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As filed with the Securities and Exchange Commission on May 23, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CITYSCAPE CORP.
(Originator and Servicer of the Trusts described herein)
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 13-3430697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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JONAH L. GOLDSTEIN, ESQ.
GENERAL COUNSEL
CITYSCAPE CORP.
565 TAXTER ROAD
ELMSFORD, NEW YORK 10523-5200
(914) 592-6677
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
SEAN P. GRIFFITHS, ESQ.
GIBSON, DUNN & CRUTCHER
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 351-4000
(FACSIMILE) (212) 351-4035
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Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF Amount to be Proposed Maximum Proposed Maximum Amount of
SECURITIES REGISTERED Registered Aggregate Price Aggregate Offering Registration Fee
Per Unit(1) Price
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<S> <C> <C> <C> <C>
Pass-Through Certificates...... $1,000,000,000 100% $1,000,000,000 $344,827.59
=======================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
================================================================================
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CITYSCAPE CORP.
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(a) AND ITEM 501 OF REGULATION S-K)
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Item Location in Prospectus
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus .................. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus**
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................... Inside Front and Outside Back Cover Pages**
3. Summary Information and Risk Factors and
Ratio of Earnings to Fixed Charges*...................... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.......................... *
6. Dilution................................................. *
7. Selling Security Holders................................. *
8. Plan of Distribution..................................... Underwriting**
9. Description of Securities to be Registered............... Outside Front Cover Page; Prospectus Summary; The
Trust Fund; Description of Certificates**
10. Interests of Named Experts and Counsel................... *
11. Material Changes......................................... **
12. Incorporation of Certain Information by
Reference................................................ Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... *
</TABLE>
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* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement
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[PRINT WITH RED HERRING LEGEND IN LEFT MARGIN]
SUBJECT TO COMPLETION DATED MAY __, 1996
PROSPECTUS
CITYSCAPE CORP.
ORIGINATOR AND SERVICER
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Pass-Through Certificates (the
"Certificates"), issuable in series (each, a "Series"), that may be sold from
time to time by Cityscape Corp. (in its capacity as originator or purchaser of
the Mortgage Loans referred to below, the "Originator"; in its capacity as
servicer of the Mortgage Loans, the "Servicer") on terms determined at the time
of sale and described in the related prospectus supplement (each, a "Prospectus
Supplement"). Each Series of Certificates will be issued by a separate trust
fund (each, a "Trust"). The primary assets of each Trust will consist of one or
more pools (each, a "Mortgage Pool") of mortgage loans (collectively, the
"Mortgage Loans") secured by first or junior liens on one- to four-family
residential or small multi-family or mixed-use properties. The Mortgage Loans
will be originated or purchased by the Originator and will be conveyed by the
Originator to the Trust. A Trust may include, in addition to the Mortgage Loans,
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other forms of credit enhancement,
to the extent described in the related Prospectus Supplement. If specified in
the related Prospectus Supplement, certain Certificates may evidence a
fractional undivided interest in a trust fund which will hold a beneficial
ownership interest in another trust fund which will contain the Mortgage Loans.
Each Series of Certificates will be issued in one or more classes
(each, a "Class"). Each Class of Certificates will evidence a beneficial
ownership interest of a specified percentage (which may be 0%) or portion of
future interest payments and a specified percentage (which may be 0%) or portion
of future principal payments on the Mortgage Loans in the related Trust. A
Series of Certificates may include one or more senior Classes that receive
certain preferential treatment with respect to one or more other Classes of
Certificates of such Series. One or more Classes of Certificates of a Series may
be entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other Classes of Certificates of such Series or
after the occurrence of specified events, or may be required to absorb one or
more types of losses prior to one or more other Classes of Certificates, in each
case as specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made on certain dates specified in the related Prospectus Supplement (each, a
"Distribution Date"), which may occur at monthly, quarterly, semi-annually or at
such other intervals as are specified therein.
The Certificates will not represent an obligation of or interest in the
Originator or any affiliates thereof, the Servicer, or any other person, except
to the limited extent specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the obligations of the
Originator with respect to a Series of Certificates will be limited to those
arising in respect of certain representations and warranties on the Mortgage
Loans. The principal obligations of the Servicer will be limited to obligations
pursuant to certain representations and warranties and to its contractual
servicing obligations, including any obligation it may have to advance
delinquent payments on the Mortgage Loans in the related Trust.
THE YIELD ON EACH CLASS OF CERTIFICATES MAY BE AFFECTED BY, AMONG OTHER
THINGS, THE RATE OF PAYMENT OF PRINCIPAL (INCLUDING PREPAYMENTS) OF THE MORTGAGE
LOANS IN THE RELATED TRUST AND THE TIMING OF RECEIPT OF SUCH PAYMENTS AS
DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. A TRUST MAY BE
SUBJECT TO EARLY TERMINATION UNDER THE CIRCUMSTANCES DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT. SEE "SPECIAL CONSIDERATIONS -- YIELD, MATURITY
AND PREPAYMENT CONSIDERATIONS" AND "MATURITY, PREPAYMENT AND YIELD
CONSIDERATIONS" HEREIN.
If specified in a Prospectus Supplement, one or more elections may be
made to treat each Trust or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes.
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THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
ORIGINATOR, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES
EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER
THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
ORIGINATOR, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES OR BY ANY OTHER PERSON, EXCEPT AS SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. Prior
to issuance, there will have been no market for the Certificates of any Series,
and there can be no assurance that a secondary market for the Certificates will
develop, or if it does develop, that it will continue. THIS PROSPECTUS MAY NOT
BE USED TO CONSUMMATE SALES OF A SERIES OF CERTIFICATES UNLESS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT.
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THE DATE OF THIS PROSPECTUS IS ________ __, 199_
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UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates to be
offered hereunder, among other things, will set forth with respect to such
Series of Certificates: (i) a description of the Class or Classes of such
Certificates; (ii) the rate of interest, the "Pass-Through Rate" or other
applicable rate (or the manner of determining such rate) and authorized
denominations of each Class of such Certificates; (iii) certain information
concerning the Mortgage Loans and insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees or other
forms of credit enhancement, if any, relating to one or more Mortgage Pools or
all or part of the related Certificates; (iv) the specified interest of each
Class of Certificates in, and manner and priority of, the distributions on the
Mortgage Loans; (v) information as to the nature and extent of subordination
with respect to such Series of Certificates, if any; (vi) the Distribution
Dates; (vii) the circumstances, if any under which each Trust may be subject to
early termination; (viii) whether a REMIC election will be made and the
designation of the regular and residual interest therein; and (ix) additional
information with respect to the plan of distribution of such Certificates.
AVAILABLE INFORMATION
The Originator has filed a Registration Statement under the Securities
Act of 1933, as amended (the "Securities Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates. The Registration
Statement and amendments thereof and the exhibits thereto are available for
inspection with charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade
Center, New York, New York 10048; and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the
Registration Statement and amendments thereof and exhibits thereto may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
No person has been authorized to give any information or to make any
representation regarding the Series of Certificates referred to in the
accompanying Prospectus Supplement other than those contained or incorporated by
reference in this Prospectus and such Prospectus Supplement with respect to such
Series and, if given or made, such information or representations must not be
relied upon. This Prospectus and the accompanying Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Certificates offered hereby and thereby nor an offer of the
Certificates to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus at any time does not
imply that information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed with the Commission by or on behalf of
the Trust referred to in the accompanying Prospectus Supplement pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of Certificates issued by such Trust shall be deemed
to be incorporated by reference in this Prospectus and to be part of this
Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such
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statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Trustee on behalf of any Trust will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to the Corporate Trust Office of
the Trustee specified in the accompanying Prospectus Supplement.
