
Beneficial Owner........................................................... S-30
Benefit Plans.............................................................. S-33
BIF........................................................................ S-15
Business Day............................................................... S-4
Certificate Account........................................................ S-5
Certificate Insurance Policy............................................... S-1
Certificate Insurer........................................................ S-1
Certificate Principal Balance.............................................. S-4
Certificateholders......................................................... S-1
Certificates............................................................... S-1
CFC........................................................................ S-4
CFC Receivables............................................................ S-11
Claim Date................................................................. S-23
Closing Date............................................................... S-3
CMAC....................................................................... S-26
Code....................................................................... S-30
Collection Account......................................................... S-5
Collection Period.......................................................... S-5
Cut-Off Date............................................................... S-3
Dealers.................................................................... S-11
Defaulted Receivable....................................................... S-23
Deficiency Amount.......................................................... S-29
Determination Date......................................................... S-22
Distribution Account....................................................... S-21
Distribution Date.......................................................... S-4
DOL........................................................................ S-33
ERISA...................................................................... S-8
Excess Funds............................................................... S-5
Exchange Act............................................................... S-36
Exemptions................................................................. S-34
Excluded Plan.............................................................. S-34
FDIC....................................................................... S-15
FDICIA..................................................................... S-15
Final Scheduled Distribution Date.......................................... S-1
FIRREA..................................................................... S-15
Fiscal Agent............................................................... S-28
Fitch...................................................................... S-8
Flow of Funds.............................................................. S-22
Foreign Owner.............................................................. S-32
GAAP....................................................................... S-26
Initial Yield Maintenance Amount........................................... S-7
Insolvency Event........................................................... S-20
</TABLE>
S-38
<PAGE>
<TABLE>
<S> <C>
Insured Payment............................................................ S-6
IRS........................................................................ S-30
Issuer..................................................................... S-3
Late Payment Rate.......................................................... S-23
Lenders.................................................................... S-4
Liquidation Proceeds....................................................... S-23
Majority Certificateholders................................................ S-20
MBIA Inc................................................................... S-25
Monthly Interest........................................................... S-4
Monthly Principal.......................................................... S-24
Monthly Report............................................................. S-25
Moody's.................................................................... S-8
Net Available Distribution Amount.......................................... S-24
Notice..................................................................... S-29
Notional Principal Contract Regulations.................................... S-30
Obligor.................................................................... S-4
Optional Termination....................................................... S-7
Original Certificate Principal Balance..................................... S-4
OTS........................................................................ S-15
Owner...................................................................... S-29
Pass-Through Rate.......................................................... S-1
Pool Balance............................................................... S-24
Pooling Agreement.......................................................... S-1
Preference Amount.......................................................... S-29
Prime Rate................................................................. S-23
Purchase Amount............................................................ S-21
Purchased Receivable....................................................... S-24
Rating Agencies............................................................ S-8
Real Estate Investment Trust............................................... S-15
Receivable File............................................................ S-19
Receivables................................................................ S-1
Record Date................................................................ S-5
Regulations................................................................ S-36
Reimbursement Amount....................................................... S-24
Required Payments.......................................................... S-24
Required Rate.............................................................. S-6
Reserve Account............................................................ S-5
Reserve Initial Deposit.................................................... S-5
Restricted Group........................................................... S-34
Retained Yield............................................................. S-30
S&P........................................................................ S-8
SAIF....................................................................... S-15
SAP........................................................................ S-26
Seller..................................................................... S-1
Servicer................................................................... S-1
Servicer Default........................................................... S-20
Servicer's Certificate..................................................... S-22
Servicing Fee.............................................................. S-7
Servicing Fee Rate......................................................... S-7
</TABLE>
S-39
<PAGE>
<TABLE>
<S> <C>
Specified Reserve Balance.................................................. S-6
Trade-In Value............................................................. S-11
Trust...................................................................... S-1
Trust Property............................................................. S-3
Trustee.................................................................... S-1
Underwriters............................................................... S-36
Underwriting Agreement..................................................... S-36
United States person....................................................... S-32
Vehicles................................................................... S-1
Yield Maintenance Account.................................................. S-6
Yield Maintenance Amount................................................... S-7
Yield Maintenance Payments................................................. S-3
</TABLE>
S-40
<PAGE>
PROSPECTUS
AUTO RECEIVABLES BACKED SECURITIES ISSUABLE IN SERIES
CHEVY CHASE BANK, F.S.B.
-------------
This Prospectus describes certain Auto Receivables Backed Notes (the
"Notes") and Auto Receivables Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities") that may be issued and sold from
time to time in one or more 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 (each, a "Prospectus Supplement"). Each series of Securities may
include one or more classes of Notes and one or more classes of Certificates,
which will be issued either by Chevy Chase Bank, F.S.B. (the "Bank") or by a
trust to be formed or managed by the Bank for the purpose of issuing one or
more series of such Securities (each, a "Trust"). The Bank together with any
Trust issuing Securities as described in this Prospectus and the related
Prospectus Supplement shall be referred to herein as the "Issuer."
Each series of Certificates will evidence beneficial interests in a
segregated pool of assets (the related "Trust Property") and each series of
Notes will represent indebtedness of the related Issuer secured by the related
Trust Property, as described herein and in the related Prospectus Supplement.
The Trust Property may consist of any combination of retail installment sale
or finance contracts between manufacturers, dealers or certain other
originators and retail consumers for the purchase of new and used automobiles,
light duty trucks and vans (the "Contracts"), or participation interests
therein, along with the related security interests in the underlying new and
used automobiles, light duty trucks and vans, and property relating thereto
(the "Vehicles"; together with the Contracts and the proceeds thereof the
"Receivables") together with all monies received relating thereto. If and to
the extent specified in the related Prospectus Supplement, credit or cash flow
enhancement with respect to the related Trust Property or any Class of
Securities may include any one or more of the following: a financial guaranty
insurance policy issued by an insurer specified in the related Prospectus
Supplement, a reserve account, yield maintenance account, letters of credit,
credit or liquidity facilities, third party payments or other support, cash
deposits or other arrangements, including hedging or derivatives contracts. In
addition to or in lieu of the foregoing, such credit or cash flow enhancement
may be provided by means of subordination, cross-support among the Trust
Properties or over-collateralization. See "Description of the Securities--
Credit and Cash Flow Enhancements." The Receivables in the Trust Property for
a series have been or will be originated or acquired by the Bank or the Bank's
wholly owned subsidiary Consumer Finance Corporation ("CFC"), or another
affiliate of the Bank (each an "Affiliate"), as described herein and in the
related Prospectus Supplement. Such Receivables will be serviced by a servicer
(the "Servicer"), which will be the Bank unless otherwise described in the
related Prospectus Supplement.
Each series of Securities may include one or more classes (each, a "Class")
entitled to disproportionate, nominal or no interest or principal
distributions. The rights of one or more Classes of Securities of any series
may be senior or subordinate to the rights of one or more of the other Classes
of such series of Securities. A series may include two or more Classes of
Securities which differ as to the timing, order or priority of payment,
interest rate or amount of distributions of principal or interest or both.
Information regarding each Class of Securities of a series offered hereby,
together with certain characteristics of the related Receivables, will be set
forth in the related Prospectus Supplement. The rate of payment in respect of
principal of the Securities of any Class will depend on the priority of
payment of such a Class and the rate and timing of payments (including
prepayments, defaults, liquidations or repurchases of Receivables) on the
related Receivables. A rate of payment lower or higher than that anticipated
may affect the weighted average life of each Class of Securities in the manner
described herein and in the related Prospectus Supplement. See "Description of
the Securities" and "Risk Factors--Maturity and Prepayment Considerations."
(cover continued on next page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" AT PAGE 12 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
-------------
THE NOTES OF A GIVEN SERIES REPRESENT NON-RECOURSE OBLIGATIONS OF THE ISSUER
ONLY AND DO NOT REPRESENT OBLIGATIONS OF CFC, ANY SERVICER OR ANY OF THEIR
RESPECTIVE AFFILIATES. THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL
INTERESTS IN THE RELATED TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE BANK, CFC, ANY SERVICER, ANY TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE SECURITIES NOR THE UNDERLYING RECEIVABLES
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE BANK, CFC, ANY SERVICER, ANY TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER
THE SECURITIES NOR THE UNDERLYING RECEIVABLES OR ANY COLLECTIONS THEREON ARE
INSURED OR GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION
OF ANY STATE OR FOREIGN JURISDICTION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE OR FOREIGN SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters as more fully described under "Method
of Distribution" herein and in the related Prospectus Supplement.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is September 17, 1997.
<PAGE>
(cover continued from previous page)
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Securities (or the Classes
of a series of Securities) to be offered hereunder will set forth, among other
things, with respect to such series of Securities (or such Classes): (i) a
description of the Class or Classes of such Securities offered hereby; (ii)
the rate of interest, the "Pass-Through Rate" or "Interest Rate" or other
applicable rate (or the manner of determining such rate) and authorized
denominations of such Class of such Securities; (iii) certain information
concerning the Receivables; (iv) a description of insurance policies, cash
accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, hedging agreements, derivatives contracts or other forms of
Credit Enhancement, if any, relating to one or more pools of Receivables or
all or part of such Class of such Securities; (v) the specified interest, if
any, of such Class of such Securities in, and manner and priority of, the
distributions from the Trust Property; (vi) information as to the nature and
extent of subordination with respect to such series or Class of Securities, if
any; (vii) the payment or distribution dates to Securityholders (as defined
hereinafter); (viii) if other than the Bank, information regarding the
Servicer(s) for the related Receivables; (ix) events of default or
amortization events; (x) the circumstances, if any, under which the
Certificates or the Notes may be subject to redemption, at the option of the
Securityholder or of the Issuer; (xi) the operation of any Pre-Funding Account
(as defined hereinafter); (xii) a description of the Issuer with respect to
such series of Securities; (xiii) information regarding tax and ERISA (as
defined hereinafter) considerations, including whether the Issuer will
constitute a Financial Asset Securitization Trust ("FASIT") and the tax
effects thereof; and (xiv) additional information with respect to the method
of distribution of such Class of such Securities.
AVAILABLE INFORMATION
The Bank has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement which may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
Registration Statement may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
(http://www.sec.gov).
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 filed by the Bank with respect to the Registration Statement,
either on its own behalf or on behalf of an Issuer, relating to any series of
Securities (or Class thereof) referred to in the accompanying Prospectus
Supplement, with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), after
the date of this Prospectus and prior to the termination of any offering of
such Securities, shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in the accompanying Prospectus Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or replaces such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
2
<PAGE>
REPORTS TO SECURITYHOLDERS
So long as the Securities are in book-entry form, monthly and annual reports
concerning the Securities, the Issuer and the Trust Property will be furnished
to the Depository Trust Company ("DTC") as registered holder of the
Securities. DTC will supply such reports to Securityholders in accordance with
its procedures. To the extent required by the Exchange Act, the Bank will
provide financial information to the Securityholders which has been examined
and reported upon, with an opinion expressed by, an independent public
accountant; to the extent not so required, such financial information will be
unaudited.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TITLE PAGE NO
----- -------
<S> <C>
Prospectus Supplement.............................................................. 2
Available Information.............................................................. 2
Incorporation of Certain Documents by Reference.................................... 2
Reports to Securityholders......................................................... 3
Prospectus Summary................................................................. 4
Risk Factors....................................................................... 12
The Trust Property................................................................. 16
The Issuers........................................................................ 17
The Receivables.................................................................... 17
Automobile Financing Programs...................................................... 19
Pool Factors....................................................................... 19
Use of Proceeds.................................................................... 20
The Lenders........................................................................ 20
The Trustee(s)..................................................................... 20
Description of the Securities...................................................... 21
Description of the Trust Agreements................................................ 28
Certain Legal Aspects of the Receivables........................................... 37
Certain Tax Considerations......................................................... 41
ERISA Considerations............................................................... 41
Methods of Distribution............................................................ 41
Legal Opinions..................................................................... 42
Index of Terms..................................................................... 43
Annex I............................................................................ A-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
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 the Securities of any series (or any Class
thereof) offered hereby contained in the related Prospectus Supplement to be
prepared and delivered in connection with the offering of such Securities.
Certain capitalized terms used in the summary are defined elsewhere in the
Prospectus on the pages indicated in the "Index of Terms."
Issuer...................... With respect to each series of Securities, either
the Bank or a Trust to be formed or managed by
the Bank. The Bank and any Trust issuing
Securities pursuant to this Prospectus and the
related Prospectus Supplement shall be referred
to herein as the "Issuer" with respect to the
related Securities. See "The Issuers."
Bank........................ Chevy Chase Bank, F.S.B., a federally chartered
stock savings bank. The Bank's principal
executive offices are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815, and its
telephone number is (301) 986-7000. See "The
Lenders."
Servicer.................... Unless otherwise disclosed in a Prospectus
Supplement, the Servicer for each series of
Securities will be the Bank.
Trustee..................... The Trustee for each series of Securities (the
"Trustee") will be specified in the related
Prospectus Supplement. In addition, a Trust may
separately enter into an Indenture and may issue
Notes pursuant to such Indenture; in any such
case the Trust and the Indenture will be
administered by separate, independent trustees to
the extent required by the rules and regulations
under the Trust Indenture Act of 1939 and the
Investment Company Act of 1940, as amended (the
"Investment Company Act").
The Securities.............. Each Class of Securities of any series offered
hereby will either comprise Certificates
evidencing beneficial ownership interests in the
related Trust Property, or Notes representing
indebtedness of the related Issuer secured by the
related Trust Property, as described herein and
in the related Prospectus Supplement.
With respect to Certificates issued by a Trust,
each Trust will be established, and the
Certificates issued, pursuant to an agreement
(each, a "Pooling Agreement") by and between the
Bank, as transferor, and the Trustee named
therein. Each Pooling Agreement will describe the
related Trust Property.
With respect to Notes that represent debt issued
by the related Issuer (which may be the Bank or a
Trust), the Issuer will enter into an indenture
(each, an "Indenture") by and between the Issuer
and the Trustee named in such Indenture. Each
Indenture will describe the related Trust
Property which secures the debt issued by the
related Issuer.
The Receivables comprising the Trust Property
will be serviced by the Servicer pursuant to a
servicing agreement (each, a "Servicing
Agreement") by and between the Servicer and the
related Issuer.
4
<PAGE>
In the case of the Trust Property of any class of
Securities, the contractual arrangements relating
to the establishment of the related Trust, if
any, the servicing of the related Receivables and
the issuance of the related Securities may be
contained in a single agreement, or in several
agreement which combine certain aspects of the
Pooling Agreement, the Servicing Agreement and
the Indenture described above (for example, a
pooling and servicing agreement or a servicing
and collateral management agreement). For
purposes of this Prospectus, the term "Trust
Agreement" as used with respect to Trust Property
means, collectively, and except as otherwise
described in the related Prospectus Supplement,
any and all agreements relating to the
establishment of the related Trust, if any, the
servicing of the related Receivables and the
issuance of the related Securities. The term
"Trustee" means any and all persons acting as a
trustee pursuant to a Trust Agreement.
Securities Will Be Non-Recourse.
The Notes of a given series will represent non-
recourse obligations of the related Issuer, and
the Certificates of a given series will
represent beneficial interests in the related
Issuer and Trust Property only and will not
represent interests in or recourse obligations
of the Bank. In the case of Certificates that
represent beneficial ownership interests in the
related Issuer, the sole source of payment will
be the related Trust Property and any other
property specified in the related Prospectus
Supplement. In the case of Notes that represent
debt issued by the related Issuer, such
Securities will have recourse solely to, and
will be secured by, the related Trust Property
and any other property specified in the related
Prospectus Supplement. Notwithstanding the
foregoing, and as to be described in the
related Prospectus Supplement, certain types of
Credit Enhancement, such as a letter of credit
or financial guaranty insurance policy, may
constitute a full recourse obligation of the
issuer of such Credit Enhancement.
General Nature of the Securities as Investments.
Unless otherwise disclosed in a Prospectus
Supplement, each Class of Securities offered
pursuant to this Prospectus and the related
Prospectus Supplement will be rated in one of
the four highest rating categories by one or
more Rating Agencies (as defined herein).
