<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed and +
+declared effective with the Securities and Exchange Commission. These +
+securities may not be sold nor may offers to buy be accepted without delivery +
+of a final Prospectus Supplement and accompanying Prospectus. This prospectus +
+shall not constitute an offer to sell or the solicitation of an offer to buy +
+nor shall there be any sale of these securities in any State in which such +
+offer, solicitation or sale would be unlawful prior to registration or +
+qualification under the securities laws of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS SUPPLEMENT (To prospectus dated September 1, 2000)
$318,684,000
Chevy Chase Auto Receivables Trust 2000-2
Chevy Chase Bank
Seller and Servicer
Consider The trust will issue -
carefully
the risk . Six classes of notes that are offered by this preliminary
factors prospectus supplement; and
beginning on
page S-5 of . Subordinate interests in the trust that are not offered by
this this preliminary prospectus supplement but serve as credit
preliminary support to the notes offered by this preliminary prospectus
prospectus supplement. These subordinate interests will initially be
supplement issued to the bank.
and page 3
of the The notes -
prospectus.
. Are backed by a pledge of assets of the trust. The assets
The notes of the trust securing the notes will include a pool of
represent "prime" quality auto loans secured by new and used
asset-backed automobiles, light duty trucks and vans;
debt secured
solely by . Receive monthly distributions on the 15th day of each
the auto month, or if not a business day, then on the next business
loan pool day, beginning on October 16, 2000; and
held by the
trust. The . Currently have no trading market.
notes are
not Credit enhancement for the notes will consist of -
interests in
or . A reserve account that can be used to pay shortfalls in
obligations payments on the notes; and
of any other
person. . Overcollateralization resulting from the excess of the
principal amount of the auto loans over the aggregate
No principal amount of the notes.
governmental
agency or
instrumentality
has insured
or
guaranteed
the notes or
the
underlying
auto loans.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Issuance Interest Final Scheduled Initial Public Underwriting Proceeds
Amount Rate Payment Date Offering Price Discount to the Bank(1)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Notes $ 49,000,000 September 17, 2001
------------------------------------------------------------------------------------------------------
Class A-2 Notes $111,000,000 September 15, 2003
------------------------------------------------------------------------------------------------------
Class A-3 Notes $ 60,000,000 August 16, 2004
------------------------------------------------------------------------------------------------------
Class A-4 Notes $ 84,199,000 November 15, 2005
------------------------------------------------------------------------------------------------------
Class B Notes $ 6,438,000 March 15, 2006
------------------------------------------------------------------------------------------------------
Class C Notes $ 8,047,000 March 15, 2007
------------------------------------------------------------------------------------------------------
Total $318,684,000
</TABLE>
(1) Before expenses, estimated to be $ .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this preliminary prospectus supplement. Any
representation to the contrary is a criminal offense.
Class A Underwriters
J.P. Morgan & Co.
Credit Suisse First Boston
Salomon Smith Barney
Class B and Class C Underwriter
J.P. Morgan & Co.
The date of this preliminary prospectus supplement is September 8, 2000
<PAGE>
Where You Can Find More Information
Federal securities law requires the filing of information with the
Securities and Exchange Commission, including annual, quarterly and special
reports, proxy statements and other information. You can read and copy these
documents at the public reference facility maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can also copy
and inspect these reports, proxy statements and other information at the
following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, New York 10048 Chicago, Illinois 60661
All reports we file on behalf of the trust with the SEC after the date of
this preliminary prospectus supplement but before the offering of the notes
ends are considered to be part of this preliminary prospectus supplement.
Information contained in those reports updates the information in this
preliminary prospectus supplement. We will provide you with copies of these
reports, at no cost, if you write to: Chevy Chase Bank, F.S.B., 8401
Connecticut Avenue, 6th Floor, Chevy Chase, Maryland 20815, telephone (301)
986-7000.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
This preliminary prospectus supplement supplements a prospectus that is part
of a registration statement filed by the bank with the SEC (Registration No.
333-36242).
You should rely only on the information provided in this preliminary
prospectus supplement and the accompanying prospectus. We have not authorized
anyone else to provide you with different information. You should not assume
that the information in this preliminary prospectus supplement or in the
prospectus is accurate as of any date other than the date on the cover page of
this preliminary prospectus supplement.
We include cross-references in this preliminary prospectus supplement to
captions in these materials where you can find further discussions. The
following table of contents provides the pages on which these captions are
located.
In this preliminary prospectus supplement, the terms "we", "us" and "our"
refer to Chevy Chase Bank, F.S.B.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Where You Can Find More Information........................................ ii
SUMMARY.................................................................... S-1
The Trust................................................................ S-1
The Seller / Servicer.................................................... S-1
Cut-Off Date............................................................. S-1
Closing Date............................................................. S-1
Payment Dates............................................................ S-1
Description of the Notes................................................. S-1
General................................................................ S-1
Class A Notes.......................................................... S-1
The Notes.............................................................. S-1
Flow of Funds.......................................................... S-1
Interest............................................................... S-2
Principal.............................................................. S-2
Optional Redemption.................................................... S-3
The Trust Assets......................................................... S-3
General................................................................ S-3
The Auto Loans......................................................... S-3
Characteristics of the Auto Loans...................................... S-3
Reserve Account........................................................ S-3
Subordination.......................................................... S-3
Overcollateralization.................................................. S-4
Servicing................................................................ S-4
Federal Income Tax Consequences.......................................... S-4
ERISA Considerations..................................................... S-4
Ratings.................................................................. S-4
Legal Investment Considerations.......................................... S-4
RISK FACTORS............................................................... S-5
THE TRUST.................................................................. S-6
General.................................................................. S-6
The Owner Trustee........................................................ S-6
The Indenture Trustee.................................................... S-7
USE OF PROCEEDS............................................................ S-7
THE 2000-2 TRUST PROPERTY.................................................. S-7
General.................................................................. S-7
PREPAYMENT AND YIELD CONSIDERATIONS........................................ S-7
THE POOL OF AUTO LOANS..................................................... S-16
General.................................................................. S-16
Underwriting Procedures.................................................. S-16
Selection Criteria....................................................... S-17
Composition of the Auto Loans as of the Cut-Off Date..................... S-17
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE BANK................................................................... S-20
General.................................................................. S-20
Litigation............................................................... S-20
Delinquency and Default Experience....................................... S-20
DESCRIPTION OF SALE AND SERVICING AGREEMENT................................ S-23
Conveyance of Auto Loans................................................. S-23
Servicing Procedures..................................................... S-23
Servicer's Certificate................................................... S-24
Review by Independent Certified Public Accountants....................... S-24
Servicer Default; Waiver of Past Defaults................................ S-25
Servicing Compensation, Payment of Expenses and Trustees' Fees........... S-25
Mandatory Repurchase of Auto Loans....................................... S-26
DESCRIPTION OF THE NOTES................................................... S-26
General.................................................................. S-26
Distributions to the Noteholders of the Subordinate Notes................ S-26
Payment Dates............................................................ S-27
Accounts................................................................. S-27
Delivery of the Servicer's Certificate................................... S-27
Flow of Funds............................................................ S-27
Interest Payments........................................................ S-28
Credit Enhancement....................................................... S-29
Overcollateralization.................................................... S-30
Withholding.............................................................. S-30
Reports to Noteholders................................................... S-30
Optional Termination..................................................... S-31
Events of Default........................................................ S-31
Rights upon an Event of Default.......................................... S-31
MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................... S-32
Tax Characterization of the Trust........................................ S-32
Tax Consequences to Holders of the Notes................................. S-33
State and Local Tax Considerations....................................... S-35
ERISA CONSIDERATIONS....................................................... S-35
RATINGS.................................................................... S-36
UNDERWRITING............................................................... S-37
LEGAL MATTERS.............................................................. S-39
REPORT OF INDEPENDENT ACCOUNTANTS.......................................... S-40
</TABLE>
iii
<PAGE>
SUMMARY
. This summary highlights selected information from this preliminary
prospectus supplement and does not contain all of the information that you
need to consider in making your investment decision. To understand all of
the terms of the offering of the notes, read carefully this entire
preliminary prospectus supplement and the accompanying prospectus.
. This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
preliminary prospectus supplement and the accompanying prospectus.
The Trust
Chevy Chase Auto Receivables Trust 2000-2, or the trust, is a Delaware business
trust. The trust will issue the notes and be liable for the payment of interest
and principal on the notes.
The trust's principal assets will be a pool of auto loans and cash held in
certain accounts.
The Seller/Servicer
Chevy Chase Bank, F.S.B, or the bank, a federally chartered stock savings bank,
will sell the auto loans to the trust and will act as servicer of the auto
loans.
Cut-Off Date
The opening of business on September 1, 2000.
Closing Date
On or about September , 2000.
Payment Dates
The 15th day of each month, if the 15th is a business day. If the 15th day is
not a business day, the payment date will be the following day that is a
business day. The first payment date will be October 16, 2000.
Description of the Notes
General
The trust will issue six classes of its asset backed notes. The notes are
designated as the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes,
the Class A-4 Notes, the Class B Notes and the Class C Notes. The Class A-1
Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes are the
Class A Notes. The Class B Notes and the Class C Notes are the Subordinate
Notes.
The notes will be secured solely by a pledge of the assets of the trust.
The trust will also issue a trust certificate. The trust certificate represents
the ownership of the trust. Payments on the trust certificate are subordinate
to payments on the notes. The trust certificate does not have a principal
balance and is not offered to the public.
The Notes
Each class of notes will have the initial principal amount, interest rate and
final scheduled payment date for that class listed on the cover page of this
preliminary prospectus supplement.
The notes will be issued initially in book-entry form only and will be issued
in minimum denominations of $1,000 and multiples of $1. You may hold your notes
through DTC in the United States or Clearstream, Luxembourg, or the Euroclear
System in Europe.
Flow of Funds
On each payment date, the trustee will apply the trust's available funds as
follows:
. first, to pay the monthly servicing fee,
. second, to pay the trustees' fees,
. third, to pay interest on the Class A Notes,
. fourth, to fund a payment of principal, to the extent as may be necessary to
reduce the Class A Note principal balance to the pool balance; i.e., to
maintain parity between the Class A Note principal balance and the pool
balance,
S-1
<PAGE>
which amount will be paid out as described below under "Principal",
. fifth, to pay interest on the Class B Notes,
. sixth, to fund a payment of principal, to the extent as may be necessary to
reduce the combined Class A and Class B Note principal balance to the pool
balance; i.e., to maintain parity between the combined Class A and Class B
Note balance and the pool balance, which amount will be paid out as
described below under "Principal",
. seventh, to pay interest on the Class C Notes,
. eighth, to fund a payment of principal, to the extent as may be necessary to
reduce the combined Class A, Class B, and Class C Note principal balance to
the pool balance; i.e., to maintain parity between the aggregate note
principal balance and the pool balance, which amount will be paid out as
described below under "Principal",
. ninth, to fund a payment of principal in an amount generally equal to the
decrease in the pool balance during the prior month, reduced by the amount
of any principal allocated as provided above, and further reduced by the
amount of any excess level of overcollateralization, which amount will be
paid out as described below under "Principal",
. tenth, to fund a payment of principal, to the extent as may be necessary to
reduce to zero the principal balance of any class which remains outstanding
on or after its final scheduled payment date, which amount will be paid out
as described below under "Principal",
. eleventh, to deposit into the reserve account an amount up to the reserve
account required amount,
. twelfth, to fund using excess cashflow, as well as excess amounts released
from the reserve account, an additional payment of principal, to the extent
as may be necessary to increase the overcollateralization to its required
target level, which amount will be paid out as described below under
"Principal", and
. thirteenth, to pay the remainder, if any, to the holder of the trust
certificate.
Interest
On each payment date, the noteholders of each class will receive interest that
accrued from the preceding payment date, payable at the interest rate for that
class. In the case of the first payment date, interest will accrue from the
closing date. The interest rate for each class is listed on the cover page of
this preliminary prospectus supplement. Interest on the Class A-1 Notes will be
calculated on the basis of a 360-day year and the actual number of days elapsed
in the accrual period. Interest on all other classes will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Interest amounts paid to the holders of the Class A Notes will be shared by the
holders of the Class A-1, the Class A-2, the Class A-3 and the Class A-4 Notes
in proportion to the interest due on each class.
Principal
On each payment date, all amounts allocated to the payment of principal as
described in "Flow of Funds" above will be aggregated and will be paid out in
the following order of priority:
. first, to the Class A-1 Noteholders until they are paid in full,
. second, to the Class A-2 Noteholders until they are paid in full,
. third, to the Class A-3 Noteholders until they are paid in full,
. fourth, to the Class A-4 Noteholders until they are paid in full,
. fifth, to the Class B Noteholders until they are paid in full, and
. sixth, to the Class C Noteholders until they are paid in full.
If an event of default occurs, the Class A Notes then outstanding will receive
principal payments pro rata, although the Class A Notes as a group will still
be entitled to payment in full before any principal is paid on the Class B
Notes or the Class C Notes.
S-2
<PAGE>
Optional Redemption
On any payment date when the outstanding principal balance of the notes is less
than or equal to 5% of the original principal balance of the notes, the bank
may purchase the auto loans from the trust. This will result in the redemption
of the notes. If a redemption occurs, you will receive a final distribution
equaling the entire unpaid principal balance of the notes plus any accrued and
unpaid interest.
The Trust Assets
General
The trust's assets will principally include:
. a pool of auto loans, which are secured by new and used automobiles, light
duty trucks and vans;
. collections on the auto loans received on or after September 1, 2000;
. an assignment of the security interests in the vehicles securing the auto
loan pool; and
. amounts held in the reserve account.
The Auto Loans
The auto loans consist of simple interest retail installment sales contracts
between dealers and retail purchasers and installment loans which are secured
by new and used automobiles, light duty trucks and vans financed by means of
the auto loan. Each obligor's obligation under its auto loan is a full recourse
obligation. The auto loans contain provisions which unconditionally require the
obligor to make all payments under the related auto loan.
On the closing date, the bank will sell the auto loans to the trust.
On the closing date the trust will pledge the auto loans to the indenture
trustee as collateral for the notes. Payments on the notes will be made from
payments on the pledged auto loans, withdrawals from the reserve account and
payments received under applicable insurance policies.
Characteristics of the Auto Loans
The statistical information presented in this preliminary prospectus supplement
is based on the auto loans as of the cut-off date.
The auto loans will consist of "prime" quality auto loans secured by new and
used automobiles, light duty trucks and vans which were purchased from
automobile dealers under the bank's financing program.
As of the cut-off date, the auto loans have:
. an aggregate principal balance of $321,904,081.65;
. a weighted average annual percentage rate of approximately 10.88%;
. a weighted average original maturity of approximately 62.32 months;
. a weighted average remaining maturity of approximately 58.83 months; and
. a remaining term of not more than 72 months and not less than 13 months.
Reserve Account
On the closing date, the amount in the reserve account will be $2,414,280.61
which is 0.75% of the original pool balance, and which is the full required
funding of the reserve account. The amount on deposit in the reserve account is
required to be maintained at this level for so long as the notes are
outstanding, except that the amount on deposit need never be greater than the
aggregate outstanding note principal balance.
Amounts in the reserve account will be available:
. to pay interest on the notes,
. to pay the principal balance of a class of notes to zero on that class's
final scheduled payment date, and
. to pay principal on the notes to the extent necessary to reduce the then
outstanding principal balance of the notes to the then outstanding pool
balance, i.e., to maintain parity between the aggregate note balance and the
pool balance.
Subordination
Payments on the Subordinate Notes are subordinated to payments on the Class A
Notes. This subordination of distributions on the Subordinate Notes is intended
to increase the likelihood that the trust will not default in making payments
due on the Class A Notes.
S-3
<PAGE>
Payments on the Class C Notes are subordinated to payments on the Class A
Notes and Class B Notes. This subordination of payments on the Class C Notes
is intended to increase the likelihood that the trust will not default in
making payments due on the Class A Notes and the Class B Notes.
Overcollateralization
On the closing date, the original pool balance will exceed the initial
principal amount of the notes of all classes by approximately $3,220,081.65,
which is approximately 1.00% of the original pool balance. This excess
represents overcollateralization. The level of overcollateralization is
required to increase to, and thereafter be maintained at, a target level equal
to the greater of (1) 4.00% of the then-current pool balance, less the amount
then on deposit in the reserve account and (2) the aggregate principal balance
of the auto loans that are delinquent 90 days or more, including
repossessions, and that have not been charged off, less the amount in the
reserve account. The level of overcollateralization is increased and
maintained through the application of excess cashflow available to the trust,
primarily in the form of the excess of interest collections on the auto loan
pool over the interest paid out on the notes, as additional principal paid on
the notes. In general, the target amount of overcollateralization will
decrease as the pool balance decreases. However, the required amount of
overcollateralization on any payment date will never be less than 0.50% of the
original pool balance. The overcollateralization will be available to absorb
losses on the auto loan pool.
Servicing
The bank will be the servicer of the auto loans and will be responsible for
servicing, managing and making collections on, and otherwise enforcing, the
auto loans.
Federal Income Tax Consequences
For federal income tax purposes:
. Dewey Ballantine LLP, tax counsel to the trust and counsel to the
underwriters, is of the opinion that the notes will be treated as
indebtedness and the trust will not be treated as an association or
publicly traded partnership taxable as a corporation. By your acceptance of
a note, you agree to treat the notes as indebtedness.
. Interest on the notes will be taxable as ordinary income when received by a
holder on the cash method of accounting and when accrued by a holder on the
accrual method of accounting.
. Dewey Ballantine LLP has prepared the discussion under "Material Federal
Income Tax Consequences" in this preliminary prospectus supplement and
"Material Federal Income Tax Considerations" in the prospectus and is of
the opinion that the discussion accurately states all material federal
income tax consequences of the purchase, ownership and disposition of the
notes to their original purchaser.
ERISA Considerations
Subject to the important considerations described under "ERISA Considerations"
in this preliminary prospectus supplement, pension, profit-sharing and other
employee benefit plans may purchase the notes. You should consult with your
counsel regarding the applicability of the provisions of the Employee
Retirement Income Security Act of 1974, as amended, before purchasing a note.
Ratings
. The trust will not issue the notes unless they have been assigned the
ratings stated below.
. You should know that the ratings could be lowered, qualified or withdrawn
by the rating agencies.
<TABLE>
<CAPTION>
Class Ratings
----- ------------------
S&P Moody's Fitch
---- ------- -----
<S> <C> <C> <C>
A-1.......................................................... A-1+ Prime-1 F-1+
A-2.......................................................... AAA Aaa AAA
A-3.......................................................... AAA Aaa AAA
A-4.......................................................... AAA Aaa AAA
B............................................................ A A1 A
C............................................................ BBB+ Baa2 BBB+
</TABLE>
Legal Investment Considerations
The Class A-1 Notes will be eligible for purchase by money market funds under
Rule 2a-7 under the Investment Company Act.
S-4
<PAGE>
RISK FACTORS
In addition to those factors described under "Risk Factors" in the
prospectus, you should consider, among other things, the following factors in
connection with the purchase of the notes:
An investment in the notes may be an illiquid investment.
There currently is no secondary market for the notes, and there is no
assurance that one will develop or, if one does develop, that it will continue
until the notes are paid in full. The underwriters intend to make a market in
the notes but have no obligation to do so.
The rate at which the notes will amortize cannot be predicted.
All of the auto loans are prepayable at any time without penalty. The rate
of prepayments on the auto loans may be influenced by a variety of economic,
social and other factors. Under certain circumstances, the bank will be
obligated to purchase auto loans as a result of breaches of certain
representations and covenants in the transaction documents. The bank also has
the right, subject to certain conditions, to purchase the auto loans when the
total principal balance of the notes is 5% or less of the total principal
balance of the notes as of the date they are issued. Any reinvestment risks
resulting from a faster or slower incidence of prepayments and/or purchases of
auto loans will be borne entirely by the noteholders.
The Subordinate Notes are subordinated to, and subject to a greater risk of
loss or delay in distributions than, the Class A Notes. Similarly, the Class C
Notes are subordinated to, and subject to a greater risk of loss or delay in
distributions than, the Class A Notes and the Class B Notes.
Payments on the Subordinate Notes will be subordinated in priority of
payment to interest and principal due on the Class A Notes. Consequently, the
holders of Subordinate Notes will not receive any payments of interest on a
payment date unless the full amount of interest due on the Class A Notes on
that payment date as well as an amount of principal to maintain parity between
the Class A Note principal balance and the pool balance has been paid. No
principal will be paid on the Subordinate Notes until the entire principal
balance of all Class A Notes has been paid in full. This subordination has the
effect of increasing the likelihood of payment on the Class A Notes and
therefore decreasing the likelihood of payment on the Subordinate Notes.
Similarly, payments on the Class C Notes will be subordinated in priority of
payment to interest and principal due on the Class A Notes and the Class B
Notes. Consequently, the holders of the Class C Notes will not receive any
payments of interest on a payment date unless the full amount of combined
interest due on the Class A Notes and the Class B Notes on that payment date as
well as an amount of principal to maintain parity between the combined Class A
and Class B Note principal balance and the pool balance has been paid. No
principal will be paid on the Class C Notes until the entire principal balance
of all Class A Notes and Class B Notes has been paid in full. This
subordination has the effect of increasing the likelihood of payment on the
Class A Notes and Class B Notes, respectively, and therefore decreasing the
likelihood of payment on the Class C Notes.
The holders of the Subordinate Notes are restricted in their rights to
accelerate the notes.
The most senior class outstanding at any time will have the right under most
circumstances to accelerate the notes or waive an event of default, as well as
to direct remedies following an event of default.
Geographic concentrations of receivables may result in higher losses if
particular regions experience downturns.
As of the cut-off date, based upon billing address information provided to
the bank, the obligors resided in 45 states, the District of Columbia and the
U.S. Virgin Islands. Of these, five states, Texas, Georgia, Virginia, North
Carolina and Maryland, account for 51.84%, 17.09%, 8.37%, 7.42% and 5.40%,
respectively, of the aggregate principal balance of the receivables in the
trust. Adverse economic conditions in these states could adversely affect the
delinquency, loan loss or repossession experience with respect to the auto
loans. Changes in these factors may also affect the rate of principal payments
on the auto loans.
S-5
<PAGE>
Failure to obtain a perfected security interest in the vehicles in all
states may lead to a reduction in distributions of principal and interest.
The bank or its agent will hold the auto loans and the certificates of title
or ownership relating to the vehicles as custodian for the indenture trustee.
However, the auto loans 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 auto loans and the vehicles may be defeated. See "Legal
Aspects of The Auto Loans" in the accompanying prospectus.
If the protection provided to the noteholders by the overcollateralization
and the reserve account is insufficient to pay principal and interest on the
notes, the noteholders would have to look principally to the obligors on the
auto loans and to the proceeds from the repossession and sale of vehicles which
secure the auto loans. In that event, certain factors, such as the indenture
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 auto loans, and thus may reduce the proceeds to be distributed to
noteholders. See "Description of the Notes--Flow of Funds" in this preliminary
prospectus supplement, as well as "Legal Aspects of The Auto Loans" in the
accompanying prospectus.
THE TRUST
The following information supplements and, to the extent more specific,
supersedes the information contained in the accompanying prospectus.
General
Chevy Chase Auto Receivables Trust 2000-2, or the trust will be a Delaware
business trust formed under the laws of the State of Delaware under a trust
agreement, dated as of September 1, 2000 between the bank and the owner trustee
for the purpose of engaging in the transactions described in this preliminary
prospectus supplement. The trust will only engage in the following activities:
. acquiring, holding and managing the auto loans and the other assets of
the trust,
. issuing the notes,
. making payments on the notes, and
. engaging in other activities in connection with the notes.
The trust's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company as owner trustee, at the same address as the owner
trustee.
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. The financial statements of the trust, which were prepared prior to
sale of the auto loans to the trust and the issuance of the notes, are included
in this preliminary prospectus supplement beginning on page S-40. No historical
or pro forma financial statements or ratios of earnings to fixed charges with
respect to the trust have been included because the trust will have had no
operating history upon its establishment and will not have engaged in any
business other than acquiring and holding the trust property, issuing the notes
and distributing payments on the notes.
The Owner Trustee
Wilmington Trust Company will be the owner trustee under the trust
agreement. It is a Delaware banking corporation and its principal offices are
located at 1100 North Market Street, Wilmington, Delaware 19890. The owner
trustee will perform limited administrative functions under the trust
agreement. The owner trustee's liability in connection with the issuance and
sale of the notes is limited solely to the express obligations of the owner
trustee as stated in the trust agreement and the sale and servicing agreement,
to be dated as of September 1, 2000, among the trust, the seller, the servicer
and the indenture trustee.
S-6
<PAGE>
The Indenture Trustee
U.S. Bank National Association will be the indenture trustee under an
indenture, dated as of September 1, 2000, among the trust and U.S. Bank
National Association, as indenture trustee. U.S. Bank National Association is a
national banking association, the principal offices of which are located at 180
East 5th Street, St. Paul, Minnesota 55101.
USE OF PROCEEDS
The net proceeds received by the trust from the sale of the notes will be
used to pay the bank the cash portion of the purchase price for the auto loans
and to fund the initial deposit to be made to the reserve account.
THE 2000-2 TRUST PROPERTY
General
The trust assets consist of the following:
. the auto loans;
. all monies, including accrued interest, due or received on the auto
loans on or after the cut-off date of September 1, 2000;
. all amounts and property from time to time held in or credited to the
collection account, the reserve account and the note account;
. all of the seller's security interests in new and used automobiles,
light duty trucks and vans, or the financed vehicles;
. 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 financed vehicles
or obligors, as the case may be, to the extent that such insurance
policies relate to the auto loans;
. any proceeds from the sale of repossessed financed vehicles;
. all of the bank's right to all documents contained in the auto loan
files;
. all property, including the right to receive future liquidation
proceeds, that secures an auto loan and that shall have been acquired by
or on behalf of the indenture trustee; and
. all proceeds of the foregoing.
The indenture does not permit the trust to acquire any additional assets.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on each class of notes will be directly
related to the rate of principal payments on the underlying auto loans. If any
class of notes is purchased at a price other than at par, the yield to maturity
on such class also will be affected by the rate of principal payments. The
principal collections on the auto loans may be in the form of scheduled
principal payments, prepayments or liquidations due to default, casualty and
the like. Any principal collections other than scheduled principal payments,
will result in distributions to the noteholders of amounts which would
otherwise have been distributed over the remaining term of the auto loans. In
general, the rate of such payments may be influenced by a number of other
factors, including general economic conditions.
S-7
<PAGE>
The effective yield to the holders of a class of notes will depend upon,
among other things, the price at which such notes are purchased, the amount of
principal, including both scheduled and nonscheduled payments thereof, which is
paid to the noteholders and the rate at which such principal is paid.
On each payment date, the indenture trustee will pay the noteholders of each
class interest that accrued from the preceding payment date, payable at the
interest rate for that class. In the case of the first payment date, monthly
interest will accrue from the closing date at the applicable note rate on the
original note principal balance for each class of the notes. Interest on the
Class A-1 Notes will be calculated on the basis of a 360-day year and the
actual number of days elapsed in the accrual period. Interest on all other
classes will be calculated on the basis of a 360-day year consisting of twelve
30-day months. The original note principal balance for each class is:
<TABLE>
<S> <C>
Class A-1 Notes: $ 49,000,000
Class A-2 Notes: $111,000,000
Class A-3 Notes: $ 60,000,000
Class A-4 Notes: $ 84,199,000
Class B Notes: $ 6,438,000, and
Class C Notes: $ 8,047,000
</TABLE>
Prepayments on auto loans can be measured relative to a prepayment standard
or model. The model used in this preliminary prospectus supplement, the
absolute prepayment model, or ABS, represents an assumed rate of prepayment
each month relative to the original number of auto loans in a pool. ABS further
assumes that all the auto loans are the same size and amortize at the same rate
and that each auto loan in each month of its life will either be paid as
scheduled or be prepaid in full. For example, in a pool of auto loans
originally containing 10,000 auto loans, a 1% ABS rate means that 100 auto
loans prepay each month. ABS does not purport to be an historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of auto loans.