No information that relates to any Series of Certificates other than
the Series referred to in the accompanying Prospectus Supplement shall be deemed
to be incorporated by reference in this Prospectus.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the related Trust
will be provided to the Certificateholders. See "Description of the Certificates
- -- Reports to Certificateholders" herein. If the Certificates of a Series are to
be issued in book-entry form (as specified in the related Prospectus
Supplement), such reports will be provided to the Certificateholder of record
and beneficial owners of such Certificates will have to rely on the procedures
described herein under "Description of the Certificates -- Form of Certificates
- -- Book-Entry Registration."
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TABLE OF CONTENTS
Caption Page
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SUMMARY.......................................... 7
SPECIAL CONSIDERATIONS........................... 19
Limited Liquidity........................... 19
Limited Obligations......................... 19
Nature of the Security for Mortgage Loans... 19
Legal Considerations........................ 21
Yield, Maturity and Prepayment
Considerations............................ 22
Underwriting Standards, Limited Operating
History and Potential Delinquencies....... 24
The Status of the Mortgage Loans in the
Event of Bankruptcy of the Originator..... 24
Limitations on Interest Payments and
Foreclosures.............................. 25
Certificate Rating.......................... 25
Book-Entry Registration..................... 25
THE TRUSTS....................................... 26
The Mortgage Loans--General................. 26
Pre-Funding Accounts........................ 28
Single Family Loans......................... 28
Multifamily Loans........................... 29
FHA Loans................................... 29
Conventional Home Improvement Loans......... 29
USE OF PROCEEDS.................................. 30
THE ORIGINATOR................................... 30
General..................................... 30
Single Family Loan Underwriting............. 30
Underwriting Guidelines for Small
Multi-Family and Mixed-Use Properties..... 32
Underwriting Guidelines for FHA Loans and
Conventional Home Improvement Loans....... 32
Representations by Originator............... 32
DESCRIPTION OF THE CERTIFICATES.................. 33
General..................................... 33
Form of Certificates........................ 34
Distributions on Certificates............... 36
Reports to Certificateholders............... 38
CREDIT ENHANCEMENT............................... 40
Subordination............................... 40
Reserve Accounts............................ 41
Certificate Guaranty Insurance Policies..... 41
Mortgage Pool Insurance Policies............ 42
Special Hazard Insurance Policies........... 43
Bankruptcy Bonds............................ 43
Cross Support............................... 43
Spread Amount............................... 44
Supplemental Interest Payments.............. 44
Maturity Protection......................... 44
FHA Insurance............................... 44
Other Insurance, Guarantees and Similar
Instruments or Agreements................. 45
Maintenance of Credit Enhancement........... 45
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS.... 46
THE POOLING AND SERVICING AGREEMENT.............. 48
Assignment of the Mortgage Loans............ 48
Payments on the Mortgage Loans.............. 51
Investment of Accounts...................... 52
Permitted Investments....................... 52
Monthly Advances and Compensating
Interest.................................. 53
Realization upon Defaulted Mortgage
Loans..................................... 54
General Servicing Procedures................ 55
Sub-Servicers............................... 55
Servicing and Other Compensation and
Payment of Expenses....................... 55
Maintenance of Hazard Insurance............. 56
Enforcement of Due-on-Sale Clauses.......... 57
Voting...................................... 57
Amendments.................................. 57
Events of Default........................... 58
Rights Upon Events of Default............... 58
Termination; Optional Termination........... 59
Evidence as to Compliance................... 59
Indemnification of Officers and Directors
of the Originator......................... 60
The Trustee................................. 60
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS AND RELATED MATTERS...................... 60
Nature of Mortgage Loans.................... 61
Foreclosure/Repossession.................... 61
Rights of Redemption........................ 62
Anti-Deficiency Legislation, Bankruptcy
Laws and Other Limitations................ 63
Enforceability of Due-on-Sale Clauses....... 63
Prepayment Charges.......................... 64
Applicability of Usury Laws................. 64
Soldiers' and Sailors' Civil Relief Act..... 64
Environmental Considerations................ 64
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......... 65
General..................................... 65
Tax Status as a REMIC....................... 65
Grantor Trust Status........................ 77
STATE TAX CONSIDERATIONS......................... 85
ERISA CONSIDERATIONS............................. 85
LEGAL INVESTMENT CONSIDERATIONS.................. 87
SMMEA....................................... 87
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Caption Page
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FFIEC Policy Statement...................... 87
General..................................... 89
METHOD OF DISTRIBUTION........................... 89
LEGAL MATTERS.................................... 89
FINANCIAL INFORMATION............................ 89
RATING........................................... 90
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SUMMARY
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Reference is made to the Index of Principal Terms for the location
in this Prospectus of the definitions of certain capitalized terms.
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Certificates Offered............................ Pass-Through Certificates (issuable in series).
The Originator and Servicer..................... Cityscape Corp., a New York corporation. The principal
office of the Originator and Servicer is located in Elmsford,
New York. See "The Originator" and "The Pooling and
Servicing Agreement -- General Servicing Procedures"
herein.
Sub-Servicers................................... The Servicer may appoint one or more mortgage servicing
institutions (each, a "Sub-Servicer") to service and
administer the Mortgage Loans in a Mortgage Pool if so
indicated in the related Prospectus Supplement.
The Trustee..................................... The Trustee for each Series of Certificates will be specified
in the related Prospectus Supplement.
The Certificates................................ Each Series of Certificates will be issued at the direction of
the Originator by a separate Trust, created pursuant to an
agreement between the Originator, the Servicer and the
Trustee (each, a "Pooling and Servicing Agreement").
Each Certificate will represent a beneficial ownership
interest in the assets of the related Trust which will consist
primarily of the Mortgage Loans.
The Certificates of any Series may be issued in
one or more classes, as specified in the related
Prospectus Supplement. A Series of Certificates
may include one or more Classes of senior
Certificates (collectively, "Senior Certificates")
which receive certain preferential treatment
specified in the related Prospectus Supplement
with respect to one or more Classes of subordinate
Certificates (collectively, the "Subordinated
Certificates"). Certain Series or Classes of
Certificates may be covered by a Certificate
Guaranty Insurance Policy (as defined herein), a
Mortgage Pool Insurance Policy (as defined
herein), a Special Hazard Insurance Policy (as
defined herein), a Bankruptcy Bond (as defined
herein) or other insurance policies, cash
accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or
other forms of credit enhancement, as described
herein and in the related Prospectus Supplement.
See "Credit Enhancement" herein.
Each Class of Certificates within a Series will
evidence the interests specified in the related
Prospectus Supplement, which may (i) include the
right to receive distributions
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allocable only to principal, only to interest or
to any combination thereof; (ii) include the right
to receive distributions only of prepayments of
principal throughout the lives of the Certificates
or during specified periods; (iii) be subordinated
in the right to receive distributions of scheduled
payments of principal, prepayments of principal,
interest or any combination thereof to one or more
other Classes of Certificates of such Series
throughout the lives of the Certificates or during
specified periods or may be subordinated with
respect to certain losses or delinquencies; (iv)
include the right to receive such distributions
only after the occurrence of events specified in
the related Prospectus Supplement; (v) include the
right to receive distributions in accordance with
a schedule or formula or on the basis of
collections from designated portions of the assets
in the related Trust; (vi) include, as to
Certificates entitled to distributions allocable
to interest, the right to receive interest at a
fixed rate or an adjustable rate; and (vii)
include, as to Certificates entitled to
distributions allocable to interest, the right to
distributions allocable to interest only after the
occurrence of events specified in the related
Prospectus Supplement, and in each case, may
accrue interest until such events occur, as
specified in such Prospectus Supplement. The
timing and amount of such distributions may vary
among Classes as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, the Certificates will be
issuable in fully registered form, in the minimum
denominations set forth in such Prospectus
Supplement. See "Description of Certificates"
herein.