Additionally, except to the extent provided in
the related Prospectus Supplement, all of the
Securities offered pursuant to this Prospectus
and the related Prospectus Supplement will be
of the fixed-income type ("Fixed Income
Securities"). Fixed Income Securities will
generally be styled as having a notional or
principal balance and a specified Interest
Rate. Fixed Income Securities may consist of
either Certificates representing beneficial
ownership interests in the related Issuer, or
Notes evidencing debt secured by the Trust
Property held by the related Issuer.
5
<PAGE>
Each series or Class of Fixed Income Securities
offered pursuant to this Prospectus may have a
different Interest Rate, which may be a fixed
or variable Interest Rate, or determined
pursuant to an index. The related Prospectus
Supplement will specify the Interest Rate for
each series or Class of Fixed Income Securities
described therein, or the initial Interest Rate
and the method for determining subsequent
changes to the Interest Rate. The applicable
Prospectus Supplement will disclose the method
for accruing interest on Fixed Income
Securities.
A series may include one or more Classes of
Fixed Income Securities ("Strip Securities")
entitled (i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest
distributions, with disproportionate, nominal
or no principal distributions. In addition, a
series of Securities may include two or more
Classes of Fixed Income Securities that differ
as to timing, sequential order, priority of
payment, Interest Rate or amount of
distribution of principal or interest or both,
or as to which distributions of principal or
interest or both on any Class may be made upon
the occurrence of specified events, in
accordance with a schedule or formula, or on
the basis of collections from designated
portions of the related pool of Receivables.
Any such series may include one or more Classes
of Fixed Income Securities ("Accrual
Securities"), as to which certain accrued
interest will not be distributed but rather
will be added to the principal balance (or
nominal balance, in the case of Accrual
Securities which are also Strip Securities)
thereof on each Distribution Date, as
hereinafter defined, or in the manner described
in the related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series may include one or more
other Classes of Fixed Income Securities
(collectively, the "Senior Securities") that
are senior to one or more other Classes of
Fixed Income Securities (collectively, the
"Subordinate Securities") in respect of certain
distributions of principal and interest and
allocations of losses on Receivables.
In addition, certain Classes of Senior (or
Subordinate) Securities may be senior to other
Classes of Senior (or Subordinate) Securities
in respect of such distributions or losses.
General Payment Terms of Securities.
As provided in the related Trust Agreement and
as described in the related Prospectus
Supplement, the holders of the Securities (the
related "Securityholders") will be entitled to
receive payments on their Securities on
specified dates (each, a "Distribution Date").
Distribution Dates with respect to Fixed Income
Securities will occur as described in the
related Prospectus Supplement.
The related Prospectus Supplement will describe
a date (the "Record Date") preceding such
Distribution Date, as of which the Trustee or
its paying agent will fix the identity of the
6
<PAGE>
Securityholders for the purpose of receiving
payments on the next succeeding Distribution
Date. As described in the related Prospectus
Supplement, the Distribution Date will be a
specified day occurring monthly, quarterly or
semi-annually.
Each Trust Agreement will describe a period
(each, a "Collection Period") preceding each
Distribution Date (for example, in the case of
monthly-pay Securities, the calendar month
preceding the month in which a Distribution
Date occurs). As more fully described in the
related Prospectus Supplement, collections
received on or with respect to the related
Receivables constituting the related Trust
Property during a Collection Period will be
required to be remitted by the Servicer to the
related Trustee prior to the related
Distribution Date and will be used to fund
payments to Securityholders on such
Distribution Date. As may be described in the
related Prospectus Supplement, the related
Trust Agreement may provide that all or a
portion of the payments collected on or with
respect to the related Receivables may be
applied by the related Trustee to the
acquisition of additional Receivables during a
specified period (rather than be used to fund
payments of principal to Securityholders during
such period), with the result that the related
Securities will possess an interest- only
period, also commonly referred to as a
revolving period, which will be followed by an
amortization period. Any such interest-only or
revolving period may, upon the occurrence of
certain events to be described in the related
Prospectus Supplement, terminate prior to the
end of the specified period and result in the
earlier than expected amortization of the
related Securities.
In addition, and as may be described in the
related Prospectus Supplement, the related
Trust Agreement may provide that all or a
portion of such collected payments may be
retained by the Trustee (and held in certain
temporary investments, including Receivables)
for a specified period prior to being used to
fund payments of principal to Securityholders.
Such retention and temporary investment by the
Trustee of such collected payments may be
required by the related Trust Agreement for the
purpose of (a) slowing the amortization rate of
the related Securities relative to the
installment payment schedule of the related
Receivables, or (b) attempting to match the
amortization rate of the related Securities to
a specified amortization schedule. Any such
feature applicable to any Securities may
terminate upon the occurrence of events to be
described in the related Prospectus Supplement,
resulting in distributions to the specified
Securityholders and an acceleration of the
amortization of such Securities.
As more fully specified in the related
Prospectus Supplement, neither the Securities
nor the underlying Receivables will be
guaranteed or insured by any governmental
agency or instrumentality or the Bank, the
related Servicer, any Trustee, or any of their
respective affiliates.
7
<PAGE>
Credit Enhancement.
If and to the extent specified in the related
Prospectus Supplement, credit or cash flow
enhancement with respect to any Class or series
of Securities or the related Trust Property may
include any one or more of the following: a
financial guaranty insurance policy issued by
an insurer specified in the related Prospectus
Supplement, a reserve account, yield
maintenance account, letters of credit, credit
or liquidity facilities, third party payments
or other support, cash deposits or other
arrangements, including hedging and derivatives
contracts (collectively "Credit Enhancement").
In addition to or in lieu of the foregoing,
Credit Enhancement may be provided by means of
subordination, cross-support among the
Receivables or over-collateralization. See
"Description of the Securities--Credit and Cash
Flow Enhancements."
Master Trusts; Issuance of
Additional Series.......... As may be described in the related Prospectus
Supplement, the Bank may cause one or more of the
Trusts (such a Trust, a "Master Trust") to issue
additional series of Securities from time to
time. Under each Trust Agreement relating to a
Master Trust (each, a "Master Trust Agreement"),
the Bank may determine the terms of any such new
series and may offer any such new series to the
public or other investors, in transactions either
registered under the Securities Act or exempt
from registration thereunder, directly or through
one or more underwriters or placement agents, in
fixed-price offerings or in negotiated
transactions or otherwise. See "Description of
the Trust Agreements--Master Trusts."
A new series to be issued by a Master Trust which
has a series outstanding may only be issued upon
satisfaction of the conditions described herein
under "Description of the Trust Agreements--
Master Trusts". Securities issued out of a Master
Trust generally will represent undivided
interests in the entire pool of Receivables
subject to such Master Trust.
The Residual Interest....... With respect to certain Trusts, such as Master
Trusts, the "Residual Interest" at any time
represents the rights to the related Trust
Property in excess of the Securityholders'
interest of all series then outstanding that were
issued by such Trust. The Residual Interest in
any Trust Property will fluctuate as the
aggregate principal balance of Receivables of
such Trust (the "Pool Balance") changes from time
to time. A portion of the Residual Interest in
any Trust may be sold separately in one or more
public or private transactions. See "Description
of the Trust Agreements--Master Trusts."
Cross-Collateralization..... As described in the related Trust Agreement and
the related Prospectus Supplement, the primary
source of payment for Securities of each series
will be the related Trust Property only.
However, as may be described in the related
Prospectus Supplement, a series or Class of
Securities may include the right to receive
moneys from a common pool of Credit Enhancement
which may be available for more than one series
of Securities, such as a master
8
<PAGE>
reserve account, master insurance policy or a
master collateral pool consisting of similar
Receivables.
Trust Property.............. As more fully specified in the related Prospectus
Supplement, the Trust Property will consist of
certain Contracts, and generally will include a
security interest in the related Vehicles. The
Contracts are obligations for the purchase of the
Vehicles, or evidence borrowings used to purchase
the Vehicles. As specified in the related
Prospectus Supplement, the Contracts may consist
of any combination of Rule of 78s Contracts,
Actuarial Contracts, Simple Interest Contracts
(each, as defined hereinafter) or other forms of
Contracts as described therein. See "The
Receivables--The Contracts."
The related Prospectus Supplement will further
describe the type and characteristics of the
Contracts included in the Trust Property relating
to the Securities offered pursuant to this
Prospectus and the related Prospectus Supplement.
The Receivables comprising the Trust Property
will be originated by the Bank or its affiliates
or acquired by the Bank from other originators or
owners of Receivables.
The Bank will either transfer a pool of
Receivables to a Trust pursuant to a Pooling
Agreement or a sale agreement, or will pledge the
Bank's right, title and interest in and to such
Receivables to a Trustee on behalf of
Securityholders pursuant to an Indenture. The
relative rights and duties of the Bank, the
Servicer and the related Trustee, if any, under
the related Trust Agreement include those
specified below and in the related Prospectus
Supplement.
In addition, if so specified in the related
Prospectus Supplement, the Trust Property will
include monies on deposit in a Pre-Funding
Account (the "Pre-Funding Account") to be
established with the related Trustee, which will
be used to acquire Additional Receivables (as
hereinafter defined) from time to time during the
"Pre-Funding Period" specified in the related
Prospectus Supplement. The amount on deposit in
any Pre-Funding Account, if any, will be reduced
during the related Pre-Funding Period by the
amount thereof used to purchase Additional
Receivables. Any amount remaining in the Pre-
Funding Account at the end of the related Pre-
Funding Period will be distributed to the related
Securityholders on the Distribution Date
immediately following the end of the Pre-Funding
Period.
If and to the extent provided in the related
Prospectus Supplement, the Bank will be obligated
(subject only to the availability thereof either
to transfer to the related Trust or pledge to the
related Trustee on behalf of the related
Securityholders, additional Receivables
(the "Additional Receivables") from time to time
during any Pre-Funding Period specified in the
related Prospectus Supplement. See "Description
of the Trust Agreements--Pre-Funding Accounts."
9
<PAGE>
Yield Maintenance
Accounts.................... Certain of the Receivables may have annual
percentage rates of interest ("APR") which are
less than the sum of the related Interest Rate,
the Servicing Fee Rate and, if applicable, the
rates at which the premium of a Credit Enhancer
(as defined hereinafter) and the Trustee's fee
are calculated (the sum of such rates, the
"Required Rate"). In such event, a Yield
Maintenance Account may be established as a
segregated trust account into which the Issuer
may make one or more deposits in an aggregate
amount (the "Yield Maintenance Amount") necessary
to fund any shortfall on interest collections
which results from Receivables having an APR of
less than the Required Rate.
Registration of Securities;
Clearance and Settlement... Unless otherwise set forth in a Prospectus
Supplement, the Securities of the series (or
Class thereof) offered hereby will initially be
represented by one or more global securities
registered in the name of Cede & Co. ("Cede") as
the nominee of DTC or another depository.
Securityholders must elect to hold their
Securities through any of DTC (in the United
States), Cedel Bank, societe anonyme ("Cedel") or
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. In such case, Securityholders will not be
entitled to receive definitive securities
representing such Securityholders' interests,
except in certain circumstances described in the
related Prospectus Supplement. See "Description
of the Securities--Book-Entry Registration."
Repurchase Obligations of
the Bank.................... As more fully described in the related Prospectus
Supplement, the Bank will be obligated to
reacquire from the related Trust Property any
Receivable which was transferred pursuant to a
Pooling Agreement or pledged pursuant to an
Indenture if the interest of the Securityholders
therein is materially and adversely affected by a
breach of any representation or warranty made by
the Bank with respect to such Receivable, which
breach has not been cured. In addition, if so
specified in the related Prospectus Supplement,
the Bank may from time to time reacquire certain
Receivables of the Trust Property, subject to
specified conditions set forth in the related
Trust Agreement.
Servicer's Compensation..... The related Servicer shall be entitled to receive
a fee for servicing the related Trust Property
equal to a specified percentage of the value of
such Trust Property, as set forth in the related
Prospectus Supplement. See "Description of the
Trust Agreements--Servicing Compensation and
Payment of Expenses" herein and in the related
Prospectus Supplement.
Optional Termination........ The Servicer, the Issuer, or, if specified in the
related Prospectus Supplement, certain other
entities may, at their respective options, effect
early retirement of a series of Securities under
the circumstances and in the manner set forth
herein under "Description of the Trust
Agreements--Termination" herein and in the
related Prospectus Supplement.
10
<PAGE>
Mandatory Termination....... The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of all or any portion of a series of
Securities by soliciting competitive bids for the
purchase of the Trust Property or otherwise,
under other circumstances and in the manner
specified in "Description of the Trust
Agreements--Termination" herein and in the
related Prospectus Supplement.
Tax Considerations.......... Securities of each series offered hereby will,
for federal income tax purposes, constitute
either (i) interests in a Trust treated as a
grantor trust under applicable provisions of the
Internal Revenue Code of 1986, as amended (the
"Code"), (ii) debt issued by a Trust or by the
Bank, (iii) interests in a Trust treated as a
partnership, (iv) interests in a Trust treated as
debt of the Bank, or (v) "regular" or "high-yield
interests" issued by a FASIT.
The Prospectus Supplement for each series of
Securities (or Class thereof) offered hereby will
summarize, subject to the limitations stated
therein, federal income tax considerations
relevant to the purchase, ownership and
disposition of such Securities.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income
Tax Consequences" in the related Prospectus
Supplement.
ERISA Considerations........ The Prospectus Supplement for each series of
Securities (or Class thereof) offered hereby will
summarize, subject to the limitations discussed
therein, considerations under the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), relevant to the purchase of
such Securities by employee benefit plans and
individual retirement accounts. See "ERISA
Considerations" in the related Prospectus
Supplement.
Legal Investment............ The related Prospectus Supplement will describe
each Class of Securities, if any, that will be
eligible for purchase by money market funds under
Rule 2a-7 under the Investment Company Act.
Ratings..................... Each Class of Securities offered pursuant to this
Prospectus and the related Prospectus Supplement
will be rated in one of the four highest rating
categories by one or more "national statistical
rating organizations," as defined in the Exchange
Act, and commonly referred to as "Rating
Agencies." Such ratings will address, in the
opinion of such Rating Agencies, the likelihood
that the Issuer will be able to make timely
payment of all amounts of interest due on the
related Securities and ultimate payment of all
amounts of principal due thereon in accordance
with the terms thereof. Such ratings will neither
address any prepayment or yield considerations
applicable to any Securities nor constitute a
recommendation to buy, sell or hold any
Securities.
The ratings expected to be received with respect
to each Class of Securities offered pursuant to
this Prospectus and the related Prospectus
Supplement will be set forth in the related
Prospectus Supplement.
11
<PAGE>
RISK FACTORS
Prospective Securityholders should consider, among other things, the
following factors in connection with the purchase of the Securities:
Limited Liquidity. There can be no assurance that a secondary market for the
Securities of any series or Class will develop or, if it does develop, that it
will provide Securityholders with liquidity of investment or that it will
continue for the life of such Securities. The Prospectus Supplement for any
series of Securities may indicate whether or not such series or any Class
thereof will be listed on any securities exchange or whether any underwriter
specified therein intends to establish and maintain a secondary market in such
Securities.
Ownership of Contracts. In connection with the issuance of any series of
Securities, the Bank will originate or acquire Contracts or CFC will originate
or acquire Contracts and assign them to the Bank. The Bank will warrant in the
related Trust Agreement (i) if the Bank retains title to the Contracts, that
the Trustee for the benefit of Securityholders has a valid security interest
in such Contracts, or (ii) if the Bank transfers such Contracts to a Trust,
that the transfer of the Contracts to such Trust either (x) is a valid
assignment, transfer and conveyance of the Contracts to the Trust or (y)
results in the related Trustee on behalf of the Securityholders having a valid
security interest in such Contracts. As to be described in the related
Prospectus Supplement, the related Trust Agreement will provide either that
the Trustee will be required to maintain possession of the original copies of
all Contracts that constitute chattel paper or that the Bank or the Servicer
will retain possession of such Contracts; provided that in case the Bank
retains possession of the related Contracts, the Servicer may take possession
of such original copies as necessary for the enforcement of any Contract. If
any Contracts remain in the possession of the Bank, the related Prospectus
Supplement may describe specific trigger events that will require delivery of
the Contracts to the Trustee. If the Bank, the Servicer, the Trustee or other
third party, while in possession of the Contracts, sells or pledges and
delivers such Contracts to another party, in violation of the Trust Agreement,
there is a risk that such other party could acquire an interest in such
Contracts having a priority over the Issuer's interest. Furthermore, if the
Bank, the Servicer or a third party, while in possession of the Contracts, is
rendered insolvent, such event of insolvency may result in competing claims to
ownership or security interests in the Contracts. Such an attempt, even if
unsuccessful, could result in delays in payments on the Securities. If
successful, such attempt could result in losses to the Securityholders or an
acceleration of the repayment of the Securities. The Bank will be obligated to
repurchase any Contract transferred to a Trust by the Bank which remains a
part of the related Trust Property if there is a breach of the Bank's
representations and warranties that materially and adversely affects the
interests of the Trust in such Contract and such breach has not been cured.