The tables captioned "Percent of Initial Note Principal Balance at Various
ABS Percentages", also called the ABS Tables, have been prepared on the basis
of the following assumptions:
. the auto loans prepay in full at the specified constant percentage of
ABS monthly, with no defaults, losses or repurchases;
. each scheduled monthly payment on the auto loans is made on the last day
of each month and each month has 30 days;
. the initial principal amount of the notes is as stated on the cover
page;
. interest on the notes accrues during each interest period at the
following assumed coupon rates: Class A-1, %; Class A-2, %; Class
A-3, %; Class A-4, %; Class B, %; and Class C, %;
. payments on the notes are made on the 15th day of each month whether or
not a business day;
. the notes are purchased on the closing date;
. the overcollateralization is initially 1.00% of the pool balance,
building to 4.00% of the amortizing pool balance, minus the amount then
on deposit in the reserve account; however, the required amount of
overcollateralization on any payment date will never be less than 0.50%
of the original pool balance;
. the reserve account is funded initially with $2,414,280.61, and remains
at that level until the aggregate outstanding note principal balance
declines below that level; after that point, the reserve account balance
tracks the amortizing aggregate note principal balance;
S-8
<PAGE>
. the trustees' fees are zero, and the annual servicing fee rate is 1.00%;
. the scheduled monthly payment for each auto loan has been calculated on
the basis of the assumed characteristics presented in the table below,
and each auto loan will amortize in amounts sufficient to repay the
principal balance of the auto loans by its indicated remaining term to
maturity; and
. the notes are not redeemed early pursuant to the optional redemption
provision.
The ABS Tables also assume that (1) the auto loans have been aggregated into
hypothetical pools with all of the auto loans within each pool having the
following characteristics, and (2) that the level of scheduled monthly payment
for each of the pools, which is based on its aggregate principal balance, gross
APR, original number of scheduled payments and remaining number of scheduled
payments as of the cut-off date, will be calculated so that each pool will be
fully amortized by the end of its remaining term to maturity.
<TABLE>
<CAPTION>
Remaining
Aggregate Term
Principal to Maturity Seasoning
Pool Balance APR (in Months) (in Months)
---- -------------- ------ ----------- -----------
<S> <C> <C> <C> <C>
1 $ 978,688.66 9.27% 20 5
2 5,842,183.24 9.49% 32 4
3 21,140,152.18 10.66% 44 4
4 194,270,874.14 10.78% 57 4
5 99,672,183.43 11.22% 68 3
</TABLE>
The ABS Tables indicate, based on the assumptions described above, the
percentages of the initial principal amount of the notes that would be
outstanding after each of the payment dates shown at various percentages of ABS
and the corresponding weighted average lives of the notes. The weighted average
life of a note is determined by (1) multiplying the amount of each principal
payment on a note by the number of years from the date of the issuance of the
notes to the payment date, (2) adding the results and (3) dividing the sum by
the initial principal amount of the notes of that class. The actual
characteristics and performance of the auto loans will differ from the
assumptions used in constructing the ABS Tables. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the auto loans will prepay at a constant
level of ABS until maturity or that all of the auto loans will prepay at the
same level of ABS. Moreover, the diverse terms of auto loans could produce
slower or faster principal distributions than indicated in the ABS Tables at
the various constant percentages of ABS specified, even if the original and
remaining terms to maturity of the auto loans are as assumed. Any difference
between the assumptions and the actual characteristics and performance of the
auto loans, including actual prepayment experience or losses, will affect the
percentages of initial balances outstanding over time and the weighted average
lives of the notes. The percentages in the ABS Tables have been rounded to the
nearest whole number.
S-9
<PAGE>
Percentage of Initial Note Principal Balance
at Various ABS Percentages
Class A-1 Notes
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closing Date........................................... 100 100 100 100 100
October 2000........................................... 86 82 79 75 71
November 2000.......................................... 72 65 58 51 43
December 2000.......................................... 58 48 38 27 16
January 2001........................................... 45 32 18 4 0
February 2001.......................................... 31 15 0 0 0
March 2001............................................. 18 0 0 0 0
April 2001............................................. 5 0 0 0 0
May 2001............................................... 0 0 0 0 0
Average Life (years)
To Maturity........................................... 0.33 0.27 0.23 0.20 0.18
To 5% Call............................................ 0.33 0.27 0.23 0.20 0.18
Percentage of Initial Note Principal Balance
at Various ABS Percentages
Class A-2 Notes
--------------------------------------------------------------------------------
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closing Date........................................... 100 100 100 100 100
October 2000........................................... 100 100 100 100 100
November 2000.......................................... 100 100 100 100 100
December 2000.......................................... 100 100 100 100 100
January 2001........................................... 100 100 100 100 95
February 2001.......................................... 100 100 99 92 84
March 2001............................................. 100 99 91 82 73
April 2001............................................. 100 93 83 73 62
May 2001............................................... 97 86 76 64 52
June 2001.............................................. 92 80 68 56 43
July 2001.............................................. 87 74 61 47 33
August 2001............................................ 82 68 54 39 24
September 2001......................................... 77 62 47 31 14
October 2001........................................... 72 56 40 23 5
November 2001.......................................... 67 50 33 15 0
December 2001.......................................... 62 44 26 7 0
January 2002........................................... 57 38 20 0 0
February 2002.......................................... 52 33 13 0 0
March 2002............................................. 47 27 7 0 0
April 2002............................................. 42 21 0 0 0
May 2002............................................... 37 16 0 0 0
June 2002.............................................. 32 10 0 0 0
July 2002.............................................. 27 5 0 0 0
August 2002............................................ 22 0 0 0 0
September 2002......................................... 17 0 0 0 0
October 2002........................................... 12 0 0 0 0
November 2002.......................................... 7 0 0 0 0
December 2002.......................................... 2 0 0 0 0
January 2003........................................... 0 0 0 0 0
Average Life (years)
To Maturity........................................... 1.48 1.21 1.00 0.84 0.72
To 5% Call............................................ 1.48 1.21 1.00 0.84 0.72
</TABLE>
S-10
<PAGE>
Percentage of Initial Note Principal Balance
at Various ABS Percentages
Class A-3 Notes
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closing Date........................................... 100 100 100 100 100
October 2000........................................... 100 100 100 100 100
November 2000.......................................... 100 100 100 100 100
December 2000.......................................... 100 100 100 100 100
January 2001........................................... 100 100 100 100 100
February 2001.......................................... 100 100 100 100 100
March 2001............................................. 100 100 100 100 100
April 2001............................................. 100 100 100 100 100
May 2001............................................... 100 100 100 100 100
June 2001.............................................. 100 100 100 100 100
July 2001.............................................. 100 100 100 100 100
August 2001............................................ 100 100 100 100 100
September 2001......................................... 100 100 100 100 100
October 2001........................................... 100 100 100 100 100
November 2001.......................................... 100 100 100 100 94
December 2001.......................................... 100 100 100 100 78
January 2002........................................... 100 100 100 100 62
February 2002.......................................... 100 100 100 86 47
March 2002............................................. 100 100 100 73 32
April 2002............................................. 100 100 100 60 18
May 2002............................................... 100 100 89 47 4
June 2002.............................................. 100 100 78 35 0
July 2002.............................................. 100 100 67 23 0
August 2002............................................ 100 99 56 11 0
September 2002......................................... 100 89 46 0 0
October 2002........................................... 100 80 35 0 0
November 2002.......................................... 100 70 25 0 0
December 2002.......................................... 100 61 15 0 0
January 2003........................................... 96 51 6 0 0
February 2003.......................................... 87 42 0 0 0
March 2003............................................. 78 33 0 0 0
April 2003............................................. 69 24 0 0 0
May 2003............................................... 60 15 0 0 0
June 2003.............................................. 51 7 0 0 0
July 2003.............................................. 43 0 0 0 0
August 2003............................................ 34 0 0 0 0
September 2003......................................... 26 0 0 0 0
October 2003........................................... 17 0 0 0 0
November 2003.......................................... 9 0 0 0 0
December 2003.......................................... 0 0 0 0 0
January 2004........................................... 0 0 0 0 0
Average Life (years)
To Maturity........................................... 2.79 2.38 2.00 1.68 1.43
To 5% Call............................................ 2.79 2.38 2.00 1.68 1.43
</TABLE>
S-11
<PAGE>
Percentage of Initial Note Principal Balance
at Various ABS Percentages
Class A-4 Notes
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ----- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Closing Date............................... 100 100 100 100 100
October 2000............................... 100 100 100 100 100
November 2000.............................. 100 100 100 100 100
December 2000.............................. 100 100 100 100 100
January 2001............................... 100 100 100 100 100
February 2001.............................. 100 100 100 100 100
March 2001................................. 100 100 100 100 100
April 2001................................. 100 100 100 100 100
May 2001................................... 100 100 100 100 100
June 2001.................................. 100 100 100 100 100
July 2001.................................. 100 100 100 100 100
August 2001................................ 100 100 100 100 100
September 2001............................. 100 100 100 100 100
October 2001............................... 100 100 100 100 100
November 2001.............................. 100 100 100 100 100
December 2001.............................. 100 100 100 100 100
January 2002............................... 100 100 100 100 100
February 2002.............................. 100 100 100 100 100
March 2002................................. 100 100 100 100 100
April 2002................................. 100 100 100 100 100
May 2002................................... 100 100 100 100 100
June 2002.................................. 100 100 100 100 93
July 2002.................................. 100 100 100 100 83
August 2002................................ 100 100 100 100 74
September 2002............................. 100 100 100 100 65
October 2002............................... 100 100 100 92 56
November 2002.............................. 100 100 100 84 48
December 2002.............................. 100 100 100 76 40
January 2003............................... 100 100 100 69 32
February 2003.............................. 100 100 97 61 24
March 2003................................. 100 100 90 55 17
April 2003................................. 100 100 84 48 11
May 2003................................... 100 100 77 41 4
June 2003.................................. 100 100 71 35 0*
July 2003.................................. 100 99 65 30 0
August 2003................................ 100 93 59 24 0
September 2003............................. 100 87 53 19 0
October 2003............................... 100 81 48 14 0
November 2003.............................. 100 75 43 9 0
December 2003.............................. 100 70 38 5 0
January 2004............................... 94 64 33 0* 0
February 2004.............................. 88 59 28 0 0
March 2004................................. 82 53 24 0 0
April 2004................................. 75 48 19 0 0
May 2004................................... 69 43 15 0 0
June 2004.................................. 64 38 12 0 0
July 2004.................................. 58 34 8 0 0
August 2004................................ 53 29 5 0 0
September 2004............................. 47 25 2 0 0
October 2004............................... 42 21 0* 0 0
November 2004.............................. 36 17 0 0 0
December 2004.............................. 31 13 0 0 0
January 2005............................... 25 9 0 0 0
February 2005.............................. 20 5 0 0 0
March 2005................................. 14 1* 0 0 0
April 2005................................. 9 0 0 0 0
May 2005................................... 4 0 0 0 0
June 2005.................................. 0* 0 0 0 0
Average Life (years)
To Maturity............................... 3.99 3.62 3.13 2.62 2.19
To 5% Call................................ 3.99 3.62 3.13 2.62 2.19
June March October January June
*5% Call.................................. 2005 2005 2004 2004 2003
</TABLE>
S-12
<PAGE>
Percentage of Initial Note Principal Balance
at Various ABS Percentages
Class B Notes
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ----- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Closing Date............................... 100 100 100 100 100
October 2000............................... 100 100 100 100 100
November 2000.............................. 100 100 100 100 100
December 2000.............................. 100 100 100 100 100
January 2001............................... 100 100 100 100 100
February 2001.............................. 100 100 100 100 100
March 2001................................. 100 100 100 100 100
April 2001................................. 100 100 100 100 100
May 2001................................... 100 100 100 100 100
June 2001.................................. 100 100 100 100 100
July 2001.................................. 100 100 100 100 100
August 2001................................ 100 100 100 100 100
September 2001............................. 100 100 100 100 100
October 2001............................... 100 100 100 100 100
November 2001.............................. 100 100 100 100 100
December 2001.............................. 100 100 100 100 100
January 2002............................... 100 100 100 100 100
February 2002.............................. 100 100 100 100 100
March 2002................................. 100 100 100 100 100
April 2002................................. 100 100 100 100 100
May 2002................................... 100 100 100 100 100
June 2002.................................. 100 100 100 100 100
July 2002.................................. 100 100 100 100 100
August 2002................................ 100 100 100 100 100
September 2002............................. 100 100 100 100 100
October 2002............................... 100 100 100 100 100
November 2002.............................. 100 100 100 100 100
December 2002.............................. 100 100 100 100 100
January 2003............................... 100 100 100 100 100
February 2003.............................. 100 100 100 100 100
March 2003................................. 100 100 100 100 100
April 2003................................. 100 100 100 100 100
May 2003................................... 100 100 100 100 100
June 2003.................................. 100 100 100 100 79*
July 2003.................................. 100 100 100 100 5
August 2003................................ 100 100 100 100 0
September 2003............................. 100 100 100 100 0
October 2003............................... 100 100 100 100 0
November 2003.............................. 100 100 100 100 0
December 2003.............................. 100 100 100 100 0
January 2004............................... 100 100 100 100* 0
February 2004.............................. 100 100 100 56 0
March 2004................................. 100 100 100 10 0
April 2004................................. 100 100 100 0 0
May 2004................................... 100 100 100 0 0
June 2004.................................. 100 100 100 0 0
July 2004.................................. 100 100 100 0 0
August 2004................................ 100 100 100 0 0
September 2004............................. 100 100 100 0 0
October 2004............................... 100 100 87* 0 0
November 2004.............................. 100 100 52 0 0
December 2004.............................. 100 100 20 0 0
January 2005............................... 100 100 0 0 0
February 2005.............................. 100 100 0 0 0
March 2005................................. 100 100* 0 0 0
April 2005................................. 100 70 0 0 0
May 2005................................... 100 25 0 0 0
June 2005.................................. 78* 0 0 0 0
July 2005.................................. 57 0 0 0 0
August 2005................................ 36 0 0 0 0
September 2005............................. 15 0 0 0 0
October 2005............................... 0 0 0 0 0
Average Life (years)
To Maturity............................... 4.89 4.65 4.20 3.46 2.81
To 5% Call................................ 4.74 4.49 4.07 3.32 2.74
June March October January June
*5% Call.................................. 2005 2005 2004 2004 2003
</TABLE>
S-13
<PAGE>
Percentage of Initial Note Principal Balance
at Various ABS Percentages
Class C Notes
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closing Date...................................... 100 100 100 100 100
October 2000...................................... 100 100 100 100 100
November 2000..................................... 100 100 100 100 100
December 2000..................................... 100 100 100 100 100
January 2001...................................... 100 100 100 100 100
February 2001..................................... 100 100 100 100 100
March 2001........................................ 100 100 100 100 100
April 2001........................................ 100 100 100 100 100
May 2001.......................................... 100 100 100 100 100
June 2001......................................... 100 100 100 100 100
July 2001......................................... 100 100 100 100 100
August 2001....................................... 100 100 100 100 100
September 2001.................................... 100 100 100 100 100
October 2001...................................... 100 100 100 100 100
November 2001..................................... 100 100 100 100 100
December 2001..................................... 100 100 100 100 100
January 2002...................................... 100 100 100 100 100
February 2002..................................... 100 100 100 100 100
March 2002........................................ 100 100 100 100 100
April 2002........................................ 100 100 100 100 100
May 2002.......................................... 100 100 100 100 100
June 2002......................................... 100 100 100 100 100
July 2002......................................... 100 100 100 100 100
August 2002....................................... 100 100 100 100 100
September 2002.................................... 100 100 100 100 100
October 2002...................................... 100 100 100 100 100
November 2002..................................... 100 100 100 100 100
December 2002..................................... 100 100 100 100 100
January 2003...................................... 100 100 100 100 100
February 2003..................................... 100 100 100 100 100
March 2003........................................ 100 100 100 100 100
April 2003........................................ 100 100 100 100 100
May 2003.......................................... 100 100 100 100 100
June 2003......................................... 100 100 100 100 100*
July 2003......................................... 100 100 100 100 100
August 2003....................................... 100 100 100 100 49
September 2003.................................... 100 100 100 100 0
October 2003...................................... 100 100 100 100 0
November 2003..................................... 100 100 100 100 0
December 2003..................................... 100 100 100 100 0
January 2004...................................... 100 100 100 100* 0
February 2004..................................... 100 100 100 100 0
March 2004........................................ 100 100 100 100 0
April 2004........................................ 100 100 100 74 0
May 2004.......................................... 100 100 100 43 0
June 2004......................................... 100 100 100 15 0
July 2004......................................... 100 100 100 0 0
August 2004....................................... 100 100 100 0 0
September 2004.................................... 100 100 100 0 0
October 2004...................................... 100 100 100* 0 0
November 2004..................................... 100 100 100 0 0
December 2004..................................... 100 100 100 0 0
January 2005...................................... 100 100 92 0 0
February 2005..................................... 100 100 70 0 0
March 2005........................................ 100 100* 51 0 0
April 2005........................................ 100 100 34 0 0
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
Payment Date 0.5% 1.0% 1.5% 2.0% 2.5%
------------ ---- ----- ------- ------- ----
<S> <C> <C> <C> <C> <C>
May 2005...................................... 100 100 19 0 0
June 2005..................................... 100* 86 7 0 0
July 2005..................................... 100 74 1 0 0
August 2005................................... 100 63 0 0 0
September 2005................................ 100 52 0 0 0
October 2005.................................. 95 42 0 0 0
November 2005................................. 78 32 0 0 0
December 2005................................. 62 22 0 0 0
January 2006.................................. 45 13 0 0 0
February 2006................................. 29 4 0 0 0
March 2006.................................... 12 0 0 0 0
April 2006.................................... 0 0 0 0 0
Average Life (years)
To Maturity.................................. 5.34 5.06 4.55 3.68 2.94
To 5% Call................................... 4.74 4.49 4.07 3.32 2.74
June March October January June
*5% Call..................................... 2005 2005 2004 2004 2003
</TABLE>
S-15
<PAGE>
THE POOL OF AUTO LOANS
General
The assets of the trust will primarily consist of the auto loans, which are
secured by the financed vehicles.
The auto loans in the pool were purchased or originated by the bank. You
should note that the bank also acts as servicer for the auto loans under the
sale and servicing agreement, and we refer to the bank in that capacity as the
servicer.
With respect to the auto loan pool as of the cut-off date:
. 99.01% by aggregate principal balance were purchased by the bank from
dealers in the ordinary course of business;
. 0.99% by aggregate principal balance were originated directly by the
bank at or through its deposit branches;
. approximately 46.00% of the aggregate principal balance represents
financing of new automobiles, light duty trucks and vans; and
. approximately 54.00% of the aggregate principal balance represents
financing of used automobiles, light duty trucks and vans.
Underwriting Procedures
Each auto loan was originated or purchased by the bank and underwritten in
accordance with the bank's established underwriting policies described below.
The underwriting procedures of the bank are designed to provide a basis for
assessing the obligor's ability and willingness to repay the loan.
The bank requires each applicant to complete an application form providing
various items of general demographic information, financial information, and
employment history. In addition, specific information with respect to the
motor vehicle to be financed is required as part of the application process.
The bank then reviews the application and a credit bureau report is obtained.
In conducting the assessment of the obligor, the bank considers such factors
as the obligor's FICO score, the ratio of the proposed loan payment to income
and the ratio of debt to income. The bank also evaluates 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 also important in the bank's analysis.
For those applications that are approved, the bank then determines the
amount and terms of the financing to be offered. The amount that the bank will
advance against the motor vehicle ranges from 100% to 120% of the invoice for
new vehicles and the NADA trade-in value for used vehicles plus, in each case,
dealer additions, based on the applicable FICO score of the obligor. Dealer
additions are limited to 15% of the purchase price. The term for a loan is a
function of the age of the motor vehicle and the applicable FICO score of the
obligor. Acceptable terms generally range from 24 to 72 months in length.
The bank's 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 with appropriate
approval authority. The bank periodically conducts quality audits to ensure
compliance with its established policies and procedures.
S-16
<PAGE>
Selection Criteria
The auto loans were selected from the bank's portfolio on the basis of a
number of criteria, including the following:
. each auto loan has an original term to maturity of 12 to 72 months;
. each auto loan has a maturity of not later than September 13, 2006;
. each auto loan provides for level monthly payments that fully amortize
the amount financed over the original term;
. no auto loan was more than 29 days past due as of the cut-off date;
. each auto loan has an unpaid principal balance of not less than $1,000
as of the cut-off date; and
. the weighted average remaining term to maturity of the auto loans was
58.83 months as of the cut-off date.
All the auto loans are prepayable at any time. The bank makes no prediction
as to the actual prepayment experience on the auto loans. See also "Description
of the Notes--Optional Termination" in this preliminary prospectus supplement
regarding the bank's option to purchase the auto loans when the total principal
balance of the notes is 5% or less of total principal balance of the notes as
of the date of issuance of the notes.
The auto loans are simple interest installment sales contracts and
installment loans which provide for equal monthly payments.
The composition, distribution by annual percentage rate, commonly called
APR, and geographical distribution of the auto loans as of the cut-off date are
as set forth in the following tables.
Composition of the Auto Loans as of the Cut-Off Date
<TABLE>
<S> <C>
Initial Aggregate Principal Balance..................... $321,904,081.65
Number of Auto Loans.................................... 17,965
Average Original Principal Balance...................... $18,829.34
Range of Original Principal Balances.................... $2,035.00 to $58,495.00
Average Remaining Principal Balance..................... $17,918.40
Range of Remaining Principal Balances................... $1,397.89 to $57,381.41
Weighted Average APR(1)................................. 10.88%
Range of APRs........................................... 7.00% to 16.99%
Weighted Average Original Term to Maturity(1)........... 62.32 months
Range of Original Terms to Maturity..................... 18 months to 72 months
Weighted Average Remaining Term to Maturity(1).......... 58.83 months
Range of Remaining Terms to Maturity.................... 13 months to 72 months
</TABLE>
--------------------------------------------------------------------------------
(1) Weighted by remaining principal balance.
S-17
<PAGE>
Distribution of the Auto Loans by APR as of the Cut-Off Date
<TABLE>
<CAPTION>
Percentage of
Number of Aggregate Aggregate
Range of APRs Auto Loans Principal Balance Principal Balance
------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
7.00% to 7.99%................. 1,496 $ 26,602,806.98 8.26%
8.00% to 8.99%................. 2,504 44,658,432.58 13.87%
9.00% to 9.99%................. 3,125 56,773,638.15 17.64%
10.00% to 10.99%................. 2,770 50,410,021.25 15.66%
11.00% to 11.99%................. 2,554 46,942,989.27 14.58%
12.00% to 12.99%................. 2,470 44,730,150.55 13.90%
13.00% to 13.99%................. 1,598 28,481,907.83 8.85%
14.00% to 14.99%................. 903 15,362,682.40 4.77%
15.00% to 15.99%................. 441 6,540,800.32 2.03%
16.00% to 16.99%................. 104 1,400,652.32 0.44%
------ --------------- -------
Total............................ 17,965 $321,904,081.65 100.00%
</TABLE>
Geographic Distribution of the Auto Loans as of the Cut-Off Date
<TABLE>
<CAPTION>
Percentage of
Number of Aggregate Aggregate
State(1)(2) Auto Loans Principal Balance Principal Balance
----------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Florida.......................... 597 10,491,473.86 3.26%
Georgia.......................... 3,124 55,003,504.06 17.09%
Maryland......................... 1,057 17,373,075.20 5.40%
North Carolina................... 1,386 23,877,489.05 7.42%
South Carolina................... 226 3,675,589.29 1.14%
Tennessee........................ 209 3,634,917.94 1.13%
Texas............................ 8,985 166,869,702.13 51.84%
Virginia......................... 1,563 26,931,201.04 8.37%
Other............................ 818 14,047,129.08 4.35%
------ --------------- ------
Total............................ 17,965 $321,904,081.65 100%
</TABLE>
--------
(1) Based upon the billing address of the obligors.
(2) No other state represents more than 1% of the auto loans.
S-18
<PAGE>
Distribution of the Auto Loans by Remaining Principal Balance as of the Cut-Off
Date
<TABLE>
<CAPTION>
Percentage of
Range of Remaining Number of Aggregate Aggregate
Principal Balances Auto Loans Principal Balance Principal Balance
------------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
$ 00.00 to $ 4,999.99........ 80 $ 316,478.81 0.10%
$ 5,000.00 to $ 9,999.99........ 1,573 13,045,748.80 4.05%
$10,000.00 to $14,999.99........ 4,898 62,467,350.43 19.41%
$15,000.00 to $19,999.99........ 5,471 95,209,791.26 29.58%
$20,000.00 to $24,999.99........ 3,416 75,949,189.53 23.59%
$25,000.00 to $29,999.99........ 1,640 44,436,721.92 13.80%
$30,000.00 to $34,999.99........ 603 19,321,229.50 6.00%
$35,000.00 to $39,999.99........ 193 7,131,576.73 2.22%
$40,000.00 to $44,999.99........ 62 2,610,722.19 0.81%
$45,000.00 to $49,999.99........ 18 841,485.62 0.26%
$50,000.00 to $54,999.99........ 10 516,405.45 0.16%
$55,000.00 to $57,381.41........ 1 57,381.41 0.02%
------ --------------- -------
Total........................... 17,965 $321,904,081.65 100.00%
====== =============== =======
</TABLE>
Distribution of the Auto Loans by Remaining Terms to Maturity as of the Cut-Off
Date
<TABLE>
<CAPTION>
Aggregate Percentage of
Range of Remaining Number of Principal Aggregate
Terms to Maturity (months) Auto Loans Balance Principal Balance
-------------------------- ---------- --------------- -----------------
<S> <C> <C> <C>
13 to 24........................... 113 $ 978,688.66 0.30%
25 to 36........................... 510 5,842,183.24 1.81%
37 to 48........................... 1,641 21,140,152.18 6.57%
49 to 60........................... 11,205 194,270,874.14 60.35%
61 to 72........................... 4,496 99,672,183.43 30.96%
------ --------------- -------
Total.............................. 17,965 $321,904,081.65 100.00%
====== =============== =======
</TABLE>
S-19
<PAGE>
THE BANK
General
The bank, which is the seller and the servicer of the auto loans, is a
federally chartered stock savings bank. The bank'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 bank's
telephone number is (301) 986-7000. The bank is subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision, or
the OTS, within the Department of the Treasury and, to a lesser extent, by the
Federal Deposit Insurance Corporation, or the FDIC. Deposits at the bank are
fully insured up to $100,000 per insured depositor by the Savings Association
Insurance Fund, which is administered by the FDIC.
Based on unaudited results, at June 30, 2000, the bank had consolidated
assets of approximately $10.6 billion, deposits of approximately $6.9 billion,
and stockholders' equity of approximately $486.3 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, or
FIRREA. At June 30, 2000, the bank's tangible, core, tier 1 risk-based and
total risk-based regulatory capital ratios were 5.46%, 5.46%, 7.27% and 11.10%,
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. 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 is being operated in an unsafe
or unsound condition or has received and has not corrected a less than
satisfactory examination rating for asset quality, management, earnings or
liquidity.
Litigation
The bank 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.
Delinquency and Default Experience
The tables below set forth certain information concerning the bank's
delinquency and loss experience with respect to its servicing portfolio of
retail installment sales contracts for new and used automobiles, light duty
trucks and vans acquired pursuant to its finance programs. Delinquency is
recognized on a contractual basis only. The bank cannot assure you that the
levels of delinquency and loss experience reflected in the tables below, are
indicative of the performance of the auto loans included in the trust.
S-20
<PAGE>
CHEVY CHASE BANK, F.S.B.
Delinquency Experience
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------
Dollar Percentage
Amount of Total
(000) Auto Loans
---------- ----------
<S> <C> <C>
Auto Loans
Outstanding(1).. $1,442,387
Delinquencies:(2)(3)
30-59 Days...... 12,701 0.88%
60-89 Days...... 3,335 0.23%
90 days or
more........... 9,580 0.66%
---------- ----
Total
Delinquencies... $ 25,616 1.77%
========== ====
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- ------------------- ------------------- ------------------- -------------------
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) Auto Loans (000) Auto Loans (000) Auto Loans (000) Auto Loans (000) Auto Loans
---------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Auto Loans
Outstanding(1).. $1,133,797 $760,348 $853,424 $714,320 $431,351
Delinquencies:(2)(3)
30-59 Days...... 10,439 0.92% 7,919 1.04% 9,212 1.08% 8,516 1.19% 2,491 0.58%
60-89 Days...... 3,180 0.28% 2,297 0.30% 3,256 0.38% 2,176 0.30% 742 0.17%
90 days or
more........... 7,709 0.68% 6,155 0.81% 9,188 1.08% 3,588 0.50% 1,667 0.39%
---------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
Total
Delinquencies... $ 21,328 1.88% $ 16,371 2.15% $ 21,656 2.54% $ 14,280 1.99% $ 4,900 1.14%
========== ========== ======== ========== ======== ========== ======== ========== ======== ==========
</TABLE>
------
(1) Auto loans 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.