The Mortgage Loans....... The primary assets of each Trust will consist of
one or more pools of first and junior lien
mortgage loans or deeds of trust, including any
note or other instrument of indebtedness (each, a
"Mortgage Note"). The Mortgage Loans may be (i)
conventional one- to four-family residential
mortgage loans ("Single Family Loans"), (ii) small
multi-family residential mortgage loans ("Multi-
Family Loans"), (iii) mixed-use mortgage loans
("Mixed Use Loans"), or (iv) loans to make home
improvements ("Home Improvement Loans") which are
either conventional loans, i.e., loans that are
not insured or ---- guaranteed by any governmental
agency ("Conventional Home Improvement Loans") or
loans originated under the Title I credit
insurance program created under the National
Housing Act of 1934 by the Federal Housing
Administration ("FHA Loans"). The properties
securing the Mortgage Loans may include
townhouses, condominiums and manufactured housing
(which is permanently affixed to and treated as
real property under local law), but shall exclude
cooperatives and mobile homes.
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The Mortgage Loans to be included in any Mortgage
Pool will be described in the related Prospectus
Supplement. The Mortgage Loans will have interest
payable thereon at (i) fixed rates specified in
the related Prospectus Supplement, (ii) at
adjustable rates computed as specified in the
related Prospectus Supplement or (iii) graduated
or other variable rates described in the related
Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, each
Mortgage Loan will require monthly payment of
principal and interest. Scheduled payments of
principal on any Mortgage Loan may be computed (i)
on a level debt service basis that will result in
full amortization over the stated term of such
Mortgage Loan, (ii) in the case of a Balloon Loan
(as defined herein), on the basis of an assumed
amortization schedule that is significantly longer
than the original term of maturity of such
Mortgage Loan and will require payment of a
substantial amount of principal at the stated
maturity specified in the related Mortgage Note or
(iii) such other basis as is specified in the
related Prospectus Supplement.
The property securing a Mortgage Loan (each, a
"Mortgaged Property") may be located in any one of
the fifty states or the District of Columbia.
Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans
will be covered by standard hazard insurance
policies ("Standard Hazard Insurance Policies")
insuring against losses due to fire and various
other causes. As set forth in the related
Prospectus Supplement, certain of the Mortgage
Loans underlying a given Series of Certificates
may have been originated by the Originator and
certain of such Mortgage Loans may have been
purchased by the Originator from its
correspondents or other third parties.
Certain of the Mortgage Loans may be partially
insured by the Federal Housing Administration
("FHA"), an agency of the United States Department
of Housing and Urban Development ("HUD"), pursuant
to the Title I credit insurance program (the
"Title I Loan Program") of the National Housing
Act of 1934. Several types of loans may be made
under the Title I Loan Program, including (1)
property improvement loans; (2) manufactured home
purchase loans; (3) manufactured home lot loans;
and (4) combination loans (to purchase a
manufactured home and a lot). Only home
improvement loans on one to four family residences
and condominiums may be included in the Mortgage
Loans. The Title I Loan Program is a coinsurance
program. The lender initially is at risk for 10%
of the principal balance of each loan. The FHA
will insure the remaining 90% of the principal
balance of each loan, subject
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to certain limits. Such FHA insurance is accorded
the full faith and credit of the United States of
America.
The Prospectus Supplement for each Series of
Certificates will specify with respect to all
Mortgage Loans included in each related Mortgage
Pool, among other things, (i) the aggregate
outstanding principal balance and the average
outstanding principal balance of the Mortgage
Loans in such Pool as of the date specified in the
Prospectus Supplement (the "Cut-off Date"), (ii)
the largest principal balance of any of the
Mortgage Loans, (iii) the types of Mortgaged
Properties securing the Mortgage Loans, (iv) the
original terms to maturity of the Mortgage Loans,
(v) the weighted average term to maturity of the
Mortgage Loans as of the Cut-off Date and the
range of the terms to maturity, (vi) the ranges of
the Combined Loan-to-Value Ratios (as defined
herein) at origination, (vii) the weighted average
rate of interest (each such rate, a "Mortgage
Rate") and ranges of Mortgage Rates borne by the
Mortgage Loans and (viii) the geographic
distribution of the Mortgaged Properties on a
state-by-state basis.
Pre-Funding Account....... If provided in the related Prospectus Supplement,
the original principal amount of a Series of
Certificates may exceed the principal balance of
the Mortgage Loans initially being delivered to
the Trustee. Cash in an amount equal to such
difference (such amount, the "Pre-Funded Amount")
will be deposited into a separate trust account
(the "Pre-Funding Account") maintained with the
Trustee for the benefit of the Certificateholders.
During the period set forth in the related
Prospectus Supplement (the "Funding Period"), the
Pre-Funded Amount in the Pre- Funding Account may
be used to purchase additional Mortgage Loans for
the related Trust subject to the satisfaction of
certain conditions specified under the related
Pooling and Servicing Agreement.
For a Trust that elects to be characterized as
either a REMIC or a grantor trust under federal
income tax laws, the maximum length of the related
Funding Period will not exceed three calendar
months or 90 days, respectively, from the date of
issuance of the Certificates and otherwise the
maximum length of the Funding Period will not
exceed the period set forth in the related
Prospectus Supplement. The amount of the initial
Pre-Funded Amount is intended not to exceed the
aggregate principal balance of additional Mortgage
Loans that the Originator anticipates will be
acquired and conveyed to the Trust during the
applicable Funding Period.
Prior to the conveyance of any additional Mortgage
Loans to the Trust, the Originator will be
required to give notice of
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the additional Mortgage Loan to be conveyed to
the Trust, to the Trustee and any third-party
credit enhancement provider. Upon the
satisfaction of the conditions set forth in the
related Pooling and Servicing Agreement, the
Trustee will release from the Pre-Funding
Account the necessary funds to purchase the
additional Mortgage Loans to be conveyed to the
Trust on such date. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account
at the end of the Funding Period, such amount,
in the amounts and in the manner specified in
the related Prospectus Supplement, will be used
to prepay some or all Classes of the related
Series of Certificates.
Credit Enhancement........ The Mortgage Loans in a Trust or the
Certificates of one or more Classes in the
related Series may have the benefit of one or
more types of credit enhancement, as described
in the related Prospectus Supplement. The
protection against losses afforded by any such
credit support will be limited. Such credit
enhancement may include one or more of the
following types or another type of credit
enhancement as specified in the Prospectus
Supplement:
A. Subordinated Certificates.. The rights of the holders of any Subordinated
Certificates of a Series to receive
distributions with respect to the related Trust
will be subordinated to the rights of the
holders of the Senior Certificates of the same
Series to receive distributions to the extent
described in the related Prospectus Supplement.