Security Interests. The transfer of the Receivables and other property of
the Trust by the Bank to a Trustee or a Trust pursuant to the related Trust
Agreement, the perfection of the security interests in the Receivables and the
enforcement of rights to realize on the Vehicles as collateral for the
Receivables are subject to a number of federal and state laws, including the
UCC as in effect in various states. As described in each Prospectus
Supplement, the Servicer will take such action as is required to perfect the
rights of the Trustee or Trust in the Receivables. Except as specified in each
Prospectus Supplement, no action will be taken to perfect the rights of the
Trustee in proceeds of any insurance policies covering individual Vehicles or
Obligors. Therefore, the rights of a third party with an interest in such
proceeds could prevail against the rights of the related Issuer. See "Certain
Legal Aspects of the Receivables".
Each Contract will create a perfected security interest in the related
Vehicle in favor of CFC or the Bank or their designees (and, if perfected in
the name of CFC or the Bank, assigned pursuant to the related Trust Agreement
to the related Trustee for the benefit of the Securityholders). However, to
the extent provided in the related Prospectus Supplement, due to the
administrative burden and expense, the certificates of title of the Vehicles
securing certain Contracts which reflect the security interest of the
applicable Lender (as defined herein) in such Vehicles may not be endorsed or
amended to reflect the Trustee's interest therein or delivered to the Trustee.
In the absence of such endorsement or amendment and delivery, the Trustee may
not have a perfected security interest in such Vehicles. As a result, a
trustee in bankruptcy of a Lender, or a receiver for the Bank,
12
<PAGE>
may be able to assert successfully that the Trust or the Trustee did not have
a security interest in the Vehicle. In addition, statutory liens for repairs
or unpaid taxes and other liens arising by operation of law may have priority
even over prior perfected security interests in the name of the Trustee in the
Vehicles.
Restrictions on Recoveries. Unless specific limitations are described in the
related Prospectus Supplement with respect to specific Contracts, all
Contracts will provide that the obligations of the Obligors thereunder are
absolute and unconditional, regardless of any defense, set-off or abatement
which the Obligor may have against the Bank or any other person or entity
whatsoever. At the time of transfer to the related Trustee, the Bank will
warrant that no claims or defenses have been asserted or threatened with
respect to the Contracts and that all requirements of applicable law with
respect to the Contracts have been satisfied.
In the event that the Bank or the Servicer must rely on repossession and
disposition of Vehicles to recover scheduled payments due on Defaulted
Receivables (as defined in the related Trust Agreement), the Issuer may not
realize the full amount due on a Contract (or may not realize the full amount
on a timely basis). Other factors that may affect the ability of the Issuer to
realize the full amount due on a Contract include whether endorsements or
amendments to certificates of title relating to the Vehicles had been filed or
such certificates have been delivered to the Trustee, whether financing
statements to perfect the security interest in the Vehicles had been filed,
depreciation, obsolescence, damage or loss of any Vehicle, and the application
of federal and state bankruptcy and insolvency laws. As a result, the
Securityholders may be subject to delays in receiving payments and suffer loss
of their investment in the Securities.
Financial Institution Insolvency Risks. The Bank intends that each transfer
by it to a Trustee or Trust will constitute either a valid sale and assignment
of the Receivables or a grant of a security interest in the Receivables. To
the extent the Bank grants a security interest in the Receivables transferred
by it to the related Trustee, and such security interest is validly perfected
before the occurrence of an insolvency event and is not taken or granted in
contemplation of insolvency or with the intent to hinder, delay or defraud the
Bank, its creditors, the FDIC, or other conservator or receiver or any federal
banking agency or any other person, the Federal Deposit Insurance Act, as
amended ("FDIA"), including as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, as amended ("FIRREA"), provides
generally that such security interest should not be subject to avoidance by
the Federal Deposit Insurance Corporation (the "FDIC") as receiver or
conservator for the Bank. Subject to clarification by regulations or
interpretations, positions taken by the FDIC staff prior to the passage of
FIRREA do not suggest that the FDIC, as receiver or conservator for the Bank,
would interfere with the timely transfer to the related Trustee of payments
collected on the related Receivables. If, however, the FDIC were to assert a
contrary position, such as requiring the Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure under the FDIA, or the conservator or receiver were to request a
stay of proceedings with respect to the Bank as provided under the FDIA,
delays in payments on the Securities and possible reductions in the amount of
those payments could occur. In addition, the FDIC, if appointed as conservator
or receiver for the Bank, has the power under the FDIA to repudiate contracts,
including secured contracts of the Bank. The FDIA provides that a claim for
damages arising from the repudiation of a contract is limited to "actual
direct compensatory damages." In the event the FDIC were to be appointed as
conservator or receiver of the Bank and were to repudiate a Trust Agreement,
then the amount payable out of available collections on the related
Receivables to the related Securityholders could be lower than the outstanding
principal and accrued interest on the related Securities.
Insurance on Vehicles. Each Receivable generally requires the related
Obligor to maintain insurance covering physical damage to the Vehicle in an
amount not less than the unpaid principal balance of such Receivable pursuant
to which the Bank (or CFC in the case of Receivables originated or acquired by
CFC) is named as a loss payee. Since the Obligors select their own insurers to
provide the requisite coverage, the specific terms and conditions of their
policies vary.
In addition, although each Receivable generally gives the applicable Lender
the right to force place insurance coverage in the event the required physical
damage insurance on a Vehicle is not maintained by an Obligor, neither the
Lender nor the Servicer is obligated to place such coverage. In the event
insurance coverage
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is not maintained by Obligors and coverage is not force placed, then insurance
recoveries may be limited in the event of losses or casualties to Vehicles
included in the Trust Property, as a result of which Securityholders could
suffer a loss on their investment.
Delinquencies and Losses. There can be no assurance that the historical
levels of delinquencies and losses experienced by a Lender on its respective
loan and vehicle portfolio will be indicative of the performance of the
Contracts included in a Trust or that such levels will continue in the future.
Delinquencies and losses could increase significantly for various reasons,
including changes in the local, regional or national economies or other
events.
Subordination; Limited Assets. To the extent specified in the related
Prospectus Supplement, distributions of interest and principal on one Class of
Securities of a series may be subordinated in priority of payment to interest
and principal due on other Classes of Securities of a related series.
Moreover, the Trust Property will not have, nor is it permitted or expected to
have, any significant assets or sources of funds other than the related
Receivables and, to the extent provided in the related Prospectus Supplement,
the related reserve account and any other Credit Enhancement. The Securities
represent obligations solely of the related Trust or debt secured by the
related Trust Property, and will not represent a recourse obligation to other
assets of the Bank or any of its affiliates. No Securities of any series will
be insured or guaranteed by the Bank, CFC, the Servicer, or the applicable
Trustee. Consequently, holders of the Securities of any series must rely for
repayment primarily upon payments on the Receivables and, if and to the extent
available, the reserve account, if any, and any other Credit Enhancement, all
as specified in the related Prospectus Supplement.
Master Trusts. As may be described in the related Prospectus Supplement, a
Master Trust may issue from time to time more than one series. While the terms
of any additional series will be specified in a supplement to the related
Master Trust Agreement, the provisions of such supplement and, therefore, the
terms of any additional series, will not be subject to prior review by, or
consent of, holders of the Securities of any series previously issued by such
Master Trust. Such terms may include methods for determining applicable
investor percentages and allocating collections, provisions creating different
or additional security or Credit Enhancements and any other provisions which
are made applicable only to such series. The obligation of the related Trustee
to issue any new series is subject to the condition, among others, that such
issuance will not result in any Rating Agency reducing or withdrawing its
rating of the Securities of any outstanding series (any such reduction or
withdrawal is referred to herein as a "Ratings Effect"). There can be no
assurance, however, that the terms of any series might not have an impact on
the timing or amount of payments received by a Securityholder of another
series issued by the same Master Trust. See "Description of the Trust
Agreements--Master Trusts."
Book-Entry Registration. 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
definitive physical securities representing such Securityholders' interests,
except in certain circumstances described in the related Prospectus
Supplement. In addition, beneficial owners of Securities may not be recognized
as Securityholders under the terms of a Trust Agreement and may exercise
rights only indirectly through DTC, Cedel or Euroclear.
Since transactions in Securities will, in most cases, be able to be effected
only through DTC, direct or indirect participants in DTC's book-entry system
or certain banks, the ability of a Securityholder to pledge a Security to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect to such Securities, may be limited due to lack of a
physical security representing the Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such case, DTC will be
required to credit such distributions to the accounts of its Participants (as
defined hereinafter) which thereafter will be required to credit them to the
accounts of the applicable Class of Securityholders either directly or
indirectly through Indirect Participants (as defined hereinafter). See
"Description of the Securities--Book Entry Registration."
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Security Rating. The rating of Securities secured by external Credit
Enhancement will depend primarily on the creditworthiness of the issuer of
such external Credit Enhancement (a "Credit Enhancer"). Any reduction in the
rating assigned to the claims-paying ability of the related Credit Enhancer to
honor its obligations pursuant to any such Credit Enhancement below the rating
initially given to the Securities would likely result in a reduction in the
rating of the related Securities.
Maturity and Prepayment Considerations. Because the rate of payment of
principal on the Securities will depend, among other things, on the rate of
payment on the related Contracts, the rate of payment of principal on the
Securities cannot be predicted. Payments on the Contracts will include
scheduled payments as well as partial and full prepayments (to the extent not
replaced with substitute Contracts), payments upon the liquidation of
Defaulted Contracts, payments upon acquisitions by the Servicer or the Bank of
Contracts from the related Trust Property on account of a breach of certain
representations and warranties in the related Trust Agreement, and payments
upon an optional acquisition by the Servicer or the Bank of Contracts from the
related Trust Property (any such voluntary or involuntary prepayment or other
early payment of a Contract, a "Prepayment"). The rate of early terminations
of Contracts due to Prepayments and defaults may be influenced by a variety of
economic and other factors, including, among others, obsolescence, then
current economic conditions and tax considerations. The risk of reinvesting
distributions of the principal of the Securities will be borne by the
Securityholders. The yield to maturity on Strip Securities or Securities
purchased at premiums or discounts to par will be extremely sensitive to the
rate of Prepayments on the related Receivables. In addition, the yield to
maturity on certain other types of classes of Securities, including Strip
Securities, Accrual Securities or certain other Classes in a series including
more than one Class of Securities, may be relatively more sensitive to the
rate of prepayment of the related Contracts than other Classes of Securities.
The rate of Prepayments of Contracts cannot be predicted and is influenced
by a wide variety of economic, social, and other factors, including prevailing
interest rates, the availability of alternate financing and local, regional
and national economic conditions. Therefore, no assurance can be given as to
the level of Prepayments that a Trust will experience.
Securityholders should consider, in the case of Securities purchased at a
discount, the risk that a slower than anticipated rate of Prepayments on the
Receivables could result in an actual yield that is less than the anticipated
yield and, in the case of any Securities purchased at a premium, the risk that
a faster than anticipated rate of Prepayments on the Receivables could result
in an actual yield that is less than the anticipated yield.
Limitations on Interest Payments and Repossessions. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, an Obligor who enters military
service after the origination of the related Receivable (including an Obligor
who is a member of the National Guard or is in reserve status at the time of
the origination of the Receivable and is later called to active duty) may not
be charged interest (including fees and charges) above an annual rate of 6%
during the period of such Obligor's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of
the Servicer to collect full amounts of interest on certain of the
Receivables. In addition, the Relief Act imposes limitations that would impair
the ability of the Servicer to repossess a Vehicle during the Obligor's period
of active duty status. Thus, in the event that such a Receivable goes into
default, there may be delays and losses occasioned by the inability of the
Servicer to realize upon the Vehicle in a timely fashion.
Financial Condition of the Bank. The Bank is generally not obligated to make
any payments in respect of the Securities or the Receivables of a specific
Trust. If the Bank were acting as the Servicer and thereafter ceases so to
act, delays in processing payments on the Receivables and information in
respect thereof could occur and result in delays in payments to the
Securityholders.
In certain circumstances, the Bank will be required to acquire Receivables
from the related Trust Property with respect to which such representations and
warranties have been breached. In the event that the Bank is incapable of
complying with its reacquire obligations and no other party is obligated to
perform or satisfy such
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obligations, Securityholders may be subject to delays in receiving payments
and suffer loss of their investment in the Securities.
The related Prospectus Supplement will set forth certain information
regarding the Bank. In addition, the Bank files reports and other information
with the OTS.
Consumer Protection Laws. The Receivables are subject to federal and state
consumer protection laws which impose requirements with respect to the making,
transfer, acquisition, enforcement and collection of consumer loans. Such
laws, as well as any new laws or rules which may be adopted, may adversely
affect the Servicer's ability to collect on the Receivables. In addition,
failure by the Bank to have complied, or the Servicer to comply, with such
requirements could adversely affect the enforceability of the Receivables. The
Bank will make representations and warranties relating to the validity and
enforceability of the Receivables and its compliance with applicable law in
connection with its performance of the transactions contemplated by the
related Trust Agreement. Pursuant to such Trust Agreement, if the Trust's
interest in a Receivable is materially and adversely affected by the failure
of a Receivable to comply with applicable requirements of consumer protection
law, such Receivable will be repurchased by the Bank. The sole remedy if any
such representation or warranty is not complied with and such noncompliance
continues beyond the applicable cure period is that the Receivables affected
thereby will be repurchased by the Bank.
THE TRUST PROPERTY
The Trust Property will include, as specified in the related Prospectus
Supplement, (i) a pool of Receivables, (ii) all monies (including accrued
interest) due or received thereunder on or after the date on which the
payments made with respect to the Receivables are payable to the related
Trustee (the applicable "Cut-off Date"), (iii) such amounts as from time to
time may be held in one or more accounts established and maintained by the
Servicer pursuant to the related Trust Agreement, as described below and in
the related Prospectus Supplement, (iv) the security interests, if any, in the
Vehicles relating to such pool of Receivables, (v) unless otherwise specified
in the related Prospectus Supplement, the right to proceeds from claims on
physical damage, credit life insurance and disability policies or other
policies, if any, covering such Vehicles or the related Obligors, as the case
may be, (vi) the proceeds of any repossessed Vehicles related to such pool of
Receivables, (vii) the rights of the Bank under agreements pursuant to which
the Bank may have acquired such Receivables, (viii) interest earned on certain
short-term investments held as part of such Trust Property, unless the related
Prospectus Supplement specifies that such earnings may be paid to the
Servicer, the Bank or another person, and (ix) if so specified in the related
Prospectus Supplement, Additional Receivables which may be added to the Trust
Property from time to time. The Trust Property will also include, if so
specified in the related Prospectus Supplement, monies on deposit in a Pre-
Funding Account, which will be used by the Trustee to acquire or receive a
security interest in Additional Receivables from time to time during the Pre-
Funding Period specified in the related Prospectus Supplement. See
"Description of the Trust Agreement--Pre-Funding Accounts." In addition, to
the extent specified in the related Prospectus Supplement, some combination of
Credit Enhancements may be issued to or held by the Trustee on behalf of the
related Trust for the benefit of the holders of one or more Classes of
Securities.