S-21
<PAGE>
CHEVY CHASE BANK, F.S.B.
Loss Experience
<TABLE>
<CAPTION>
For the six-month
period
ended
June 30, 2000
----------------------
Percentage
of Average
Dollar Auto Loans
Amount Outstanding
(000) (1)
---------- -----------
<S> <C> <C>
Average Auto
Loans
Outstanding(2).. $1,347,866
Gross Charge-
offs(3)......... 4,793 0.71%
Recoveries(4)... 1,005 0.15%
---------- ----
Net Losses...... $ 3,788 0.56%
========== ====
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- -------------------- -------------------- -------------------- --------------------
Percentage Percentage Percentage Percentage Percentage
Dollar of Average Dollar of Average Dollar of Average Dollar of Average Dollar of Average
Amount Auto Loans Amount Auto Loans Amount Auto Loans Amount Auto Loans Amount Auto Loans
(000) Outstanding (000) Outstanding (000) Outstanding (000) Outstanding (000) Outstanding
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Auto
Loans
Outstanding(2).. $940,031 $771,587 $832,700 $565,963 $363,845
Gross Charge-
offs(3)......... 8,200 0.87% 12,682 1.64% 8,303 1.00% 3,795 0.67% 2,120 0.58%
Recoveries(4)... 1,554 0.16% 1,211 0.15% 770 0.09% 277 0.05% 275 0.07%
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- -----------
Net Losses...... $ 6,646 0.71% $ 11,471 1.49% $ 7,533 0.91% $ 3,518 0.62% $ 1,845 0.51%
======== =========== ======== =========== ======== =========== ======== =========== ======== ===========
</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-22
<PAGE>
DESCRIPTION OF SALE AND SERVICING AGREEMENT
Conveyance of Auto Loans
On the closing date, the bank will sell to the trust, without recourse
except as expressly set forth in the sale and servicing agreement, all of the
bank's right, title and interest in and to the auto loans and the other trust
property, including its security interests in the financed vehicles.
Concurrently with this sale and assignment, the indenture trustee will execute,
authenticate and deliver the notes to the underwriters against payment to the
bank of the net purchase price of the sale of the notes.
In the sale and servicing agreement, the bank will make various
representations and warranties to the trust, including:
. the information provided with respect to auto loans is correct in all
material respects;
. the obligor on each auto loan is required to obtain physical damage and
theft insurance in accordance with the bank's normal requirements;
. at the date of issuance of each class of notes, the auto loans 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 trust and
indenture trustee;
. on the closing date, each of the auto loans is or will be secured by a
first priority perfected security interest in the financed vehicle in
favor of the bank; and
. at the time it was originated, each auto loan 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 trust and the noteholders will have against the bank
for breach of any of the representations and warranties made with respect to
the auto loans in the sale and servicing agreement will be to require the bank
to repurchase the auto loan. See "--Mandatory Repurchase of Auto Loans" in this
preliminary prospectus supplement.
To assure uniform quality in servicing the auto loans and to reduce
administrative costs, the bank, as servicer, shall be appointed as initial
custodian of the auto loans. The servicer, in its capacity as custodian, will
hold the auto loans and all electronic entries, documents, instruments and
writings related to the auto loans, or the auto loan file, directly or through
sub-servicers, on behalf of the indenture trustee for the benefit of
noteholders. The auto loans will not be stamped or otherwise marked to reflect
the sale and assignment of the auto loans to the trust and the pledge thereof
to the indenture trustee and will not be segregated from other receivables held
by the servicer. However, UCC financing statements reflecting the sale and
assignment of the auto loans by the bank to the trust will be filed, and the
bank's accounting records and computer systems will be marked to reflect such
sale and assignment and subsequent pledge to the indenture trustee. See "Legal
Aspects of The Auto Loans" in the prospectus. The sale and servicing agreement
will require the servicer to file continuation statements relating to such UCC
financing statements in order to maintain the perfected security interest of
the trust in the auto loans. The servicer may designate a third-party document
retention company to act as custodian with respect to auto loan files.
Servicing Procedures
The servicer will service the auto loans pursuant to the sale and servicing
agreement. The sale and servicing agreement requires the servicer to carry out
the servicing of the auto loans generally in the same manner in which it
services receivables and vehicles held for its own account. In performing its
servicing duties, the servicer will act on behalf and for the benefit of the
trust and the noteholders, subject at all times to
S-23
<PAGE>
the provisions of the sale and servicing 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 noteholders, will be responsible for managing, servicing and
administering the auto loans and enforcing and making collections on the auto
loans and any insurance policies relating to the financed vehicles and for
enforcing any security interest in any of the financed vehicles, all as set
forth in the sale and servicing 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 indenture trustee with respect to
distributions, providing appropriate federal income tax information for use in
providing information to noteholders and attempting to maintain the perfected
security interest of the bank in the financed vehicles.
In connection with the servicing of the auto loans, the servicer has the
right to sell any defaulted auto loan. Any proceeds from such a sale will be
deposited into the collection account.
Servicer's Certificate
The sale and servicing agreement requires that on or before December 31 of
each year, beginning December 31, 2001, the servicer deliver an officer's
certificate to the indenture trustee and the rating agencies which states that:
. the officer has reviewed the servicer's activities and performance of
its duties under the sale and servicing agreement during the preceding
12-month period ended December 31 of that year (or the period since the
date of the sale and servicing agreement);
. the review has been made under that officer's supervision; and
. to the best of the officer's knowledge, based on the review, the
servicer has fulfilled all of its obligations under the sale and
servicing agreement throughout the period in question, or, if there has
been a default in the fulfillment of any such obligation, specifying
each default known to the officers, its nature and status.
Review by Independent Certified Public Accountants
The sale and servicing agreement requires the servicer to have a firm of
independent certified public accountants, who may also render other services to
the servicer, deliver a written statement to the indenture trustee. The
independent certified public accountants must deliver this report within 90
days following the end of each fiscal year of the servicer, beginning with the
servicer's fiscal year ending September 30, 2001 and send a copy to the rating
agencies. This report must confirm that:
. the firm of independent certified public accountants has read the
monthly servicer's certificates delivered pursuant to the sale and
servicing agreement with respect to each collection period during such
one-year period, or such longer or shorter period since the date of the
sale and servicing agreement;
. the firm of independent certified public accountants has reviewed the
servicing of the auto loans by the servicer;
. its review 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 sale and servicing agreement; and
. except as described in the report, the review 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.
S-24
<PAGE>
Servicer Default; Waiver of Past Defaults
A servicer default under the sale and servicing agreement will consist of
the occurrence and continuance of any of the following:
. the servicer's failure to deliver the servicer's certificate to the
indenture trustee on or before the determination date, which failure
continues unremedied for more than three business days after written
notice from the indenture trustee or the holders of notes evidencing not
less than 25% of the principal balance of the notes as of that date of
determination;
. the servicer's failure to deliver to the indenture trustee for
distribution to the noteholders any proceeds or payment which the sale
and servicing agreement requires it to deliver, which failure continues
unremedied for more than three business days after written notice from
the indenture trustee or the holders of notes evidencing not less than
25% of the principal balance of the notes as of that date of
determination;
. the servicer's failure to observe or perform in any material respect any
other covenant or agreement of the servicer, in the sale and servicing
agreement, which failure materially and adversely affects the rights of
the noteholders and which continues unremedied for more than 30 days
after the giving of written notice of such failure to the servicer, by
the indenture trustee or to the indenture trustee by noteholders
evidencing not less than 25% of the principal balance of the notes as of
that date of determination; and
. any insolvency event.
An insolvency event means 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, as described in "The Trust Documents--Removal
of the Servicer" in the prospectus. Upon the occurrence of a servicer default,
the servicer may be removed by the indenture trustee or by the majority
noteholders. The majority noteholders may waive some defaults by the servicer
in the performance of its obligations under the sale and servicing agreement.
The majority noteholders means, as of any date of determination, holders of
notes representing a majority of the aggregate principal balance of all classes
of notes as of that date of determination.
Servicing Compensation, Payment of Expenses and Trustees' Fees
For its servicing of the auto loans, the servicer will be entitled to
receive a monthly servicing fee on each payment date which equals one-twelfth
times 1.00% of the pool balance as of the first day of the immediately
preceding collection period. The servicer will deposit all late fees into the
collection account and those fees will be included in available funds.
All costs of servicing each auto loan in the manner required by the sale and
servicing agreement will be borne by the servicer, but the servicer shall be
entitled to retain, out of any amounts actually recovered with respect to any
defaulted auto loan or the financed vehicles subject to a defaulted auto loan,
the servicer's actual out-of-pocket expenses reasonably incurred with respect
to such defaulted auto loan or financed vehicle.
On each payment date, the indenture trustee and the owner trustee are each
entitled to receive a fee (payable from available funds) for their services as
indenture trustee and owner trustee, during the prior collection period in an
amount agreed upon by the bank and the indenture trustee and the owner trustee,
respectively.
S-25
<PAGE>
Mandatory Repurchase of Auto Loans
In the event of a breach of any representation or warranty with respect to
the auto loans described in "--Conveyance of Auto Loans" in this preliminary
prospectus supplement, which breach materially and adversely affects an auto
loan or the interest of the trust or the noteholders in such auto loan, the
bank will be required to repurchase the auto loan from the trust for the
purchase amount. This repurchase requirement will not apply if the breach has
been cured by the last day of the collection period following the collection
period during which the bank becomes aware of, or receives written notice from
the indenture trustee, or the servicer of the breach. 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
noteholders or the indenture trustee against the bank for any such uncured
breach. See "The Trust Documents--Servicer Covenants" in the accompanying
prospectus.
In the event of a breach of certain covenants of the servicer in the sale
and servicing agreement, the servicer will be required to purchase the affected
auto loans from the trust. The purchase obligation will constitute the sole
remedy available to the noteholders or the indenture trustee against the
servicer for any such uncured breach. See "The Trust Documents--Servicing
Procedures" in the accompanying prospectus.
The purchase amount of any auto loan, with respect to any payment date
equals the sum of:
. the outstanding principal balance of the auto loan as of the last day of
the preceding collection period, and
. the amount of unpaid interest on the auto loan's principal balance at
the related APR through the date the auto loan is purchased, after
giving effect to the receipt of monies collected on the auto loan in
that preceding collection period.
DESCRIPTION OF THE NOTES
General
The trust will issue the notes under an indenture, a form of which has been
filed as an exhibit to the registration statement. The following summary
describes material terms of the notes and the indenture. The summary does not
purport to be complete and is subject to all the provisions of the notes and
the indenture. The following summary supplements the description of the general
terms and provisions of the notes of any given series and the related indenture
as described in the accompanying prospectus, and to the extent that those
descriptions differ from the descriptions provided in this preliminary
prospectus supplement, the descriptions provided in this preliminary prospectus
supplement replace those descriptions. You can obtain a copy of the indenture
without charge on written request addressed to the indenture trustee at its
Corporate Trust Department at 180 East 5th Street, St. Paul, Minnesota 55101,
Att: Structured Finance/Chevy Chase 2000-2.
The trust will offer the notes in minimum denominations of $1,000 and
integral multiples of $1 in book-entry form only. Persons acquiring beneficial
interests in the notes will hold their interests through The Depository Trust
Company in the United States or Clearstream, Luxembourg or in the Euroclear
System in Europe. See "Description of the Securities--Book-Entry Registration"
and Annex I in the prospectus.
In addition to the notes, the trust will also issue the trust certificate
which will not be offered by this preliminary prospectus supplement.
Distributions to the Noteholders of the Subordinate Notes
Payments of interest on the Subordinate Notes will only be made on each
payment date if available funds remain after paying all fees to the servicer,
the indenture trustee and the owner trustee and after making all payments of
interest on the Class A Notes and certain payments of principal on that date.
No principal will be paid to the holders of the Subordinate Notes until the
entire outstanding principal balance of all Class A Notes has been paid to
zero.
S-26
<PAGE>
Payment Dates
The notes will pay interest and principal on the fifteenth day of each
month, or, if the fifteenth day is not a business day, on the next following
business day. The first payment date will be October 16, 2000. Only holders of
record as of the close of business on the day immediately preceding a payment
date, commonly known as a record date, will receive payments on that payment
date.
A 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 indenture trustee under the
trust agreement is located are authorized or obligated by law or executive
order to close.
Each month the trust will distribute the amounts received on the auto loans
and any other collections available as property of the trust during the
calendar month, before the month in which the payment date occurs. This period
is referred to as a collection period.
The final scheduled payment dates are set forth on the cover to this
preliminary prospectus supplement.
Accounts
On the closing date the indenture trustee will establish the following
accounts, for the benefit of the noteholders:
. the collection account, into which all payments, made on or with respect
to the auto loans will be deposited,
. the note account, and
. the reserve account.
Delivery of the Servicer's Certificate
On or before the earlier of the 8th business day or the 11th calendar day
of each month, or the determination date, the servicer will deliver a
servicer's certificate to the indenture trustee and the rating agencies. The
servicer's certificate will provide the information needed to make payments
and other distributions and transfers on the upcoming payment date.
Flow of Funds
On each payment date, the servicer will, in the servicer's certificate,
instruct the indenture trustee as to the application of the available funds
for that payment date. The available funds for a payment date are the
collections on the auto loan pool received by the servicer during the prior
month, minus servicer compensation (other than the monthly servicing fee) and
reimbursable amounts owed to the servicer; this amount will be transferred
from the collection account to the note account. The available funds, together
with amounts transferred from the reserve account to the note account to fund
noteholder payments, will, on each payment date, be allocated in the following
order of priority:
(1) to the servicer, the monthly servicing fee;
(2) to the owner trustee and the indenture trustee, the fees then due to each
of them;
(3) to the Class A Noteholders, ratably, the interest then due to them,
including carryover shortfall interest;
(4) to fund a payment of principal to the extent as may be necessary to reduce
the Class A Note principal balance to the pool balance; i.e., to maintain
parity between the Class A Note principal balance and the pool balance,
which amount will be paid out as described below under "Principal";
S-27
<PAGE>
(5) to the Class B Noteholders, the interest then due to them, including
carryover shortfall interest;
(6) to fund a payment of principal to the extent as may be necessary to reduce
the combined Class A and Class B Note principal balance to the pool
balance; i.e. to maintain parity between the combined Class A and Class B
Note balance and the pool balance, which amount will be paid out as
described below under "Principal";
(7) to the Class C Noteholders, the interest then due to them, including any
carryover shortfall interest;
(8) to fund a payment of principal to the extent as may be necessary to reduce
the combined Class A, Class B, and Class C Note principal balance to the
pool balance; i.e., to maintain parity between the aggregate note principal
balance and the pool balance, which amount will be paid out as described
below under "Principal";
(9) to fund a payment of principal in an amount generally equal to the decrease
in the pool balance during the prior month, reduced by the amount of any
principal allocated as provided above, and further reduced by the amount of
any excess level of overcollateralization, which amount will be paid out as
described below under "Principal";
(10) to fund a payment of principal to the extent as may be necessary to reduce
to zero the principal balance of any class which remains outstanding on or
after its final scheduled payment date, which amount will be paid out as
described below under "Principal";
(11) to the reserve account, any deficiency in the reserve account required
amount;
(12) to fund, using excess cashflow, as well as excess amounts released from
the reserve account, an additional payment of principal to the extent as
may be necessary to increase the overcollateralization to its required
target level, which amount will be paid out as described below under
"Principal"; and
(13) the remainder, if any, of the available funds, to the holder of the trust
certificate.
Interest Payments
Interest on each class of notes will accrue during each interest accrual
period at the applicable interest rate listed below from and including the most
recent payment date that interest was paid--or, in the case of the first
payment date, from and including the closing date to but excluding the
following payment date. The interest accruing during an interest period will
accrue on each class's outstanding principal amount as of the end of the prior
payment date--or, in the case of the first payment date, on each class's
initial note principal balance.
For any payment date, interest due but not paid on that payment date will be
due on the next payment date together with, to the extent permitted by law,
interest at the applicable interest rate on that unpaid amount. Interest on the
Class A-1 Notes will be calculated on the basis of a 360-day year and the
actual number of days elapsed in the applicable interest accrual period.
Interest on all other classes of notes will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
The interest rate for each class of notes is as follows:
. Class A-1 Interest Rate: % per annum;
. Class A-2 Interest Rate: % per annum;
. Class A-3 Interest Rate: % per annum;
. Class A-4 Interest Rate: % per annum;
S-28
<PAGE>
. Class B Interest Rate: % per annum; and
. Class C Interest Rate: % per annum.
Principal Payments. On each payment date, all amounts allocated to the
payment of principal as described in "Flow of Funds" above will be aggregated
and will be paid out in the following order of priority:
(1) to the Class A-1 Noteholders in reduction of principal until the
principal balance of the Class A-1 Notes has been reduced to zero;
(2) to the Class A-2 Noteholders in reduction of principal until the
principal balance of the Class A-2 Notes has been reduced to zero;
(3) to the Class A-3 Noteholders in reduction of principal until the
principal balance of the Class A-3 Notes has been reduced to zero;
(4) to the Class A-4 Noteholders in reduction of principal until the
principal balance of the Class A-4 Notes has been reduced to zero;
(5) to the Class B Noteholders in reduction of principal until the
principal balance of the Class B Notes has been reduced to zero; and
(6) to the Class C Noteholders in reduction of principal until the
principal balance of the Class C Notes has been reduced to zero.
If an event of default occurs, the Class A Notes then outstanding will
receive principal payments pro rata, although the Class A Notes as a group will
still be entitled to payment in full before any principal is paid on the Class
B Notes and the Class C Notes.
Credit Enhancement
Subordination of the Subordinate Notes. Payments on the Subordinate Notes
are subordinated to payments on the Class A Notes. This subordination of
distributions on the Subordinate Notes is intended to increase the likelihood
that the trust will not default in making payments due on the Class A Notes.
Payments on the Class C Notes are subordinated to payments on the Class A
Notes and Class B Notes. This subordination of payments on the Class C Notes is
intended to increase the likelihood that the trust will not default in making
payments due on the Class A Notes and the Class B Notes.
Reserve Account. On the closing date, the amount in the reserve account will
be $2,414,280.61 which is 0.75% of the original pool balance and which is the
full required funding of the reserve account. The amount on deposit in the
reserve account is required to be maintained at this level for so long as the
notes are outstanding, except that the amount on deposit need never be greater
than the aggregate outstanding note principal balance.
On each payment date, the amount on deposit in the reserve account will be
available to pay:
. interest on the notes for that payment date,
. if that payment date is the final scheduled payment date of any class of
notes, the amount necessary to reduce the principal balance of such
class of notes to zero, and
. the excess, if any, by which the aggregate outstanding principal amount
of all classes of notes, after taking into account all other payments of
principal on that payment date, exceeds the pool balance as of the end
of the prior month, i.e., the amount necessary to maintain parity
between the aggregate note balance and the pool balance.
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<PAGE>
Amounts on deposit in the reserve account on a payment date, after taking
into account all deposits to and withdrawals from the reserve account, which
are in excess of the required amount will be released from the reserve account
and applied:
. as part of excess cashflow, to fund an additional payment of principal
on the notes to the extent needed to increase or maintain the
overcollateralization, and
. to make a payment to the holders of the trust certificate.
Overcollateralization
On the closing date, the original pool balance will exceed the initial
principal amount of the notes of all classes by approximately $3,220,081.65,
which is approximately 1.00% of the original pool balance. This excess
represents overcollateralization. The level of overcollateralization is
required to increase to, and thereafter be maintained at, a target level equal
to the greater of (1) 4.00% of the pool balance less the amount in the reserve
account and (2) the aggregate principal balance of the auto loans that are
delinquent 90 days or more, including repossessions, and have not been charged
off and less the amount in the reserve account. The level of
overcollateralization is increased and maintained through the application of
excess cashflow available to the trust, primarily in the form of the excess of
interest collections on the auto loan pool over the interest paid out on the
notes as well as releases of excess amounts from the reserve account. In
general, the target amount of overcollateralization will decrease as the pool
balance decreases. However, the required amount of overcollateralization on any
payment date will never be less than 0.50% of the original pool balance. The
overcollateralization will be available to absorb losses on the auto loan pool
prior to any withdrawals from the reserve account used to fund principal.
Withholding
The indenture trustee is required to comply with all federal income tax
withholding requirements respecting payments to noteholders of interest or
original issue discount with respect to the notes that the indenture 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 "Material Federal Income Tax Consequences--
Tax Consequences to Holders of the Notes--Foreign Investors" in this
preliminary prospectus supplement. The consent of neither the noteholders nor
the Beneficial Owners will be required for such withholding. In the event that
the indenture trustee does withhold or causes to be withheld any amount from
interest or original issue discount payments or advances thereof to any
noteholders pursuant to federal income tax withholding requirements, the
indenture trustee is required to indicate the amount withheld in its monthly
report to such noteholders. If any withholding or other tax is imposed by any
jurisdiction, neither the noteholders nor the Beneficial Owners have any right
to receive additional interest or other amounts in consequence thereof.
Reports to Noteholders
On each payment date, the indenture trustee will furnish or cause to be
furnished with each payment to noteholders, a monthly report, based on
information in the servicer's certificate, setting forth the following
information for that payment date:
. the amount of the principal payment for each class of notes including
any overdue principal;
. the amount of the interest payment for each class of notes including any
overdue interest;
. the aggregate amount of fees received by the servicer, the owner trustee
and the indenture trustee for the collection period;
. the amount, if any, withdrawn from the reserve account with respect to
such payment date;
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<PAGE>
. the aggregate net losses on the auto loans for the related collection
period;
. the pool balance and the pool factor as of the end of the related
collection period;
. the aggregate principal balance of all auto loans which were delinquent
(1) 30 days or more and (2) 90 days or more, in each case, as of the
last day of the related collection period; and
. the principal balance for each class of notes on such payment date
(after giving effect to the distributions on such payment date).
Optional Termination
The indenture and the sale and servicing agreement will provide that on any
payment date on which the total principal balance of the notes is 5% or less of
the aggregate original note principal balance, the bank will have the option to
acquire all right, title and interest in all, but not less than all, auto loans
held in the trust by paying into the trust for retirement of the notes an
amount equal to the aggregate of the purchase amounts of the auto loans.
Events of Default
The notes are subject to the following events of default:
. default in the payment of interest on any Note, when the same becomes
due and payable, and the default shall continue for a period of five
days; or
. default in the payment of the outstanding principal balance of any note
on its final scheduled payment date, and the default shall continue for
a period of five days;
. default in the observance or performance of any other covenant or
agreement of the trust made in the indenture, or any representation or
warranty of the trust made in the indenture proving to have been
incorrect in any material respect as of the time when the same shall
have been made, subject to the giving of notice and a grace period; or
. bankruptcy events concerning the trust.
Rights upon an Event of Default
If there is an event of default, interest will continue to accrue on the
principal and the overdue interest at the applicable interest rate on the note
until any overdue principal and interest is paid. The indenture trustee's
remedies following an event of default will include the institution of
proceedings to collect amounts due, foreclosure of the property comprising the
trust assets and the exercise of other standard secured creditor remedies. The
indenture trustee may also elect to maintain possession of the trust assets,
and continue to apply collections on the auto loans as if there had been no
declaration of acceleration. The indenture trustee's remedies also include the
right to retain an independent public accounting firm to produce a verification
report as to whether or not the trust assets would be sufficient, on an ongoing
basis, to make all payments on the notes, assuming that the notes remain
outstanding through maturity.
. If the event of default results from the bankruptcy of the trust or the
failure of the trust to pay timely interest on any class of notes or
principal on the final scheduled payment date of any note, the notes of
all classes may be accelerated, and the indenture trustee may exercise
the above remedies, but only if so directed by the controlling class.
. If the event of default results from a covenant default by the trust,
then the notes will only be accelerated and remedies exercised, if the
holders of a majority of the principal balance of each class, voting on
a class-by-class basis, so direct.
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<PAGE>
The noteholders may base their directions to the indenture trustee on the
results of the verification report, as well as a valuation of the projected
sale proceeds of the trust assets. The costs of any verification report or
valuation will not be borne by the indenture trustee or by the owner trustee,
but by the trust, or, if the noteholders so elect, by the noteholders.
Controlling class means the holders of notes representing a majority of the
principal balance of the Class A Notes then outstanding, or if the Class A
Notes are not outstanding, the Class B Notes then outstanding, or if neither
the Class A Notes nor the Class B Notes are outstanding, the Class C Notes then
outstanding.
If an event of default occurs and has not been remedied, the indenture
trustee will be under no obligation to exercise any of the rights or powers
under the trust documents at the request or direction of any of the holders of
the notes, if the indenture trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with the request. Subject to the provisions for
indemnification and limitations contained in the trust documents and except in
the case of a default in respect of a covenant, the controlling class will have
the right to direct the time, method and place of conducting any proceeding or
any remedy available to the indenture trustee. The controlling class may, in
some cases, waive any default, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the trust
documents that cannot be modified without the waiver or consent of all the
holders of the outstanding notes. No holder of a note will have the right to
institute any proceeding under the trust documents, unless:
. the holder previously has given the indenture trustee written notice of
a continuing event of default;
. the holders of not less than 25% of the aggregate principal balance of
all outstanding notes have made written request to the indenture trustee
to institute the proceeding in its own name as indenture trustee;
. the holder or holders have offered the indenture trustee reasonable
indemnity against costs, expenses and liabilities to be incurred in
complying with the request;
. the indenture trustee has for 60 days failed to institute the
proceeding; and
. no direction inconsistent with the written request has been given to the
indenture trustee during the 60-day period by the holders of a majority
of the aggregate principal balance of all outstanding notes. In
addition, the indenture trustee and the note owners, by accepting a
beneficial interest in the notes, will covenant that they will not at
any time institute against the trust or the bank, or join in any
institution against the trust or the bank of, any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy
or similar law.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
considerations to investors of the purchase, ownership and disposition of the
notes. The discussion is based upon laws, regulations, rulings and decisions
now in effect, all of which are subject to change. The discussion below does
not purport to deal with all federal tax considerations applicable to all
categories of investors. Some holders, including insurance companies, tax-
exempt organizations, financial institutions or broker dealers, taxpayers
subject to the alternative minimum tax, and holders that will hold the notes as
other than capital assets, may be subject to special rules that are not
discussed below. It is recommended that investors consult their own tax
advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the notes.
Tax Characterization of the Trust
Dewey Ballantine LLP is our tax counsel, and is of the opinion that,
assuming the parties will comply with the terms of the governing agreements,
the trust will not be an association, or publicly traded partnership, taxable
as a corporation for federal income tax purposes.
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<PAGE>
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The seller agrees, and the
noteholders will agree by their purchase of notes, to treat the notes as
indebtedness for all federal, state and local income tax purposes. There are no
regulations, published rulings or judicial decisions involving the
characterization for federal income tax purposes of securities with terms
substantially the same as the notes. In general, whether instruments such as
the notes constitute indebtedness for federal income tax purposes is a question
of fact, the resolution of which is based primarily upon the economic substance
of the instruments and the transaction under which they are issued rather than
the form of the transaction or the manner in which the instruments are labeled.
The Internal Revenue Service and the courts have stated various factors to
be taken into account in determining, for federal income tax purposes, whether
or not an instrument constitutes indebtedness and whether a transfer of
property is a sale because the transferor has relinquished substantial
incidents of ownership in the property or whether the transfer is a borrowing
secured by the property.
On the basis of its analysis of the above factors as applied to the facts
and its analysis of the economic substance of the contemplated transaction, tax
counsel is of the opinion that, for federal income tax purposes, the notes will
be treated as indebtedness, and not as an ownership interest in the auto loans,
nor as an equity interest in the trust or in a separate association taxable as
a corporation or other taxable entity.