This subordination is intended to enhance the
likelihood of regular receipt by holders of
Senior Certificates of the full amount of
payments which such holders would be entitled
to receive if there had been no losses;
however, there can be no assurance that the
Senior Certificates will receive the full
amount of payments to which they are entitled
as a result of such subordination or the
existence of the Reserve Accounts described
below. The protection afforded to the holders
of Senior Certificates through subordination
may be accomplished by the preferential right
of such Certificateholders to receive, prior to
any distribution being made in respect of the
related Subordinated Certificates, the amounts
of principal and interest due to them on each
Distribution Date (as defined herein) out of
the funds available for distribution on such
date in the related Certificate Account (as
defined herein) to the extent described in the
related Prospectus Supplement. The protection
afforded to the holders of Senior Certificates
through subordination also may be accomplished
by allocating certain types of losses or
delinquencies to the related Subordinated
Certificates to the extent described in the
related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, a Subordinated Class of
Certificates may be senior to other
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Classes of Certificates with respect to the right
to receive certain types of payments or with
respect to allocation of certain losses or
delinquencies. If so specified in the related
Prospectus Supplement, subordination may apply
only in the event of certain types of losses not
covered by other forms of credit enhancement, such
as hazard losses not covered by Standard Hazard
Insurance Policies or losses due to the bankruptcy
of the borrower under a Mortgage Loan (the
"Mortgagor") not covered by a Bankruptcy Bond. The
related Prospectus Supplement will set forth
information concerning the amount of subordination
of a Class or Classes of Subordinated Certificates
in a Series, the circumstances in which such
subordination will be applicable and the manner,
if any, in which the amount of subordination will
decrease over time.
B. Reserve Account..... If so specified in the related Prospectus
Supplement, one or more reserve or spread accounts
(each, a "Reserve Account") may be established and
maintained, in whole or in part, by the deposit
therein of distributions allocable to the holders
of specified Classes of Certificates for a
specified time or until a specified level is
reached. The related Prospectus Supplement will
set forth information concerning the manner of
funding any Reserve Account, and the conditions
under which amounts in any such Reserve Account
will be used to make distributions to holders of
certain Classes of Certificates or released to
holders of certain Classes of Certificates, the
Servicer, the Originator or another entity.
C. Certificate Guaranty
Insurance Policy..... If so specified in the related Prospectus
Supplement, a certificate guaranty insurance
policy or policies (each, a "Certificate Guaranty
Insurance Policy") may be obtained and maintained
for a Class or Series of Certificates. A
Certificate Guaranty Insurance Policy generally
will unconditionally and irrevocably guarantee
that the full amount of principal and interest
distributable to Certificateholders on any
Distribution Date, as well as any other amounts
specified in the related Prospectus Supplement
(the "Insured Amount"), will be available for
distribution to Certificateholders on such
Distribution Date. A Certificate Guaranty
Insurance Policy may have certain limitations set
forth in the related Prospectus Supplement,
including but not limited to limitations on the
insurer's obligation to guarantee the Originator's
obligation to repurchase or substitute for any
Mortgage Loans, to guarantee any specified rate of
prepayments or to provide funds to redeem
Certificates on any specified date.
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D. Mortgage Pool Insurance
Policy.................... If so specified in the related Prospectus
Supplement, a mortgage pool insurance policy or
policies (each, a "Mortgage Pool Insurance
Policy") may be obtained and maintained for all
or certain of the Mortgage Loans in the related
Trust, limited in scope, covering losses on the
related Mortgage Loans up to a maximum amount.
The terms of any such Mortgage Pool Insurance
Policy will be described in the related
Prospectus Supplement.
E. Special Hazard Insurance
Policy.................... If so specified in the related Prospectus
Supplement, certain physical risks with respect
to the related Mortgage Properties that would
not otherwise be insured against by Standard
Hazard Insurance Policies may be covered by a
special hazard insurance policy or policies
(each, a "Special Hazard Insurance Policy").
Each Special Hazard Insurance Policy will be
limited in scope and will cover losses up to a
maximum amount. The terms of any such Special
Hazard Insurance Policy will be described in
the related Prospectus Supplement.
F. Bankruptcy Bond........... If so specified in the related Prospectus
Supplement, a mortgagor bankruptcy bond or
bonds (each, a "Bankruptcy Bond") may be
obtained to cover certain losses resulting from
a reduction by a bankruptcy court of scheduled
payments of principal or interest on a Mortgage
Loan or a reduction by such court of the
principal amount of a Mortgage Loan. The level
of coverage and other terms of each Bankruptcy
Bond will be specified in the related
Prospectus Supplement.
G. Cross Support............ If so specified in the related Prospectus
Supplement, the ownership interests of separate
Trusts or separate groups of assets in a single
Trust may be evidenced by separate Classes of
the related Series of Certificates. In such
case, credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to certain
Certificates evidencing interests in one or
more Trusts or asset groups prior to
distributions to other Certificates evidencing
interests in other Trusts or asset groups. If
specified in the related Prospectus Supplement,
the coverage provided by one or more other
forms of credit support, such as Reserve
Accounts or Certificate Guaranty Insurance
Policies, may apply concurrently to two or more
separate Trusts, without priority among such
Trusts, until the credit support is exhausted.
If applicable, the Prospectus Supplement will
identify the Trusts or asset groups to which
such credit support relates and the manner of
determining the amount of the coverage provided
thereby and of the application of such coverage
to the identified Trusts or asset groups.
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H. Spread Amount................... If so specified in the related Prospectus
Supplement, certain Classes of Certificates may be
entitled to receive limited acceleration of
principal relative to the amortization of the
related Mortgage Loans. The accelerated amortization
will be achieved by applying certain excess interest
collected on the Mortgage Loans to the payment of
the principal on such Classes of Certificates. This
acceleration feature is intended to create an amount
(the "Spread Amount"), resulting from, and generally
equal to, the excess of the aggregate principal
balances of the applicable Mortgage Loans over the
principal balances of the applicable Classes of
Certificates. Once the required Spread Amount is
reached, and subject to the provisions described in
the next sentence and in the related Prospectus
Supplement, the acceleration feature will cease,
unless necessary to maintain the required level of
the Spread Amount. The applicable Pooling and
Servicing Agreement will provide that, subject to
certain floors, caps and triggers, the required
level of the Spread Amount may increase or decrease
over time. An increase would result in a temporary
period of accelerated amortization of the applicable
Classes of Certificates to increase the actual level
of the Spread Amount to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual level
of the Spread Amount to its required level. A
Pooling and Servicing Agreement also may provide
that after one or more Classes of Certificates have
been paid to the required level of the Spread
Amount, excess interest, together with certain other
excess amounts, may be applied to make-up shortfalls
in, or accelerate the amortization of, other Classes
of Certificates.
I. Supplemental Interest Payments.. If so specified in the related Prospectus
Supplement, one or more Classes of Certificates may
be entitled to receive supplemental interest
payments ("Supplemental Interest Payments") under
specified circumstances. Supplemental interest
payments will be available to fund some or all of
the difference, if any, between the interest owed to
a Class of Certificates on a Distribution Date and
the interest that would be available to pay such
interest assuming no defaults or delinquencies on
the Mortgage Loans. Such differences may result if
the interest rates on the applicable Classes of
Certificates are based upon an index that differs
from the index used in determining the interest
rates on the Mortgage Loans. Except as otherwise
provided in a Prospectus Supplement, supplemental
interest payments will not be available to fund
shortfalls resulting from delinquencies or defaults
on the Mortgage Loans.
J. Maturity Protection............. If so specified in the Prospectus Supplement, one or
more Classes of Certificates may be entitled to
third-party payments to help provide that the
holders of such
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Certificates receive their unpaid principal on or
prior to a specified date.
K. FHA Insurance............. To the extent specified in the related Prospectus
Supplement, all or a portion of the Mortgage Loans
may be FHA Loans subject to FHA insurance.