The Receivables comprising the Trust Property will, as specifically
described in the related Prospectus Supplement, be purchased or originated by
the Bank, its wholly-owned subsidiary, CFC, or another originator (each, a
"Lender" and together, the "Lenders"). The underwriting criteria applicable to
the Receivables included in any Trust Property will be described in all
material respects in the related Prospectus Supplement.
The Trust Property will include Receivables with respect to which the
related Contract or the related Vehicles are subject to federal or state
registration or titling requirements applicable to motor vehicles.
The Receivables included in the Trust Property will be selected from those
Receivables held by the Lenders based on the criteria specified in the
applicable Trust Agreement and described herein or in the related Prospectus
Supplement.
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With respect to each series of Securities, on or prior to the date on which
the Securities are delivered to Securityholders (the "Closing Date"), the Bank
will either (i) transfer the related Receivables into a Trust pursuant to a
Pooling Agreement between the Bank and the Trustee or (ii) enter into an
Indenture with a Trustee relating to the issuance of such Securities, secured
by the related Receivables.
THE ISSUERS
With respect to each series of Securities, the Bank will either issue such
Securities or will establish a separate Trust that will issue such Securities,
in either case pursuant to the related Trust Agreement. For purposes of this
Prospectus and the related Prospectus Supplement, the Bank or, in the case of
Securities issued by a Trust, such Trust shall be referred to as the Issuer
with respect to the related Securities.
Upon the issuance of the Securities of a given series, the proceeds from
such issuance will be used by the related Trustee to acquire the related
Receivables. The Servicer will service the related Receivables pursuant to the
applicable Servicing Agreement, and will be compensated for acting as the
Servicer. To facilitate servicing and to minimize administrative burden and
expense, the Servicer may be appointed custodian for the related Receivables
by each Trustee and the Bank, as may be set forth in the related Prospectus
Supplement.
If the protection provided to the Securityholders of a given Class by the
subordination of another Class of Securities of such series and by the
availability of the funds in the reserve account, if any, or any other Credit
Enhancement for such series is insufficient, the Issuer must rely solely on
the payments from the Obligors on the related Contracts, and the proceeds from
the sale of Vehicles which secure the Defaulted Contracts. In such event,
certain factors may affect such Issuer's ability to realize on the collateral
securing such Contracts, and thus may reduce the proceeds to be distributed to
the Securityholders of such series or Class.
THE RECEIVABLES
RECEIVABLES POOLS
Information with respect to the Receivables in the related Trust Property
will be set forth in the related Prospectus Supplement, including, to the
extent appropriate, the composition of such Receivables and the distribution
of such Receivables by geographic concentration, APR and current principal
balance as of the applicable Cut-off Date.
THE CONTRACTS
As specified in the related Prospectus Supplement, the Contracts may consist
of any combination of Rule of 78s Contracts, Actuarial Contracts or Simple
Interest Contracts. Generally, "Rule of 78s Contracts" provide for fixed level
monthly payments which will amortize the full amount of the Contract over its
term. The Rule of 78s Contracts provide for allocation of payments according
to the "sum of periodic balances" or "sum of monthly payments" method (the
"Rule of 78s"). Each Rule of 78s Contract provides for the payment by the
Obligor of a specified total amount of payments, payable in monthly
installments on the related due date, which total represents the principal
amount financed and finance charges in an amount calculated on the basis of
APR for the term of such Contract. The rate at which such amount of finance
charges is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal balance of the
related Contract are calculated in accordance with the Rule of 78s. Under the
Rule of 78s, the portion of each payment allocable to interest is higher
during the early months of the term of a Contract and lower during later
months than that under a constant yield method for allocating payments between
interest and principal. Notwithstanding the foregoing, as specified in the
related Prospectus Supplement, all payments received by the Servicer on or in
respect of the Rule of 78s Contracts may be allocated on an actuarial or
simple interest basis.
If an Obligor elects to prepay a Rule of 78s Contract in full, it is
entitled to a rebate of the portion of the outstanding balance then due and
payable attributable to unearned finance charges. If a Simple Interest
Contract
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is prepaid, rather than receive a rebate, the Obligor is required to pay
interest only to the date of prepayment. The amount of a rebate under a Rule
of 78s Contract calculated in accordance with the Rule of 78s will always be
less than had such rebate been calculated on an actuarial basis and generally
will be less than the remaining scheduled payments of interest that would be
due under a Simple Interest Contract for which all payments were made on
schedule. Distributions to Securityholders may not be affected by Rule of 78s
rebates under the Rule of 78s Contract because pursuant to the related
Prospectus Supplement such distributions may be determined using the actuarial
or simple interest method.
Generally, the "Actuarial Contracts" provide for amortization of the loan
over a series of fixed level payment monthly installments. A fixed, scheduled
amount is due monthly on a specified date; the application of the payment to
principal and interest is not affected by whether the payment was received on
the scheduled due date, or early or late.
"Simple Interest Contracts" provide for the amortization of the amount
financed under the receivable over a series of fixed level monthly payments.
However, unlike the monthly payment under Rule of 78s Contracts, each monthly
payment consists of an installment of interest which is calculated on the
basis of the outstanding principal balance of the receivable multiplied by the
stated APR and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments
are received under a Simple Interest Contract, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if an Obligor pays a fixed
monthly installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly greater. Conversely, if an Obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be
greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, the Obligor pays a fixed monthly
installment until the final scheduled payment date, at which time the amount
of the final installment is increased or decreased as necessary to repay the
then outstanding principal balance.
DELINQUENCIES AND LOSSES
Certain information relating to a Lender's delinquency and loss experience
with respect to Contracts it has originated or acquired will be set forth in
each Prospectus Supplement. This information may include, among other things,
the experience with respect to all Contracts in such Lender's portfolio during
certain specified periods. There can be no assurance that the delinquency and
loss experience on any Trust Property will be comparable to such Lender's
prior experience.
MATURITY AND PREPAYMENT CONSIDERATIONS
As more fully described in the related Prospectus Supplement, if a Contract
permits a Prepayment, such payment, together with accelerated payments
resulting from defaults, will shorten the weighted average life of the related
pool of Receivables and the weighted average life of the related Securities.
The rate of Prepayments on the Receivables may be influenced by a variety of
economic, financial and other factors. In addition, under certain
circumstances, the Bank will be obligated to and may have the right to
reacquire Receivables from the related Trust Property pursuant to the
applicable Trust Agreement as a result of breaches of representations and
warranties. Any reinvestment risks resulting from a faster or slower
amortization of the related Securities which results from Prepayments will be
borne entirely by the related Securityholders.
The related Prospectus Supplement will set forth certain additional
information with respect to the maturity and prepayment considerations
applicable to a particular pool of Receivables and the related series of
Securities, together with a description of any applicable prepayment
penalties.
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AUTOMOBILE FINANCING PROGRAMS
UNDERWRITING PROCEDURES
Each Receivable was originated or purchased by a Lender after a review by
such Lender in accordance with its established underwriting procedures. Each
Lender has its own underwriting procedures which will be described in all
material respects in the related Prospectus Supplement; however, some of the
current underwriting practices of the Lenders are noted in the following
paragraphs.
Generally, the underwriting procedures of the Lenders are designed to
provide a basis for assessing the Obligor's ability and willingness to repay
the loan. In conducting this assessment, the Lenders consider the Obligor's
ratio of debt to income and evaluate the Obligor's credit history through a
review of a written credit report compiled by a recognized consumer credit
reporting bureau. The Obligor's equity in the collateral and the terms of the
loan are of secondary importance in the Lender's analysis. The Lenders'
guidelines are intended only to provide a basis for lending decisions, and
exceptions to such guidelines may, within certain limits, be made based upon
the credit judgment of the lending officer. The Lenders periodically conduct
quality audits to ensure compliance with their established policies and
procedures.
CFC's underwriting guidelines relate to a category of lending in which loans
may be made to applicants who have experienced certain adverse credit events
(and therefore would not necessarily meet all of the Bank's guidelines for its
traditional loan program) but who meet certain other creditworthiness tests.
Such loans generally experience higher rates of delinquencies, repossessions
and losses, especially under adverse economic conditions, as compared with
loans originated pursuant to the Bank's traditional lending program.
SELECTION CRITERIA
The Receivables with respect to each issuance of Securities will be selected
from the applicable Lender's portfolios on the basis of a number of criteria
specified in the related Prospectus Supplement, including the following:
(i) original term to maturity, (ii) final maturity date, (iii) except as
otherwise disclosed, Contracts which provide for level monthly payments that
fully amortize the amount financed over the original term, (iv) maximum number
of days delinquent and (v) Contracts which have an unpaid principal balance of
not less than a specified amount as of the applicable Cut-Off Date.
Contracts are generally prepayable at any time. The Bank can make no
prediction as to the actual prepayment experience on the Receivables.
The composition, distribution by APR and geographical distribution of the
Receivables as of the applicable Cut-Off Date will be as set forth in the
applicable Prospectus Supplement.
POOL FACTORS
The "Pool Factor" for each Class of Securities will be a seven-digit
decimal, which the Servicer will compute prior to each distribution with
respect to such Class of Securities, indicating the remaining outstanding
principal balance of such Class of Securities as of the applicable
Distribution Date, as a fraction of the initial outstanding principal balance
of such Class of Securities. Each Pool Factor will be initially 1.0000000, and
thereafter will decline to reflect reductions in the outstanding principal
balance of the applicable Class of Securities. A Securityholder's portion of
the aggregate outstanding principal balance of the related Class of Securities
is the product of (i) the original face amount of such Securityholder's
Securities and (ii) the applicable Pool Factor.
As more specifically described in the related Prospectus Supplement with
respect to each series of Securities, the related Securityholders of record
will receive reports on or about each Distribution Date
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concerning the payments received on the Receivables, the Pool Balance, each
Pool Factor and various other items of information. In addition,
Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date
permitted by law.
USE OF PROCEEDS
Except as provided in the related Prospectus Supplement, the proceeds from
the sale of the Securities of a given series will be used by the Bank or a
Trust for the acquisition of the related Receivables, to fund reserve
accounts, for issuance expenses, and/or general corporate purposes, including,
without limitation, the acquisition of additional Receivables, the repayment
of indebtedness and general working capital purposes.
THE LENDERS
GENERAL
The Bank, which is one of the Lenders, is a federally chartered stock
savings bank. The Bank's home office is located at 7926 Jones Branch Drive,
McLean, Virginia 22102, and the Bank's principal executive offices are located
at 8401 Connecticut Avenue, Chevy Chase, Maryland 20815. The Bank's telephone
number is (301) 986-7000. The Bank is subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision (the "OTS")
within the Department of the Treasury and by the FDIC. Deposits at the Bank
are fully insured up to $100,000 per insured depositor by the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC. For
further information regarding the Bank, its assets, capitalization, and
regulatory status and the effect of current legislation, see the related
Prospectus Supplement.
The other Lender, CFC, is a wholly-owned subsidiary of the Bank, formed in
December 1994 for the purpose of providing automobile financing to applicants
who may have experienced certain adverse credit events.
THE TRUSTEE(S)
The Trustee for each series of Securities will be specified in the related
Prospectus Supplement. The Trustee's liability in connection with the issuance
and sale of the related Securities is limited solely to the express
obligations of such Trustee set forth in the related Trust Agreement.
With respect to each series of Securities, the procedures for the
resignation or removal of the Trustee and the appointment of a successor
Trustee shall be specified in the related Prospectus Supplement to the extent
such procedures differ from those described herein under "Description of the
Trust Agreements--Duties and Immunities of the Trustee."
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DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant
to a Trust Agreement. The following summaries (together with additional
summaries under "Description of the Trust Agreements" below) describe all
material terms and provisions relating to the Securities common to each Trust
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
Trust Agreement for the related Securities and the related Prospectus
Supplement.
This Prospectus refers to series of Securities offered hereunder and under
the related Prospectus Supplement; however, if only certain Classes of a
Series are offered hereunder and under the related Prospectus Supplement, such
reference shall be limited to the Classes offered hereunder and under the
related Prospectus Supplement, unless the context otherwise requires.
All of the Securities of a series (or Class thereof) offered pursuant to
this Prospectus and the related Prospectus Supplement will be rated in one of
the four highest rating categories by one or more Rating Agencies.
The Securities will generally be styled as having a principal or notional
balance and a specified Interest Rate. The Securities may either represent
beneficial ownership interests in the related Receivables held by the related
Trust or debt secured by certain assets of the related Issuer.
Each series or Class of Securities offered pursuant to this Prospectus may
have a different Interest Rate, which may be a fixed or adjustable interest
rate, or tied to an index. The related Prospectus Supplement will specify the
Interest Rate for each series or Class of Securities offered thereby, or the
initial interest rate and the method for determining subsequent changes to the
Interest Rate.
A series may include one or more Classes of Strip Securities entitled (i) to
principal distributions, with disproportionate, nominal or no interest
distributions, or (ii) to interest distributions, with disproportionate,
nominal or no principal distributions. In addition, a series of Securities may
include two or more Classes of Securities that differ as to timing, sequential
order, priority of payment, Interest Rate or amount of distribution of
principal or interest or both, or as to which distributions of principal or
interest or both on any Class may be made upon the occurrence of specified
events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related pool of Receivables. Any
such series may include one or more Classes of Accrual Securities, as to which
certain accrued interest will not be distributed but rather will be added to
the principal balance (or nominal balance, in the case of Accrual Securities
which are also Strip Securities) thereof on each Distribution Date (as
hereinafter defined) or in the manner described in the related Prospectus
Supplement.
If so provided in the related Prospectus Supplement, a series may include
one or more other Classes of Senior Securities that are senior to one or more
other Classes of Subordinate Securities in respect of certain distributions of
principal and interest and allocations of losses on Receivables.
In addition, certain Classes of Senior (or Subordinate) Securities may be
senior to other Classes of Senior (or Subordinate) Securities in respect of
such distributions or losses.
GENERAL PAYMENT TERMS OF SECURITIES
As provided in the related Trust Agreement and as described in the related
Prospectus Supplement, Securityholders will be entitled to receive payments on
their Securities on the specified Distribution Dates. Distribution Dates with
respect to the Securities will occur monthly, quarterly or semi-annually, as
described in the related Prospectus Supplement.
The related Prospectus Supplement will describe the Record Date preceding
such Distribution Date, as of which the Trustee or its paying agent will fix
the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Distribution Date. Unless otherwise described in the
related Prospectus Supplement, the Distribution Date may be the fifteenth day
of each month (or, in the case of quarterly-pay Securities, the fifteenth day
of every third month; and in the case of semi-annual pay Securities, the
fifteenth day
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of every sixth month) and the Record Date will be the close of business as of
the last day of the calendar month that precedes the calendar month in which
such Distribution Date occurs.
Each Trust Agreement will describe a Collection Period preceding each
Distribution Date (for example, in the case of monthly-pay Securities, the
calendar month preceding the month in which a Distribution Date occurs). As
more fully provided in the related Prospectus Supplement, collections received
on or with respect to the related Receivables constituting the related Trust
Property during a Collection Period will be required to be remitted by the
Servicer to the related Trustee prior to the related Distribution Date and
will be used to fund payments to Securityholders on such Distribution Date. As
may be described in the related Prospectus Supplement, the related Trust
Agreement may provide that all or a portion of the payments collected on or
with respect to the related Receivables may be applied by the related Trustee
to the acquisition of additional Receivables during a specified period (rather
than be used to fund payments of principal to Securityholders during such
period) with the result that the related Securities will possess an interest-
only period, also commonly referred to as a revolving period, which will be
followed by an amortization period. Any such interest only or revolving period
may, upon the occurrence of certain events to be described in the related
Prospectus Supplement, terminate prior to the end of the specified period and
result in the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Trust Agreement may provide that all or a portion of such
collected payments may be retained by the Trustee (and held in certain
temporary investments, including Receivables) for a specified period prior to
being used to fund payments of principal to Securityholders. Such retention
and temporary investment by the Trustee of such collected payments may be
required by the related Trust Agreement for the purposes of (a) slowing the
amortization rate of the related Securities relative to the installment
payment schedule of the related Receivables, or (b) attempting to match the
amortization rate of the related Securities to an amortization schedule
established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in distributions to
the specified Securityholders and an acceleration of the amortization of such
Securities.