If the notes are characterized as indebtedness, interest paid or accrued on
a note will be treated as ordinary income to the noteholders and principal
payments on a note will be treated as a return of capital to the extent of the
noteholder's basis in the note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the notes when earned, even
if not paid, unless it is determined to be uncollectible. The trust will report
to noteholders of record and the IRS regarding the interest paid and original
issue discount, if any, accrued on the notes to the extent required by law.
Although, as described above, it is the opinion of tax counsel that, for
federal income tax purposes, the notes will be characterized as indebtedness,
this opinion is not binding on the IRS and thus no assurance can be given that
this characterization will prevail. If the IRS successfully asserted that one
or more of the notes did not represent indebtedness for federal income tax
purposes, the noteholders would likely be treated as owning an interest in a
partnership and not an interest in an association or publicly traded
partnership, taxable as a corporation. If the noteholders were treated as
owning an equitable interest in a partnership, the partnership itself would not
be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's
income, gain, loss, deductions and credits. The amount, timing and
characterization of types of income and deductions for a noteholder would
differ if the notes were held to constitute partnership interests, rather than
indebtedness. Since the seller and the trust will treat the notes as
indebtedness for federal income tax purposes, the servicer will not attempt to
satisfy the tax reporting requirements that would apply under this alternative
characterization of the notes. Investors that are foreign persons should
consult their own tax advisors in determining the federal, state, local and
other tax consequences to them of the purchase, ownership and disposition of
the notes. See "Taxation of Foreign Investors" below.
Original Issue Discount. It is anticipated that the notes will not have any
original issue discount or OID, other than possibly OID within a de minimis
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Internal Revenue Code, generally will not apply to the notes. OID
will be considered de minimis if it is less than 0.25% of the principal amount
of a note multiplied by its expected weighted average life.
Market Discount. A subsequent purchaser who buys a note for less than its
principal amount may be subject to the market discount rules of section 1276
through 1278 of the Code. If a subsequent purchaser of a note disposes of the
note, including some nontaxable dispositions such as a gift, any gain upon the
sale or other disposition will be recognized as ordinary income to the extent
of any accrued for the period that the purchaser
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<PAGE>
holds the note. Similarly, if a subsequent purchaser receives a principal
payment, the amount of that principal payment will be treated as ordinary
income to the extent of any market discount accrued for the period that the
purchaser holds the note. The holder may instead elect to include market
discount in income as it accrues on all debt instruments acquired in the year
of acquisition of the notes and thereafter. Market discount generally will
equal the excess, if any, of the then current unpaid principal balance of the
note over the purchaser's basis in the note offered immediately after the
purchaser acquired the note. In general, market discount on a note will be
treated as accruing over the term of the note in the ratio of interest for the
current period over the sum of the current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method. At the request of a holder of a note, information will
be made available that will allow the holder to compute the accrual of market
discount under the first method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or continues
indebtedness to acquire a note at a market discount may be required to defer
the deduction of all or a portion of the interest on the indebtedness until the
corresponding amount of market discount is included in income.
However, market discount on a note will be considered to be zero if it is
less than a de minimis amount, which is 0.25% of the remaining principal
balance of the note multiplied by its expected weighted average remaining life.
If OID or market discount is de minimis, the actual amount of discount must be
allocated to the remaining principal distributions on the notes and, when each
distribution is received, capital gain equal to the discount allocated to the
distribution will be recognized.
Market Premium. A subsequent purchaser who buys a note for more than its
principal amount generally will be considered to have purchased the note at a
premium. The holder may amortize the premium, using a constant yield method,
over the remaining term of the note and, except as future regulations may
otherwise provide, may apply the amortized amounts to reduce the amount of
interest reportable for the note over the period from the purchase date to the
date of maturity of the note. The amortization of the premium on an obligation
that provides for partial principal payments prior to maturity should be
governed by the methods described above for accrual of market discount on such
an obligation. A holder that elects to amortize premium must reduce his tax
basis in the obligation by the amount of the aggregate deductions, or interest
offsets, allowable for amortization of premium. If a debt instrument purchased
at a premium is redeemed in full prior to its maturity, a purchaser who has
elected to amortize premium should be entitled to a deduction for any remaining
unamortized premium in the taxable year of redemption.
Sale or Redemption of Notes. If a note is sold or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale and the holder's adjusted basis in the note. The adjusted basis
generally will equal the cost of the note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
note, and by any market discount which the taxpayer elected to include in
income or was required to include in income, and reduced by payments other than
payments of qualified stated interest in respect of the note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a note, either
on the date on which the payment is scheduled to be made or as a prepayment,
will recognize gain equal to any excess, of the amount of the payment over his
adjusted basis in the note allocable thereto. A noteholder who receives a final
payment which is less than his adjusted basis in the note will generally
recognize a loss in the amount of the shortfall on the last day of his taxable
year. Generally, this gain or loss realized by an investor who holds a note as
a capital asset within the meaning of Section 1221 of the Code should be
capital gain or loss, except as described above in respect of market discount
and except that a loss attributable to accrued but unpaid interest may be an
ordinary loss.
Taxation of Foreign Investors. Interest payments including OID, if any, on
the notes made to a foreign person, which is a nonresident alien individual,
foreign corporation or other non-United States person, generally will be
portfolio interest. This interest is not subject to United States tax if the
payments are not effectively connected with the conduct of a trade or business
in the United States by the foreign person and if the trust or
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<PAGE>
other person who would otherwise be required to withhold tax from these
payments is provided with an appropriate statement that the beneficial owner of
the note identified on the statement is a foreign person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the notes may be subject to the
backup withholding tax under Section 3406 of the Code at a rate of 31% if
recipients of the distributions fail to furnish to the payor their taxpayer
identification numbers and other required information, or otherwise fail to
establish an exemption from tax. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against the
recipient's federal income tax. Furthermore, penalties may be imposed by the
IRS on a recipient of distributions that is required to supply information but
that does not do so in the proper manner.
The IRS has issued withholding regulations, which make certain modifications
to withholding, backup withholding and information reporting rules. The
withholding regulations attempt to unify certification requirements and modify
certain reliance standards. The withholding regulations will generally be
effective for payments made after December 31, 2000. Prospective investors are
urged to consult their own tax advisors regarding the withholding regulations.
State and Local Tax Considerations
Potential noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential noteholders should
consult their own tax advisors as to the various state and local tax
consequences of an investment in the notes.
ERISA CONSIDERATIONS
The notes may be purchased by ERISA plans as described in the prospectus
under "ERISA Considerations--ERISA Considerations regarding Securities which
are Notes." The notes should be treated as indebtedness without substantial
equity features for purposes of the plan assets regulation. This determination
is based in part on the traditional debt features of the notes, including the
reasonable expectation of purchasers of notes that the notes will be repaid
when due, as well as the absence of conversion rights, warrants and other
typical equity features. The debt treatment of the notes for ERISA purposes
could change if the trust incurred losses. As described in the prospectus, the
acquisition or holding of the notes by or on behalf of an employee benefit plan
could still result in a prohibited transaction if the acquisition or holding of
the notes by or on behalf of the plan were deemed to be a prohibited loan to a
party in interest with respect to the plan. Accordingly, each purchaser and
each transferee using the assets of a plan subject to ERISA or Section 4975 of
the Internal Revenue Code to acquire the notes will be deemed to have
represented that the acquisition and continued holding of the notes will be
covered by a Department of Labor class exemption.
Any plan fiduciary considering the purchase of a note may wish to consult
with its counsel as to the potential applicability of ERISA and the Internal
Revenue Code to the investment. Moreover, each plan fiduciary may wish to
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the notes is appropriate for the plan,
taking into account the overall investment policy of the benefit plan and the
composition of the plan's investment portfolio.
The sale of notes to a plan is in no respect a representation by us or the
underwriters that this investment meets all relevant legal requirements for
investments by plans generally or any particular plan or that this investment
is appropriate for plans generally or any particular plan.
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RATINGS
As a condition to issuance, the notes must receive at least the following
ratings from Moody's Investors Service, Inc., Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc. and Fitch, Inc. in
order to be issued:
<TABLE>
<CAPTION>
Class Ratings
----------- ----------------------
S&P Moody's Fitch
--- ------- ------
<S> <C> <C> <C>
A-1 A-1+ Prime-1 F-1+
A-2 AAA Aaa AAA
A-3 AAA Aaa AAA
A-4 AAA Aaa AAA
B A A1 A
C BBB+ Baa2 BBB+
</TABLE>
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 assigned
to the notes address the likelihood of the receipt by the noteholders of all
distributions to which the noteholders are entitled by their respective final
scheduled payment dates. The ratings assigned to the notes do not represent any
assessment of the likelihood that principal prepayments might differ from those
originally anticipated or address the possibility that noteholders might suffer
a lower than anticipated yield.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in an underwriting
agreement, dated September , 2000, the underwriters named below have agreed
to purchase from the bank the following respective principal amounts of the
notes:
Class A-1 Notes
--------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount of
Underwriter Notes
----------- ---------
<S> <C>
J.P. Morgan Securities Inc. $
Credit Suisse First Boston Corporation $
Salomon Smith Barney Inc. $
-----
Total......................................................... $
-----
Class A-2 Notes
--------------------------------------------
<CAPTION>
Principal
Amount of
Underwriter Notes
----------- ---------
<S> <C>
J.P. Morgan Securities Inc. $
Credit Suisse First Boston Corporation $
Salomon Smith Barney Inc. $
-----
Total......................................................... $
-----
Class A-3 Notes
--------------------------------------------
<CAPTION>
Principal
Amount of
Underwriter Notes
----------- ---------
<S> <C>
J.P. Morgan Securities Inc. $
Credit Suisse First Boston Corporation $
Salomon Smith Barney Inc. $
-----
Total......................................................... $
-----
Class A-4 Notes
--------------------------------------------
<CAPTION>
Principal
Amount of
Underwriter Notes
----------- ---------
<S> <C>
J.P. Morgan Securities Inc. $
Credit Suisse First Boston Corporation $
Salomon Smith Barney Inc. $
-----
Total......................................................... $
-----
</TABLE>
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<PAGE>
Class B Notes
--------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount of
Underwriter Notes
----------- ---------
<S> <C>
J.P. Morgan Securities Inc. .................................. $
-----
Total......................................................... $
-----
Class C Notes
--------------------------------------------
<CAPTION>
Principal
Amount of
Underwriter Notes
----------- ---------
<S> <C>
J.P. Morgan Securities Inc. .................................. $
-----
Total......................................................... $
-----
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will be
obligated to purchase all the notes, if any are purchased.
The bank has been advised by the underwriters that they propose initially to
offer the notes to the public at the prices set forth on the cover page of this
preliminary prospectus supplement and to dealers at prices less the initial
selling concession, but not in excess of the percentages listed in the table
below. The underwriters may allow, and the dealers may reallow, a concession to
other dealers, but not in the excess of the reallowance concessions listed
below. After the initial public offering of the notes, the public offering
prices and the concessions, may be changed.
<TABLE>
<CAPTION>
Selling
Concessions Reallowance
----------- -----------
<S> <C> <C>
Class A-1 Notes......................................
Class A-2 Notes......................................
Class A-3 Notes......................................
Class A-4 Notes......................................
Class B Notes........................................
Class C Notes........................................
</TABLE>
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. 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 notes 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 notes 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 notes to be higher than it would
otherwise be in the absence of such transactions.
The bank 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.
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Each underwriter has represented and agreed that:
. 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 notes in, from or otherwise involving the United
Kingdom;
. 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 notes 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
. it has not offered or sold and, during the period of six months from the
date hereof, will not offer or sell any notes 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 the bank and its affiliates.
LEGAL MATTERS
Certain legal matters relating to the issuance of the notes will be passed
upon for the bank by Shaw Pittman, New York, New York and Washington, D.C. and
for the underwriters by Dewey Ballantine LLP, New York, New York. George M.
Rogers, Jr., who is associated with Shaw Pittman, is a director of the bank and
a trustee of the parent of the bank.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Certificateholder of Chevy Chase Auto Receivables Trust 2000-2:
We have audited the accompanying balance sheet of Chevy Chase Auto
Receivables Trust 2000-2 (the "Trust") as of September 8, 2000. This financial
statement is the responsibility of the Trust's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Trust as of September 8, 2000,
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Vienna, Virginia
September 8, 2000
S-40
<PAGE>
CHEVY CHASE AUTO RECEIVABLES TRUST 2000-2
BALANCE SHEET
SEPTEMBER 8, 2000
ASSETS
<TABLE>
<S> <C>
Cash.................................................................... $1,000
------
Total Assets............................................................ $1,000
======
LIABILITIES AND OWNER'S EQUITY
Owner's Equity.......................................................... $1,000
------
Total liabilities and Owner's Equity.................................... $1,000
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
S-41
<PAGE>
CHEVY CHASE AUTO RECEIVABLES TRUST 2000-2
NOTES TO FINANCIAL STATEMENT
------------
1. Nature of Operations:
Chevy Chase Auto Receivables Trust 2000-2 (the "Trust"), was formed in the
State of Delaware on September 1, 2000. The Trust has been inactive since that
date.
The Trust was organized to engage exclusively in the following business and
financial activities: to acquire motor vehicle retail installment sale
contracts from the bank to issue and sell notes collateralized by its assets;
and to engage in any lawful act or activity and to exercise any power that is
incidental and is necessary or convenient to the foregoing.
2. Capital Contribution:
Chevy Chase Bank F.S.B. purchased, for $1,000, a 100% beneficial ownership
interest in the Trust.
S-42
<PAGE>
PROSPECTUS
Chevy Chase Auto Receivables Trusts
Asset Backed Notes
Asset Backed Certificates
------------
You are
encouraged to The Securities -
read the section
entitled "Risk . will be issued from time to time in series;
Factors" on page
3 of this . will be issued by trusts established by Chevy
prospectus and Chase Bank, F.S.B.;
consider these
factors before . will be backed by a pool of auto loans held by the
making a decision issuing trust;
to invest in
these securities. . will be rated in one of the four highest rating
categories by at least one nationally recognized
These securities statistical rating organization; and
are auto
receivable asset- . may have the benefit of one or more forms of
backed securities credit enhancement, such as insurance policies,
which represent overcollateralization, subordination or reserve
interests in or funds.
obligations of
the trust issuing The Assets -
a series of
securities and The assets of each trust will primarily consist of a
are not interests pool of auto loans, funds on deposit in one or more
in or obligations accounts and forms of credit support described in
of any other this prospectus and in the prospectus supplement.
person or entity.
Neither these
securities nor
the auto loans
will be insured
or guaranteed by
any governmental
agency or
instrumentality.
Retain this
prospectus for
future reference.
This prospectus
may not be used
to consummate
sales of
securities unless
accompanied by
the prospectus
supplement
relating to the
offering of these
securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is September 1, 2000
<PAGE>
IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS AND
THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate documents
that progressively provide more detail: (1) this prospectus, which provides
general information, some of which may not apply to a particular series of
securities, and (2) the prospectus supplement, which describes the specific
terms of your series of securities.
This prospectus by itself does not contain complete information about the
offering of your securities; the balance of that information is contained in
the prospectus supplement. We suggest that you read both this prospectus and
the prospectus supplement in full. We cannot sell the securities to you unless
you have received both this prospectus and the prospectus supplement.
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Summary of Terms........................................................... 1
Risk Factors............................................................... 3
Trust Assets............................................................... 7
The Trustee................................................................ 7
Use of Proceeds............................................................ 7
The Lenders................................................................ 8
General.................................................................. 8
The Automobile Financing Business of the Lenders........................... 8
Underwriting Procedures.................................................. 8
Selection Criteria....................................................... 8
Payment Terms of the Auto Loans.......................................... 9
Insurance................................................................ 9
Description of the Securities.............................................. 10
Material Provisions of the Securities.................................... 10
General Payment Terms of Securities...................................... 11
Payment Date Distributions............................................... 11
Determination of Principal and Interest on the Securities................ 11
Soft Bullets............................................................. 12
Fixed Rate Securities.................................................... 12
Floating Rate Securities................................................. 12
Indexed Securities....................................................... 13
Scheduled Amortization Securities; Companion Securities.................. 13
Maturity and Prepayment Considerations................................... 14
Yield Considerations..................................................... 14
Book-Entry Registration.................................................. 14
Definitive Securities.................................................... 18
Credit and Cash Flow Enhancements........................................ 18
The Trust Documents........................................................ 19
Sale of Auto Loans by the Lenders to the Trust........................... 19
</TABLE>
<TABLE>
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Page
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<S> <C>
Representation and Warranties of the Lenders; Repurchase Obligation...... 20
Accounts................................................................. 20
Collection Account..................................................... 20
Distribution Account................................................... 20
Yield Maintenance Account.............................................. 21
Mandatory Repurchase of Auto Loans....................................... 21
The Servicer............................................................. 22
Servicing Procedures..................................................... 22
Servicer Covenants....................................................... 23
Defaulted Auto Loans..................................................... 23
Servicing Compensation and Payment of Expenses........................... 23
Indemnification.......................................................... 24
Evidence as to Compliance................................................ 24
Certain Matters Regarding the Servicer................................... 24
Servicer Default......................................................... 25
Removal of the Servicer.................................................. 25
Amendment................................................................ 25
Events of Default........................................................ 26
Rights upon an Event of Default.......................................... 26
Certain Covenants of Each Trust.......................................... 27
Certain Matters Regarding the Trustee and the Trust...................... 28
Limitation on Liability of the Trustee................................... 28
Resignation of Trustee................................................... 29
Termination.............................................................. 29
Legal Aspects of the Auto Loans............................................ 29
Security Interest in Vehicles............................................ 29
Repossession............................................................. 31
Notice of Sale; Redemption Rights........................................ 31
Deficiency Judgments and Excess Proceeds................................. 31
Consumer Protection Laws................................................. 31
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Soldiers' and Sailors' Civil Relief Act of 1940.......................... 32
Other Limitations........................................................ 32
Material Federal Income Tax Considerations................................. 33
General.................................................................. 33
Grantor Trust Securities................................................. 33
Debt Securities.......................................................... 34
Partnership Interests.................................................... 35
FASIT Securities......................................................... 37
Discount and Premium..................................................... 39
Backup Withholding and Information Reporting............................. 42
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Foreign Investors........................................................ 42
State Tax Considerations................................................... 43
ERISA Considerations....................................................... 43
General.................................................................. 43
ERISA Considerations Regarding Securities Which are Certificates......... 44
ERISA Considerations Regarding Securities Which are Notes................ 45
Consultation With Counsel................................................ 46
Methods of Distribution.................................................... 46
Legal Matters.............................................................. 47
Clearance, Settlement and Tax Documentation Procedures..................... A-1
</TABLE>
ii
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this prospectus and does not
contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, we suggest that you carefully read this entire prospectus and the
accompanying prospectus supplement.
The Trusts
Each series of securities will be issued by a separate trust.
The Bank
Chevy Chase Bank, F.S.B., or the bank, is a federal chartered stock savings
bank. The bank's principal executive offices are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815.
The auto loans held by each trust will have been originated or purchased by the
bank or its subsidiary, Consumer Finance Corporation, or CFC. We refer to the
bank or Consumer Finance Corporation as the lenders in this prospectus.
The bank is a lender to borrowers of "prime" credit quality; CFC is a "non-
prime" lender.
The Securities
The securities of a series may be issued in one or more classes, as specified
in the prospectus supplement. One or more classes of securities:
. may be entitled to receive distributions only of principal, only of interest
or any combination of principal and interest;
. may be subordinated in right to receive distributions of principal and
interest to one or more other classes of the same series throughout the life
of the securities or during specified time periods;
. may be entitled to receive distributions only after a specified period of
time has passed, a specified amount of principal has been paid down, or a
specified percentage of credit enhancement has built up; this could take the
form of a lockout feature, in which a class receives no principal
distributions for an initial period, then receives all or a portion of the
principal distributions during a subsequent period;
. may be entitled to receive distributions in accordance with a schedule or
formula or on the basis of collections from designated portions of the
assets in the issuing trust;
. may be entitled to receive interest at a fixed rate or a variable rate; and
. may have a balance that may decrease based on the amortization of auto loans
or increase based on principal collections used to purchase additional auto
loans or classes of securities.
The timing and amounts of distributions may vary among classes, over time, or
otherwise as specified in the prospectus supplement.
Classes of interest only and principal only securities are subject to special
investment risks that are a function of how quickly principal payments are
received on the underlying pool of auto loans, optional or mandatory prepayment
features of the securities, and the price paid for the securities. Investors in
these types of securities could lose their investment. The ratings assigned to
these securities frequently will not address these risks, so a substantial loss
may not be inconsistent with a high rating. These interest only and principal
only securities are appropriate investments only for sophisticated investors
who are able to independently assess the risks of their investment.
Trust Property
Each trust will hold:
. a pool of auto loans, each of which will be secured by new or used
automobiles, vans and light duty trucks;
. amounts held in trust accounts; and
. forms of credit support, if applicable.
You will find a description of the pool of auto loans in the prospectus
supplement. If a trust has not purchased all of the auto loans at the time you
purchase your securities, it will purchase the remainder from the lenders over
a period specified in the prospectus supplement.
1
<PAGE>
Credit Enhancement
Credit enhancement refers to a mechanism that is intended to protect the owners
of securities against losses due to defaults on the auto loans. A series of
securities, or some of the classes within the series, may have the benefit of
one or more types of credit enhancement such as the following:
. the use of excess interest to cover losses and to distribute as principal to
create overcollateralization;
. the subordination of distributions on the lower classes of securities to the
required distributions of more senior classes of securities;
. the allocation of losses on the auto loans to the lower classes of
securities;
. the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees, letters of credit and similar instruments and
arrangements;
. swaps (including currency swaps) and other derivative instruments and
interest rate protection agreements;
. repurchase or put obligations;
. a yield maintenance account or other yield supplement agreements; and
. other arrangements similar to those described above.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the prospectus supplement.
Pre-Funding Feature
A trust may enter into agreements with the lenders, in which the lenders will
sell additional auto loans to the trust after the securities are issued. The
transfer of auto loans after the date the securities are issued is known as the
pre-funding feature. Any subsequent auto loans will be required to conform to
the requirements described in the prospectus supplement. If the pre-funding
feature is used, the trustee will be required to deposit all or a portion of
the proceeds of the sale of the securities of the series in a segregated
account. The subsequent auto loans will be transferred to the trust in exchange
for money released from the segregated account. These transfers must occur
within a specified period, not to exceed one year. If a trust elects federal
income treatment as a grantor trust, the pre-funding period will be limited to
three months. If all of the monies originally deposited in the account are not
used by the end of the specified period, all remaining monies will be applied
as a mandatory prepayment of a class or classes of securities.
Federal Income Tax Considerations
The securities of each series will, for federal income tax purposes, constitute
one of the following:
. interests in a trust treated as a grantor trust under applicable provisions
of the Internal Revenue Code;
. debt secured by the underlying auto loans;
. interests in a trust which is treated as a partnership; or
. regular interests or high-yield interests in a trust treated as a financial
asset securitization investment conduit or FASIT under the Internal Revenue
Code.
We suggest that you review "Material Federal Income Tax Considerations"
beginning on page [ ] in this prospectus and in the prospectus supplement. In
addition, you should consult your own tax advisor concerning your investment.
ERISA Considerations
A fiduciary of a pension, profit sharing or other employee benefit plan may
wish to review with its legal advisors whether the purchase, holding or
disposition of securities could give rise to a prohibited transaction under
ERISA, or the Internal Revenue Code, and whether an exemption from the
prohibited transaction rules is available. We suggest that you review "ERISA
Considerations" beginning on page [ ] in this prospectus and in the prospectus
supplement.
Rating
Each class of securities offered by a prospectus supplement will be rated in
one of the four highest rating categories of at least one nationally recognized
statistical rating agency.
2
<PAGE>
RISK FACTORS
You should consider the following risk factors prior to any purchase of any
class of securities. You should also consider the information under the caption
"Risk Factors" in the accompanying prospectus supplement.
You may not be able to sell your securities, and may have to hold your
securities to maturity even though you may want to sell them.
A secondary market for these securities is unlikely to develop. If it does
develop, it may not provide you with sufficient liquidity of investment or
continue for the life of these securities. The underwriters may establish a
secondary market in the securities, although no underwriter will be obligated
to do so. The securities are not expected to be listed on any securities
exchange or quoted in the automated quotation system of a registered securities
association.
Issuance of the securities in book-entry form may also reduce the liquidity in
the secondary trading market, since some investors may be unwilling to purchase
securities for which they cannot obtain definitive physical securities.
Prepayments on the auto loans could cause you to be paid earlier than you
expect, which may adversely affect your yield to maturity.
. The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the auto loans. If
you purchase a security at a premium based on your expectations as to its
maturity or weighted average life, and the security pays principal more
quickly than you expected, your yield will be reduced. In addition, if you
purchase a security at a discount based on your expectations as to its
maturity or weighted average life, and the security pays principal more
slowly than you expected, your yield will be lower than you anticipated.
. The yield to maturity on interest only securities will be extremely
sensitive to the rate of prepayments on the auto loans. If the auto loans
prepay very quickly the yield on an interest-only security could be
dramatically reduced.
. The auto loans may be prepaid in full or in part at any time.
. We cannot predict the rate of prepayments of the loans, which is influenced
by a wide variety of economic, social and other factors, including
prevailing interest rates, the availability of alternative financing, local
and regional economic conditions and certain natural disasters such as
floods, hurricanes, earthquakes and tornadoes. Therefore, we can give no
assurance as to the level of prepayments that a trust will experience.
. One or more classes of securities of any series may be subject to optional
or mandatory redemption in whole or in part, on or after a specified date,
or on or after the time when the aggregate outstanding principal amount of
the auto loans or the securities is less than a specified amount or
percentage.
. Since prevailing interest rates are subject to fluctuation, there can be no
assurance that you will be able to reinvest these amounts at a yield
equaling or exceeding the yield on your securities. You will bear the risk
of reinvesting unscheduled distributions resulting from a redemption.
Non-prime auto loan pools will incur higher losses than prime auto loan pools.
Some or all of the assets of a trust may consist of non-prime auto loans. A
loan is usually considered non-prime because the borrower has limited income,
past credit problems, such as prior bankruptcy or a history of delinquent
payments on other debt, or a limited or no credit history. Non-prime loans
generally experience a higher rate of delinquency and loss than prime loans.
3
<PAGE>
The added risk presented by non-prime auto loans is considered in structuring
the issuances of securities. However, we can give no assurance that the
structure established will be adequate to prevent losses to some or all of the
securityholders.
Used vehicles included in the auto loan pool may incur higher losses than new
autos.
Some or all of the assets of a trust may consist of loans to finance the
purchase of used vehicles. Loans for used vehicles may be either prime or non-
prime loans. Because the value of a used vehicle is more difficult to
determine, upon sale of a repossessed vehicle, a greater loss may be incurred.
Security interests may not be perfected, which could allow others superior
rights to the trust assets.
The certificates of title for the financed vehicles may be held by the
servicer. The servicer may use the facilities of a third party, off-site
document retention service to store the loan contracts or the physical
certificates of title. The certificates of title may not be endorsed or amended
to identify the secured party. Because this will not be done, the security
interests may be defeated through fraud, forgery, negligence or error and will
not be perfected in every state. If someone has a security interest in a
vehicle that is superior to the interest of the trustee, you could experience
delays in payments or a loss on your investment in the securities.
State and federal credit protection laws may limit collection of principal and
interest on the auto loans.
Auto lending is regulated at both the federal and state levels and violations
of these laws, policies and principles may limit the ability of the servicer to
collect all or part of the amounts due on the auto loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the trust, as the owner of the auto loan, to claims for damages and to
administrative enforcement. The occurrence of any of the foregoing could cause
losses on your securities.
Defaulted auto loans may result in a delay in payments to securityholders and a
loss of your investment.
In the event that the bank or the servicer must repossess and dispose of
vehicles to recover scheduled payments due on defaulted auto loans, the trust
may not realize the full amount due on an auto loan, or may not realize the
full amount on a timely basis. Other factors that may affect the ability of the
trust to realize the full amount due on an auto loan 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 auto loans 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,
you may be subject to delays in receiving payments and suffer loss of your
investment in the securities.
Insolvency of either of the lenders may reduce or delay payments to
securityholders.