L. Other Credit Enhancement.. Other credit enhancement arrangements, including,
but not limited to, letters of credit or third party
guarantees, may be used to provide coverage for
certain risks of losses on the Mortgage Loans in a
given Trust. These arrangements may be in addition
to or in lieu of any forms of credit support
described in this Prospectus. The related Prospectus
Supplement will describe any such arrangements,
including information as to the extent of coverage
and any conditions or limitations thereto. Any such
arrangement must be acceptable to each nationally
recognized rating agency that is engaged by the
Originator to provide a rating for any Class of
Certificates of the related Series (each, a "Rating
Agency").
Advances..................... Unless otherwise specified in the related Prospectus
Supplement, the Servicer and, if applicable, each
Sub- Servicer will be obligated each month (or at
such other intervals specified in the related
Prospectus Supplement) to advance amounts
corresponding to all or a portion of delinquent
interest payments on each Mortgage Loan until the
date on which such Mortgaged Property is sold at a
foreclosure sale or such related Mortgage Loan is
otherwise liquidated or charged off. Any such
obligation to make advances may be limited to
amounts due to holders of Senior Certificates, to
amounts deemed to be recoverable from late payments
or liquidation proceeds, for specified periods or
any combination thereof, in each case as specified
in the related Prospectus Supplement. See "The
Pooling and Servicing Agreement -- Monthly Advances
and Compensating Interest" herein.
Compensating Interest........ Unless otherwise specified in the related Prospectus
Supplement, with respect to each Mortgage Loan as to
which the Servicer receives a principal payment in
full in advance of the final scheduled due date (a
"Principal Prepayment"), the Servicer will be
required to remit to the Trustee, from amounts
otherwise payable to the Servicer as servicing
compensation, an amount generally representing the
excess of interest on the principal balance of such
Mortgage Loan prior to such Principal Prepayment
over the amount of interest actually received on the
related Mortgage Loan during the applicable period.
See "The Pooling and Servicing Agreement -- Monthly
Advances and Compensating Interest" herein.
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Optional Termination ..... The Originator, the Servicer, the holders of REMIC
Residual Certificates (as defined herein), certain
insurers or certain other entities specified in the
related Prospectus Supplement may have the option to
effect early retirement of a Series of Certificates
through the purchase of the Mortgage Loans in the
Trust, subject to the aggregate principal balance of
the related Mortgage Loans being less than the
percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the
Mortgaged Loans at the Cut-off Date for the related
Series. Typically, the Originator, the Servicer or
such other entity will cause the retirement of a
Series of Certificates when servicing of the then
remaining amount of Mortgage Loans becomes
inefficient. See "The Pooling and Servicing
Agreement -- Termination; Optional Termination"
herein.
Mandatory Termination .... The Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may
be required to effect early retirement of a Series
of Certificates under the circumstances and in the
manner specified in the related Prospectus
Supplement and herein under "The Agreement --
Termination; Purchase of Mortgage Loans."
Certain Federal Income
Tax Consequences ......... The federal income tax consequences of the purchase,
ownership and disposition of the Certificates of
each Series will depend on, among other things,
whether an election is made to treat the
corresponding Trust (or certain assets of the Trust)
as a "real estate mortgage investment conduit" under
the Internal Revenue Code of 1986, as amended (the
"Code").
A. REMIC ............. If an election is to be made to treat the Trust (or
certain assets of the Trust) for a Series of
Certificates as a REMIC for federal income tax
purposes, the related Prospectus Supplement will
specify which Class or Classes thereof will be
designated as regular interests in the REMIC
("Regular Certificates") and which Class of
Certificates will be designated as the residual
interest in the REMIC ("Residual Certificates"). To
the extent provided herein and in the related
Prospectus Supplement, Certificates representing an
interest in the REMIC will be considered "qualifying
real property loans" within the meaning of Section
593(d)(1) of the Code, "real estate assets" for
purposes of Section 856(c)(6)(B) of the Code and
assets described in Section 7701(a)(19)(C) of the
Code.
For federal income tax purposes, Regular
Certificates generally will be treated as debt
obligations of the Trust with payment terms
equivalent to the terms of such Certificates.
Holders of Regular Certificates will be required to
report income with respect to such Certificates
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under an accrual method, regardless of their normal
tax accounting method. Original issue discount, if
any, on Regular Certificates will be includible in
the income of the Certificateholders thereof as it
accrues, in advance of receipt of the cash
attributable thereto, which rate of accrual will be
determined based on a reasonable assumed prepayment
rate of the Mortgage Loans held by the Trust. The
Residual Certificates generally will not be treated
as evidences of indebtedness for federal income tax
purposes, but instead, as representing rights to the
taxable income or net loss of the REMIC.
B. Grantor Trust...... If no election is to be made to treat the Trust (or
any portion thereof) for a Series of Certificates
("Non-REMIC Certificates") as a REMIC, the Trust
will be classified as a grantor trust for federal
income tax purposes and not as an association
taxable as a corporation. Holders of Non- REMIC
Certificates will be treated for such purposes,
subject to the possible application of the stripped
bond rules, as owners of undivided interests in the
related Mortgage Loans and generally will be
required to report as income their pro rata share of
the entire gross income (including amounts paid as
reasonable servicing compensation) from the Mortgage
Loans and will be entitled, subject to certain
limitations, to deduct their pro rata share of
expenses of the Trust.
To the extent provided herein and in the related
Prospectus Supplement, Non-REMIC Certificates will
represent interests in "qualifying real property
loans" within the meaning of Section 593(d)(1) of
the Code, "real estate assets" for purposes of
Section 856(c)(6)(B) of the Code and "Loans ...
principally secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of
the Code.
Investors are advised to consult their tax advisors
and to review "Certain Federal Income Tax
Consequences" herein and, if applicable, in the
related Prospectus Supplement.
ERISA Considerations..... Fiduciaries of employee
benefit plans subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), should consider the ERISA fiduciary
investment standards before authorizing an
investment by a plan in a Series of Certificates. In
addition, fiduciaries of employee benefit plans
subject to Title I of ERISA, as well as certain
plans not subject to ERISA, but which are subject to
Section 4975 of the Code, such as individual
retirement accounts and Keogh plans covering only a
sole proprietor or partners (collectively,
"Plan(s)"), should consult with their legal counsel
to determine whether an investment in a Series of
Certificates will cause the Mortgage Loans of the
Trust to
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be considered plan assets pursuant to the plan
asset regulations set forth in 29 C.F.R.
Section 2510.3-101 (the "Plan Asset
Regulations"), thereby subjecting the Plan to
the prohibited transaction rules with respect
to the Mortgage Loans and the Trustee or the
Servicer to the fiduciary investment standards
of ERISA, or cause the excise tax provisions of
Section 4975 of the Code to apply to the
Mortgage Loans unless some exemption granted by
the Department of Labor applies to the
purchase, sale, transfer or holding of a Series
of Certificates. See "ERISA Considerations"
herein.
Rating.................. At the date of issuance, each Class of
Certificates offered pursuant to the related
Prospectus Supplement will be rated in one of
the four highest rating categories by one or
more nationally recognized Rating Agencies. See
"Rating" herein.
Legal Investment........ As disclosed in the related Prospectus
Supplement, certain Classes of Certificates may
not constitute "mortgage- related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, if so,
will not be legal investments for certain types
of institutional investors under SMMEA.