Neither the Securities nor the underlying Receivables will be guaranteed or
insured by any governmental agency or instrumentality or the Bank, CFC, the
Servicer, any Trustee or any of their respective affiliates unless
specifically set forth in the related Prospectus Supplement.
As may be described in the related Prospectus Supplement, Securities of each
series covered by a particular Trust Agreement will either evidence specified
beneficial ownership interests in the Trust Property, or will represent debt
secured by the related Trust Property. To the extent that any Trust Property
includes certificates of interest or participations in Receivables, the
related Prospectus Supplement will describe the material terms and conditions
of such certificates or participations.
BOOK-ENTRY REGISTRATION
As may be described in the related Prospectus Supplement, Securityholders of
a given series may hold their Securities through DTC (in the United States) or
CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Securities in respect of a
given series. CEDEL and Euroclear will hold omnibus positions on behalf of the
CEDEL Participants (as defined below) and the Euroclear Participants (as
defined below) (collectively, the "Participants"), respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries (collectively, the "Depositaries") which in
turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing
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agency" registered pursuant to Section 17A of the Exchange Act. DTC was
created to hold securities for its Participants and to facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entries, thereby eliminating the need for physical
movement of notes or certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depository to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositories.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available
in the relevant CEDEL or Euroclear cash account only as of the business day
following settlement in DTC.
The Securityholders of a given series or Class thereof that are not
Participants or Indirect Participants but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, Securities of such
series or Class may do so only through Participants and Indirect Participants.
In addition, Securityholders of a given series or Class thereof will receive
all distributions of principal and interest through the Participants who in
turn will receive them from DTC. Under a book-entry format, Securityholders of
a given series or Class thereof may experience some delay in their receipt of
payments, since such payments will be forwarded by the applicable Trustee to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or such
Securityholders. It is anticipated that the only "Securityholder" in respect
of any series or Class thereof that is issued in book-entry form will be Cede,
as nominee of DTC. Securityholders of such series or Class thereof will not be
recognized as Securityholders of such series or Class, and such
Securityholders will be permitted to exercise the rights of Securityholders of
such series or Class only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities of a given series or Class among Participants on whose behalf it
acts with respect to such Securities and to receive and transmit distributions
of principal of, and interest on, such Securities. Participants and Indirect
Participants with which the Securityholders of a given series or Class have
accounts with respect to such Securities similarly are required to make book-
entry transfers and receive and transmit such payments on behalf of their
respective Securityholders of such series or Class. Accordingly, although such
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder of a given series or Class to pledge Securities of such series
or
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Class to persons or entities that do not participate in the DTC system, or to
otherwise act with respect to such Securities, may be limited due to the lack
of a physical certificate for such Securities.
DTC will advise the Trustee in respect of each series or Class that it will
take any action permitted to be taken by a Securityholder of the related
series or Class only at the direction of one or more Participants to whose
accounts with DTC the Securities of such series or Class are credited. DTC may
take conflicting actions with respect to other undivided interests to the
extent that such actions are taken on behalf of Participants whose holdings
include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. 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 the
Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 28 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
Morgan Guaranty Trust Bank of New York, Brussels, Belgium office, under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the
"Euroclear Operator" (as defined below), and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative. The Cooperative establishes policy for the
Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The "Euroclear Operator" is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of relationship with persons holding through
Euroclear Participants.
Except as required by law, the Trustee in respect of a series will not have
any liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the related Securities held
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by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
As may be described in the related Prospectus Supplement, the Securities
will be issued in fully registered, certificated form ("Definitive
Securities") to the Securityholders of a given series or Class thereof or
their nominees, rather than to DTC or its nominee, only if (i) the Servicer
advises the Trustee of the applicable series or Class in writing that DTC is
no longer willing or able to discharge properly its responsibilities as
depository with respect to such series or Class of Securities and such Trustee
or the Servicer is unable to locate a qualified successor, (ii) the Servicer,
at its option, elects to terminate the book-entry system through DTC with
respect to such series or Class, or (iii) after the occurrence of a default by
the Servicer under the related Trust Agreement, Securityholders representing
at least a majority of the outstanding principal amount of such series or
Class of Securities advise the Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in such Securityholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all such
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive certificates representing
such Securities and receipt of instructions for re-registration, the
applicable Trustee will reissue such Securities as Definitive Securities to
such Securityholders.
Distributions of principal of, and interest on, such Securities will
thereafter be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or Trust Agreement directly to holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the applicable Record Date specified for such
Securities in the related Prospectus Supplement. Such distributions will be
made by check mailed to the address of such holder as it appears on the
register maintained by the applicable Trustee. The final payment on any such
Security, however, will be made only upon presentation and surrender of such
Security at the office or agency specified in the notice of final distribution
to the applicable Securityholders.
Definitive Securities in respect of a given series or Class of Securities
will be transferable and exchangeable at the offices of the applicable Trustee
or of a certificate registrar named in a notice delivered to holders of such
Definitive Securities. No service charge will be imposed for any registration
of transfer or exchange, but the applicable Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of
principal and interest (or, where applicable, of principal or interest only)
on each Class of such Securities entitled thereto will be made by the
applicable Indenture Trustee to the holders of Notes (the "Noteholders") and
by the applicable Trustee to the holders of Certificates (the
"Certficateholders") of such series. The timing, calculation, allocation,
order, source, priorities of and requirements for each Class of Noteholders
and all distributions to each Class of Certificateholders of such series will
be set forth in the related Prospectus Supplement.
With respect to each series of Securities, on each Distribution Date
collections on the related Receivables will be distributed to Securityholders,
to the extent provided in the related Prospectus Supplement. Credit
Enhancement, such as a reserve account, may be available to cover any
shortfalls in the amount available for distribution on such date, to the
extent specified in the related Prospectus Supplement. As more fully described
in the related Prospectus Supplement, and unless otherwise specified therein,
distributions in respect of principal of a Class of Securities of a given
series will be subordinate to distributions in respect of interest on such
Class, and distributions in respect of the Certificates of such series may be
subordinate to payments in respect of the Notes of such series.
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CREDIT AND CASH FLOW ENHANCEMENTS
The amounts and types of Credit Enhancement arrangements, if any, and the
provider thereof, if applicable, with respect to each Class of Securities of a
given series will be set forth in the related Prospectus Supplement. If and to
the extent provided in the related Prospectus Supplement, Credit Enhancement
may be in the form of an insurance policy, subordination of one or more
Classes of Securities, reserve accounts, yield maintenance accounts,
overcollateralization, letters of credit, credit or liquidity facilities,
third party payments or other support, surety bonds, guaranteed cash deposits
or such other arrangements as may be described in the related Prospectus
Supplement, or any combination of two or more of the foregoing. If specified
in the applicable Prospectus Supplement, Credit Enhancement for a Class of
Securities may cover one or more other Classes of Securities of the same
series, and Credit Enhancement for a series of Securities may cover one or
more other series of Securities.
The presence of Credit Enhancement for the benefit of any Class or series of
Securities is intended to enhance the likelihood of receipt by the
Securityholders or such Class or series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses on their Securities. As more specifically provided in
the related Prospectus Supplement, the Credit Enhancement for a Class or
series of Securities will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance and interest
thereon under all circumstances. If losses occur which exceed the amount
covered by any Credit Enhancement or which are not covered by any Credit
Enhancement, Securityholders of any Class or series will bear their allocable
share of deficiencies, as described in the related Prospectus Supplement. In
addition, if a form of Credit Enhancement covers more than one series of
Securities, Securityholders of any such series will be subject to the risk
that such Credit Enhancement will be exhausted by the claims of
Securityholders of other series.
WAIVER OF PAST DEFAULTS
The Securityholders of Securities evidencing more than the percentage
specified in the related Trust Agreement of the outstanding principal balance
of the related Securities (the "Security Principal Balance"), with the consent
of the related Credit Enhancer, or a Credit Enhancer, may waive certain
defaults by the Servicer in the performance of its obligations under a Trust
Agreement. No such waiver shall impair any Credit Enhancer's or the
Securityholders' rights with respect to subsequent defaults.
OPTIONAL TERMINATION
A Trust Agreement may provide that on any Distribution Date following the
Record Date on which the Pool Balance is a specified percentage or less of the
Security Principal Balance of the related Securities at issuance (the
"Original Security Principal Balance"), the Bank will have the option to
acquire all rights, title and interest in all, but not less than all,
Receivables held as part of the related Trust Property, by paying to the
related Trustee for retirement of the Securities an amount equal to the
aggregate Purchase Amounts for the Receivables, together with any
Reimbursement Amounts then owed to any Credit Enhancer pursuant to the terms
of the Credit Enhancement and the related agreements (the "Reimbursement
Amounts").
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on or about each Distribution
Date for such series, the Servicer or the related Trustee will forward or
cause to be forwarded to each holder of record of such Class of Securities a
statement or statements with respect to the related Trust Property setting
forth the information specifically described in the related Trust Agreement,
which generally will include the following information:
(i) the amount of the distribution with respect to each Class of
Securities;
(ii) the amount of such distribution allocable to principal;
(iii) the amount of such distribution allocable to interest;
(iv) the Pool Balance, if applicable, as of the close of business on the
last day of the related Collection Period;
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(v) the aggregate outstanding principal balance and the Pool Factor for
each Class of Securities after giving effect to all payments reported under
(ii) above on such Distribution Date;
(vi) the amount paid to the Servicer, if any, with respect to the related
Collection Period;
(vii) the amount of the aggregate Purchase Amounts for Receivables that
have been reacquired, if any, for such Collection Period; and
(viii) the amount of coverage under any letter of credit, financial
guaranty insurance policy, reserve account, yield maintenance account or
other form of Credit Enhancement covering default risk as of the close of
business on the applicable Distribution Date.
Each amount set forth pursuant to subclauses (i), (ii), (iii) and (v) with
respect to the Securities of any series will be expressed as a dollar amount
per $1,000 of the initial principal balance of such Securities, as applicable.
The actual information to be set forth in statements to Securityholders of a
series will be described in the related Prospectus Supplement.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year, the applicable Trustee will provide to the
Securityholders a statement containing the amounts described in (ii) and (iii)
above for that calendar year and any other information required by applicable
tax laws, for the purpose of the Securityholders' preparation of federal
income tax returns.
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any Class of
Securities of a given series may consist of Securities ("Indexed Securities")
in which the principal amount payable at the final scheduled Distribution Date
(the "Indexed Principal Amount") is determined by reference to a measure (the
"Index") which will be related to (i) the difference in the rate of exchange
between United States dollars and a currency or composite currency (the
"Indexed Currency") specified in the applicable Prospectus Supplement (such
Indexed Securities, "Currency Indexed Securities"); (ii) the difference in the
price of a specified commodity (the "Indexed Commodity") on specified dates
(such Indexed Securities, "Commodity Indexed Securities"); (iii) the
difference in the level of a specified stock index (the "Stock Index"), which
may be based on U.S. or foreign stocks, on specified dates (such Indexed
Securities, "Stock Indexed Securities"); or (iv) such other objective price or
economic measures as are described in the applicable Prospectus Supplement.
The manner of determining the Indexed Principal Amount of an Indexed Security
and historical and other information concerning the Indexed Currency, the
Indexed Commodity, the Stock Index or other price or economic measures used in
such determination will be set forth in the applicable Prospectus Supplement,
together with information concerning tax consequences to the holders of such
Indexed Securities.
If the determination of the Indexed Principal Amount of an Indexed Security
is based on an Index calculated or announced by a third party and such third
party either suspends the calculation or announcement of such Index or changes
the basis upon which such Index is calculated (other than changes consistent
with policies in effect at the time such Indexed Security was issued and
permitted changes described in the applicable Prospectus Supplement), then
such Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to
the original third party, then the Indexed Principal Amount of such Indexed
Security shall be calculated in the manner set forth in the applicable
Prospectus Supplement. Any determination of such independent calculation agent
shall in the absence of manifest error be binding on all parties.
Interest on an Indexed Security will be payable based on the amount
designated in the applicable Prospectus Supplement (the "Face Amount"). The
applicable Prospectus Supplement will describe whether the principal amount of
the related Indexed Security, if any, that would be payable upon redemption or
repayment prior to the applicable final scheduled Distribution Date will be
the Face Amount of such Indexed Security, the Indexed Principal Amount of such
Indexed Security at the time of redemption or repayment, or another amount
described in such Prospectus Supplement.
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DESCRIPTION OF THE TRUST AGREEMENTS
The following summary describes certain terms of each Trust Agreement
pursuant to which the related Trust Property will be held and the related
Securities will be issued. For purposes of this Prospectus, the term Trust
Agreement as used with respect to a series of Securities means, collectively,
and except as otherwise specified, any and all agreements relating to the
establishment of the related Trust Property, the servicing of the related
Receivables and the issuance of the related Securities, including without
limitation the Indenture, (i.e. pursuant to which any Notes shall be issued).
Forms of the Trust Agreement have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. The summary does not purport
to be complete. It is qualified in its entirety by reference to the provisions
of the Trust Agreements.
CONVEYANCE OF RECEIVABLES
Except as expressly set forth in the related Trust Agreement, on the Closing
Date, the Bank will transfer, without recourse, Receivables acquired by the
Bank and originated or acquired by the Bank, another Lender or another
originator either to a Trust pursuant to a Pooling Agreement or a Sale
Agreement, or will pledge, without recourse, the Bank's right, title and
interests in and to such Receivables to a Trustee on behalf of the related
Securityholders pursuant to an Indenture. The obligations of the Bank and the
Servicer under the related Trust Agreement include those specified below and
in the related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, the Bank will
be obligated to reacquire from the related Trust Property its interest in any
Receivable transferred to a Trust or pledged to a Trustee on behalf of
Securityholders if the interest of the Securityholders therein is materially
and adversely affected by a breach of any representation or warranty made by
the Bank with respect to such Receivable, which breach has not been cured
following the discovery by or notice to the Bank of the breach. In addition,
if so specified in the related Prospectus Supplement, the Bank may from time
to time reacquire certain Receivables or substitute other Receivables for such
Receivable subject to specified conditions set forth in the related Trust
Agreement.
Possible representations and warranties may include, among other things,
that (i) the information provided with respect to the Receivables is correct
in all material respects; (ii) the Obligor on each Receivable is generally
required to obtain physical damage and theft insurance in accordance with the
related Lender's normal requirements; (iii) at the date of issuance of the
Securities, the Receivables are free and clear of all security interests,
liens, charges, and encumbrances and no setoffs, defenses, or counterclaims
against the Bank have been asserted or threatened (other than the interest of
the Trustee); (iv) on the Closing Date, each of the Receivables is or will be
secured by a first priority perfected security interest in the Vehicle in
favor of the applicable Lender; and (v) each Receivable, at the time it was
originated or purchased, complied, and on the Closing Date complies, in all
material respects, with applicable federal and state laws, including consumer
credit, truth in lending, equal credit opportunity, and disclosure laws.
ACCOUNTS
With respect to each series of Securities, the Servicer will establish and
maintain one or more accounts, in the name of such Trustee on behalf of the
related Securityholders, into which all payments made on or with respect to
the related Receivables will be deposited (the "Collection Account"). Unless
otherwise specified in the related Prospectus Supplement, the Servicer will
also establish and maintain with such Trustee separate accounts, in the name
of such Trustee on behalf of such Securityholders, in which amounts withdrawn
from the Collection Account and the reserve account or received under other
Credit Enhancement, if any, for distribution to such Securityholders will be
deposited and from which distributions to such Securityholders will be made
(the "Distribution Account").
Any other accounts to be established with respect to a Trust, including any
reserve account, will be described in the related Prospectus Supplement.