In some circumstances, an insolvency of the lenders may delay or reduce
payments to securityholders. The bank, as a depositary institution, the
deposits of which are insured by the Federal Deposit Insurance Corporation, is
not subject to the federal bankruptcy laws, but rather to federal laws
governing bank insolvency. These laws require that the FDIC become the receiver
of the bank in the event of its insolvency. CFC is subject to the federal
bankruptcy laws. In the event of the insolvency of either lender, the FDIC, a
court or bankruptcy trustee could conclude that the lender still owns the auto
loans or that the bank, CFC and the trust are all a single entity for
bankruptcy purposes. If a court or bankruptcy trustee would reach either of
these conclusions, you could experience delays in payments or a loss on your
investment in the securities.
Securityholders have no recourse against the lenders or the FDIC for losses.
There is no recourse for losses on these securities against either lender. The
securities represent obligations solely of the issuing trust. No securities
will be guaranteed by the lenders, the FDIC, or the trustee. Consequently, if
payments on the auto loans, and to the extent available, any credit
enhancement, are
4
<PAGE>
insufficient to pay the securities in full, you have no rights to obtain
payment from either lender, the FDIC, or the trustee.
Insurance on vehicles may not be maintained, which may lead to losses on the
auto loans.
At the time the lenders originate the auto loans they require that the
borrowers have theft and damage insurance on the vehicles. There can be no
assurance that the borrower will maintain the insurance coverage on the
vehicle. The servicer will not obtain insurance coverage without the consent of
the borrower if it learns that a vehicle is uninsured. If an uninsured loss
occurs and the borrower defaults on the auto loan at a time when the credit
enhancement is not sufficient to ensure payments are made to securityholders,
securityholders may be subject to a delay in receiving payments or a loss on
their investment in the securities.
The ratings assigned to your securities by the rating agencies may be lowered
or withdrawn at any time, which may affect your ability to sell your
securities.
The ratings assigned to the securities will be based on, among other things,
the adequacy of the assets of the trust and any credit enhancement for a series
of securities. Any rating which is assigned may not remain in effect for any
given period of time or may be lowered or withdrawn entirely by the rating
agencies if, in their judgment, circumstances in the future so warrant. Ratings
may also be lowered or withdrawn because of an adverse change in the financial
or other condition of a provider of credit enhancement or a change in the
rating of a credit enhancement provider's long term debt at any time, which may
affect your ability to sell your securities.
Inability of the bank or CFC to purchase auto loans from the trust when a
representation or warranty is breached may cause your payments to be reduced or
delayed.
If a representation and warranty concerning an auto loan is breached, the
transaction documents require either of the bank or CFC to purchase the loan
from the trust. If either of the bank or CFC is unable to purchase such auto
loans and no other party is obligated to perform or satisfy these obligations,
you may experience delays in receiving payments and losses.
Subordination of certain securities may result in reduced payments to those
securities.
Distributions on one or more classes of securities of a series may be
subordinated in priority of payment to distributions on one or more other
classes of securities. Subordination of a class of securities has the effect of
increasing the likelihood of payment on the senior classes of securities in
that series and decreasing the likelihood of payment on that subordinated class
of securities.
Credit enhancement, if provided, will be limited in both amount and scope of
coverage, and may not be sufficient to cover all losses or risks on your
investment.
Credit enhancement may be provided in limited amounts to cover some, but not
all, types of losses on the auto loans and may reduce over time in accordance
with a schedule or formula. Furthermore, credit enhancement may provide only
very limited coverage as to some types of losses, and may provide no coverage
as to other types of losses. Credit enhancement does not guarantee any
specified rate of prepayments, which is one of the principal risks of your
investment. The amount and types of credit enhancement coverage, the
identification of any entity providing the credit enhancement, the terms of any
subordination and any other information will be described in the accompanying
prospectus supplement.
The historical levels of delinquencies and losses experienced by a lender may
change significantly in the future.
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 auto loans included in a trust
5
<PAGE>
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.
Book-entry registration may reduce the liquidity of the securities.
Since transactions in the securities, in most cases can be effected only
through DTC, Clearstream, Luxembourg, Euroclear, participating organizations,
indirect participants and certain banks, your ability to pledge securities to
persons or entities that do not participate in the DTC, Clearstream, Luxembourg
or Euroclear systems, or otherwise to take actions in respect of those
securities, may be limited due to lack of a physical certificate representing
such securities.
Potential delays in receipt of payments on the securities.
You may experience some delay in receipt of payments of interest of and
principal on the securities because such payments will be forwarded by the
trustee to DTC and DTC will credit such payments to the accounts of its
participants, which will thereafter credit them to your accounts either
directly or indirectly through indirect participants.
Because the ratings of the securities are dependent upon creditworthiness of
the credit enhancement provider, a downgrade of the credit enhancement provider
could cause a downgrade of the securities.
The ratings of securities enhanced by a credit enhancement provider will depend
primarily on the creditworthiness of the credit enhancement provider. There is
a risk that any reduction in any of the credit enhancement provider's financial
strength ratings could result in a reduction of the ratings on the securities.
6
<PAGE>
TRUST ASSETS
We will establish a separate trust to issue each series of securities. The
securities will be backed by the property of that issuing trust. The primary
asset of each trust will be a pool of auto loans originated or purchased and
serviced by the lenders.
The property of each trust will include:
. the pool of auto loans for new and used automobiles, vans and light duty
trucks;
. any amounts in the accounts established for that trust;
. security interests in the financed vehicles;
. rights to proceeds from insurance policies covering the borrowers or the
financed vehicles; and
. rights against one or both of the lenders for breaches of
representations or warranties relating to the auto loans.
THE TRUSTEE
The trustee for each trust will be named in the accompanying prospectus
supplement. The trustee's liability in connection with the issuance and sale
of the securities is limited to the express obligations of that trustee set
out in the trust documents. A trustee may resign at any time, in which event
the servicer will be obligated to appoint a successor trustee. In addition, if
the trustee ceases to be eligible as trustee pursuant to the trust documents
or it becomes insolvent, the trustee may be removed. Any resignation or
removal of a trustee will not become effective until acceptance of the
appointment by the successor trustee.
USE OF PROCEEDS
The net proceeds received from the sale of the securities of a given series
will be used by the lenders for:
. the origination or purchase of additional auto loans;
. repayment of indebtedness; and
. general working capital purposes.
7
<PAGE>
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 its principal executive offices are located at 8401
Connecticut Avenue, Chevy Chase, Maryland 20815. Its telephone number is (301)
986-7000. The bank is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision 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, which is
administered by the FDIC. Please refer to the prospectus supplement for the
particular series of securities for further information regarding the bank, its
assets, capitalization, and regulatory status and the effect of current
legislation.
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 AUTOMOBILE FINANCING BUSINESS OF THE LENDERS
Underwriting Procedures
Each lender originates or purchases the auto loans after it has reviewed
each auto loan in accordance with its established underwriting procedures. The
prospectus supplement for your series will describe each lender's underwriting
procedures in detail; however, some of the current underwriting practices of
the lenders are noted below.
The underwriting procedures of the lenders are designed to provide a basis
for assessing the borrower's ability and willingness to repay the loan. In
conducting this assessment, the lenders consider the borrower's ratio of debt
to income and evaluate the borrower's credit history through a review of a
credit report compiled by a recognized consumer credit reporting bureau. The
borrower's equity in the collateral and the terms of the loan are also
important in the lender's analysis. The lenders' guidelines are intended only
to provide a basis for lending decisions, and, within certain limits,
exceptions to such guidelines may 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.
These types of loans experience rates of delinquencies, repossessions and
losses, especially under adverse economic conditions, which are generally
higher than those loans originated under the bank's traditional lending
program.
Selection Criteria
The prospectus supplement will specify the criteria which each lender has
used to select the auto loans from its portfolio for transfer to the issuing
trust. These criteria include the following:
. original term to maturity,
. final maturity date,
. contracts which provide for level monthly payments that fully amortize
the amount financed over the original term (unless otherwise disclosed),
. maximum number of days delinquent, and
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. contracts which have an unpaid principal balance of not less than a
specified amount as of the given cut-off date.
Contracts are generally prepayable at any time. The bank can make no
prediction as to the actual prepayment experience on the auto loans.
You should refer to the prospectus supplement for the particular series for
additional information with respect to maturity and prepayment considerations,
any applicable prepayment penalties, the composition, distribution by the
stated annual percentage rate of interest, commonly known as APR, and
geographical distribution of the auto loans.
Payment Terms of the Auto Loans
Each auto loan provides for the allocation of payments according to the
simple interest method or the actuarial method. Except for balloon loans
described below, the scheduled payment on each auto loan is a fixed level
payment that will pay off the full amount over its term assuming the borrower
makes no early or late payments.
Payments on simple interest loans will be applied first to interest accrued
through the date immediately before the date of payment and then to unpaid
principal. Accordingly, if a borrower makes his payment before its due date,
the portion of the payment applied to interest will be less than if the payment
had been made on the due date. As a result, the portion of the payment applied
to reduce the principal balance will be correspondingly greater, and the
principal balance will pay down more rapidly than scheduled.
Conversely, if a borrower pays an installment after its due date, the
portion of the payment applied to interest will be greater than if the payment
had been made on the due date. As a consequence, the portion of the payment
applied to reduce the principal balance will be correspondingly less, and the
principal balance will pay down more slowly than scheduled, in which case a
larger portion of the principal balance may be due on the final scheduled
payment date.
An actuarial loan provides for principal reduction of the loan over a series
of fixed level monthly installments. Each scheduled payment is deemed to
consist of an amount of interest equal to 1/12 of the APR of the loan
multiplied by the scheduled principal balance of the receivable and an amount
of principal equal to the remainder of the scheduled payment. No adjustment is
made in the event of early or late payments, although in the case of late
payments the borrower may be subject to a late charge.
A balloon loan is one for which the last scheduled monthly payment is
significantly larger than any prior scheduled monthly payment.
Information with respect to the specific auto loan pool will be set out in
the prospectus supplement, including, to the extent appropriate, the
composition, the distribution by APR and by the states of residence at
origination, the portion of the auto loan pool consisting of actuarial loans
and of simple interest loans and the portion of the auto loan pool secured by
new vehicles and by used vehicles.
Insurance
The lenders require that theft and physical damage insurance policies be
maintained by the borrowers naming the applicable lender as the loss payee.
Although each lender has the right to force place insurance coverage if the
borrower does not maintain the necessary insurance coverage, neither the lender
nor the servicer is obliged to force-place insurance.
The lenders maintain fidelity bond coverage insuring against losses through
wrongdoing of its officers, employees and agents.
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DESCRIPTION OF THE SECURITIES
Material Provisions of the Securities
The securities will be issued in series. The following summaries describe
the material provisions of the securities.
The securities may be offered in the form of certificates representing
beneficial ownership interests in the auto loans held by the trust or in the
form of notes representing debt secured by the auto loans held by the trust.
Each series or class of securities may have a different rate of interest,
which may be fixed or adjustable. The prospectus supplement will specify the
interest rate for your series or class of securities, 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 interest only or principal only
securities. In addition, a series may include two or more classes that differ
as to timing, sequential order, priority of payment, interest rate or amount of
distributions of principal or interest or both. 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 assets of the trust. A series may include one or
more classes of securities, as to which accrued interest will not be
distributed but rather will be added to the principal or notional balance of
the security on each payment date.
A series of securities may include one or more classes of securities that
are senior to one or more classes of subordinate securities in respect of
distributions of principal and interest and allocations of losses on the auto
loans.
A series of securities may have a balance that may decrease based on the
amortization of auto loans or increase based on principal collections used to
purchase additional auto loans.
Each trust may also issue classes of subordinated equity securities which
will represent the right to receive the proceeds of the trust property after
all required payments have been made to the holders of all of the senior and
subordinate notes or certificates issued by the trust, and following any
required deposits to any reserve account that may be established for the
benefit of the holders of the notes or certificates. These subordinated classes
may constitute what are commonly referred to as the residual interest, the
seller's interest or the general partnership interest, depending upon the
treatment of the trust for federal income tax purposes. These subordinated
classes generally will not have principal and interest components. Any losses
suffered by the trust will first be absorbed by the residual class of
securities, or as described in the prospectus supplement.
The prospectus supplement relating to a series of securities will describe
the following specific terms of that series, including:
. the aggregate principal amount, interest rate, and authorized
denominations of each class of securities;
. a statistical profile of the auto loans backing that series;
. the terms of any credit enhancement for that series;
. a description of other material assets in the trust, including any
reserve fund;
. the final scheduled distribution date of each class of securities;
. the method used to calculate the rate at which interest on each class of
securities will accrue, the time period during which interest on each
class of securities will accrue, the order of priority of the
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application of interest to the respective classes and the manner of
distribution of interest among each class of securities;
. the method to be used to calculate the amount of principal required to
be applied to each class of securities of your series on each payment
date, the timing of the application of principal and the order of
priority of the application of principal to the respective classes of
securities;
. additional information about the plan of distribution of the securities;
and
. the federal income tax characterization of the securities.
General Payment Terms of Securities
Securityholders will be entitled to receive payments on their securities on
specified payment dates. Payment dates will occur monthly, quarterly, semi-
annually or as described in the prospectus supplement.
The prospectus supplement will describe a record date for each payment
date, as of which the trustee or its paying agent will fix the identity of the
securityholders for the purpose of receiving payments on that payment date.
The prospectus supplement and the agreements will describe a period, known as
the collection period, prior to each payment date. Interest accrued and
principal collected on the auto loans during a collection period will be
required to be remitted by the servicer to the trustee prior to the payment
date and will be used to distribute payments to securityholders on that
payment date.
None of the securities or the auto loans will be guaranteed or insured by
any governmental agency or instrumentality, the lenders, the servicer, the
trustee, or any of their respective affiliates.
Payment Date Distributions
On each payment date, distributions of principal and interest or, where
applicable, of principal only or interest only, on each class of securities
will be made either by the trustee or a paying agent appointed by the trustee,
to the persons who are registered as securityholders at the close of business
on the record date. Interest that accrues and is not payable on a class of
securities may be added to the principal balance of each security of the
class. Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a securityholder. If the
securityholder has notified the trustee or the paying agent, as the case may
be, and the agreements provide, payment may be in the form of a check mailed
to the address of the person entitled thereto as it appears on the register.
The final payment distribution upon retirement of the securities will be made
only upon presentation and surrender of the securities at the office or agency
of the trustee specified in the notice to securityholders of the final
distribution.
Determination of Principal and Interest on the Securities
The method of determining, and the amount of, distributions of principal
and interest or, principal only or interest only, on a particular series of
securities will be described in the prospectus supplement. Each class of
securities, except for principal only securities, may bear interest at a
different interest rate. Interest on the securities will be calculated either
on the basis of a 360-day year consisting of twelve 30-day months, on the
basis of the actual number of days in the interest period over 360, or on the
basis of the actual number of days in the interest period over 365 or 366, as
the case may be.
On each payment date, the trustee or the paying agent will distribute to
each securityholder an amount equal to the percentage interest represented by
the security held by the holder multiplied by the total amount to be
distributed on that payment date on account of that class.
For a series of securities that includes two or more classes, the timing,
sequential order, priority of payment, amount of distributions in respect of
principal, any schedule or formula or other provisions applicable
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to the determination of distributions among multiple classes of senior
securities or subordinate securities will be described in the prospectus
supplement.
Prior to each payment date the trustee will determine the amounts of
principal and interest which will be due to securityholders on that payment
date. If the amount then available to the trustee is insufficient to cover the
amount due to securityholders, the trustee will be required to notify the
credit enhancement provider, if there is one for that series providing credit
enhancement for this type of deficiency. The credit enhancement provider, in
this case, will then be required to fund the deficiency.
Soft Bullets
Since the auto loan pools which will back the securities will generate
principal collections in each period, and will have unpredictable amortization
rates, the securities will generally not be structured as "bullet" maturities
similar to corporate debt, meaning a debt security which pays interest in all
periods but principal only in a single payment at maturity.
However, a trust may enter into forward purchase or liquidity arrangements
which result in a security not unlike "bullet maturity" corporate debt. These
securities, commonly known as soft bullets, typically have interest payments
due in all periods and a single principal payment due on a date certain, but
the payment of that principal on that date certain may be dependent on the
trust's ability at the time to issue refunding debt, or to access the liquidity
lines. If the refunding debt cannot be issued, or if the liquidity lines cannot
be accessed, the securities will then begin to amortize in each period until
final maturity.
Fixed Rate Securities
Each class of securities may bear interest at an annual fixed rate or at a
variable or adjustable rate per annum, as more fully described below and in the
prospectus supplement. Each class of fixed rate securities will bear interest
at the applicable interest rate specified in the prospectus supplement.
Floating Rate Securities
Each class of floating rate securities will bear interest for each related
interest period at a rate per annum determined by reference to an interest rate
index, commonly known as the base rate, plus or minus a spread, if any, or
multiplied by a spread multiplier, in each case as specified in the prospectus
supplement. The spread is the percentage above or below the base rate at which
interest will be calculated that may be specified in the prospectus supplement
as being applicable to such class, and the spread multiplier is the percentage
that may be specified in the prospectus supplement as being applicable to such
class.
The prospectus supplement will designate a base rate for a given floating
rate security based on the London interbank offered rate, commonly called
LIBOR, eurodollar synthetic forward rates, commercial paper rates, federal
funds rates, U.S. Government treasury securities rates, negotiable certificates
of deposit rates or another rate as set forth in the prospectus supplement.
As specified in the prospectus supplement, floating rate securities may also
have either or both of the following, in each case expressed as an annual rate:
(1) a maximum limitation, or ceiling, on the rate at which interest may accrue
during any interest period, which may be an available funds cap rate and (2) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. The interest rate on either type of security will not be
higher than the maximum rate permitted by applicable law.
Each trust that issues a class of floating rate securities will appoint and
enter into agreements with a calculation agent to calculate interest rates on
each class of floating rate securities. The prospectus supplement will set
forth the identity of the calculation agent for each such class of floating
rate securities which may be the trustee for the series. All determinations of
interest by the calculation agent will, in the absence of manifest error, be
conclusive for all purposes and binding on the holders of floating rate
securities of a given class.
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The trust may also include a derivative arrangement for any series or any
class of securities. A derivative arrangement may include a guaranteed rate
agreement, a maturity liquidity facility, a tax protection agreement, an
interest rate cap or floor agreement, an interest rate or currency swap
agreement or any other similar arrangement.
Indexed Securities
Any class of securities may consist of securities in which the indexed
principal amount, the principal amount payable at the final scheduled
distribution date for such class is determined by reference to a measure,
commonly known as an index, which will be related to one of the following:
. the difference in the rate of exchange between United States dollars and
a currency or composite currency specified in the prospectus supplement;
. the difference in the price of a specified commodity on specified dates;
. the difference in the level of a specified stock index which may be
based on U.S. or foreign stocks, on specified dates;
. such other objective price or economic measure as is described in the
prospectus supplement. The manner of determining the indexed principal
amount of an indexed security and historical and other information
concerning the applicable index will be set forth in the 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 that third
party either suspends the calculation or announcement of that index or changes
the basis upon which that index is calculated, then that index shall be
calculated for purposes of such indexed security by an independent calculation
agent named in the 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 that 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 that indexed security will be calculated in the
manner set out in the prospectus supplement. Any determination of the
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 prospectus supplement as the face amount of that indexed
security. The prospectus supplement will describe how the principal amount of
the related indexed security, if any, would be paid upon redemption or
repayment prior to the applicable final scheduled distribution date.
Scheduled Amortization Securities; Companion Securities
The securities may include one or more classes of scheduled amortization
securities and companion securities. Scheduled amortization securities are
securities for which payments of principal are to be made in specified amounts
on specified payment dates, to the extent of funds being available on that
payment date. Companion securities are securities which receive payments of all
or a portion of any funds available on a given payment date which are in excess
of amounts required to be applied to payments on scheduled amortization
securities on such payment date. Because of the manner of application of
payments of principal to companion securities, the weighted average lives of
companion securities of a series may be expected to be more sensitive to the
actual rate of prepayments on the auto loans in the related trust than will the
scheduled amortization securities of that series.
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Maturity and Prepayment Considerations
The weighted average life of the securities will be influenced by the rate
at which the principal of the auto loans backing those securities are paid.
Payment on the auto loans may be in the form of scheduled payments or
prepayments.
Prepayments will shorten the weighted average life of the securities. The
rate of prepayments on the auto loans may be influenced by a variety of
economic, financial and other factors. In addition, under various
circumstances, the lender or servicer will be obligated to acquire auto loans
from the trust as a result of breaches of representations and warranties. Any
reinvestment risks resulting from a faster or slower rate of principal
repayment on the securities will be borne entirely by the securityholders.
Each prospectus supplement will set forth additional information about the
maturity and prepayment considerations applicable to a particular pool of auto
loans and series of securities.
Yield Considerations
The yield to maturity of a security will depend on the price paid, its
interest rate and the rate of payment of principal on the security or on its
notional amount, if the security is not entitled to payments of principal, as
well as other factors.
A class of securities may be entitled to variable payments of interest at a
fixed, maximum interest rate, commonly referred to as an available funds cap,
which is calculated based on the weighted average APR of the auto loan pool
minus any interest strips retained by the originator and all trust fees, if
specified in the prospectus supplement, or at another maximum interest rate as
may be described in the prospectus supplement.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the auto loans. If you
purchase a security at a premium based on your expectations as to its maturity
or weighted average life, and the security pays principal more quickly than you
expected, your yield will be reduced. In addition, if you purchase a security
at a discount based on your expectations as to its maturity or weighted average
life, and the security pays principal more slowly than you expected, your yield
will be lower than you anticipated.
The yield on the securities also will be affected by liquidations of auto
loans following borrowers' defaults, receipt of proceeds from credit life,
credit disability or casualty insurance policies and by repurchases of auto
loans in the event of breaches of representations. The yield to maturity on
some types of securities, including interest only and principal only
securities, and securities in a series including more than one class, may be
relatively more sensitive to the rate of prepayment on the auto loans than
other classes of securities.
The timing of changes in the rate of principal payments on or repurchases of
the auto loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher, or lower, than the rate anticipated by the investor during the period
immediately following the issuance of a series of securities would not be fully
offset by a subsequent like reduction or increase in the rate of principal
payments.
Book-Entry Registration
The securities are sometimes referred to in this prospectus as book-entry
securities. No person acquiring an interest in the book-entry securities will
be entitled to receive a definitive security representing an obligation of, or
interest in, the trust, except under the limited circumstances described in
this prospectus. Beneficial owners may elect to hold their interests through
the Depository Trust Company, commonly known as DTC, in the United States, or
Clearstream Banking, societe anonyme, commonly known as Clearstream,
Luxembourg, or the Euroclear System, in Europe. Transfers within DTC,
Clearstream, Luxembourg or Euroclear, as the case
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may be, will be in accordance with the usual rules and operating procedures of
that system. So long as the securities are book-entry securities, they will be
evidenced by one or more securities registered in the name of Cede & Co., which
will be the holder of those securities, as the nominee of DTC or one of the
relevant depositaries. Cross-market transfers between persons holding directly
or indirectly through DTC, on the one hand, and counterparties holding directly
or indirectly through Clearstream, Luxembourg or Euroclear, on the other, will
be effected in DTC through The Chase Manhattan Bank, the relevant depositories
of Clearstream, Luxembourg or Euroclear, respectively, and each participating
member of DTC. The securities will initially be registered in the name of Cede
& Co. The interests of the holders of those securities will be represented by
book-entries on the records of DTC and participating members thereof. All
references in this prospectus to any securities reflect the rights of
beneficial owners only as those rights may be exercised through DTC and its
participating organizations for so long as those securities are held by DTC.
The beneficial owners of securities may elect to hold their securities
through DTC in the United States, or Clearstream, Luxembourg or Euroclear if
they are participants in these systems, or indirectly through organizations
which are participants in these systems. The book-entry securities will be
issued in one or more securities per class of securities which in the aggregate
equal the outstanding principal balance of the related class of securities and
will initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. The Chase Manhattan
Bank will act as depositary for Clearstream, Luxembourg and Morgan Guaranty
Trust Company of New York will act as depositary for Euroclear. Investors may
hold beneficial interests in the book-entry securities in minimum denominations
representing principal amounts of $1,000. Except as described below, no
beneficial owner will be entitled to receive a physical or definitive security
representing that security. Unless and until definitive securities are issued,
it is anticipated that the only holder of these securities will be Cede & Co.,
as nominee of DTC. Beneficial owners will not be "holders", "noteholders" or
"certificateholders", as the case may be, as those terms are used in the trust
documents. Beneficial owners are only permitted to exercise their rights
indirectly through participants and DTC.
The beneficial owner's ownership of a book-entry security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of such book-entry
security will be recorded on the records of DTC or on the records of a
participating firm that acts as agent for the financial intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's financial intermediary is not a DTC participant and on the records of
Clearstream, Luxembourg or Euroclear, as appropriate.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to section 17A of the Exchange Act. DTC was created to hold securities
for its 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 securities. Participants
include securities brokers and dealers, including the underwriter, 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.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of book-entry
securities, such as the securities, among participants on whose behalf it acts
with respect to the book-entry securities and to receive and transmit
distributions of principal of and interest on the book-entry securities.
Participants and indirect participants with which beneficial owners have
accounts with respect to the book-entry securities similarly are required to
make book-entry transfers and receive and transmit payments on behalf of their
respective beneficial owners.
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Beneficial owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, book-entry securities may do so only through participants and indirect
participants. In addition, beneficial owners will receive all distributions of
principal and interest from the trustee, or a paying agent on behalf of the
trustee, through DTC participants. DTC will forward these distributions to its
participants, which thereafter will forward them to indirect participants or
beneficial owners. Beneficial owners will not be recognized by the trustee, the
servicer or any paying agent as holders of the securities, and beneficial
owners will be permitted to exercise the rights of the holders of the
securities only indirectly through DTC and its participants.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Credits or any
transactions in these securities settled during that processing will be
reported to the relevant Euroclear or Clearstream, Luxembourg participants on
that business day. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream, Luxembourg
participant or Euroclear participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream, Luxembourg or Euroclear cash account only as of the business day
following settlement in DTC.
Transfers between participants will conform with DTC rules. Transfers
between Clearstream, Luxembourg participants and Euroclear participants will
conform with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant depositary; however, these cross-
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines.
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the relevant
depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream, Luxembourg participants and Euroclear participants may not
deliver instructions directly to the European depositaries.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg holds securities for its
participant organizations and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
participants, thereby eliminating the need for physical movement of securities.
Transactions may be settled in Clearstream, Luxembourg in any of 38 currencies,
including United States dollars. Clearstream, Luxembourg provides to its
Clearstream, Luxembourg participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg
interfaces with domestic markets in several countries. As a professional
depository, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Monetary Institute. Clearstream, Luxembourg 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 Clearstream, Luxembourg is also
available to others, including banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream,
Luxembourg participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating both the need for physical movement of securities and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 37 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and
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borrowing and interfaces with domestic markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described
above. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation. All operations are conducted by the
Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not Euroclear
Clearance. Euroclear Clearance establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks (including central
banks), securities brokers and dealers, and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law. The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific securities to
specific securities clearance accounts. The Euroclear operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no
record of or relationship with persons holding through Euroclear participants.
Distributions on the book-entry securities will be made on each distribution
date by the trustee to Cede & Co., as nominee of DTC. DTC will be responsible
for crediting the amount of those payments to the accounts of the applicable
DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing payments to the beneficial
owners of the book-entry securities that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
securities that it represents.
Under a book-entry format, beneficial owners of the book-entry securities
may experience some delay in their receipt of payments, since those payments
will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions with respect to securities held through Clearstream, Luxembourg
or Euroclear will be credited to the cash accounts of Clearstream, Luxembourg
participants or Euroclear participants in accordance with the relevant system's
rules and procedures, to the extent received by the relevant depositary. These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
financial intermediaries, the ability of a beneficial owner to pledge book-
entry securities to persons or entities that do not participate in the DTC
system, or otherwise take actions on those book-entry securities, may be
limited due to the lack of physical securities for such book-entry securities.
In addition, issuance of the book-entry securities in book-entry form may
reduce the liquidity of such securities in the secondary market since certain
potential investors may be unwilling to purchase securities for which they
cannot obtain physical securities.