Institutions whose investment activities are
subject to legal investment laws and
regulations or to review by certain regulatory
authorities may be subject to additional
restrictions on investment in certain Classes
of Certificates. Any such institution should
consult its own legal advisors in determining
whether and the extent to which a Class of
Certificates constitutes legal investments for
such investors. See "Legal Investment" herein.
Registration of Certificates... Unless otherwise specified in the Prospectus
Supplement, the Certificates will be issued as
physical certificates ("Definitive
Certificates") in fully registered form in the
denominations specified in the Prospectus
Supplement. Certificates may, however, be
represented by global certificates registered
in the name of Cede & Co. ("Cede"), as nominee
of The Depository Trust Company ("DTC"), or
another nominee if so specified in the related
Prospectus Supplement. In such case,
Certificateholders will not be entitled to
receive Definitive Certificates representing
such Certificateholders' interests, except in
certain circumstances described in the related
Prospectus Supplement. See "Description of the
Certificates -- Form of Certificates --
Book-Entry Registration" herein.
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SPECIAL CONSIDERATIONS
LIMITED LIQUIDITY
Prior to issuance, there will have been no market for the Certificates
of any Series. There can be no assurance that a secondary market for the
Certificates will develop or, if a secondary market does develop, that it will
provide Certificateholders with liquidity of investment or that it will continue
for the lives of the Certificates. Certain Classes of the Certificates may not
constitute "mortgage related securities" under SMMEA, and certain investors may
be subject to legal restrictions that preclude their purchase of any such
non-SMMEA Certificates. In addition, certain Classes of Certificates may be
restricted as to transferability to certain entities if so specified in the
related Prospectus Supplement. Any restrictions on the purchase or
transferability of the Classes of a given Series of Certificates may have a
negative effect on the development of a secondary market in such Certificates.
LIMITED OBLIGATIONS
Proceeds of the assets of any Trust, including the Mortgage Loans, any
Reserve Account and any Certificate Guaranty Insurance Policy, will be the sole
source of funds for the payment of the required distributions on the
Certificates of the related Series and there will be no recourse to the
Originator or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make any such required distributions on such
Certificates. The Certificates represent beneficial ownership interests in the
related Trust only and do not represent interests in or other obligations of the
Originator, the Servicer, any Sub-Servicer, the Trustee or any other person.
Neither the Certificates nor the Mortgage Loans, except any FHA Loans, are
insured or guaranteed by any governmental agency or instrumentality. Any FHA
insurance on FHA Loans will not protect against all contingencies with respect
to such loans and will cover certain contingencies only to a limited extent. The
only obligations of the foregoing entities with respect to the Certificates or
the Mortgage Loans will be the obligations (if any) of the Originator, the
Servicer and any Sub-Servicer pursuant to certain limited representations and
warranties made with respect to the Mortgage Loans, and the servicing
obligations of the Servicer and any Sub-Servicer under the related Pooling and
Servicing Agreement (including their respective limited obligations to make
certain advances in the event of delinquencies on the Mortgage Loans, but only
to the extent deemed recoverable). Except as described in the related Prospectus
Supplement, neither the Certificates nor the underlying Mortgage Loans will be
guaranteed or insured by the Originator, the Servicer, the Trustee, any
Sub-Servicer or any of their respective affiliates. Notwithstanding the
foregoing, and as specified in the related Prospectus Supplement, certain types
of credit enhancement, such as a Certificate Guaranty Insurance Policy or a
letter of credit, may constitute a full recourse obligation of the issuer of
such credit enhancement.
NATURE OF THE SECURITY FOR MORTGAGE LOANS
Risks Associated with any Decline in Value of Mortgaged Properties. An
overall decline in the market value of residential real estate, the general
condition of a Mortgaged Property, or other factors, including acts of nature
such as hurricanes, floods, tornadoes or earthquakes, could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Mortgage Loans, together with any other liens on the Mortgaged Properties, equal
or exceed the value of the Mortgaged Properties. Such a decline could, in
certain circumstances, result in the interest of the related Trust in the
Mortgaged Property being extinguished. In addition, certain areas of the country
may from time to time experience significant declines in real estate values. The
Originator will not be able to quantify the impact of any such declines in the
value of any Mortgaged Properties or predict whether, to what extent or how long
such declines may continue. Because certain Mortgage Loans may have been
underwritten pursuant to standards that rely primarily on the value of the
related Mortgaged Properties rather than the creditworthiness of the borrowers
under such Mortgage, the actual rates of delinquencies, foreclosures and losses
on such Mortgage Loans, particularly in periods during which the value of
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the related Mortgaged Properties has declined, could be higher than those
historically experienced by the mortgage lending industry in general.
Risks Associated with Junior Liens. Certain of the Mortgage Loans will
be mortgage loans secured by junior liens (each, a "Junior Lien") subordinate to
the rights of the mortgagees under the related senior mortgages (each, a "Senior
Lien"). As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
Junior Lien only to the extent that the claims, if any, of each such Senior Lien
are satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing the
related Junior Lien unless it forecloses subject to the related Senior Lien, in
which case it must either pay the entire amount of each Senior Lien to the
applicable mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on each Senior Lien in the event of a default
thereunder. Generally, a servicer will satisfy each such Senior Lien at or prior
to the foreclosure sale only to the extent it determines that any amounts so
paid will be recoverable from future payments and collections on the Junior Lien
or otherwise. The Trusts will not have any source of funds (and may not be
permitted under the REMIC provisions of the Code) to satisfy any such Senior
Lien or make payments due under any Senior Lien. See "Certain Legal Aspects of
the Mortgage Loans -- Foreclosure/ Repossession" herein.
Risks Associated with Balloon Loans. Certain of the Mortgage Loans may
constitute "Balloon Loans." Balloon Loans are loans originated with a term to
stated maturity that is shorter than the period on which the corresponding
amortization schedule is based. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon payment" which will be
significantly larger than the previous monthly payments due on such Balloon
Loan. The ability of such Mortgagor to repay a Balloon Loan at maturity
frequently will depend on such Mortgagor's ability to refinance the Mortgage
Loan. The ability of a Mortgagor to refinance such a Mortgage Loan will be
affected by a number of factors, including the prevailing level of mortgage
rates at the time, the value of the related Mortgaged Property, the Mortgagor's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor, the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a Balloon Loan, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Originator,
the Servicer, the Originator, the Trustee or any other entity will be obligated
to provide funds to refinance any Balloon Loan.