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For any series of Securities, funds in the Collection Account, the
Distribution Account, any reserve account and other accounts identified as
such in the related Prospectus Supplement (collectively, the "Trust Accounts")
shall be invested as provided in the related Trust Agreement in Eligible
Investments. "Eligible Investments" are generally limited to investments
acceptable to the Rating Agencies as being consistent with the rating of such
Securities. Subject to certain conditions, Eligible Investments may include
securities issued by the Bank, the Servicer or their respective affiliates or
other trusts created by the Bank or its affiliates. Except as described below
or in the related Prospectus Supplement, Eligible Investments are limited to
obligations or securities that mature not later than the business day
immediately preceding the related Distribution Date. However, subject to
certain conditions, funds in the reserve account may be invested in securities
that will not mature prior to the date of the next distribution and will not
be sold to meet any shortfalls. Thus, the amount of cash in any reserve
account at any time may be less than the balance of such reserve account. If
the amount required to be withdrawn from any reserve account to cover
shortfalls in collections on the related Receivables exceeds the amount of
cash in such reserve account, a temporary shortfall in the amounts distributed
to the related Securityholders could result, which could, in turn, increase
the average life of the Securities of such series. Except as otherwise
specified in the related Prospectus Supplement, investment earnings on funds
deposited in the applicable Trust Accounts, net of losses and investment
expenses (collectively, "Investment Earnings"), shall be deposited in the
applicable Collection Account on each Distribution Date and shall be treated
as collections of interest on the related Receivables.
Unless otherwise specified in the related Prospectus Supplement, the Trust
Accounts will be maintained as Eligible Deposit Accounts. Unless otherwise
specified in the related Prospectus Supplement, "Eligible Deposit Account"
means either (a) a segregated account with an Eligible Institution or (b) a
segregated trust account with the corporate trust department of a depository
institution organized under the laws of the United States of America or any
one of the states thereof or the District of Columbia (or any domestic branch
of a foreign bank), having corporate trust powers and acting as trustee for
funds deposited in such account, so long as any of the securities of such
depository institution has a credit rating from each Rating Agency in one of
its generic rating categories which signifies investment grade. Unless
otherwise specified in the related Prospectus Supplement, "Eligible
Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Indenture Trustee or the related Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) (A) has either
(w) a long-term unsecured debt rating acceptable to the Rating Agencies or (x)
a short-term unsecured debt rating or certificate of deposit rating acceptable
to the Rating Agencies or (B) the parent corporation of which has either (y) a
long-term unsecured debt rating acceptable to the Rating Agencies or (z) a
short-term unsecured debt rating or certificate of deposit rating acceptable
to the Rating Agencies and (ii) whose deposits are insured by the FDIC.
MANDATORY REPURCHASE OF RECEIVABLES
Unless otherwise specified in the related Prospectus Supplement, in the
event of a breach of any representation or warranty with respect to the
Receivables described under "--Conveyance of Receivables," which breach or
failure materially and adversely affects a Receivable or the interests of the
related Trust, the Securityholders or a Credit Enhancer in such Receivable,
the Bank, unless such breach or failure has been cured, will be required to
reacquire such Receivable from the Trustee for the Purchase Amount. The
Purchase Amount is payable on the date on which the amounts to be distributed
on the related Distribution Date are to be determined (the "Determination
Date") in such subsequent Collection Period. The repurchase obligation will
constitute the sole remedy available to the Securityholders or the Trustee
against the Bank for any such uncured breach or failure.
The "Purchase Amount" of any Receivable means, with respect to any
Distribution Date an amount equal to the sum of (a) the outstanding principal
balance of such Receivable as of the last day of the preceding Collection
Period and (b) the amount of accrued interest on such principal balance at the
related APR from the date a payment was last made by or on behalf of the
Obligor through the Determination Date immediately preceding such Distribution
Date, and after giving effect to the receipt of monies collected on such
Receivable in such preceding Collection Period.
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YIELD MAINTENANCE ACCOUNT AND YIELD MAINTENANCE AGREEMENT
If so provided in the related Prospectus Supplement, pursuant to the related
Trust Agreement and/or a Yield Maintenance Agreement (as such term is defined
in the related Prospectus Supplement, the "Yield Maintenance Agreement") a
Yield Maintenance Account may be established for the related series.
Each Yield Maintenance Account will be designed solely to hold funds to be
applied by the applicable Trustee to provide payments to Securityholders in
respect of Receivables the APR of which is less than the Required Rate.
Monies on deposit in the Yield Maintenance Account may be invested in
Eligible Investments under the circumstances and in the manner described in
the related Yield Maintenance Agreement. If so specified in the related
Prospectus Supplement, investment earnings on investment of funds in a Yield
Maintenance Account will be deposited into such Yield Maintenance Account.
If a Yield Maintenance Account is established with respect to any Securities
as to which a Pre-Funding Account has been established, the Bank and the
related Indenture Trustee or applicable Trustee, will enter into a Yield
Maintenance Agreement pursuant to which, on each subsequent transfer date, the
Bank will deposit into the Yield Maintenance Account the Additional Yield
Maintenance Amount (as such term is defined in the related Prospectus
Supplement, the "Additional Yield Maintenance Amount") in respect of the
related Receivables. Each Yield Maintenance Agreement will affect only
Receivables having an APR less than the related Required Rate.
MASTER TRUSTS
As may be described in the related Prospectus Supplement, each Trust
Agreement may provide that, pursuant to any one or more supplements thereto,
the Bank may direct the related Trustee to issue from time to time new series
subject to the conditions described below (each such issuance a "Master Trust
New Issuance"). Each Master Trust New Issuance will have the effect of
decreasing the Residual Interest in the related Master Trust. Under each such
Master Trust Agreement, the Bank may designate, with respect to any newly
issued series: (i) its name or designation; (ii) its initial principal amount
(or method for calculating such amount); (iii) its Interest Rate (or formula
for the determination thereof); (iv) the Distribution Dates and the date or
dates from which interest shall accrue; (v) the method for allocating
collections to Securityholders of such series; (vi) any bank accounts to be
used by such series and the terms governing the operation of any such bank
accounts; (vii) the percentage used to calculate monthly servicing fees;
(viii) the provider and terms of any form of Credit Enhancement with respect
thereto; (ix) the terms on which the Securities of such series may be
repurchased or remarketed to other investors; (x) the number of Classes of
Securities of such series, and if such series consists of more than one Class,
the rights and priorities of each such Class; (xi) the extent to which the
Securities of such series will be issuable in book-entry form; (xii) the
priority of such series with respect to any other series; and (xiii) any other
relevant terms. None of the Bank, the Servicer, the related Trustee or any
Master Trust is required or intends to obtain the consent of any
Securityholder of any outstanding series to issue any additional series.
Each Master Trust Agreement provides that the Bank may designate terms such
that each Master Trust New Issuance has an amortization period which may have
a different length and begin on a different date than such periods for any
series previously issued by the related Master Trust and then outstanding.
Moreover, each Master Trust New Issuance may have the benefits of Credit
Enhancements issued by Credit Enhancers different from the providers of the
Credit Enhancement, if any, with respect to any series previously issued by
the related Master Trust and then outstanding. Under each Master Trust
Agreement, the related Trustee shall hold any such Credit Enhancement only on
behalf of the Securityholders to which such Credit Enhancement relates. The
Bank will have the option under each Master Trust Agreement to vary among
series the terms upon which a series may be repurchased by the Issuer or
remarketed to other investors. As more fully described in the related
Prospectus Supplement, there is no limit to the number of Master Trust New
Issuances that the Bank may cause under a Master Trust Agreement. Each Master
Trust will terminate only as provided in the related Master Trust Agreement.
There can be no assurance that the terms of any Master Trust New Issuance
might not have an
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impact on the timing and amount of payments received by Securityholders of
another series issued by the same Master Trust.
Under each Master Trust Agreement and pursuant to a related supplement, a
Master Trust New Issuance may only occur upon the satisfaction of certain
conditions provided in each such Master Trust Agreement. Unless otherwise
specified in the related Prospectus Supplement, the obligation of the related
Trustee to authenticate the Securities of any such Master Trust New Issuance
and to execute and deliver the supplement to the related Master Trust
Agreement is subject to the satisfaction of the following conditions: (a) on
or before the date upon which the Master Trust New Issuance is to occur, the
Bank shall have given the related Trustee, the Servicer, the Rating Agency and
certain related providers of Credit Enhancement, if any, written notice of
such Master Trust New Issuance and the date upon which the Master Trust New
Issuance is to occur; (b) the Bank shall have delivered to the related Trustee
a supplement to the related Master Trust Agreement, in form satisfactory to
such Trustee, executed by each party to the related Master Trust Agreement
other than such Trustee; (c) the Bank shall have delivered to the related
Trustee any related Credit Enhancement agreement; (d) the related Trustee
shall have received confirmation from the Rating Agency that such Master Trust
New Issuance will not result in any Rating Agency reducing or withdrawing its
rating with respect to any other series or Class of such Trust; (e) the Bank
shall have delivered to the related Trustee, the Rating Agency and certain
providers of Credit Enhancement, if any, an opinion of counsel acceptable to
the related Trustee that for federal income tax purposes (i) the Master Trust
New Issuance will not cause the related Master Trust to be deemed to be an
association (or publicly traded partnership) taxable as a corporation, (ii)
such Master Trust New Issuance will not affect the tax characterization as
debt of Securities of any outstanding series or Class issued by such Master
Trust that were characterized as debt at the time of their issuance and (iii)
such Master Trust New Issuance will not cause or constitute an event in which
gain or loss would be recognized by any Securityholders or the related Master
Trust; and (f) any other conditions specified in any supplement. Upon
satisfaction of the above conditions, the related Trustee shall execute the
supplement to the related Master Trust Agreement and issue the Securities of
such new series.
THE SERVICER
The Servicer under each Trust Agreement will be named in the related
Prospectus Supplement. The entity serving as Servicer may be the Bank or an
affiliate of the Bank and may have other business relationships with the Bank
or the Bank's affiliates. The Servicer with respect to each series will
service the Receivables constituting the related Trust Property for such
series. Any Servicer may delegate its servicing responsibilities to one or
more sub-servicers, but will not be relieved of its liabilities with respect
thereto.
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Trustee will appoint the Servicer as initial
custodian of the Receivables. The Servicer, in its capacity as custodian, will
hold the Receivables and all electronic entries, documents, instruments and
writings relating thereto (each, a "Receivable File"), either directly or
through sub-servicers, on behalf of the Trustee for the benefit of
Securityholders and the related Credit Enhancer, if any. The Servicer may
designate CFC to act as Custodian with respect to Receivables Files relating
to the CFC Receivables.
The Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Trust Agreement. An uncured breach of such a representation or
warranty that in any respect materially and adversely affects the interests of
the Securityholders will constitute a Servicer Default by the Servicer under
the related Trust Agreement.
SERVICING PROCEDURES
The Receivables will be serviced by a Servicer pursuant to a Trust
Agreement. Such Servicer may designate CFC or another entity to act as sub-
servicer with respect to the CFC Receivables, although such designation will
not relieve the Servicer from its servicing obligations with respect to such
CFC Receivables. Each Trust Agreement will require that servicing of the
Receivables by the Servicer shall generally be carried out in the same manner
in which it services receivables and vehicles held for its own account. In
performing its duties thereunder, the Servicer will act on behalf and for the
benefit of the related Trustee, subject at all times to the
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provisions of the related Trust Agreement, without regard to any relationship
which the Servicer or any affiliate of the Servicer may otherwise have with an
Obligor.
The Servicer, as an independent contractor on behalf of the related Trustee
and for the benefit of the Securityholders and any Credit Enhancer, will be
responsible for managing, servicing and administering the Receivables and
enforcing and making collections on the Receivables and any insurance policies
and for enforcing any security interest in any of the Vehicles, all as set
forth in the related Trust Agreement. The Servicer's responsibilities will
include collecting and posting of all payments, responding to inquiries of
Obligors, investigating delinquencies, accounting for collections, furnishing
monthly and annual statements to the Trustee and any Credit Enhancer, with
respect to distributions, providing appropriate federal income tax information
for use in providing information to Securityholders, collecting and remitting
sales and property taxes on behalf of taxing authorities and maintaining the
perfected security interest of the related Lender in the Vehicles.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will covenant in each Trust Agreement that: (A) the Vehicle securing
each Receivable will not be released from the security interest granted by the
Contract in whole or in part, except as contemplated by such Trust Agreement;
(B) the Servicer will not impair in any material respect the rights of the
Trustee or the Securityholders in the Receivables, certain rights under any
agreements pursuant to which such Lender acquired such Receivables; and (C)
the Servicer will not increase or decrease the amount of payments or the
amount financed under a Receivable, or change the APR of a Receivable;
provided, however, that the Servicer may extend any Receivable for credit-
related reasons that would be acceptable to the Servicer with respect to
retail installment sales or finance contracts and installment loans serviced
by it for its own account in accordance with its customary standards. However,
if the cumulative extensions with respect to any Receivable shall cause the
term of any such Receivable to extend beyond the last day of the Collection
Period immediately preceding the final scheduled distribution date with
respect to the related Securities, then the Servicer shall be obligated to
purchase such Receivable as of the last day of the Collection Period following
the Collection Period in which the extension was made (or, at the Servicer's
election, as of the last day of the Collection Period or earlier under certain
circumstances).
Unless otherwise specified in the related Prospectus Supplement, in the
event of a breach by the Servicer of any covenant described above that
materially and adversely affects a Receivable or the interests of the related
Issuer, the Securityholders or a Credit Enhancer in such Receivable, the
Servicer, unless such breach has been cured by the last day of the Collection
Period following the Collection Period during which the Servicer became aware
of, or received written notice of, such breach, will be required to purchase
as of such day (or, at the Servicer's election, as of the last day of the
Collection Period during which such breach was discovered) the Receivable from
the Trustee for the Purchase Amount which shall be paid on the Determination
Date in such subsequent Collection Period or earlier under certain
circumstances. The purchase obligation will constitute the sole remedy
available to the Securityholders or the Trustee against the Servicer for any
such uncured breach.
Each Trust Agreement will also require the Servicer to charge off a
Receivable as a Defaulted Receivable in accordance with its customary
standards and to follow such of its normal collection practices and procedures
as it deems necessary or advisable, and that are consistent with the standard
of care required by such Trust Agreement, to realize upon any Receivable. The
Servicer may sell the Vehicle securing such Receivable at a judicial sale or
take any other action permitted by applicable law. See "Certain Legal Aspects
of the Receivables." The net proceeds of such realization will be deposited
into the Collection Account at the time and in the manner described above.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For its servicing of the Receivables, the Servicer will be entitled to
retain from collections on the Receivables a Servicing Fee in an amount as
described in the related Prospectus Supplement. A portion of such Servicing
Fee may be paid over by the Servicer to CFC or any other sub-servicer with
respect to its sub-servicing of the CFC Receivables.
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All costs of servicing each Receivable in the manner required by the related
Trust Agreement shall be borne by the Servicer, but the Servicer shall be
entitled to retain, out of any amounts actually recovered with respect to any
Defaulted Receivable or the Vehicles subject thereto, the Servicer's actual
out-of-pocket expenses reasonably incurred with respect to such Defaulted
Receivable or Vehicle.
INDEMNIFICATION
Each Trust Agreement will provide that the Servicer will defend, indemnify
and hold harmless the Trustee, the Trust, the Securityholders, and any Credit
Enhancer against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation, reasonably incurred, arising out of or resulting from the use,
repossession or operation by the Servicer or any affiliate thereof of any
Vehicles; provided, however, that the Servicer will have no obligation to
indemnify any person or entity against any credit loss on any Receivable
serviced by the Servicer in accordance with the requirements of the Trust
Agreement. The Servicer will also indemnify, defend and hold harmless the
related Issuer, the Trustee and its officers, directors, employees and agents,
and any Credit Enhancer from and against any loss, liability, expense, damage
or injury, including any judgement, award, settlement, reasonable attorneys'
fees and other costs or expenses incurred in connection with the defense of
any action, proceeding or claim, to the extent such loss, liability, expense,
damage or injury arises out of, or is imposed upon such persons through, the
willful misfeasance, bad faith or negligence of the Servicer in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties as Servicer under the related Trust Agreement. The
Bank's obligations, as Servicer, to indemnify the related Issuer and the
Securityholders for acts or omissions of the Bank as Servicer will survive the
removal of the Servicer but will not apply to any acts or omissions of a
successor Servicer.
EVIDENCE AS TO COMPLIANCE
Except as otherwise provided in the related Prospectus Supplement, each
Trust Agreement will require the Servicer to deliver an officers' certificate
to the Trustee stating (i) a review of the activities of the Servicer during
the period specified in the related Prospectus Supplement and of its
performance under the Trust Agreement has been made under such officers'
supervision and (ii) to the best of such officers' knowledge, based on such
review, the Servicer has fulfilled all of its obligations under the Trust
Agreement throughout such period, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officers and the nature and status thereof.