Monthly and annual reports on the trust provided by the trustee to Cede &
Co., as nominee of DTC, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting DTC, and to the financial intermediaries to whose DTC accounts the
book-entry securities of the beneficial owners are credited.
DTC has advised the lenders and the servicer that it will take any action
permitted to be taken by a holder of the securities under the trust documents
only at the direction of one or more participants to whose accounts with DTC
the book-entry securities are credited. Additionally, DTC has advised the
lenders that it will take such actions with respect to specified percentages of
voting rights only at the direction of and on behalf of participants whose
holdings of book-entry securities evidence such specified percentages of voting
rights. DTC
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may take conflicting actions with respect to percentages of voting rights to
the extent that participants whose holdings of book-entry securities evidence
such percentages of voting rights authorize divergent action.
None of the trust, the lenders, the servicer, any credit enhancement
provider or the trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the book-entry securities held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Definitive Securities
The securities, which will be issued initially as book-entry securities,
will be converted to definitive securities and reissued to beneficial owners or
their nominees, rather than to DTC or its nominee, only if:
. DTC or the servicer advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository
with respect to the book-entry securities and DTC or the servicer is
unable to locate a qualified successor, or
. the trustee, at its option, elects to terminate the book-entry system
through DTC.
If any event described in the preceding paragraph occurs, DTC will be
required to notify all participants of the availability through DTC of
definitive securities. Upon delivery of definitive securities, the trustee will
reissue the book-entry securities as definitive securities to beneficial
owners. Distributions of principal of, and interest on, the book-entry
securities will thereafter be made by the trustee, or a paying agent on behalf
of the trustee, directly to holders of definitive securities in accordance with
the procedures set forth in the trust documents.
Definitive securities will be transferable and exchangeable at the offices
of the trustee or the registrar. No service charge will be imposed for any
registration of transfer or exchange, but the trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
Credit and Cash Flow Enhancements
The amounts and types of credit enhancement arrangements, if any, and the
credit enhancement provider, for each class of securities will be detailed 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;
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. third party payments or other support;
. surety bonds;
. guaranteed cash deposits;
. swap contracts, including interest rate and currency swaps; or
. other arrangements or any combination of two or more of the above.
Credit enhancement may cover one or more classes of the series. Credit
enhancement for any class or series of securities is intended to enhance the
likelihood that securityholders of that class or series will receive the full
amount of principal and interest due and to decrease the likelihood that the
securityholders will experience losses. Credit enhancement for a class or
series of securities will not provide protection against all risks of loss and
may not guarantee repayment of the entire principal balance and interest. If
losses occur which exceed the amount covered by any credit enhancement or which
are not covered by any credit enhancement, securityholders will bear their
allocable share of deficiencies. In addition, if a form of credit enhancement
covers more than one series of securities, securityholders of those series will
be subject to the risk that the credit enhancement will be exhausted by the
claims of securityholders of other series.
THE TRUST DOCUMENTS
Each series of securities will be issued under one or more trust documents
which term refers to pooling and servicing agreements, trust documents,
receivables purchase agreements, sale and servicing agreements and indentures
which will establish the trust, transfer the auto loans, provide for the
servicing of the auto loans and issue the securities. The following paragraphs
describe the material provisions common to the trust documents. A more detailed
discussion of the trust documents governing your specific series will appear in
the prospectus supplement.
Sale of Auto Loans by the Lenders to the Trust
Each of the lenders will sell to the issuing trust all its right, title and
interest in and to all of the auto loans. These sales may occur as direct
transfers from each lender to the trust, or as indirect transfers, as when one
lender first transfers its auto loans to the other lender, which then transfers
all of the auto loans to the trust, or when one or both of the lenders first
transfer the auto loans to a special purpose finance vehicle, which in turn
transfers the auto loans to the trust.
Each of the lenders will indicate in their computer files that the auto
loans have been sold to the trust. The lenders, in their capacities as servicer
or subservicer, may retain possession of the records and agreements relating to
the auto loans. The servicer may use the facilities of a third party, off-site
document retention service to store the loan contracts or the physical
certificates of title. The records and agreements will not be segregated by the
lenders from other documents and agreements relating to other auto loans and
are not stamped or marked to reflect the sale or transfer of the auto loans to
the trust. However, the computer records of the lenders will be marked to
evidence the sale or transfer. The lenders will file UCC financing statements
meeting the requirements of applicable state law and in each of the
jurisdictions in which these filings are required in order to maintain the lien
priority of the auto loans.
All of the auto loans transferred to an issuing trust will be identified in
a schedule of auto loans delivered to the trustee. The net proceeds received
from the sale of the securities will be used by the trust to purchase the auto
loans and, if applicable, to deposit the pre-funded amount into the pre-funding
account. The prospectus supplement for a series of securities will specify
whether, and the terms, conditions and manner under which subsequent auto loans
for the series will be acquired by the applicable trust from time to time
during any pre-funding period.
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Representation and Warranties of the Lenders; Repurchase Obligation
In the trust documents, one or both of the lenders, will represent and
warrant to the issuing trust to the effect, among other things, that:
. the information provided with respect to the auto loans is correct in
all material respects;
. the borrower on each auto loan is generally required to obtain physical
damage and theft insurance in accordance with the related lender's
normal requirements;
. at the date of issuance of the securities, the auto loans 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);
. on the closing date, each of the auto loans is or will be secured by a
first priority perfected security interest in the vehicle in favor of
the applicable lender; and
. each auto loan, 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.
Some of the representations and warranties will only be made to the best
knowledge of the lenders.
If the bank or CFC breaches the representations and warranties relating to
the auto loans and the financed vehicles in a manner that materially and
adversely affects any auto loan or the interests of the securityholders or the
interests of the trustee, the bank or CFC will be obligated, unless the breach
is cured, to repurchase the auto loans from the trust. The bank or CFC will be
obligated to repurchase the auto loans if its breach is not cured by the last
day of the second calendar month following the discovery by or notice to the
lenders of the breach.
In addition, the prospectus supplement will specify if the lenders may from
time to time reacquire certain auto loans or substitute other auto loans for
such auto loans subject to the provisions of the trust documents.
Accounts
Collection Account
With respect to your series of securities, the servicer will establish and
maintain a collection account. The collection account will be one or more
accounts, in the name of the trustee on behalf of the securityholders, into
which all payments made on or with respect to the auto loans will be deposited.
Distribution Account
The prospectus supplement for a series of securities will specify whether
the servicer will also establish and maintain a distribution account with the
trustee. The distribution account will be one or more separate accounts in the
name of such trustee on behalf of such securityholders. Amounts withdrawn from
the collection account and any reserve account or received under other credit
enhancement, if any, for distribution to such securityholders will be deposited
in the distribution account. Distributions will be made to the securityholders
from the distribution account.
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Yield Maintenance Account
The trust documents may provide for the establishment and maintenance of a
yield maintenance account in order to provide payments to securityholders in
those cases where the APR of auto loans is less than the required rate.
The trust documents will describe if money on deposit in the yield
maintenance account may be invested in eligible investments and if investment
earnings on funds in a yield maintenance account will be deposited into the
yield maintenance account.
If a yield maintenance account is established with respect to securities
which have a pre-funding feature, on each subsequent transfer date the bank
will deposit into the yield maintenance account an additional yield maintenance
amount in respect of auto loans having an APR less than the required rate.
Any other accounts to be established with respect to a trust, including any
reserve account, will be described in the prospectus supplement for your
series.
The collection account, the distribution account, any reserve account and
any other accounts established by the servicer are referred to as trust
accounts. For any series of securities, funds in the collection account, the
distribution account, any reserve account and other identified trust accounts
shall be invested in eligible investments as directed by the trust documents
for your series.
Eligible investments are generally limited to investments acceptable to the
rating agencies as being consistent with the rating of such securities.
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. Eligible investments are limited to obligations or securities that
mature not later than the business day immediately preceding the distribution
date, or are otherwise subject to demand withdrawal. Investment earnings on
funds deposited in the applicable trust accounts, net of losses and investment
expenses may be retained in the related account, deposited in one particular
account, or released to the lenders or the servicer, as provided in the trust
documents.
The trust accounts will generally be maintained as eligible deposit accounts
and the accompanying prospectus supplement will specify if this is not the
case.
An eligible deposit account is an account that is either
. a segregated account with a depository institution organized under the
laws of the United States or any of the states which depository at the
time of any deposit therein has a net worth in excess of $50,000,000 and
long-term debt rating acceptable to the rating agencies or a short-term
deposit obligation rating acceptable to the rating agencies, or
. a segregated trust account with the corporate trust department of a
depository organized under the laws of the United States or any one of
the states, and acting as a trustee for funds deposited in the account,
so long as any of the unsecured, unguaranteed senior debt securities of
the depository shall have a long-term debt rating acceptable to the
rating agencies.
Mandatory Repurchase of Auto Loans
If the bank or CFC breaches the representations and warranties relating to
the auto loans and the financed vehicles in a manner that materially and
adversely affects any auto loan or the interests of the securityholders, a
credit enhancement provider or the interests of the trustee, the bank or CFC
will be obligated, unless the breach is cured, to repurchase the auto loans
from the trust. The bank or CFC will be obligated to repurchase the auto loans
by paying the purchase amount if the breach by the bank or CFC is not cured by
the end of the cure
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period. The repurchase obligation is the only remedy available to the
securityholders or the trustee against the bank or CFC for any uncured breach
or failure.
The purchase amount of any auto loan is determined at the time of the
particular distribution date and is equal to:
. the outstanding principal balance of the auto loan in question as of the
last day of the preceding collection period, plus
. the amount of accrued interest on the outstanding principal balance at
the related APR from the date a payment was last made by or on behalf of
the borrower through the last day of the collection period immediately
preceding the distribution date, and after any money collected on the
auto loan in the preceding collection period has been received.
The Servicer
The prospectus supplement for your series will name the servicer under the
trust documents. 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 your series will service the
auto loans constituting the trust property for that series. Any servicer may
delegate its servicing responsibilities to one or more sub-servicers, but will
not be relieved of its liabilities with respect to servicing.
To assure uniform quality in servicing the auto loans and to reduce
administrative costs, the trustee may appoint the servicer as initial custodian
of the auto loans. The servicer, in its capacity as custodian, will hold the
auto loans and all electronic entries, documents, instruments and writings
relating to the auto loans, and commonly referred to as a receivables file,
either directly or through sub-servicers, on behalf of the trustee for the
benefit of securityholders and any credit enhancement provider. The loan
contracts or the certificates of title may be held by an unaffiliated document
retention service, or in some cases may be held by the trustee or its custodian
other than the servicer. In addition, the servicer may designate CFC to act as
custodian with respect to receivables files relating to the CFC auto loans.
Servicing Procedures
The auto loans will be serviced by a servicer pursuant to the trust
documents. The servicer may designate CFC or another entity to act as sub-
servicer with respect to the CFC auto loans, although such designation will not
relieve the servicer from its servicing obligations with respect to such CFC
auto loans. Each trust document will require that servicing of the auto loans
by the servicer shall generally be carried out in the same manner in which it
services auto loans 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 provisions of the trust documents,
without regard to any relationship which the servicer or any affiliate of the
servicer may otherwise have with a borrower.
The servicer, as an independent contractor on behalf of the related trustee
and for the benefit of the securityholders and any credit enhancement provider,
will be responsible for managing, servicing and administering the auto loans
and enforcing and making collections on the auto loans and any insurance
policies and for enforcing any security interest in any of the vehicles, all as
set forth in the trust documents. The servicer's responsibilities will include
collecting and posting of all payments, responding to inquiries of borrowers,
investigating delinquencies, accounting for collections, furnishing monthly and
annual statements to the trustee and any credit enhancement provider, 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.
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Servicer Covenants
The servicer will covenant in the trust documents that:
. the vehicle securing each auto loan will not be released from the
security interest granted by the contract in whole or in part, except as
contemplated by the trust documents;
. the servicer will not impair in any material respect the rights of the
trustee or the securityholders in the auto loans under any agreements
pursuant to which the lender acquired the auto loans; and
. except in the case of bankrupt borrowers, where the court has ordered a
change in the amount financed under an auto loan or in the APR of an
auto loan or scheduled payment of an auto loan, the servicer will not
increase or decrease the amount of payments or the amount financed under
an auto loan, or change the APR of an auto loan; provided, however, that
the servicer may extend any auto loan 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 auto loan cause
the term of that auto loan 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
that auto loan as of the last day of the collection period following the
collection period in which the extension was made or, if the servicer chooses,
as of the last day of the collection period or earlier under certain
circumstances.
If the servicer breaches any covenant described above in a way that
materially and adversely affects an auto loan or the interests of the trust,
the securityholders or a credit enhancement provider in the auto loan, 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, if the servicer chooses, as of the last day of the collection
period during which such breach was discovered) the auto loan from the trustee
for the purchase amount. The servicer will pay the purchase amount on the
determination date in the subsequent collection period or earlier under certain
circumstances. The purchase obligation will constitute the sole remedy
available to the securityholders, any credit enhancement provider or the
trustee against the servicer for any such uncured breach.
Defaulted Auto Loans
The trust documents will also require the servicer to charge off an auto
loan as a defaulted auto loan in accordance with its customary standards and to
follow those normal collection practices and procedures as it deems necessary
or advisable, and that are consistent with the standard of care required by the
trust documents to realize upon any auto loan. The servicer may sell the
vehicle securing a defaulted auto loan at a judicial sale or take any other
action permitted by applicable law. The net proceeds of any realization of a
defaulted auto loan will be deposited into the collection account.
Servicing Compensation and Payment of Expenses
For its servicing of the auto loans, the servicer will be entitled to retain
a servicing fee from collections on the auto loans. The details of the
servicing fee will be provided in each prospectus supplement. A portion of the
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 auto loans.
All costs of servicing the auto loans in the manner required by the trust
documents 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
auto loan or the vehicles subject thereto, the servicer's actual out-of-pocket
expenses reasonably incurred with respect to the defaulted auto loan or
vehicle.
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Indemnification
The trust documents will provide that the servicer will defend, indemnify
and hold harmless the trustee, the trust, the securityholders, and any credit
enhancement provider 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 auto loan
serviced by the servicer in accordance with the requirements of the trust
documents. The servicer will also indemnify, defend and hold harmless the
trust, the trustee and its officers, directors, employees and agents, and any
credit enhancement provider from and against any loss, liability, expense,
damage or injury, including any judgment, 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 trust documents. The bank's
obligations, as servicer, to indemnify the trust 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
The trust documents will require the servicer to deliver an officers'
certificate to the trustee confirming that a review of the activities of the
servicer during the period specified in the related prospectus supplement and
of its performance under the trust documents has been made under the officers'
supervision and that, to the best of the officers' knowledge and based on that
review, the servicer has fulfilled all of its obligations under the trust
documents throughout such period. If there has been a default in the
fulfillment of any obligation, the certificate will specify the nature and
status of each default known to the officers.
The prospectus supplement shall specify if 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 an annual written statement to the
effect that such firm has read the monthly servicer's certificates delivered
pursuant to the trust documents and reviewed the servicing of the auto loans by
the servicer. The annual statement will confirm that the review (1) included
evaluations of servicing practices relating to automobile, light duty truck and
van loans serviced for others in accordance with the requirements of the trust
documents, 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 the
accounting firm to report.
Certain Matters Regarding the Servicer
The servicer may not resign from its obligations and duties as servicer
under the trust documents, unless it is determined that the servicer's
performance of its duties is no longer permissible under applicable law. The
servicer's resignation will not become effective until the related trustee or a
successor servicer has assumed the servicer's servicing obligations and duties
under the trust documents.
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 documents, or for errors in judgment; provided, however,
that neither the servicer nor any such person will be protected against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. In addition, the trust
documents will provide that the servicer is under no obligation to appear in,
prosecute, or defend any legal action that is not incidental to its servicing
responsibilities under the trust documents and that, in its opinion, may cause
it to incur any expense or liability.
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Under the circumstances specified in the trust documents, any entity into
which the servicer may be merged or consolidated, or any entity resulting from
any merger or consolidation to which the servicer is a party, or any entity
succeeding to the business of the servicer or, with respect to its obligations
as servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the servicer, will be the successor to the servicer
under the trust documents.
Servicer Default
A servicer default under the trust documents defining its servicing
obligations will consist of the occurrence and continuance of any of the
following:
. any failure by the servicer to deliver to the trustee the servicer's
certificate or to deliver to the trustee for distribution to the
securityholders any required payment, if the failure continues
unremedied for more than the number of days specified in the prospectus
supplement after the servicer receives written notice from (1) the
trustee, or the holders of a specified percentage of the related
securities, provided the consent of any credit enhancement provider is
obtained, or (2) any credit enhancement provider;
. any failure by the servicer duly to observe or perform in any material
respect any other covenant or agreement of the servicer in the trust
documents, if the failure materially and adversely affects the rights of
the securityholders and continues unremedied for more than the number of
days specified in the prospectus supplement after written notice of the
failure is given (1) to the servicer by the trustee and by the credit
enhancement provider, (2) to the servicer and to the trustee by a
specified percentage of the related securityholders and by the credit
enhancement provider or (3) to the servicer by the credit enhancement
provider; and
. any events of insolvency, readjustment of debt, marshalling of assets
and liabilities, or similar proceedings with respect to the servicer and
certain actions by the servicer indicating its insolvency or inability
to pay its obligations.
Removal of the Servicer
The servicer can generally only be removed if a servicer default has
occurred and has not been remedied. The prospectus supplement will specify if
this is not the case. If a servicer default has occurred and remains
unremedied, the trustee, acting at the direction of the controlling parties,
may give written notice to the servicer of the termination of all of the rights
and obligations of the servicer under the trust documents providing for the
servicing of the auto loans. On and after the time the servicer receives a
notice of termination, the trustee will be the successor in all respects to the
servicer in its capacity as servicer of the auto loans under the trust
documents. If the trustee is unwilling to act as successor servicer, the
trustee may, and if it is unable to act as successor servicer, the trustee
shall be obliged to, 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 documents. The controlling parties of a series will be
the provider of any credit enhancement for that series, if that provider is not
in default, or, if there is no credit enhancement provider for that series, or
if the credit enhancement provider is in default, then the holders of
securities of that series representing more than 50%, or in some cases, 66 2/3,
of the voting rights of that series.
Amendment
If it will not materially adversely affect the securityholders, the trust
documents may be amended, without the consent of the related securityholders,
for the purpose of adding, changing or eliminating any provisions or of
modifying in any manner the rights of the securityholders. The trust documents
may also be amended by the bank, the servicer, and the trustee with the consent
of securityholders evidencing at least a majority of the voting rights of the
then outstanding securities for the purpose of adding, changing in any manner,
or
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eliminating any provisions of the trust documents, including provisions that
would adversely affect the ratings of the securities; but no amendment may,
without the consent of all securityholders, (1) increase or reduce the amount
or priority of, or accelerate or delay the timing of, collections on the
related auto loans or distributions that are required to be made for the
benefit of the securityholders or (2) reduce the percentage of securities which
are required to consent to any amendment, without the consent of all
securityholders.
Events of Default
Any of the following will be an event of default for a series of securities
which includes notes:
. a default in the payment of any interest on any note that, when it
becomes due and payable, continues for a period of five days;
. a default in the payment of the outstanding principal balance of a class
of notes of that series on the scheduled maturity date of the class,
that continues for a period of five days;
. default in the observance or performance of any covenant or agreement of
the trust made in the trust documents for that series, or any
representation or warranty of the trust made in the trust documents or
in any certificate or other writing delivered under the trust documents
proving to have been incorrect in any material respect as of the time
when made which has a material adverse effect on note owners, and the
default shall continue or not be cured, for a period of 60 days after
notice is given to the trust by the trustee or to the trust and the
trustee by the holders of at least 25% in principal amount of the notes
of that series then outstanding, specifying the default or incorrect
representation or warranty;
. the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the trust or any substantial
part of the trust assets in an involuntary case under any applicable
federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the trust or for
any substantial part of the trust assets, or ordering the winding-up or
liquidation of the trust's affairs, and the decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; or
. the commencement by the trust of a voluntary case under any applicable
federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, or the consent by the trust to the entry of an
order for relief in an involuntary case, or the consent by the trust to
the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the
trust or for any substantial part of the trust assets, or the making by
the trust of any general assignment for the benefit of creditors, or the
failure by the trust generally to pay its debts as those debts become
due, or the taking of any action by the trust in furtherance of any of
the foregoing.
The amount of principal required to be paid to noteholders on any payment
date will be limited to amounts available to be deposited in the account.
Therefore, the failure to pay principal on a class of notes will not result in
the occurrence of an event of default until the scheduled maturity date for
that class of notes.
Rights upon an Event of Default
If there is an event of default due to late payment or nonpayment of
interest or principal on a note, interest will continue to accrue on the
principal and the overdue interest at the applicable interest rate on the note
until the overdue principal and interest is paid. If an event of default for a
series occurs and continues, the trustee, acting at the direction of the
controlling parties, shall, declare the principal of the notes to be
immediately due and payable. The declaration may, under some circumstances, be
rescinded by the controlling parities.
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If the notes are accelerated following an event of default in that series,
the trustee may institute proceedings to collect amounts due or foreclose on
property comprising trust assets or exercise remedies as a secured party. If
the trustee, at the direction of the controlling parties, determines that the
auto loans will not provide sufficient funds for the payment of principal and
interest on the notes as the payments would become due, any sale, liquidation
or other disposition of the trust assets in that series for an amount less
than the amounts due on the notes will not occur without the consent of the
controlling parties. If the trustee has not made a determination that a sale
or liquidation of the trust assets in that series will not provide sufficient
funds to pay principal and interest on the notes, it may sell, liquidate or
otherwise dispose of the trust assets only if all noteholders consent.
If an event of default occurs and has not been remedied, the trustee will
be under no obligation to exercise any of the rights or powers under the trust
documents at the request or direction of any of the holders of the notes, if
the trustee reasonably believes it will not be adequately indemnified against
the costs, expenses and liabilities which might be incurred by it in complying
with the request. Subject to the provisions for indemnification and
limitations contained in the trust documents, the controlling parties will
have the right to direct the time, method and place of conducting any
proceeding or any remedy available to the trustee, and the controlling parties
may, in some cases, waive any default, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the trust documents that cannot be modified without the waiver or consent of
all the holders of the outstanding notes. No holder of a note of a series will
have the right to institute any proceeding under the trust documents, unless:
. the holder previously has given the trustee written notice of a
continuing event of default;
. the holders of not less than 25% of the aggregate principal balance of
all outstanding notes of a series have made written request to the
trustee to institute the proceeding in its own name as trustee;
. the holder or holders have offered the trustee reasonable indemnity
against costs, expenses and liabilities to be incurred in complying with
the request;
. the trustee has for 60 days failed to institute the proceeding; and
. no direction inconsistent with the written request has been given to the
trustee during the 60-day period by the holders of a majority of the
aggregate principal balance of all outstanding notes of a series. In
addition, the trustee and the note owners, by accepting a beneficial
interest in the notes, will covenant that they will not at any time
institute against the trust or the lenders, or join in any institution
against the trust or the lenders of, any bankruptcy, reorganization or
other proceeding under any federal or state bankruptcy or similar law.
Certain Covenants of Each Trust
The trust documents provide that the trust may not consolidate with or
merge into any other entity, unless:
. the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the District
of Columbia;
. the entity expressly assumes the trust's obligation to make due and
punctual payments upon the securities and the performance or observance
of any agreement and covenant of the trust under the trust documents;
. no event of default shall have occurred and be continuing immediately
after the merger or consolidation;
. the trust has been advised that the ratings of the securities then in
effect would not be reduced or withdrawn by any rating agency as a
result of the merger or consolidation;
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. any action that is necessary to maintain the lien and security interest
created by the indenture is taken; and
. the trust has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax consequence
to the trust or to any securityholder.
The trust will not, among other things:
. except as expressly permitted by the trust documents, sell, transfer,
exchange or otherwise dispose of any of the assets of the trust,
. claim any credit on or make any deduction from the principal and
interest payable in respect of the securities other than amounts
withheld under the Internal Revenue Code or applicable state law or
assert any claim against any present or former holder of securities
because of the payment of taxes levied or assessed upon the trust,
. permit the validity or effectiveness of the trust documents to be
impaired or permit any person to be released from any covenants or
obligations with respect to the securities under the trust documents
except as may be expressly permitted thereby, or
. permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance to be created on or extend to or otherwise arise upon
or burden the assets of the trust or any part of the trust, or any
interest therein or the proceeds of the trust.
The trust may not engage in any activity other than as specified under the
trust documents.
Certain Matters Regarding the Trustee and the Trust
Neither the trust, the trustee nor any director, officer or employee of the
trust or the trustee will be under any liability to the trust or the
securityholders for any action taken or for refraining from the taking of any
action in good faith under the trust documents or for errors in judgment.
However, the trustee, the trust and any director, officer or employee will not
be protected against any liability which would otherwise be imposed by reason
of willful malfeasance, bad faith or negligence in the performance of duties or
by reason of reckless disregard of obligations and duties under the trust
documents.
Limitation on Liability of the Trustee
The trustee will make no representations as to the validity or sufficiency
of the trust documents, the securities or of the trust assets or related
documents. If no event of default has occurred, the trustee is required to
perform only those duties specifically required of it under the trust
documents. Upon receipt of the various certificates, statements, reports or
other instruments required to be furnished to it, the trustee will be required
to examine them to determine whether they are in the form required by the trust
documents; however, the trustee will not be responsible for the accuracy or
content of any of the documents furnished to it.
The trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, the trustee will not be
personally liable for any action taken, suffered or omitted to be taken by it
in good faith in accordance with the direction of the required percentage of
the securityholders in an event of default. The trustee is not required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the trust documents, or in the exercise
of any of its rights or powers, if it has reasonable grounds for believing that
repayment of the funds or adequate indemnity against the risk or liability is
not reasonably assured to it.
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Resignation of Trustee
The trustee may, upon written notice to the bank and the trust, resign at
any time, in which event the servicer will be obligated to use its best efforts
to appoint a successor trustee. If no successor trustee has been appointed and
has accepted the appointment within 60 days after giving notice of resignation,
the resigning trustee or the trust may petition any court of competent
jurisdiction for appointment of a successor trustee. The trustee may also be
removed at any time by the servicer. In addition, the servicer or the
controlling parties may remove the trustee under a series:
. if the trustee ceases to be eligible to continue as trustee under the
trust documents;
. if the trustee becomes insolvent; or
. the trustee's long-term debt ratings are below investment grade.
Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of the appointment by the
successor trustee.
Termination
The obligations of the servicer, the bank, CFC and the trustee with respect
to a trust will terminate upon the earlier to occur of:
. the maturity or liquidation of the last auto loan held by that trust and
the disposition of any amounts received upon liquidation of any
remaining auto loans; and
. the payment in full to securityholders.
Once the pool balance, or, in the case of securities issued in the form of
notes, the outstanding note balance, has declined to below a specified
percentage, then the servicer will be permitted, at its option, to purchase the
auto loans from the trust. If the auto loans held by a trust are so purchased,
then the related securities will be redeemed.
LEGAL ASPECTS OF THE AUTO LOANS
The following discussion contains summaries of the material legal aspects of
the auto loans that are general in nature. These legal aspects are governed in
part by state laws, which may be different in the various states.
Security Interest in Vehicles
In all the states in which the auto loans have been originated, retail
installment sale contracts evidence the credit sale of automobiles, light duty
trucks and vans by dealers to borrowers. The auto loans are chattel paper under
the UCC.
Perfection of security interests in the financed vehicles is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In most states, a security interest in a vehicle generally
may be perfected only by amendment of that vehicle's certificate of title to
note the security interest of the secured party. That notation of a secured
party's security interest is generally effected in those states by depositing
with the applicable state highway department, motor vehicles registrar, or
similar authority along with any registration fees, the vehicle's certificate
of title and an application containing the name and address of the secured
party.
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The bank or CFC will assign its security interest in the financed vehicles
securing the auto loans to the trust. However, because of the administrative
burden and expense, involved, we will not amend any certificate of title to
identify the related trust as the new secured party on the certificates of
title relating to the financed vehicles. Also, the bank or CFC may continue to
hold the certificates of title in its possession.