Risks Associated with Bankruptcy of the Mortgagor. General economic
conditions and other factors (which may not affect real property values) have an
impact on the ability of Mortgagors to repay Mortgage Loans. Loss of earnings,
illness, divorce and other similar factors may lead to an increase in
delinquencies, defaults and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risks Associated with Defaulted Mortgage Loans. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the distribution of related
proceeds to the Certificateholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes and
rules and is subject to many of the delays and expenses of other lawsuits if
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defenses or counterclaims are interposed, sometimes requiring several years to
complete. Furthermore, in some states an action to obtain a deficiency judgment
is not permitted following a nonjudicial sale of a Mortgaged Property. In the
event of a default by a Mortgagor, these restrictions, among other things, may
impede the ability of the Servicer, or any Sub-Servicer, to foreclose on or sell
the Mortgaged Property or to obtain Liquidation Proceeds (as defined under
"Description of the Certificates -- Distributions on Certificates -- Available
Funds" herein) (net of expenses) sufficient to repay all amounts due on the
related Mortgage Loan. The Servicer, or any Sub-Servicer, will be entitled to
deduct from Liquidation Proceeds all expenses reasonably incurred in attempting
to recover amounts due on the related Liquidated Mortgage Loan (as defined under
"The Pooling and Servicing Agreement -- Realization upon Defaulted Mortgage
Loans" herein) and not yet repaid, including unreimbursed Monthly Advances (as
defined under "The Pooling and Servicing Agreement -- Monthly Advances and
Compensating Interest" herein) and Servicing Advances (as defined under "The
Pooling and Servicing Agreement -- Servicing and Other Compensation and Payment
of Expenses" herein), payments to prior lienholders, legal fees and costs of
legal action, real estate taxes, and maintenance and preservation expenses. In
the event that any of the Mortgaged Properties fail to provide adequate security
for the related Mortgage Loans, and the credit enhancement for the related
Series is not available to cover resulting shortfalls, Certificateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that the Servicer or any Sub-Servicer
took the same steps in realizing upon a defaulted Mortgage Loan having a small
remaining principal balance as it would in the case of a defaulted Mortgage Loan
having a larger principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller Mortgage Loan than would be the case with a larger
Mortgage Loan. Because the average outstanding principal balances of Mortgage
Loans that are Junior Liens generally are smaller relative to the average
outstanding principal balances of Mortgage Loans that are first mortgage loans,
realizations net of liquidation expenses on defaulted Mortgage Loans that are
Junior Liens may also be smaller as a percentage of the principal amount of such
Mortgage Loans than would be the case if such mortgage loans were secured by
first mortgages.
Environmental Concerns. Under environmental legislation and case law
applicable in various states, a secured party that takes a deed in lieu of
foreclosure, acquires a Mortgaged Property at a foreclosure sale or, prior to
foreclosure, has been involved in decisions or actions that may lead to
contamination of a Mortgaged Property may be liable for the costs of cleaning up
a contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a Trust, in its capacity as holder of any
related Mortgage Note, since under the terms of the related Pooling and
Servicing Agreement, a Trust is not required to take an active role in operating
the related Mortgaged Properties. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters -- Environmental Considerations" herein.
Risks Associated with Non-Owner Occupied Properties. Certain of the
Mortgaged Properties relating to Mortgage Loans may not be owner-occupied. It is
possible that the rates of delinquencies, foreclosures and losses on Mortgage
Loans secured by non-owner-occupied properties could be higher than such rates
on Mortgage Loans secured by the primary residence of the borrower.
LEGAL CONSIDERATIONS
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Originator, the Servicer and any Sub-Servicer. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and
practices which may apply to the origination, servicing and collection of the
Mortgage Loans. See "Certain Legal Aspects of the Mortgage Loans and Related
Matters" herein.
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The Mortgage Loans may also be subject to federal laws, including: (i)
the Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer, or any Sub-Servicer, to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the Servicer, or any Sub-Servicer, to damages and administrative
sanctions. If the Servicer, or any Sub-Servicer, is unable to collect all or
part of the principal or interest on any Mortgage Loans because of a violation
of the aforementioned laws, public policies or general principles of equity,
then the Trust may be delayed from repaying, or may be unable to repay, all
amounts owed to Certificateholders. Furthermore, depending upon whether damages
and sanctions are assessed against the Servicer or the Originator, such
violations may have a material impact upon the financial ability of the Servicer
to continue to act in such capacity or the ability of the Originator to
repurchase or replace Mortgage Loans if such violation breaches a representation
or warranty contained in the related Pooling and Servicing Agreement.
Certain additional provisions under the Federal Truth-in-Lending Act
became effective on October 1, 1995. These provisions apply to certain types of
mortgage loans, generally as a result of such loan's coupon rate being 10% or
more greater than the yield on United States Treasury Securities of comparable
maturity, or if the "total points and fees" payable to the obligor exceed a
specified level. If the requirements are triggered, certain additional
disclosures are required to be made to the obligor and certain other
restrictions on the loan and its terms apply (e.g., restrictions relating to
prepayment penalties and balloon maturities). These provisions further require
persons who sell or assign mortgages which are subject to these requirements to
furnish a notice to such effect to the purchaser or assignee. Such purchasers or
assignees may under certain circumstances be liable for the failure of the
originating lender to provide the required disclosures or for the inclusion in
the loan of any prohibited terms.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The yield to maturity of any Class of Certificates will be affected by
the amount and timing of principal payments on the related Mortgage Loans, the
manner of allocation of available funds and/or losses to such Class, the
interest rates or amounts of interest payable on such Class and the purchase
price paid for such Class. The interaction of the foregoing factors may have
different effects on, and create different risks for, the various Classes of
Certificates, and the effects and/or risks for any one Class may vary over the
life of such Class. The related Prospectus Supplement may include additional
prepayment considerations with respect to different Classes of Certificates of a
Series. Investors should carefully consider the different consequences of such
risks as may be described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that may be experienced on Mortgage Loans included in any Trust.
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Although published statistical data regarding the effects of interest
rates on prepayment rates for Mortgage Loans of the type typically made or
acquired by the Originator are limited, a number of factors suggests that the
prepayment behavior of a pool including Mortgage Loans may be significantly
different from that of a pool composed entirely of conforming, non-conforming,
"jumbo" or government-insured (i.e., "traditional") first mortgage loans with
equivalent interest rates and maturities. One such factor is the smaller average
principal balance of Mortgage Loans that may result in a higher prepayment rate
than that of a traditional first mortgage loan with a larger average balance,
regardless of the interest rate environment. A small principal balance, however,
also may make refinancing Mortgage Loans at a lower interest rate less
attractive to the borrower relative to refinancing a larger balance first
mortgage loan, as the perceived impact to the borrower of lower interest rates
on the amount of the monthly payment for a Mortgage Loan may be less than for a
traditional first mortgage loan with a larger balance. Other factors that might
be expected to affect the prepayment rate of a pool of Mortgage Loans include
the amounts of, and interest rates on, the underlying Senior Liens, if any, and
the use of first mortgage loans as long-term financing for home purchase and
home equity loans as shorter-term financing for a variety of purposes, including
home improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, Mortgage Loans may experience a higher rate of
prepayments than traditional first mortgage loans. In addition, any future
limitations on the deductibility of interest payments on the Mortgage Loans for
federal income tax purposes may further increase the rate of prepayments on the
Mortgage Loans.
In addition, certain of the Mortgage Loans comprising the Mortgage Pool
may have adjustable Mortgage Rates ("ARM Loans"). The Originator is not aware of
any publicly available statistics that set forth principal prepayment experience
or prepayment forecasts of ARM Loans over an extended period of time, and its
experience with respect to ARM Loans is insufficient to draw any conclusions
with respect to the expected prepayment rates on ARM Loans that may be included
in a Mortgage Pool. As is the case with conventional fixed-rate mortgage loans,
ARM Loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, ARM Loans could be subject to higher prepayment rates than
if prevailing interest rates remain constant because the availability of
fixed-rate mortgage loans at competitive interest rates may encourage mortgagors
to refinance their ARM Loans to "lock in" a lower fixed interest rate.
Conversely, if prevailing interest rates rise significantly, ARM Loans may
prepay at lower rates than if prevailing rates remain at or below those in
effect at the time such ARM Loans were originated. There can be no certainty as
to the rate of prepayments on the ARM Loans in stable or changing interest rate
environments. See "Maturity, Prepayment and Yield Considerations" herein.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of any related Senior
Liens), sales of Mortgaged Properties subject to due-on-sale provisions and
liquidations due to default, as well as the receipt of proceeds from physical
damage, credit life and disability insurance policies. In addition, repurchases
or purchases of Mortgage Loans from a Trust required to be made by the
Originator or the Servicer under the related Pooling and Servicing Agreement
will have the same effect on the Certificateholders as a prepayment of such
Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement,
all of the Mortgage Loans contain due-on-sale provisions, and the Servicer will
be required to enforce such provisions unless (i) such enforcement would
materially increase the risk of default or delinquency on, or materially
decrease the security for, such Mortgage Loan or (ii) such enforcement is not
permitted by applicable law, in which case the Servicer is authorized to permit
the purchaser of the related Mortgaged Property to assume the Mortgage Loan.