If so specified in the related Prospectus Supplement, the Servicer shall
cause a firm of independent certified public accountants (who may also render
other services to the Servicer) to deliver to the Trustee and each holder of
the Securities an annual written statement to the effect that such firm has
read the monthly Servicer's certificates delivered pursuant to the related
Trust Agreement with respect to such period and reviewed the servicing of the
Receivables by the Servicer and that such review (1) included evaluations of
servicing practices relating to automobile, light duty truck and van loans
serviced for others in accordance with the requirements set forth in the Trust
Agreement, and (2) except as described in the report, disclosed no exceptions
or errors in the records relating to automobile, light duty truck and van
loans serviced for others that, in the firm's opinion, industry practice
requires such firm to report.
CERTAIN MATTERS REGARDING THE SERVICER
Each Trust Agreement will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder, except upon determination that
the performance by such Servicer of such duties is no longer permissible under
applicable law. No such resignation will become effective until the related
Trustee or a successor servicer has assumed such Servicer's servicing
obligations and duties under such Trust Agreement.
Each Trust Agreement will further provide that neither the Servicer nor any
of its respective directors, officers, employees, or agents shall be under any
liability to the Trustee or the Securityholders for taking any action or for
refraining from taking any action pursuant to the Trust Agreement, or for
errors in judgment; provided, however, that neither the Servicer nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance
of duties or
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by reason of reckless disregard of obligations and duties thereunder. In
addition, each Trust Agreement will provide that the Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under such Trust Agreement and
that, in its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in a Trust Agreement, any entity into
which the Servicer may be merged or consolidated, or any entity resulting from
any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor to the Servicer
under such Trust Agreement.
SERVICER DEFAULT
Unless otherwise specified in the related Prospectus Supplement, any of the
following events will constitute a "Servicer Default" under a Trust Agreement:
(i) any failure by the Servicer to deliver to the Trustee on or before the
Determination Date the Servicer's certificate or to deliver to the Trustee for
distribution to the Securityholders any required payment, which failure
continues unremedied for more than the number of days specified in the related
Prospectus Supplement after written notice from (x) the Trustee, or the
Holders of a specified percentage of the related Securities, in either case
with the consent of any Credit Enhancer, or (y) a Credit Enhancer, if any, is
received by the Servicer; (ii) any failure by the Servicer or the Bank duly to
observe or perform in any material respect any other covenant or agreement of
the Servicer or the Bank, as the case may be, in the Trust Agreement, which
failure materially and adversely affects the rights of the Securityholders and
which continues unremedied for more than the number of days specified in the
related Prospectus Supplement after the giving of written notice of such
failure (x) to the Servicer or the Bank, as the case may be, by the Trustee
and by the Credit Enhancer, (y) to the Servicer or the Bank, as the case may
be, and to the Trustee by a specified percentage of the related
Securityholders and by the Credit Enhancer or (z) to the Servicer or the Bank,
as the case may be, by the Credit Enhancer; and (iii) any Insolvency Event. An
"Insolvency Event" shall mean financial insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to
the Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations.
REMOVAL OF THE SERVICER
Unless otherwise specified in the related Prospectus Supplement, the
Servicer can only be removed pursuant to a Servicer Default. Unless otherwise
specified in the related Prospectus Supplement, if a Servicer Default shall
have occurred and be continuing, (x) with the consent of the Credit Enhancer,
if any, either the Trustee or the Securityholders evidencing more than 50% of
the Security Principal Balance or (y) a Credit Enhancer may give written
notice to the Servicer of the termination of all of the rights and obligations
of the Servicer under the Trust Agreement. On and after the time the Servicer
receives a notice of termination, the related Trustee shall be the successor
in all respects to the Servicer in its capacity as servicer of the Receivables
under the Trust Agreement. The Trustee may, if it shall be unwilling to so
act, or shall, if it is unable to so act, appoint, or petition a court of
competent jurisdiction for the appointment of, a successor Servicer to act as
successor to the outgoing Servicer under the Trust Agreement.
PAYMENTS ON RECEIVABLES
With respect to each series of Securities, unless otherwise specified in the
related Prospectus Supplement, the Servicer will deposit into the Collection
Account all payments on the related Receivables (from whatever source) and all
proceeds of such Receivables collected within two (2) business days of receipt
thereof in the related collection facility, such as a lock-box account or
collection account. Moneys deposited in such collection facility for Trust
Property may be commingled with funds from other sources.
PRE-FUNDING ACCOUNTS
A series of securities may contain a feature pursuant to which the Bank will
agree to transfer Additional Receivables to the related Trust Property,
following the date on which the related Securities are issued. Such a
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pre-funding feature may permit the acquisition of Additional Receivables that
could not be delivered by the Bank or have not formally completed the
origination process, in each case prior to the Closing Date. Any such
agreement will require that any Receivables so transferred to the related
Trust Property conform to the requirements specified therein.
If such feature is to be utilized or the related Trust Agreement so
specifies, and unless otherwise specified in the related Prospectus
Supplement, the related Trustee will be required to deposit in a segregated
account (each, a "Pre-Funding Account") up to 100% of the net proceeds
received by the Trustee in connection with the sale of one or more Classes of
Securities of the related series; the Additional Receivables will be
transferred to the related Trust Property in exchange for money released to
the Bank from the related Pre-Funding Account. Each such agreement or the
related Trust Agreement will specify the Pre-Funding Period during which any
such transfers must occur; for a Trust which elects federal income treatment
as a grantor trust, the related Pre-Funding Period will be limited to three
months from the date such Trust is established; for a Trust which is treated
as a mere security device for federal income tax purposes, the related Pre-
Funding Period will be limited to nine months from the date such Trust is
established. Unless otherwise specified in the related Prospectus Supplement,
each such agreement or the related Trust Agreement will require that, if all
moneys originally deposited to such Pre-Funding Account are not so used by the
end of the related Pre-Funding Period, then any remaining moneys will be
applied as a mandatory prepayment of the related Class or Classes of
Securities as specified in the related Prospectus Supplement.
During the Pre-Funding Period the moneys deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in cash-
equivalent investments rated in one of the four highest rating categories by
at least one nationally recognized statistical rating organization and which
will either mature prior to the end of the Pre-Funding Period, or will be
drawable on demand and in any event, will not constitute the type of
investment which would require registration of the related Trust as an
"investment company" under the Investment Company Act of 1940, as amended.
STATEMENTS TO INDENTURE TRUSTEES AND TRUSTEES
Prior to each Distribution Date with respect to each series of Securities,
the Servicer will provide to the applicable Indenture Trustee and/or the
applicable Trustee and Credit Enhancer as of the close of business on the last
day of the preceding related Collection Period a statement setting forth
substantially the same information as is required to be provided in the
periodic reports provided to Securityholders of such series described under
"Description of the Securities--Reports to Securityholders".
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, a Trust
Agreement may be amended by agreement of the Trustee, the Bank and the
Servicer at any time, without the consent of the Securityholders but with the
consent of the related Credit Enhancer, if any, to cure any ambiguity or
defect, to correct or supplement any provisions therein, to correct any
typographical error or to add any other provisions with respect to matters or
questions arising thereunder, upon receipt of an opinion of counsel to the
Trustee that such amendment will not adversely affect in any material respect
the interests of any Securityholder.
Unless otherwise specified in the related Prospectus Supplement, a Trust
Agreement may also be amended from time to time by the Trustee, the Bank and
the Servicer with the consent of the related Credit Enhancer, if any, and
Holders of Securities evidencing more than 50% of the related Security
Principal Balance for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Trust Agreement or of
modifying in any manner the rights of the Securityholders; provided, however,
that no such amendment shall (a) increase or reduce in any manner the amount
of, or accelerate or delay the timing of, collections of payments on the
Receivables or distributions which are required to be made on any Security
without the consent of the Holder of such Security or (b) reduce the aforesaid
percentage of Securityholders required to consent to any amendment, without
unanimous consent of the Securityholders.
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The Trustee will be required under a Trust Agreement to furnish
Securityholders, any Credit Enhancer and the Rating Agencies with written
notice of the substance of any such amendment to the Trust Agreement promptly
upon execution of such amendment.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee may resign, subject to the conditions set forth below, at any
time upon written notice to the Servicer, in which event the Servicer, with
the consent of any Credit Enhancer, will be obligated to appoint a successor
Trustee. If no successor Trustee shall have been so appointed and have
accepted such appointment within a specified period after the giving of such
notice of resignation, the resigning Trustee may petition a court of competent
jurisdiction for the appointment of a successor Trustee. Any successor Trustee
shall meet the financial and other standards for qualifying as a successor
Trustee under the Trust Agreement. The Servicer may also remove the Trustee if
the Trustee ceases to be eligible to continue as such under the Trust
Agreement, or is legally unable to act, or if the Trustee is adjudicated to be
insolvent. In such circumstances, the Servicer will also be obligated to
appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective without the
written consent of any Credit Enhancer and until acceptance of the appointment
by the successor Trustee.
The Trust Agreement will provide that the Trustee shall prepare or shall
cause to be prepared any tax returns required to be filed by the related Trust
and shall promptly sign and file such returns. In addition, the Trust
Agreement provides that in no event shall the Trustee be liable for any
liabilities, costs or expenses of the Trust or the Securityholders under any
tax law, including without limitation federal, state or local income or excise
taxes or any other tax imposed on or measured by income (or any interest or
penalty with respect thereto or arising from a failure to comply therewith).
The Servicer will indemnify, defend and hold harmless the Trustee, its
officers, directors, employees and agents and any Credit Enhancer from and
against any loss, liability or expense incurred without negligence or bad
faith on the part of the Trustee or its officers, directors, employees or
agents and arising out of or in connection with the acceptance or
administration by the Trustee of its duties pursuant to the Trust Agreement,
as applicable, including the costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance of any
of the Trustee's powers or duties under the Trust Agreement.
TERMINATION
With respect to each series of Securities, unless otherwise specified in the
related Prospectus Supplement, the obligations of the Servicer, the Bank and
the applicable Trustee pursuant to the related Trust Agreement will terminate
upon the earlier to occur of (i) the maturity or other liquidation of the last
related Receivable and the disposition of any amounts received upon
liquidation of any such remaining Receivables and (ii) the payment to
Securityholders of the related series of all amounts required to be paid to
them pursuant to such Trust Agreement. As more fully described in the related
Prospectus Supplement, in order to avoid excessive administrative expense, the
Servicer will be permitted, unless otherwise specified in the related
Prospectus Supplement, at its option to purchase the related Trust Property,
as of the end of any Collection Period immediately preceding a Distribution
Date, if the Pool Balance of the related Contracts is less than a specified
percentage (set forth in the related Prospectus Supplement) of the initial
Pool Balance in respect of such Trust Property, all such remaining Receivables
(at the price specified in the related Prospectus Supplment) as of the end of
such Collection Period, together with any related Reimbursement Amounts. The
related Securities will be redeemed following such purchase.
If and to the extent provided in the related Prospectus Supplement with
respect to the Trust Property, the applicable Trustee will solicit bids for
the purchase of the Receivables remaining in such Trust Property, in the
manner and subject to the terms and conditions set forth in such Prospectus
Supplement. If such Trustee receives satisfactory bids as described in such
Prospectus Supplement, then the Receivables remaining in such Trust Property
will be sold to the highest bidder.
As more fully described in the related Prospectus Supplement, any
outstanding Securities of the related series will be redeemed concurrently
with either of the events specified above and the subsequent distribution to
the related Securityholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement may affect the prepayment of the
Securities of such series.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
GENERAL
The transfer of Receivables and other property by the Bank to the Trust
pursuant to the related Trust Agreement, the perfection of the security
interests in the Receivables and the enforcement of rights to realize on the
Vehicles as collateral for the Receivables are subject to a number of federal
and state laws, including the Uniform Commercial Code (the "UCC") as in effect
in various states. As specified in each Prospectus Supplement, the Bank will
take such action as is required to perfect the rights of the Trustee in the
Receivables. If, through inadvertence or otherwise, a third party were to
purchase (including the taking of a security interest in) a Receivable for new
value in the ordinary course of its business, without actual knowledge of the
Trustee's interest, and take possession of a Receivable, the purchaser would
acquire an interest in such Receivable superior to the interest of the Trust.
As further specified in each Prospectus Supplement, no action will be taken to
perfect the rights of the Trustee in proceeds of any insurance policies
covering individual Vehicles or Obligors. Therefore, the rights of a third
party with an interest in such proceeds could prevail against the rights of
the Trustee.
SECURITY INTEREST IN VEHICLES
Retail installment sale or finance contracts and installment loans such as
the Receivables evidence the credit sale of automobiles, light duty trucks and
vans by dealers to obligors; the contracts and the installment loan and
security agreements also constitute personal property security agreements and
include grants of security interests in the vehicles under the UCC. Perfection
of security interests in the vehicles is generally governed by the motor
vehicle registration laws of the state in which the vehicle is located. In the
jurisdictions in which most of the Vehicles are expected to be located, a
security interest in a vehicle is perfected by notation of the secured party's
lien on the vehicle's certificate of title and, in certain jurisdictions, by
delivery of the certificate of title to the secured party. Each Receivable
prohibits the sale or transfer of the Vehicle without the consent of the
applicable Lender.
Pursuant to each Trust Agreement, the related Lender will assign its
security interests in the Vehicles to the Trustee. However, because of the
administrative burden and expense, neither the Lender nor the Trustee will
amend or endorse any certificate of title to identify the Trustee as the new
secured party on the certificates of title relating to the Vehicles. Also,
unless otherwise specified in the related Prospectus Supplement, the Bank, as
Servicer, will continue to hold any certificates of title relating to the
Vehicles in its possession as custodian for the Trustee pursuant to the
related Trust Agreement.
Under the laws of certain states, such an assignment of security interests
may not be sufficient to convey to the Trustee perfected security interests in
the Vehicles.
Because the Trustee will not be identified as the secured party on the
certificate of title, the security interest of the Trustee in the vehicle
could be defeated in certain circumstances. In the absence of fraud or forgery
by the vehicle owner or the related Lender, or administrative error by state
or local agencies or the related Lender, the notation of the lien of the
related Lender on the certificates should be sufficient to protect the Trustee
against the right of subsequent purchasers of a Vehicle or subsequent lenders
who take a security interest in a Vehicle. If there are any Vehicles as to
which the related Lender failed to obtain a perfected security interest, its
security interest would be subordinate to, among others, subsequent purchasers
of the Vehicles and holders of perfected security interests. Such a failure,
however, would constitute a breach of the Bank's warranties under the Trust
Agreement and would create an obligation of the Bank to repurchase the related
Receivable unless the breach is cured.
Under the laws of most states, the perfected security interest in a vehicle
continues for four months after a vehicle is moved to a state other than the
state which issued the certificate of title and thereafter until the vehicle
owner re-registers the vehicle in the new state. A majority of states require
surrender of a certificate of title to
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<PAGE>
re-register a vehicle; accordingly, a secured party must surrender possession
if it holds the certificate of title to the vehicle. Thus, the secured party
would have the opportunity to re-perfect its security interest in the vehicle
in the state of relocation. In states that do not require a certificate of
title for registration of a motor vehicle, re- registration could defeat
perfection.
In the ordinary course of servicing receivables, the Bank takes steps to
effect re-perfection upon receipt of notice of re-registration or information
from the obligor as to relocation. Similarly, when an obligor sells a vehicle,
a majority of states require surrender of a certificate of title to issue a
certificate of title in the name of the purchaser. In such states the Bank
must surrender possession of the certificate of title, if it holds the
certificate of title, and accordingly will have an opportunity to require
satisfaction of the related Receivable before release of the lien. Under each
Trust Agreement, the Servicer will be obligated to take appropriate steps, at
its own expense, to maintain perfection of security interests in the Vehicles.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for certain unpaid taxes take priority over even a perfected
security interest in a Vehicle. The Code also grants priority to certain
federal tax liens over the lien of a secured party. The laws of certain states
and federal law permit the confiscation of motor vehicles under certain
circumstances if used in unlawful activities, which may result in the loss of
a secured party's perfected security interest in the confiscated motor
vehicle.