Even though we are not amending the certificates of title, the assignment to
the trust will, in most states, be an effective conveyance of a security
interest. Under the laws of most states, a transferee of a security interest in
a motor vehicle is not required to reapply to the related department of motor
vehicles or analogous state office for a transfer of registration when the
security interest is sold or transferred by the lienholder to secure payment or
performance of an obligation. Accordingly, under the laws of these states, the
assignment by the bank or CFC to the trust and any pledge to the trustee
effectively conveys the security in the auto loans, and specifically, the
vehicles, without re-registration and without amendment of any lien noted on
the certificate of title.
If there are any financed vehicles as to which a perfected security interest
is not obtained, the trust's security interest will be subordinate to the
rights of, among others, subsequent purchasers of the financed vehicles and
holders of perfected security interests. Such a failure, however, would
constitute a breach of the bank's or CFC's warranties under the trust
documents, and would create an obligation of the lenders to repurchase the auto
loan unless the breach is cured. By not identifying the trust as the secured
party on the certificate of title, the security interest of the trust in the
financed vehicle could be defeated through fraud or negligence.
In some states, unless the borrower has notice of the sale of its auto loan,
payment by the borrower to the owner of the auto loan last known to that
borrower will be binding upon all subsequent owners of the auto loan. By not
notifying the borrower of the sale of the auto loan to the trust, the trust
would not have a claim against the borrower for payments made by the borrower
to the owner last known to that borrower.
In most states, the perfected security interest in a vehicle continues for
four months after a vehicle leaves the state of its registration until re-
registration in the new state. A majority of states generally require a
surrender of a certificate of title to re-register a vehicle; accordingly, a
secured party must surrender possession if it holds the certificate of title to
the vehicle, or, in the case of vehicles registered in states providing for the
notation of a security interest on the certificate of title but not possession
by the secured party, the secured party would receive notice of surrender if
the security interest is noted on the certificate of title. Thus, the secured
party would have the opportunity to re-perfect its security interest in the
vehicle in the new state. In other states that do not require a certificate of
title for registration of a motor vehicle or in cases of fraud on the part of
the borrower, re-registration could defeat perfection. In the ordinary course
of servicing auto loans, the servicer takes steps to re-perfect upon receipt of
notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower sells a vehicle, the servicer must surrender
possession of the certificate of title or will receive notice as a result of
its security interest and will have an opportunity to require satisfaction of
the related receivable before release of the security interest. The servicer
will be obligated to take appropriate steps, at its expense, to maintain
perfection of security interests in the financed vehicles.
In most states, liens for repairs performed on, and for storage of, a motor
vehicle, and liens for some types of unpaid taxes, take priority over a
perfected security interest in a financed vehicle. The Internal Revenue Code
also grants priority to some federal tax liens over the lien of a secured
party. The laws of some 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 vehicle. The bank or CFC will represent each security interest in a
financed vehicle is or will be prior to all other present liens, other than tax
liens and liens that arise by operation of law, and security interests in that
financed vehicle.
However, liens for repairs or taxes, or the confiscation of a financed
vehicle, could arise or occur at any time during the term of an auto loan. No
notice will be given to the trustee in the event such a lien arises or
confiscation occurs.
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Repossession
In the event of a default by a borrower, the servicer will be entitled to
exercise all the remedies of a secured party under the UCC of the state in
which enforcement is to take place, except where specifically limited by other
laws. In most states, the UCC remedies of a secured party include:
. right to repossession by self-help means, unless those means would
constitute a breach of the peace;
. unless a vehicle is voluntarily surrendered, self-help repossession is
the method that will be employed by the servicer in the majority of
instances in which a default occurs and is accomplished by retaking
possession of the financed vehicle; and
. in cases where the borrower objects or raises a defense to repossession,
or if otherwise required by applicable state law, a court order must be
obtained from the appropriate state court, and the vehicle must then be
repossessed in accordance with that order.
. In some states, unless the vehicle is voluntarily surrendered or
abandoned, judicial means must be employed to seize the vehicle.
In some states under certain circumstances after the vehicle has been
repossessed, the borrower may reinstate the auto loan by paying the delinquent
amounts due on the auto loan.
Notice of Sale; Redemption Rights
In the event of default by the borrower, some states require that the
borrower be notified of the default and be given some time to cure the default
prior to repossession. Generally, this right of reinstatement may be exercised
on a limited number of occasions in any one-year period, or in some
jurisdictions, over the life of the loan.
The UCC and other state laws require the secured party to provide the
borrower with reasonable notice of the date, time, and place of any public sale
and/or the date after which any private sale of the vehicle may be held. In
some states the borrower has the right to redeem the vehicle prior to actual
sale by paying the secured party the unpaid principal balance of the auto loan
plus reasonable expenses for repossessing, holding, and preparing the vehicle
for disposition and arranging for sale, plus, in some jurisdictions, reasonable
attorneys' fees, or, in some other states, by payment of delinquent
installments or the unpaid balance. Repossessed vehicles are generally resold
by the servicer through automobile auctions attended principally by automotive
dealers.
Deficiency Judgments and Excess Proceeds
The proceeds of resale of the repossessed vehicles generally will be applied
to the expenses of resale and repossession and then to the outstanding balance
of the auto loan. While some states impose prohibitions or limitations on
deficiency judgments, if the net proceeds from resale do not cover the full
amount of the auto loan, a deficiency judgment can be sought in those states
that do not prohibit or limit those judgments. Additionally, in most states, in
order for a creditor in a secured transaction to sue for a deficiency, the
lender must first dispose of the vehicle in a commercially reasonable manner in
accordance with the governing UCC provisions. Any deficiency judgment would be
a personal judgment against the borrower for the shortfall, and a defaulting
borrower 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.
Consumer Protection Laws
Numerous federal and state consumer protection laws and accompanying
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, state laws may impose finance charge ceilings and
other restrictions on consumer transactions and require disclosures in addition
to those required under federal law. These requirements may impose specific
statutory liabilities upon creditors who fail to comply with their provisions.
In some cases, this liability could affect the ability of the servicer to
enforce auto loans.
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The so-called holder-in-due-course rule of the Federal Trade Commission has
the effect of subjecting the trust to all claims and defenses which the
borrower could assert against the originator of the auto loan. The provisions
of the holder-in due-course rule are generally duplicated by the Uniform
Consumer Credit Code, state statutes or the common law in some states.
Liability under the holder-in due-course rule is limited to the amounts paid by
the borrower under the auto loan, and the trust may be unable to collect any
remaining balance from the borrower.
Under most state motor vehicle dealer licensing laws, sellers of motor
vehicles are required to be licensed to sell motor vehicles at retail sale.
Furthermore, federal law requires that all sellers of new and used vehicles
furnish a signed written statement certifying the accuracy of the odometer
reading. If a seller is not properly licensed or if an odometer disclosure
statement was not provided to the purchaser of the financed vehicle, the
borrower may be able to assert a defense against the seller.
Courts have imposed general equitable principles on secured parties pursuing
repossession of collateral or litigation involving deficiency balances. These
equitable principles may relieve a borrower from some or all of the legal
consequences of a default.
In several cases, borrowers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections provided under the Constitution of the United States. Courts have
generally upheld the notice provisions of the UCC and related laws as
reasonable or have found that the repossession and resale by the creditor do
not involve sufficient state action to afford constitutional protection to
consumers.
The bank or CFC will represent and warrant that each auto loan complies with
all requirements of law in all material respects. Accordingly, if a borrower
has a claim against the trust for violation of any law and that claim
materially and adversely affects the trust's interest in the auto loan, that
violation would constitute a breach and would oblige the bank or CFC to
repurchase the auto loan unless the breach is cured.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Relief Act of 1940, which is
referred to in this prospectus as the Relief Act, members of all branches of
the military on active duty, including draftees and reservists on active duty,
are entitled to have interest rates reduced and capped at 6% annum on
obligations, including the auto loans, incurred prior to the commencement of
active duty and for the duration of active duty. Because the Relief Act applies
to borrowers who enter military service after origination of the auto loan, no
information can be provided as to the number of auto loans that may be affected
by the Relief Act. The Relief Act would adversely affect, for an indeterminate
period of time, the ability of the servicer to collect full amounts of interest
on some of the auto loans. Any loss resulting from the application of the
Relief Act or similar legislation or regulations would reduce the amounts
available to be paid to the securityholders. In addition, the Relief Act limits
the ability of the servicer to repossess a vehicle during the borrower's period
of active duty status, and, under certain circumstances, during an additional
three month period. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any auto loan which goes into default,
there may be delays in payment and losses on the securities. Any other interest
shortfalls, deferrals or forgiveness of payments on the auto loans resulting
from similar legislation or regulations may result in delays in payments or
losses to securityholders.
Other Limitations
In addition to the laws limiting or prohibiting deficiency judgments, other
statutory provisions, including the United States Bankruptcy Code and similar
state laws, may affect the ability of the trust and the servicer to repossess a
vehicle or enforce a deficiency judgment. For example, in a Chapter 13
proceeding under the federal bankruptcy law, a court may prevent a lender from
repossessing a motor vehicle. Furthermore, as part of the rehabilitation plan,
a court may reduce the amount of the secured indebtedness to the market value
of the motor vehicle at the time of bankruptcy, leaving the lender 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
interest rate and time of repayment.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the securities offered by this prospectus. The discussion is based upon
laws, regulations, rulings and decisions now in effect, all of which are
subject to change. The discussion below does not purport to deal with all
federal tax consequences applicable to all categories of investors, including
insurance companies, tax-exempt organizations, regulated investment companies,
financial institutions or broker dealers, taxpayers subject to the alternative
minimum tax, and holders that will hold the securities as other than capital
assets, all of whom may be subject to special rules. Investors are urged to
consult their own tax advisors in determining the particular federal, state and
local consequences to them of the purchase, ownership and disposition of the
securities.
With respect to each series of securities, Dewey Ballantine LLP, special tax
counsel to the lenders, will deliver its opinion with respect to federal tax
matters for to that series. Each opinion shall be attached on Form 8-K to be
filed with the SEC prior to the sale of that series.
The following discussion addresses securities of four general types:
(1) grantor trust securities, representing interests in a trust, a
grantor trust;
(2) debt securities, that are intended to be treated for federal income
tax purposes as indebtedness secured by the underlying loans;
(3) partnership interests, representing interests in a trust, a
partnership, that is intended to be treated as a partnership under the
Internal Revenue Code of 1986, as amended, referred to as the "Code"; and
(4) FASIT securities, representing interests in a financial asset
securitization investment trust, a FASIT, or portion thereof, which the
lenders will covenant to elect to have treated as a FASIT under sections
860H through 860L of the Code. The prospectus supplement for your series of
securities will indicate whether a FASIT election, or elections, will be
made for the related trust and, if a FASIT election is to be made, will
identify all "regular interests," "high-yield interests" and the "ownership
interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that require the
recognition of gain upon the "constructive sale of an appreciated financial
position." A constructive sale of an appreciated financial position occurs if a
taxpayer enters into a transaction or series of transactions with respect to a
financial instrument that have the effect of substantially eliminating the
taxpayer's risk of loss and opportunity for gain with respect to the financial
instrument. These provisions apply only to classes of securities that do not
have a principal balance.
Grantor Trust Securities
Each beneficial owner of a grantor trust security will generally be treated
as the owner of an interest in the auto loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
auto loans constituting the related grantor trust, together with interest
thereon at a pass-through rate, will be referred to as a grantor trust
fractional interest security. A grantor trust security representing ownership
of all or a portion of the difference between interest paid on the auto loans
constituting the related grantor trust and interest paid to the beneficial
owners of grantor trust fractional interest securities issued with respect to a
grantor trust will be referred to as a grantor trust strip security.
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Taxation of Beneficial Owners of Grantor Trust Securities. Beneficial owners
of grantor trust fractional interest securities generally will be required to
report on their federal income tax returns their respective shares of the
income from the auto loans, including amounts used to pay reasonable servicing
fees and other expenses but excluding amounts payable to beneficial owners of
any corresponding grantor trust strip securities, and, subject to the
limitations described below, will be entitled to deduct their shares of any
reasonable servicing fees and other expenses. If a beneficial owner acquires a
grantor trust fractional interest security for an amount that differs from its
outstanding principal amount, the amount includible in income on a grantor
trust fractional interest security may differ from the amount of interest
distributable thereon. See "Discount and Premium" below. Individuals holding a
grantor trust fractional interest security directly or through a pass-through
entity will be allowed a deduction for reasonable servicing fees and expenses
only to the extent that the aggregate of a beneficial owner's miscellaneous
itemized deductions exceeds 2% of a beneficial owner's adjusted gross income.
Further, beneficial owners, other than corporations, subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as "stripped coupons" under section 1286 of
the Code. Accordingly, a beneficial owner will be required to treat the excess
of the total amount of payments on a security over the amount paid for a
security as original issue discount and to include a discount in income as it
accrues over the life of a security. See "Discount and Premium" below.
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued
as part of the same series of securities. The consequences of the application
of the coupon stripping rules would appear to be that any discount arising upon
the purchase of a security, and perhaps all stated interest thereon, would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues, regardless of the beneficial owner's method of
accounting, as described below under "Discount and Premium." The coupon
stripping rules will not apply, however, if (1) the pass-through rate is no
more than 100 basis points lower than the gross rate of interest payable on the
underlying auto loans and (2) the difference between the outstanding principal
balance on the security and the amount paid for a security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security.
Sales of Grantor Trust Securities. Any gain or loss recognized on the sale
of a grantor trust security, equal to the difference between the amount
realized on the sale and the adjusted basis of a grantor trust security, will
be capital gain or loss, except to the extent of accrued and unrecognized
market discount, which will be treated as ordinary income, and in the case of
banks and other financial institutions except as provided under section 582(c)
of the Code. The adjusted basis of a grantor trust security will generally
equal its cost, increased by any income reported by the originator, including
original issue discount and market discount income, and reduced, but not below
zero, by any previously reported losses, any amortized premium and any
distributions of principal.
Grantor Trust Reporting. The trustee will furnish to each beneficial owner
of a grantor trust fractional interest security with each distribution a
statement setting forth the amount of the distribution allocable to principal
on the underlying the auto loans and to interest thereon at the related
interest rate. In addition, within a reasonable time after the end of each
calendar year, based on information provided by the servicer, the trustee will
furnish to each beneficial owner during the year the customary factual
information as the servicer deems necessary or desirable to enable beneficial
owners of grantor trust securities to prepare their tax returns and will
furnish comparable information to the IRS as and when required to do so by law.
Debt Securities
Debt securities will not be treated as ownership interests in the auto loans
or the trust. Beneficial owners will be required to report income received with
respect to the debt securities in accordance with their normal
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method of accounting. For additional tax consequences relating to debt
securities purchased at a discount or with premium, see "Discount and Premium"
below.
Taxation of Beneficial Owners of Debt Securities. If the debt securities are
characterized as indebtedness, interest paid or accrued on a debt security will
be treated as ordinary income to the beneficial owner and principal payments on
a debt security will be treated as a return of capital to the extent of the
beneficial owner's basis in the debt security allocable thereto. An accrual
method taxpayer will be required to include in income interest on the debt
security when earned, even if not paid, unless it is determined to be
uncollectible. The trust will report to beneficial owners of record and the IRS
the amounts of interest paid and original issue discount, if any, accrued on
the debt securities to the extent required by law.
Sales of Debt Securities. If a beneficial owner of a debt security sells or
exchanges the security, the beneficial owner will recognize gain or loss equal
to the difference, if any, between the amount received and the beneficial
owner's adjusted basis in the security. The adjusted basis in the security
generally will equal its initial cost, increased by any original issue discount
or market discount previously included in the lenders' gross income with
respect to the security and reduced by the payments previously received on the
security, other than payments of qualified stated interest, and by any
amortized premium.
In general, except as described in "Discount and Premium -- Market
Discount," below, except for financial institutions subject to section 582(c)
of the Code, any gain or loss on the sale or exchange of a debt security
recognized by an investor who holds the security as a capital asset, within the
meaning of section 1221 of the Code, will be capital gain or loss and will be
long-term or short-term depending on whether the security has been held for
more than one year.
Debt Securities Reporting. The trustee will furnish to each beneficial owner
of a debt security with each distribution a statement setting forth the amount
of a distribution allocable to principal on the underlying auto loans and to
interest on it at the related interest rate. In addition, within a reasonable
time after the end of each calendar year, based on information provided by the
servicer, the trustee will furnish to each beneficial owner during a year the
customary factual information as the servicer deems necessary or desirable to
enable beneficial owners of debt securities to prepare their tax returns and
will furnish comparable information to the IRS as and when required to do so by
law.
Partnership Interests
Each beneficial owner of a partnership interest will generally be treated as
the owner of an interest in the auto loans.
Taxation of Beneficial Owners of Partnership Interests. If the trust is
treated as a partnership for federal income tax purposes, the trust will not be
subject to federal income tax. Instead, each beneficial owner of a partnership
interest will be required to separately take into account its allocable share
of income, gains, losses, deductions, credits and other tax items of the trust.
These partnership allocations are made in accordance with the Code, Treasury
regulations and the partnership agreement, here, the trust documents and
related documents.
The trust's assets will be the assets of the partnership. The trust's income
will consist primarily of interest and finance charges earned on the underlying
the auto loans. The trust's deductions will consist primarily of interest
accruing with respect to any indebtedness issued by the trust, servicing and
other fees, and losses or deductions upon collection or disposition of the
trust's assets.
In certain instances, the trust could have an obligation to make payments of
withholding tax on behalf of a beneficial owner of a partnership interest. See
"Backup Withholding" and "Foreign Investors" below.
Substantially all of the taxable income allocated to a beneficial owner of a
partnership interest that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity, including an individual retirement account, will
constitute "unrelated business taxable income" generally taxable to a holder
under the Code.
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Under section 708 of the Code, the trust will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits interests
in the trust are sold or exchanged within a 12-month period. Under Treasury
regulations issued on May 9, 1997 if a termination occurs, the trust is deemed
to contribute all of its assets and liabilities to a newly formed partnership
in exchange for a partnership interest. Immediately thereafter, the terminated
partnership distributes interests in the new partnership to the purchasing
partners and remaining partners in proportion to their interests in liquidation
of the terminated partnership.
Sale or Exchange of Partnership Interests. Generally, capital gain or loss
will be recognized on a sale or exchange of partnership interests in an amount
equal to the difference between the amount realized and the lenders' tax basis
in the partnership interests sold. A beneficial owner's tax basis in a
partnership interest will generally equal the beneficial owner's cost increased
by the beneficial owner's share of trust income recognized and decreased by any
distributions received with respect to the partnership interest. In addition,
both the tax basis in the partnership interest and the amount realized on a
sale of a partnership interest would take into account the beneficial owner's
share of any indebtedness of the trust. A beneficial owner acquiring
partnership interests at different prices may be required to maintain a single
aggregate adjusted tax basis in the partnership interests, and upon sale or
other disposition of some of the partnership interests, to allocate a portion
of the aggregate tax basis to the partnership interests sold, rather than
maintaining a separate tax basis in each partnership interest for purposes of
computing gain or loss on a sale of that partnership interest.
Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, the excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under section 754 of
the Code.
Partnership Reporting. The trustee is required to (1) keep complete and
accurate books of the trust, (2) file a partnership information return with the
IRS (IRS Form 1065) and with any state where required for each taxable year of
the trust and (3) report each beneficial owner's allocable share of items of
trust income and expense to beneficial owners and the IRS on Schedule K-1. The
trust will provide the Schedule K-1 information to nominees that fail to
provide the trust with the information statement described below and the
nominees will be required to forward the information to the beneficial owners
of the partnership interests. Generally, beneficial owners of a partnership
interest must file tax returns that are consistent with the information return
filed by the trust or be subject to penalties unless the beneficial owner of a
partnership interest notifies the IRS of all inconsistencies.
Under section 6031 of the Code, any person that holds partnership interests
as a nominee at any time during a calendar year is required to furnish the
trust with a statement containing information on the nominee, the beneficial
owners and the partnership interests so held. The information includes (a) the
name, address and taxpayer identification number of the nominee and (b) as to
each beneficial owner (1) the name, address and identification number of the
person, (2) whether the person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and (3) information on
partnership interests that were held, bought or sold on behalf of the person
throughout the year. In addition, brokers and financial institutions that hold
partnership interests through a nominee are required to furnish directly to the
trust information regarding themselves and their ownership of partnership
interests. A clearing agency registered under section 17A of the Securities
Exchange Act of 1934 is not required to furnish any information statement to
the trust. Nominees, brokers and financial institutions that fail to provide
the trust with the information described above may be subject to penalties.
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The Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a partnership interest, and, under certain circumstances, a
beneficial owner of a partnership interest may be precluded from separately
litigating a proposed adjustment to the items of the trust. An adjustment could
also result in an audit of the beneficial owner of a partnership interest's
returns and adjustments of items not related to the income and losses of the
trust.
FASIT Securities
If provided in a related prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of section 860L(a) of the Code.
The trust would make the election at the direction of the lenders.
Qualification as a FASIT requires ongoing compliance with certain conditions.
The tax opinion delivered prior to the sale of, and in connection with, a FASIT
issuance, will state that the characteristics and the composition of the trust
property will enable the trust to meet the requirements for qualification and
taxation as a FASIT. A trust for which a FASIT election is made will be
referred to in this prospectus as a FASIT trust. The securities of each class
will be designated as "regular interests" or "high-yield regular interests" in
the FASIT trust except that one separate class will be designated as the
"ownership interest" in the FASIT trust. The prospectus supplement for your
series of securities will state whether securities of each class will
constitute either a regular interest or a high-yield regular interest, a FASIT
regular security, or an ownership interest, a FASIT ownership security.
Taxation of Beneficial Owners of FASIT Regular Securities. A FASIT trust
will not be subject to federal income tax except with respect to income from
prohibited transactions and in certain other instances as described below. The
FASIT regular securities generally will be treated for federal income tax
purposes as newly-originated debt instruments and avoid double taxation (income
is not taxed at the corporate level but only to the investors). Interest paid
to holders of regular interests in a FASIT is deductible by the FASIT in
computing its net income as passed through to its owner. In general, interest,
original issue discount and market discount on a FASIT regular security will be
treated as ordinary income to the beneficial owner, and principal payments,
other than principal payments that do not exceed accrued market discount, on a
FASIT regular security will be treated as a return of capital to the extent of
the beneficial owner's basis allocable thereto. Beneficial owners must use the
accrual method of accounting with respect to FASIT regular securities,
regardless of the method of accounting otherwise used by the beneficial owners.
See "Discount and Premium" below.
In order for the FASIT trust to qualify as a FASIT, there must be ongoing
compliance with the requirements set forth in the Code:
(1) the entity elects to be treated as a FASIT;
(2) there is a single ownership interest held directly by an eligible
corporation;
(3) all other interests that are issued by the FASIT qualify as regular
interests;
(4) no later than three months after formation, substantially all assets
of the FASIT (including assets treated as held by the entity, such as
assets held by the owner or a person related to the owner that support any
regular interest in such entity) are permitted assets; and
(5) the entity is not a regulated investment company (RIC) (such as a
mutual fund).
The FASIT must fulfill an asset test, which requires that substantially all
the assets of the FASIT, as of the close of the third calendar month beginning
after the startup day, which for purposes of this discussion is the date of the
initial issuance of the FASIT securities, and at all times thereafter, must
consist of cash or cash
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equivalents, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a Real Estate
Mortgage Investment Conduit, commonly referred to as a REMIC. Based on proposed
regulations issued by the Treasury Department on February 7, 2000 (the
"Proposed Regulations"), the "substantially all" requirement should be met if
at all times the aggregate adjusted basis of the nonqualified assets is less
than one percent of the aggregate adjusted basis of all the FASIT's assets. The
FASIT provisions of the Code, sections 860H through 860L, also require the
FASIT ownership interest and "high-yield regular interests," described below,
to be held only by fully taxable domestic corporations.
The FASIT provisions allow the lenders to add additional assets to a FASIT
trust after the startup day. These assets would be limited to additional auto
loans and credit enhancement support relating to the additional auto loans,
such as cash, hedging agreements, and insurance policies. The FASIT provisions
additionally permit the removal of assets from a FASIT trust.
The trust agreements will require that each FASIT Trust will be limited in
its ability to acquire or dispose of its assets to the degree permitted by the
more restrictive REMIC rules, as opposed to the FASIT rules.
The trust agreements for a FASIT trust will provide that any additional
assets acquired by the trust will be selected if such loans meet specified
requirements similar to the requirements used to purchase pre-funded auto
loans, i.e., a maximum principal balance, a minimum coupon, a latest maturity
date and a maximum used-vehicle percentage.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance, guarantees
of payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the borrower on interests issued by the FASIT.
Foreclosure property is real property acquired by the FASIT in connection with
the default or imminent default of a qualified mortgage, provided the lenders
had no knowledge or reason to know as of the date the asset was acquired by the
FASIT that a default had occurred or would occur.
In addition to the foregoing requirements, the various interests in a FASIT
also must meet certain other requirements. All of the interests in a FASIT must
be either of the following: (a) one or more classes of regular interests or (b)
a single class of ownership interest. A regular interest is an interest in a
FASIT that is issued on or after the startup day with fixed terms, is
designated as a regular interest, and (1) unconditionally entitles the holder
to receive a specified principal amount, or other similar amount, (2) provides
that interest payments, or other similar amounts, if any, at or before maturity
are payable based on either a fixed rate or a qualified variable rate, (3) has
a stated maturity of not longer than 30 years, (4) has an issue price not
greater than 125% of its stated principal amount, and (5) has a yield to
maturity not greater than 5 percentage points higher than the related
applicable federal rate, as defined in Code section 1274(d). A regular interest
that is described in the preceding sentence except that it fails to meet one or
more of requirements (1), (2), (4), or (5) is a "high-yield regular interest."
A high-yield regular interest that fails requirement (2) must consist of a
specified, nonvarying portion of the interest payments on the permitted assets,
by reference to the REMIC rules. An ownership interest is an interest in a
FASIT other than a regular interest that is issued on the startup day, is
designated an ownership interest and is held by a single, fully-taxable,
domestic corporation. An interest in a FASIT may be treated as a regular
interest even if payments of principal with respect to interest are
subordinated to payments on other regular interests or the ownership interest
in the FASIT, and are dependent on the absence of defaults or delinquencies on
permitted assets lower than reasonably expected returns on permitted assets,
unanticipated expenses incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing requirements of
the Code for status as a FASIT during any taxable year, the Code provides that
the entity or applicable portion thereof will not be treated as a FASIT
thereafter. The Proposed Regulation indicate, however, that the Commissioner
may allow an entity to continue to be a FASIT or to re-elect FASIT status if
loss of its status is determined by the
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Commissioner to have been inadvertent, it takes prompt steps to requalify and
the holders of the ownership interests in the entity agree to make such
adjustments as the Commissioner may require with respect to the period in which
the entity failed to qualify as a FASIT. Loss of FASIT status results in
retirement of all regular interests and their reissuance. If the resulting
instruments are treated as equity under general tax principles, cancellation of
debt income may result.
Taxes on a FASIT Trust. Income from certain transactions by a FASIT, called
prohibited transactions, are taxable to the holder of the ownership interest in
a FASIT at a 100% rate. Prohibited transactions generally include (1) the
disposition of a permitted asset other than for (a) foreclosure, default, or
imminent default, (b) bankruptcy or insolvency of the FASIT, (c) a qualified,
complete, liquidation, (d) substitution for another permitted debt instrument
or distribution of the debt instrument to the holder of the ownership interest
to reduce overcollateralization, but only if a principal purpose of acquiring
the debt instrument which is disposed of was not the recognition of gain, or
the reduction of a loss, on the withdrawn asset as a result of an increase in
the market value of the asset after its acquisition by the FASIT or (e) the
retirement of a class of FASIT regular interests; (2) the receipt of income
from nonpermitted assets; (3) the receipt of compensation for services; or (4)
the receipt of any income derived from a loan originated by the FASIT (subject
to certain safe harbors). It is unclear the extent to which tax on the
transactions could be collected from the FASIT trust directly under the
applicable statutes rather than from the holder of the FASIT Residual Security.