The Bank will represent that, as of the Closing Date, each security interest
in a Vehicle is or will be prior to all other present liens (other than tax
liens and liens that arise by operation of law) upon and security interests in
such Vehicle. However, liens for repairs or taxes, or the confiscation of a
Vehicle, could arise or occur at any time during the term of a Receivable. No
notice will be given to the Trustee or Securityholders in the event such a
lien arises or confiscation occurs.
REPOSSESSION
In the event of default by an Obligor, the holder of the related retail
installment sale or finance contract has all the remedies of a secured party
under the UCC, except where specifically limited by other state laws. The UCC
remedies of a secured party include the right to repossession by self-help
means, unless such means would constitute a breach of the peace. Unless a
vehicle is voluntarily surrendered, self-help repossession is accomplished
simply by taking possession of the related financed vehicle. In cases where
the Obligor objects or raises a defense to repossession, or if otherwise
required by applicable state law, a court order is obtained from the
appropriate state court, and the vehicle must then be recovered in accordance
with that order. In some jurisdictions, the secured party is required to
notify the debtor of the default and the intent to repossess the collateral
and give the debtor a time period within which to cure the default prior to
repossession. Generally, this right of cure may only be exercised on a limited
number of occasions during the term of the related contract. Other
jurisdictions permit repossession without prior notice if it can be
accomplished without a breach of the peace (although in some states, a course
of conduct in which the creditor has accepted late payments has been held to
create a right by the Obligor to receive prior notice).
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require a secured party to provide the Obligor
with reasonable notice of the date, time and place of any public sale and/or
the date after which any private sale of the collateral may be held. In
addition, some states also impose substantive timing requirements on the sale
of repossessed vehicles in certain circumstances and/or various substantive
timing and content requirements on such notices. In most states, under certain
circumstances after a financed vehicle has been repossessed, the Obligor may
redeem the collateral by paying the delinquent installments and other amounts
due. The Obligor has the right to redeem the collateral prior to actual sale
or entry by the secured party into a contract for sale of the collateral by
paying the secured party the unpaid principal balance of the obligation,
accrued interest thereon, reasonable expenses for repossessing, holding, and
preparing the collateral for disposition and arranging for its sale, plus, in
some jurisdictions, reasonable attorneys' fees and legal expenses or in some
other states, by payment of delinquent installments on the unpaid principal
balance of the related obligation.
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DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the Vehicles generally will be applied first to
the expenses of resale and repossession and then to the satisfaction of the
indebtedness. In many instances, the remaining principal amount of such
indebtedness will exceed such proceeds. Under the UCC and laws applicable in
some states, a creditor is entitled to bring an action to obtain a deficiency
judgment from a debtor for any deficiency on repossession and resale of a
motor vehicle securing such debtor's loan; however, in some states, a creditor
may not seek a deficiency judgment from a debtor whose financed vehicle had an
initial cash sales price below some requisite dollar amount. Some states
impose prohibitions or limitations or notice requirements on actions for
deficiency judgments. In addition to the notice requirement described above,
the UCC requires that every aspect of the sale or other disposition, including
the method, manner, time, place and terms, be "commercially reasonable."
Generally, courts have held that when a sale is not "commercially reasonable,"
the secured party loses its right to a deficiency judgment. In addition, the
UCC permits the debtor or other interested party to recover for any loss
caused by noncompliance with the provisions of the UCC. Also, prior to a sale,
the UCC permits the debtor or other interested person to obtain an order
mandating that the secured party refrain from disposing of the collateral if
it is established that the secured party is not proceeding in accordance with
the "default" provisions under the UCC. However, the deficiency judgment would
be a personal judgment against the Obligor for the shortfall, and a defaulting
Obligor can be expected to have very little capital or sources of income
available following repossession. Therefore, in many cases, it may not be
useful to seek a deficiency judgment or, if one is obtained, it may be settled
at a significant discount or be uncollectible.
Occasionally, after resale of a vehicle and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC requires the
creditor to remit the surplus to any holder of a subordinate lien with respect
to the vehicle or if no such lienholder exists or if there are remaining
funds, the UCC requires the creditor to remit the surplus to the Obligor under
the contract.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon creditors and servicers involved in
consumer finance. These laws include the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B
and Z, state adaptations of the National Consumer Act and of the Uniform
Consumer Credit Code, state motor vehicle retail installment sale acts, state
"lemon" laws and other similar laws. In addition, the laws of certain states
impose finance charge ceilings and other restrictions on consumer transactions
and require contract disclosures in addition to those required under federal
law. These requirements impose specific statutory liabilities upon creditors
who fail to comply with their provisions. In some cases, this liability could
affect the ability of an assignee such as the Trustee to enforce consumer
finance contracts such as the Receivables.
The so-called "Holder-in-Due-Course Rule" of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting any assignee of the seller in a
consumer credit transaction (and certain related creditors and their
assignees) to all claims and defenses which the Obligor in the transaction
could assert against the seller. Liability under the FTC Rule is limited to
the amounts paid by the Obligor under the contract, and the holder of the
contract may also be unable to collect any balance remaining due thereunder
from the Obligor. The FTC Rule is generally duplicated by the Uniform Consumer
Credit Code, other state statutes or the common law in certain states. To the
extent that the Receivables will be subject to the requirements of the FTC
Rule, the Trustee, as holder of the Receivables, will be subject to any claims
or defenses that the purchaser of the related Vehicle may assert against the
seller of such Vehicle. Such claims will be limited to a maximum liability
equal to the amounts paid by the Obligor under the related Receivable.
Under most state vehicle dealer licensing laws, sellers of automobiles,
light duty trucks and vans are required to be licensed to sell vehicles at
retail sale. In addition, with respect to used vehicles, the Federal Trade
39
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Commission's Rule on Sale of Used Vehicles requires that all sellers of used
vehicles prepare, complete and display a "Buyer's Guide" which explains the
warranty coverage for such vehicles. Furthermore, Federal Odometer Regulations
promulgated under the Motor Vehicle Information and Cost Savings Act and the
motor vehicle title laws of most states require that all sellers of used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if
either a Buyer's Guide or Odometer Disclosure Statement was not provided to
the purchaser of a Vehicle, the Obligor may be able to assert a defense
against the seller of the Vehicle. If an Obligor on a Receivable were
successful in asserting any such claim or defense, the Servicer would pursue
on behalf of the Trust any reasonable remedies against the seller or
manufacturer of the vehicle, subject to certain limitations as to the expense
of any such action specified in the related Trust Agreement.
Any loss relating to any such claim, to the extent not covered by a
withdrawal from a reserve account or from a payment under an insurance policy
or other Credit Enhancement could result in losses to the Securityholders. If
an Obligor were successful in asserting any such claim or defense as described
in this paragraph or the two immediately preceding paragraphs, such claim or
defense would constitute a breach of a representation and warranty under the
related Trust Agreement and would create an obligation of the Bank to
reacquire the related Receivable unless the breach were cured.
Courts have applied general equitable principles to secured parties pursuing
repossession or litigation involving deficiency balances. These equitable
principles may have the effect of relieving an Obligor from some or all of the
legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections of the 14th Amendment to the Constitution of the United States.
Courts have generally either upheld the notice provisions of the UCC and
related laws as reasonable or have found that the creditor's repossession and
resale do not involve sufficient state action to afford constitutional
protection to consumers.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act, an Obligor who enters military service
after the origination of such Obligor's Receivable (including an Obligor who
was in reserve status and is called to active duty after origination of the
Receivable), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such Obligor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to Obligors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard, and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
Obligors who enter military service (including reservists who are called to
active duty) after origination of the related Receivable, no information can
be provided as to the number of loans that may be effected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Servicer to collect full amounts of
interest on certain of the Receivables. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation or
regulations, which would not be recoverable from the related Receivables,
would result in a reduction of the amounts distributable to the holders of the
related Securities, and would not be covered by any form of Credit Enhancement
provided in connection with the related series of Securities. In addition, the
Relief Act imposes limitations that would impair the ability of the Servicer
to foreclose on an affected Receivable during the Obligor's period of active
duty status, and, under certain circumstances, during an additional three
month period thereafter. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any Receivable which goes into default,
there may be delays in payment and losses on the related Securities in
connection therewith. Any other interest shortfalls, deferrals or forgiveness
of payments on the Receivables resulting from similar legislation or
regulations may result in delays in payments or losses to Securityholders of
the related series.
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OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a creditor to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossessing a motor vehicle, and, as part of the rehabilitation
plan, reduce the amount of the secured indebtedness to the market value of the
motor vehicle at the time of bankruptcy (as determined by the court), leaving
the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness. Any such shortfall, to the extent not covered
by Credit Enhancement (as specified in each Prospectus Supplement), could
result in losses to the related Securityholders.
CERTAIN TAX CONSIDERATIONS
The Prospectus Supplement for each series of Securities (or Class thereof)
offered hereby and by the related Prospectus Supplement will summarize,
subject to the limitations stated therein, federal income tax considerations
relevant to the purchase, ownership and disposition of such Securities.
ERISA CONSIDERATIONS
The Prospectus Supplement for each series of Securities (or Class thereof)
offered hereby and by the related Prospectus Supplement will summarize,
subject to the limitations discussed therein, considerations under ERISA
relevant to the purchase of such Securities by employee benefit plans and
individual retirement accounts.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Bank from such sale.
The Bank intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters, including sales to trusts with respect to
which the underwriters may act as depositor and may from time to time
repurchase Securities for resale to the public;
2. By placements by the Bank with institutional investors through
dealers;
3. By direct placements by the Bank with institutional investors; and
4. By competitive bid.
In addition, if specified in the related Prospectus Supplement, a series of
Securities may be offered in whole or in part in exchange for the Receivables
(and other assets, if applicable) that would comprise the Trust Property in
respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions,
at fixed public offering prices or at varying prices to be determined at the
time of sale or at the time of commitment therefor. The managing
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underwriters will be set forth on the cover of the Prospectus Supplement
relating to such series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Bank or from purchasers of the Securities in the form of
discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Bank and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Prospectus Supplement will describe any such compensation paid by the
Bank.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Bank will indemnify the several underwriters and the
underwriters will indemnify the Bank against certain civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Bank and purchasers of
Securities of such series.
Purchasers of Securities, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Securities. Holders of Securities should consult with their legal advisors in
this regard prior to any such reoffer or sale.
LEGAL OPINIONS
Certain legal matters relating to the issuance of the Securities of any
series, including certain federal and state income tax consequences with
respect thereto, will be passed upon by counsel specified in the related
Prospectus Supplement.
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INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<S> <C>
Accrual Securities.......................................................... 6
Actuarial Contracts......................................................... 18
Additional Receivables...................................................... 9
Additional Yield Maintenance Amount......................................... 30
Affiliate................................................................... 1
APR......................................................................... 10
Bank........................................................................ 1
Cede........................................................................ 10
Cedel....................................................................... 10
CEDEL Participants.......................................................... 24
Certificateholders.......................................................... 25
Certificates................................................................ 1
CFC......................................................................... 1
Class....................................................................... 1
Closing Date................................................................ 17
Code........................................................................ 11
Collection Account.......................................................... 28
Collection Period........................................................... 7
Commission.................................................................. 2
Commodity Indexed Securities................................................ 27
Contracts................................................................... 1
Cooperative................................................................. 24
Credit Enhancement.......................................................... 8
Credit Enhancer............................................................. 15
Currency Indexed Securities................................................. 27
Cut-Off Date................................................................ 16
Definitive Securities....................................................... 25
Depositaries................................................................ 22
Determination Date.......................................................... 29
Distribution Account........................................................ 28
Distribution Date........................................................... 6
DTC......................................................................... 3
Eligible Deposit Account.................................................... 29
Eligible Institution........................................................ 29
Eligible Investments........................................................ 29
ERISA....................................................................... 11
Euroclear................................................................... 10
Euroclear Operator.......................................................... 24
Euroclear Participants...................................................... 24
Exchange Act................................................................ 2
Face Amount................................................................. 27
FASIT....................................................................... 2
FDIA........................................................................ 13
FDIC........................................................................ 13
Fixed Income Securities..................................................... 5
FTC Rule.................................................................... 39
High Yield Interests........................................................ 11
Indenture................................................................... 4
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Index....................................................................... 27
Indexed Commodity........................................................... 27
Indexed Currency............................................................ 27
Indexed Principal Amount.................................................... 27
Indexed Securities.......................................................... 27
Indirect Participants....................................................... 23
Insolvency Event............................................................ 34
Interest Rate............................................................... 2
Investment Company Act...................................................... 4
Investment Earnings......................................................... 29
Issuer...................................................................... 1
Lender...................................................................... 16
Master Trust................................................................ 8
Master Trust Agreement...................................................... 8
Master Trust New Issuance................................................... 30
Noteholders................................................................. 25
Notes....................................................................... 1
Original Security Principal Balance......................................... 26
OTS......................................................................... 20
Participants................................................................ 22
Pass-Through Rate........................................................... 2
Pool Balance................................................................ 8
Pool Factor................................................................. 19
Pooling Agreement........................................................... 4
Pre-Funding Account......................................................... 9
Pre-Funding Period.......................................................... 9
Prepayment.................................................................. 15
Prospectus Supplement....................................................... 1
Purchase Amount............................................................. 29
Rating Agencies............................................................. 11
Ratings Effect.............................................................. 14
Receivable File............................................................. 31
Receivables................................................................. 1
Regular Interests........................................................... 11
Record Date................................................................. 6
Registration Statement...................................................... 2
Reimbursement Amounts....................................................... 26
Relief Act.................................................................. 15
Required Rate............................................................... 10
Residual Interest........................................................... 8
Rule of 78s................................................................. 17
Rule of 78s Contracts....................................................... 17
Rules....................................................................... 23
SAIF........................................................................ 20
Securities.................................................................. 1
Securities Act.............................................................. 2
Security Principal Balance.................................................. 26
Securityholders............................................................. 6
Senior Securities........................................................... 6
Servicer.................................................................... 1
Servicer Default............................................................ 34
Servicing Agreement......................................................... 4
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
Simple Interest Contracts................................................... 18
Stock Index................................................................. 27
Stock Indexed Securities.................................................... 27
Strip Securities............................................................ 6
Subordinate Securities...................................................... 6
Terms and Conditions........................................................ 24
Trust....................................................................... 1
Trust Accounts.............................................................. 29
Trust Agreement............................................................. 5
Trust Property.............................................................. 1
Trustee..................................................................... 4
UCC......................................................................... 37
Vehicles.................................................................... 1
Yield Maintenance Agreement................................................. 30
Yield Maintenance Amount.................................................... 10
</TABLE>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENT PROCEDURES
Except in certain limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their Relevant
Depository which in turn will hold such positions in their accounts as DTC
Participants. Investors electing to hold their Global Securities through DTC
will follow DTC settlement practices. Investor securities custody accounts
will be credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior asset-
backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Trading between a DTC Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a CEDEL Participant or a Euroclear Participant, the
purchaser will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear will instruct the Relevant Depository, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following
month. Payment will then be made by the Relevant Depository to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual prodecures, to the CEDEL Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and
the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., trade fails), the CEDEL or Euroclear cash debt will
be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although the result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
CEDEL or Euroclear will instruct the respective Depository, as appropriate, to
credit the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
CEDEL Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). In the event that the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect
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to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem;
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on debt issued in registered
form by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with Effectively Connected Income (Form
4224). A Non-U.S. Person (as defined below), including a corporation or bank
that is a Non-U.S. Person, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption
from Withholding of Tax on the Income Effectively Connected with the Conduct
of a Trade or Business in the United States). Form 4224 may also be filed by
the Certificate Owner's Agent.
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty Countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on
the treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8.
Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (W-9). Generally, U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. Owners of Global Securities or,
in the case of a Form 1001 or a Form 4224 filer, their agent, file by
submitting the appropriate form to the person through whom they
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hold (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one taxable year of the Owner.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof, (iii) an estate
that is subject to U.S. federal income tax regardless of the source of its
income, or (iv) a trust if a court within the United States can exercise
primary supervision over its administration and one or more United States
persons have the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors
are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
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