The Proposed Regulations issued by the Treasury Department on February 7,
2000 include rules applicable to FASITs. These rules address administrative
provisions, ownership issues, permitted assets, prohibited transactions,
consequences of FASIT cessation, gain recognition on property transferred to a
FASIT, and include a prohibition of foreign FASITs and a special anti-abuse
rule. The Proposed Regulations are proposed to become effective on the date
final regulations are filed with the Federal Register, except for the portions
of the Proposed Regulations containing the anti-abuse rule and allowing the
deferral of gain on assets held by a pre-effective date FASIT, which are
proposed to become effective February 4, 2000. The Proposed Regulations are
subject to change before being adopted as final regulations, and it is unclear
whether they will be applied retroactively when adopted.
Due to the complexity of these rules and the proposed form of the Treasury
regulations, potential investors may wish to consult their own tax advisors
regarding the tax treatment of their acquisition, ownership and disposition of
the FASIT regular securities.
Discount and Premium
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and
certain grantor trust fractional interest securities will be treated as having
original issue discount by virtue of the coupon stripping rules in section 1286
of the Code. In very general terms, (1) original issue discount is treated as a
form of interest and must be included in a beneficial owner's income as it
accrues, regardless of the beneficial owner's regular method of accounting,
using a constant yield method; (2) market discount is treated as ordinary
income and must be included in a beneficial owner's income as principal
payments are made on the security, or upon a sale of a security; and (3) if a
beneficial owner so elects, premium may be amortized over the life of the
security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount. In general, a security will be considered to be
issued with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The issue price of a
security is the initial offering price to the public, excluding bond houses and
brokers, at which a substantial number of the securities were sold. The issue
price also includes any accrued interest attributable to the period between the
beginning of the first remittance period and the closing date. The stated
redemption price at maturity of a security that has a notional principal amount
or receives principal only or that provides for or may provide for accruals of
interest is equal to the sum of all distributions to be made under the
security. The stated
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redemption price at maturity of any other security is its stated principal
amount, plus an amount equal to the excess, if any, of the interest payable on
the first payment date over the interest that accrues for the period from the
closing date to the first payment date. The trustee will supply, at the time
and in the manner required by the IRS, to beneficial owners, brokers and
middlemen information with respect to the original issue discount accruing on
the securities.
Notwithstanding the general definition, original issue discount will be
treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity of the security multiplied by its weighted average life. The
weighted average life of a security is computed for this purpose as the sum,
for all distributions included in the stated redemption price at maturity, of
the amounts determined by multiplying (1) the number of complete years,
rounding down for partial years, from the closing date until the date on which
each distribution is expected to be made under the assumption that the auto
loans prepay at the rate specified in the related prospectus supplement, the
prepayment assumption, by (2) a fraction, the numerator of which is the amount
of the distribution and the denominator of which is the security's stated
redemption price at maturity. Even if original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the security and, when each
distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules applicable to prepayable securities. Under these rules, described in
greater detail below, (a) the amount and rate of accrual of original issue
discount on each series of securities will be based on (1) a prepayment
assumption as described below, and (2) in the case of a security calling for a
variable rate of interest, an assumption that the value of the index upon which
the variable rate is based remains equal to the value of that rate on the
closing date, and (b) adjustments will be made in the amount of discount
accruing in each taxable year in which the actual prepayment rate differs from
the prepayment assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the
manner prescribed in Treasury regulations. To date, no regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The lenders anticipate that the prepayment assumption
for each series of securities will be consistent with this standard. The
lenders make no representation, however, that the auto loans for a given series
will prepay at the rate reflected in the prepayment assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the securities.
Each beneficial owner must include in gross income the sum of the "daily
portions" of original issue discount on its security for each day during its
taxable year on which it held the security. For this purpose, in the case of an
original beneficial owner, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of
the original issue discount that accrued during each "accrual period." Original
issue discount calculations must be based on accrual periods of no longer than
one year either (1) beginning on a payment date, or, in the case of the first
period, the Closing date, and ending on the day before the next payment date or
(2) beginning on the next day following a payment date and ending on the next
payment date.
Under section 1272(a)(6) of the Code, the portion of original issue discount
treated as accruing for any accrual period will equal the excess, if any, of
(a) the sum of (1) the present values of all the distributions remaining to be
made on the security, if any, as of the end of the accrual period and (2) the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (b) the adjusted issue price
of the security at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated based on (1) the yield to maturity of the security, calculated as of
the closing date, giving effect to the prepayment assumption, (2) events,
including actual prepayments, that have occurred prior to the end of the
accrual period, (3) the prepayment assumption, and (4) in the case of a
security calling for a variable rate of interest, an assumption
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that the value of the index upon which the variable rate is based remains the
same as its value on the closing date over the entire life of the security. The
adjusted issue price of a security at any time will equal the issue price of
the security, increased by the aggregate amount of previously accrued original
issue discount with respect to the security, and reduced by the amount of any
distributions made on the security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing
during any accrual period will then be allocated ratably to each day during the
period to determine the daily portion of original issue discount.
In the case of grantor trust strip securities as described in the related
prospectus supplement, and certain FASIT securities, the calculation described
in the preceding paragraph may produce a negative amount of original issue
discount for one or more accrual periods. No definitive guidance has been
issued regarding the treatment of negative amounts. The legislative history to
section 1272(a)(6) indicates that negative amounts may be used to offset
subsequent positive accruals but may not offset prior accruals and may not be
allowed as a deduction item in a taxable year in which negative accruals exceed
positive accruals. Beneficial owners of the securities should consult their own
tax advisors concerning the treatment of negative accruals.
A subsequent purchaser of a security that purchases the security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds the
security, the daily portion of original issue discount with respect to the
security, but reduced, if the cost of the security to the purchaser exceeds its
adjusted issue price, by an amount equal to the product of (1) the daily
portion and (2) a constant fraction, the numerator of which is the excess and
the denominator of which is the sum of the daily portions of original issue
discount on the security for all days on or after the day of purchase.
Market Discount. A beneficial owner that purchases a security at a market
discount, that is, at a purchase price less than the remaining stated
redemption price at maturity of the security, or, in the case of a security
with original issue discount, its adjusted issue price, will be required to
allocate each principal distribution first to accrued market discount on the
security, and recognize ordinary income to the extent the distribution does not
exceed the aggregate amount of accrued market discount on the security not
previously included in income. For securities that have unaccrued original
issue discount, the market discount must be included in income in addition to
any original issue discount. A beneficial owner that incurs or continues
indebtedness to acquire a security at a market discount may also be required to
defer the deduction of all or a portion of the interest on the indebtedness
until the corresponding amount of market discount is included in income. In
general terms, market discount on a security may be treated as accruing either
(1) under a constant yield method or (2) in proportion to remaining accruals of
original issue discount, if any, or if none, in proportion to remaining
distributions of interest on the security, in any case taking into account the
prepayment assumption. The trustee will make available, as required by the IRS,
to beneficial owners of securities information necessary to compute the accrual
of market discount.
Regardless of the above rules, market discount on a security will be
considered to be zero if the discount is less than 0.25% of the remaining
stated redemption price at maturity of the security multiplied by its weighted
average remaining life. Weighted average remaining life would be calculated in
a manner similar to weighted average life, taking into account payments,
including prepayments, prior to the date of acquisition of the security by the
subsequent purchaser. If market discount on a security is treated as zero under
this rule, the actual amount of market discount must be allocated to the
remaining principal distributions on the security and, when each distribution
is received, gain equal to the discount allocated to the distribution will be
recognized.
Premium. A purchaser of a security that purchases the security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased the security, a premium security, at a premium. A
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat the premium as
"amortizable bond premium." If a beneficial owner makes an election, the amount
of any interest payment that must be included in the beneficial owner's income
for each period ending on a payment date will be reduced by the portion of the
premium allocable to that period based on the premium security's yield to
maturity. The premium amortization should be made using
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constant yield principles. If an election is made by the beneficial owner, the
election will also apply to all fully taxable bonds, the interest on which is
not excludible from gross income, held by the beneficial owner at the beginning
of the first taxable year to which the election applies and to all fully
taxable bonds thereafter acquired by it, and is irrevocable without the consent
of the IRS. If an election is not made, (1) a beneficial owner must include the
full amount of each interest payment in income as it accrues, and (2) the
premium must be allocated to the principal distributions on the premium
security and when each distribution is received a loss equal to the premium
allocated to the distribution will be recognized. Any tax benefit from the
premium not previously recognized will be taken into account in computing gain
or loss upon the sale or disposition of the premium security.
Special Election. A beneficial owner may elect to include in gross income
all "interest" that accrues on the security by using a constant yield method.
For purposes of the election, the term interest includes stated interest,
acquisition discount, original issue discount, de minimis original issue
discount, market discount, de minimis market discount and unstated interest as
adjusted by any amortizable bond premium or acquisition premium. A beneficial
owner should consult its own tax advisor regarding the time and manner of
making and the scope of the election and the implementation of the constant
yield method.
Backup Withholding and Information Reporting
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of the
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The IRS recently issued Withholding Regulations, which make certain
modifications to withholding, backup withholding and information reporting
rules. The Withholding Regulations attempt to unify certification requirements
and modify certain reliance standards. The Withholding Regulations will
generally be effective for payments made after December 31, 2000. Prospective
investors are urged to consult their own tax advisors regarding the Withholding
Regulations.
Foreign Investors
The Withholding Regulations. The withholding regulations would require, in
the case of securities held by a foreign partnership, that (1) the
certification described above be provided by the partners rather than by the
foreign partnership and (2) the partnership provide information, including a
United States taxpayer identification number. See "Backup Withholding" above. A
look-through rule would apply in the case of tiered partnerships. In addition,
the Withholding Regulations may require that a foreign beneficial owner,
including, in the case of a foreign partnership, the partners thereof, obtain a
United States taxpayer identification number and make certain certifications if
the foreign beneficial owner wishes to claim exemption from, or a reduced rate
of, withholding under an income tax treaty. Non-U.S. persons should consult
their own tax advisors regarding the application to them of the withholding
regulations.
Grantor Trust Securities, Debt Securities, and FASIT Regular Securities.
Distributions made on a grantor trust security, debt security or a FASIT
regular security to, or on behalf of, a beneficial owner that is not a U.S.
person generally will be exempt from U.S. federal income and withholding taxes.
The term U.S. person means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. 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 person has the authority
to control all substantial decisions of the trust. This exemption is applicable
provided (a) the beneficial owner is
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not subject to U.S. tax as a result of a connection to the United States other
than ownership of the security, (b) the beneficial owner signs a statement
under penalties of perjury that certifies that the beneficial owner is not a
U.S. person, and provides the name and address of the beneficial owner, and (c)
the last U.S. person in the chain of payment to the beneficial owner receives a
statement from a beneficial owner or a financial institution holding on its
behalf and does not have actual knowledge that the statement is false.
Beneficial owners should be aware that the IRS might take the position that
this exemption does not apply to a beneficial owner of a FASIT regular security
that also owns 10% or more of the FASIT ownership securities of any FASIT
trust, or to a beneficial owner that is a "controlled foreign corporation"
described in section 881(c)(3)(C) of the Code.
High-Yield FASIT Regular Securities. High-yield FASIT regular securities may
not be sold to or beneficially owned by non-U.S. persons. Any purported
transfer will be null and void and, upon the trustee's discovery of any
purported transfer in violation of this requirement, the last preceding owner
of a high-yield FASIT regular securities will be restored to ownership thereof
as completely as possible. The last preceding owner will, in any event, be
taxable on all income with respect to a high-yield FASIT regular securities for
federal income tax purposes. The trust documents will provide that, as a
condition to transfer of a high-yield FASIT regular security, the proposed
transferee must furnish an affidavit as to its status as a U.S. person and
otherwise as a permitted transferee.
Partnership Interests. Depending upon the particular terms of the trust
documents, a trust may be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons. If the trust is considered to be engaged in a trade or
business in the United States for such purposes and the trust is treated as a
partnership, the income of the trust distributable to a non-U.S. person would
be subject to federal withholding tax. Also, in such cases, a non-U.S.
beneficial owner of a partnership interest that is a corporation may be subject
to the branch profits tax. If the trust is notified that a beneficial owner of
a partnership interest is a foreign person, the trust may withhold as if it
were engaged in a trade or business in the United States in order to protect
the trust from possible adverse consequences of a failure to withhold. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to withheld taxes, taking the position that no taxes were
due because the trust was not in a U.S. trade or business.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state and local income tax consequences
of the acquisition, ownership, and disposition of the securities. State and
local income tax law may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential investors should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the securities.
ERISA CONSIDERATIONS
General
Provisions of ERISA and of the Internal Revenue Code prohibit a pension,
profit sharing or other employee benefit plan and other individual retirement
arrangements from engaging in transactions involving plan assets with persons
that are parties in interest under ERISA or disqualified persons under the Code
with respect to the plan. However, if a statutory or administrative exemption
applies to the transaction, plans may engage in these transactions. ERISA and
the Code also prohibit generally actions involving conflicts of interest by
fiduciaries of plans or arrangements. Persons who violate these prohibited
transaction rules may incur excise tax and other liabilities under ERISA and
the Code. In addition, investments by plans are subject to ERISA's general
fiduciary requirements, including ERISA's investment prudence and
diversification requirements and the requirement that a plan make its
investments in accordance with its governing documents. Employee benefit plans
that are governmental plans and church plans under ERISA, are not subject to
ERISA requirements. Accordingly, these plans may invest in securities without
regard to the ERISA considerations discussed below. Any plan, which is
qualified and exempt from taxation under section 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules detailed in section 503
of the Code.
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Transactions involving a trust might be deemed to constitute prohibited
transactions under ERISA and the Code with respect to a plan, including an
individual retirement arrangement, that purchased securities. In the absence of
an exemption, the purchase, sale or holding of a security by a plan, including
an individual retirement arrangement, might result in prohibited transactions.
This may result in excise taxes and civil penalties being imposed.
ERISA Considerations Regarding Securities Which are Certificates
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions which generally exempt transactions meeting
the department's requirements from:
a) 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
b) excise taxes imposed under sections 4975(a) and (b) of the Code.
These exempted transactions deal with the initial purchase, holding and the
subsequent resale by plans of certificates in pass-through trusts which hold:
. secured receivables,
. secured loans, and
. other secured obligations.
These underwriter exemptions will only be available for securities that are
certificates.
Among the conditions that must be satisfied for the underwriter exemptions
to apply are the following:
. the plan must acquire the certificates on terms, including the
certificate's price, that are at least as favorable to the plan as they
would be in an arm's-length transaction with an unrelated party;
. the certificates must not be subordinated to the trust's other
certificates;
. when the plan acquires the certificates, the certificates must have a
rating in one of the three highest generic rating categories from
Standard & Poor's Rating Group, Moody's Investors Service, Duff & Phelps
Credit Rating Co. or Fitch IBCA Inc.;
. the trustee must not be an affiliate of any other member of the
restricted group;
. the sum of all payments made to and retained by the underwriters must
not total more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
lenders and the servicer for assigning the loans to the trust must not
total more than the fair market value of the loans; the sum of all
payments made to and retained by the servicer must not total more than
reasonable compensation and expense reimbursement for its services;
. the plan must be an accredited investor as defined in Regulation D of
the commission under the Securities Act; and
. in the event that all of the auto loans to be held by the trust have not
been transferred to the trust on the closing date, additional auto loans
having an aggregate value equal to no more than 25% of the certificate's
total principal amount may be transferred to the trust under a pre-
funding feature, within 90 days or 3 months following the closing date.
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The trust must also meet the following requirements:
. the trust property must consist solely of assets of the type that have
been included in other investment pools;
. certificates in the other investment pools must have been rated in one
of the three highest rating categories of Standard & Poor's Rating
Group, Moody's Investors Service, Fitch IBCA Inc. or Duff & Phelps
Credit Rating Co. for at least one year prior to the date the plan
acquired the certificates; and
. investors other than plans must have purchased certificates evidencing
interests in the other investment pools for at least one year prior to
the date the plan acquired the certificates.
Moreover, the underwriter exemptions provide relief from various self-
dealing/conflict of interest prohibited transactions that may occur when the
plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary -- or its affiliate -- is a borrower on the auto loans held in the
trust; provided that, among other requirements:
. when a plan acquires an initial issuance of certificates, at least fifty
percent of each class in which a plan has invested is acquired by
persons independent of the restricted group and at least fifty percent
of the aggregate interest in the trust is acquired by persons
independent of the restricted group;
. the fiduciary -- or its affiliate -- is a borrower with respect to five
percent or less of the fair market value of the obligations contained in
the trust;
. when the plan acquires the certificates the plan's investment in any
class does not exceed twenty-five percent of all of the certificates of
that class; and
. immediately after the plan acquires the certificates, no more than
twenty-five percent of the plan's assets for which the person is a
fiduciary are invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
The underwriter exemptions do not apply to plans sponsored by a member of
the restricted group, which is the lenders, the servicer, the underwriters, the
trustee, any borrower with respect to auto loans included in the trust property
constituting more than five percent of the aggregate unamortized principal
balance of the trust estate's assets, or any affiliate of these parties.
ERISA Considerations Regarding Securities Which are Notes
The underwriter exemptions will not be available for securities that are
notes. Under the plan assets regulation issued by the Department of Labor, the
trust's assets would be treated as a plan's assets for the purposes of ERISA
and the Code only if the plan acquired an equity interest in the trust and none
of the exceptions contained in the plan assets regulation were applicable. An
equity interest is defined under the plan assets regulation as an interest
other than an instrument which:
. is treated as indebtedness under applicable local law, and
. which has no substantial equity features.
If the notes are treated as having substantial equity features, the
purchase, holding and resale of the notes could result in a transaction that is
prohibited under ERISA or the Code. If the notes are treated as indebtedness
without substantial equity features, the trust's property would not be deemed
assets of a plan. In that case, the acquisition or holding of the notes by or
on behalf of a plan could still result in a prohibited transaction, if the
acquisition or holding of notes by or on behalf of a plan were deemed to be a
prohibited loan to a party in
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interest with respect to the plan. Exemptions from these prohibited transaction
rules could apply to a plan's purchase and its holding of notes, depending on
the type and circumstances of the plan fiduciary making the decision to acquire
the notes. Included among these exemptions are:
. PTCE 84-14, regarding transactions effected by qualified professional
asset managers;
. PTCE 90-1, regarding transactions entered into by insurance company
pooled separate accounts;
. PTCE 91-38, regarding transactions entered into by bank collective
investment funds;
. PTCE 95-60, regarding transactions entered into by insurance company
general accounts; and
. PTCE 96-23, regarding transactions effected by in-house asset managers.
Each purchaser and each transferee of a note that is treated as debt for
purposes of the plan assets regulation may be required to represent and warrant
that its purchase and holding of the note will be covered by one of the
exemptions listed above or by another Department of Labor class exemption.
Consultation With Counsel
The prospectus supplement will provide further information that plans should
consider before purchasing the securities. A plan fiduciary considering the
purchase of securities may wish to consult its tax or legal advisors regarding:
. whether the trust's property would be considered plan assets,
. the possibility of exemptive relief from the prohibited transaction
rules; and
. other ERISA issues and their potential consequences.
In addition, each plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, investing in
the securities is appropriate for the plan, taking into account the plan's
overall investment policy and the composition of the plan's investment
portfolio. The sale of securities to a plan is in no respect a representation
by us or by the underwriters that this investment meets all relevant
requirements regarding investments by plans generally, by any particular plan
or that this investment is appropriate for plans generally or any particular
plan.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank,
510 U.S. 86 (1993), the United States Supreme Court ruled that assets held in
an insurance company's general account may be deemed to be plan assets for
ERISA purposes under certain circumstances.
METHODS OF DISTRIBUTION
The trusts will offer the securities in series through one or more of the
methods described below. The prospectus supplement will describe the offering
method and will state the public offering or purchase price and the net
proceeds to the bank from the sale.
The securities will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular series of securities may be made through
a combination of two or more of these methods. The methods are as follows:
. by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
. by placements by the company with institutional investors through
dealers;
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. by direct placements by the company with institutional investors; and
. by competitive bid.
In addition, securities may be offered in whole or in part in exchange for
the auto loans -- and other assets, if applicable -- that would comprise the
trust property.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the 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. The securities will be described on the
cover of the prospectus supplement and the members of the underwriting
syndicate, if any, will be named in the 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 the securities, and any discounts or commissions received by
them and any profit on the resale of securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933. The
prospectus supplement will describe any compensation paid by the bank or its
affiliates.
It is anticipated that the underwriting agreement pertaining to the sale of
securities will provide that:
. the obligations of the underwriters will be subject to conditions
precedent;
. the underwriters will be obligated to purchase all the securities if any
are purchased, other than in connection with an underwriting on a best
efforts basis; and
. 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 of 1933 or will contribute to payments required to be made.
The prospectus supplement for any securities offered by placements through
dealers will contain information regarding the nature of the offering and any
agreements to be entered into between the bank or its affiliates and purchasers
of securities.
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 of 1933 in connection with reoffers and sales by
them of securities. Securityholders should consult with their legal advisors in
this regard prior to any reoffer or sale.
LEGAL MATTERS
Legal matters relating to these securities will be passed upon by counsel
specified in the prospectus supplement for the series of securities.
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Annex I
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the securities will be available only in
book-entry form. Investors in the securities may hold the securities through
any of DTC, Clearstream, Luxembourg or Euroclear. The securities will be
tradable 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 Clearstream, Luxembourg
and Euroclear will be conducted in the ordinary way in accordance with the
normal rules and operating procedures of Clearstream, Luxembourg and Euroclear
and in accordance with conventional eurobond practice, which is 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 Clearstream, Luxembourg or Euroclear
and DTC participants holding securities will be effected on a delivery-against-
payment basis through the respective Depositaries of Clearstream, Luxembourg
and Euroclear and as DTC participants.
Non-U.S. holders of global securities will be subject to U.S. withholding
taxes unless the holders meet a number of requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement
All securities will be held in book-entry form by DTC in the name of Cede &
Co. as nominee of DTC. Investors' interests in the securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
relevant depository which in turn will hold these positions in their accounts
as DTC participants.
Investors electing to hold their 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 securities through Clearstream, Luxembourg
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary security and no
lock-up or restricted period. 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 asset-back
securities issues in same-day funds.
Trading between Clearstream, Luxembourg or Euroclear Participants. Secondary
market trading between Clearstream, Luxembourg participants or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
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Trading between DTC, Seller and Clearstream, Luxembourg or Euroclear
Participants. When securities are to be transferred from the account of a DTC
participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the relevant depository, as
the case may be, to receive the securities against payment. Payment will
include interest accrued on the 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 the 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 securities. After settlement has been completed, the
securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Clearstream,
Luxembourg 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 and the trade
fails, the Clearstream, Luxembourg or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream, Luxembourg 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 Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the securities are credited to
their account one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg 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, Clearstream,
Luxembourg participants or Euroclear participants purchasing securities would
incur overdraft charges for one day, assuming they cleared the overdraft when
the securities were credited to their accounts. However, interest on the
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 the overdraft charges,
although the result will depend on each Clearstream, Luxembourg 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 Clearstream,
Luxembourg 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 Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which securities are to be transferred by the respective
clearing system, through the respective depository, to a DTC participant. The
seller will send instructions to Clearstream, Luxembourg or Euroclear through a
Clearstream, Luxembourg participant or Euroclear participant at least one
business day prior to settlement. In these cases Clearstream, Luxembourg or
Euroclear will instruct the respective depository, as appropriate, to credit
the securities to the DTC participant's account against payment. Payment will
include interest accrued on the securities from and including the last interest
payment to and excluding the settlement date on the basis of the actual number
of days in the 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
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account of Clearstream, Luxembourg participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
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 Clearstream, Luxembourg participant or Euroclear
participant has a line of credit with its respective clearing system and elects
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 and the trade
fails, receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase global securities from DTC participants for delivery to Clearstream,
Luxembourg participants or Euroclear participants may wish to 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:
. borrowing through Clearstream, Luxembourg or Euroclear for one day,
until the purchase side of the trade is reflected in their Clearstream,
Luxembourg or Euroclear accounts in accordance with the clearing
system's customary procedures;
. borrowing the securities in the U.S. from a DTC participant no later
than one day prior to settlement, which would give the securities
sufficient time to be reflected in their Clearstream, Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
. 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 Clearstream,
Luxembourg participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of securities holding securities through Clearstream,
Luxembourg or Euroclear, or through DTC if the holder has an address outside
the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons, unless:
(1) 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 the beneficial owner and the U.S.
entity required to withhold tax complies with applicable certification
requirements and
(2) the beneficial owner takes one of the steps described below to
obtain an exemption or reduced tax rate.
The IRS recently issued Withholding Regulations, which make certain
modifications to withholding, backup withholding and information reporting
rules. The Withholding Regulations attempt to unify certification requirements
and modify certain reliance standards. The Withholding Regulations will
generally be effective for payments made after December 31, 2000. Taxpayers
should begin compliance with the Withholding Regulations immediately, although
the existing rules will remain in effect until the Withholding Regulations take
effect.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the securities as well
as the application of the Withholding Regulations. Prospective investors are
urged to consult their own tax advisors for specific advice regarding their
holding and disposing of the securities.
. Exemption for Non-U.S. Persons. Under the existing rules, beneficial
owners of global securities that are Non-U.S. Persons can obtain a
complete exemption from the withholding tax by filing a signed
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Form W-8, Certificate of Foreign Status. Under the Withholding
Regulations, a Non-U.S. Person may claim beneficial owner status by
filing Form W-8BEN (Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding). The old Form W-8 is valid until the
earlier of (i) three years beginning on the date that the form is
signed, or (ii) December 31, 2000. The new Form W-8BEN is valid for a
period of three years beginning on the date that the form is signed. If
the information shown on Form W-8 or Form W-8BEN changes, a new Form W-8
or Form W-8BEN must be filed within 30 days of the change.
. Exemption for Non-U.S. Persons with effectively connected income. Under
existing rules, a Non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States,
can obtain an exemption from the withholding tax by filing Form 4224,
Exemption from Withholding of Tax on Income Effectively Connected with
the Conduct of a Trade or Business in the United States. Under the
Withholding Regulations, a Non-U.S. Person may claim an exemption from
U.S. withholding on income effectively connected with the conduct of a
trade or business in the United States by filing Form W-8ECI
(Certificate of Foreign Person's Claim for Exemption From Withholding on
Income Effectively Connected With the Conduct of a Trade or Business in
the United States). The old Form 4224 is valid until the earlier of (i)
one year beginning on the date that the form is signed, or (ii) December
31, 2000. The new Form W-8ECI is valid for a period of three years
beginning on the date that the form is signed.
. Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. 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. Under the Withholding Regulations, a Non-
U.S. Person may claim treaty benefits by filing Form W-8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax
Withholding). The old Form 1001 is valid until the earlier of (i) three
years beginning on the date that the form is signed, or (ii) December
31, 2000. The new Form W-8BEN is valid for a period of three years
beginning on the date that the form is signed.
. Exemption for U.S. Persons. 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. Under the existing rules,
the owner of a global security or his agent files by submitting the
appropriate form to the person through whom it holds, the clearing
agency, in the case of persons holding directly on the books of the
clearing agency. The Withholding Regulations revise the procedures that
withholding agents and payees must follow to comply with, or to
establish an exemption from, withholding for payments made after
December 31, 2000. Each foreign holder of securities should consult its
own tax advisor regarding compliance with these procedures under the
Withholding Regulations.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity, taxable as such for federal
income tax purposes, organized in or under the laws of the United States or any
state thereof (including the District of Columbia), (iii) an estate that is
subject to U.S. federal income tax regardless of the source of its income, or
(iv) a trust other than a "foreign trust" as defined in Section 7701(a)(31) of
the Internal Revenue Code of 1986, as amended. The term "Non-U.S. Person" means
any person who is not a U.S. Person.
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$318,684,000
Chevy Chase Auto Receivables Trust 2000-2
[CHEVY CHASE BANK, F.S.B LOGO]
Seller and Servicer
Auto Receivables Backed Notes, Series 2000-2
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PROSPECTUS SUPPLEMENT
------------
J.P. Morgan & Co.
Credit Suisse First Boston
Salomon Smith Barney
You should rely on the information contained or incorporated by
reference in this preliminary prospectus supplement and the
accompanying prospectus. We have not authorized anyone to
provide you with different information.
We are not offering the securities offered hereby in any state
where the offer is not permitted.
September 8, 2000