Additionally, should the Originator solicit refinancings from existing
borrowers, the rate of prepayments on the Mortgage Loans may increase due to any
resulting refinancings.
Prepayments on the Mortgage Loans for a Series generally will result in
a faster rate of distributions of principal on the Certificates. Thus, the
prepayment experience of the Mortgage Loans will affect the average life and
yield to investors of each Class and the extent to which each such Class is paid
prior to its final scheduled Distribution Date. A Series may include Classes of
Certificates which pay "interest only" or are entitled to receive a
disproportionately high level of interest distributions as compared to the
amount of principal to which
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such Classes of Certificates are entitled (each, an "Interest Weighted Class")
or Classes of Certificates which pay "principal only" or are entitled to receive
a disproportionately high level of principal distributions compared to the
amount of interest to which such Classes of Certificates are entitled (each, a
"Principal Weighted Class"). A Series may include an Interest Weighted Class
offered at a significant premium or a Principal Weighted Class offered at a
substantial discount. Yields on such Classes of Certificates will be extremely
sensitive to prepayments on the Mortgage Loans for such Series. In general if a
Certificate, including a Certificate of an Interest Weighted Class, is purchased
at a premium and principal distributions on the Mortgage Loans occur at a rate
faster than anticipated at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that assumed at the time of purchase.
Where the amount of interest allocated with respect to an Interest Weighted
Class is extremely disproportionate to principal, a Certificateholder could,
under some such prepayment scenarios, fail to recoup its original investment.
Conversely, if a Certificate, including a Certificate of a Principal Weighted
Class, is purchased at a discount and principal distributions thereon occur at a
rate slower than assumed at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that originally anticipated.
See "Maturity Prepayment and Yield Considerations" herein.
Any rating assigned to the Certificates by a Rating Agency will reflect
only such Rating Agency's assessment of the likelihood that timely distributions
will be made with respect to such Certificates in accordance with the related
Pooling and Servicing Agreement. Such rating will not constitute an assessment
of the likelihood that principal prepayments on the Mortgage Loans will be made
by Mortgagors or of the degree to which the rate of such prepayments might
differ from that originally anticipated. As a result, such rating will not
address the possibility that prepayment rates higher or lower than anticipated
by an investor may cause such investor to experience a lower than anticipated
yield, or that an investor purchasing an Interest Weighted Certificate at a
significant premium might fail to recoup its initial investment.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of Mortgagors.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
As described herein, the Originator's underwriting standards generally
are less stringent than those of the Federal National Mortgage Association
("FNMA") or the Federal Home Mortgage Corporation ("FHLMC") with respect to a
borrower's credit history and in certain other respects. A borrower's tarnished
credit history may not preclude the Originator from making a loan; however, it
will reduce the size (and consequently the Combined Loan-to-Value Ratio) of the
loan that the Originator is willing to make. As a result of this approach to
underwriting, the Mortgage Loans in the Mortgage Pool may experience higher
rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in a manner which is more similar to the FNMA and FHLMC guidelines.
The Servicer commenced servicing portfolios of mortgage loans in 1994.
Accordingly, neither the Originator nor the Servicer has representative
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF BANKRUPTCY OF THE ORIGINATOR
In the event of the bankruptcy of the Originator, a trustee in
bankruptcy of the Originator or its creditors could attempt to recharacterize
the sale of the Mortgage Loans to the related Trust as a borrowing by the
Originator or an affiliate. If such recharacterization were to be upheld, the
related Certificateholders could be deemed to be creditors of the Originator or
such affiliate, with the Mortgage Loans constituting security for such debt, and
thus, the Mortgage Loans might be subject to the automatic stay of the
Bankruptcy Court having jurisdiction over the Originator's or its affiliate's
bankruptcy estate and a trustee in bankruptcy could elect to
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accelerate payment of the Certificates and liquidate the Mortgage Loans, with
the Certificateholders entitled to the then outstanding principal amount thereof
together with accrued interest. Thus, the Certificateholders could lose the
right to future payments of interest, and might suffer reinvestment loss in a
lower interest rate environment. Even if such recharacterization were not
upheld, Certificateholders may be subject to substantial delays in distributions
due to the bankruptcy proceedings.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), or similar state legislation, a
mortgagor who enters military service after the origination of the related
mortgage loan (including a mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the mortgage loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could affect, for an indeterminate period of time,
the ability of the Servicer to collect full amounts of interest on certain of
the Mortgage Loans. In addition, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status. Thus, in the event that
such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
CERTIFICATE RATING
Depending on the structure of the related transaction, the rating of a
Series or Class of Certificates the credit of which is enhanced through external
means such as a letter of credit, Certificate Guaranty Insurance Policy or
mortgage pool insurance may depend primarily on the creditworthiness of the
issuer of such external credit enhancement device. Any reduction or withdrawal
of the rating assigned to the claims-paying ability of the credit enhancement
issuer below the rating initially given to such Certificates would likely result
in a reduction in the rating of such Certificates and, in such event, the market
price of such Certificates could be adversely affected. See "Rating" herein.
BOOK-ENTRY REGISTRATION
Effect on Liquidity. If so specified in the related Prospectus
Supplement, the Certificates may initially be registered in book-entry form.
Issuance of the Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Difficulty in Pledging. Since transactions in Certificates will, in
most cases, be able to be effected only through Participants, Indirect
Participants (both Participants and Indirect Participants are defined under
"Description of the Certificates -- Form of Certificates -- Book-Entry
Registration" herein) and certain banks, the ability of a Certificateholder to
pledge a Certificate to persons or entities that do not participate in the DTC
system, or otherwise to take actions in respect of such Certificates, may be
impaired since physical certificates representing the Certificates will not
generally be available.
Potential Delays in Receipt of Distributions. Certificateholders may
experience some delay in their receipt of distributions of interest on and
principal of the Certificates since distributions may be required to be
forwarded by the Trustee to DTC and, in such a case, DTC will be required to
credit such distributions to the accounts of its Participants which thereafter
will be required to credit them to the accounts of the applicable
Certificateholders either directly or indirectly through Indirect Participants.
See "Description of the Certificates -- Form of Certificates -- Book-Entry
Registration" herein.
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THE TRUSTS
A Trust for any Series of Certificates will include a Mortgage Pool
that may consist of Mortgage Loans together with payments in respect thereof and
certain other accounts, obligations or agreements, in each case as specified in
the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust and will not be entitled to payments in respect of the assets of any other
Trust established by the Originator or any of its affiliates. If specified in
the related Prospectus Supplement, certain Certificates will evidence the entire
fractional undivided ownership interest in a Trust which will contain a
beneficial ownership interest in another Trust which will contain all or some of
the Mortgage Loans.
Certain of the Mortgage Loans may have been originated by the
Originator. Other Mortgage Loans may have been acquired by the Originator in the
open market or in privately negotiated transactions, including transactions with
entities affiliated with the Originator. See "Mortgage Loan Program --
Underwriting Criteria."
The following is a brief description of the Mortgage Loans expected to
be included in the Trusts. The related Prospectus Supplement will set forth
detailed information respecting the Mortgage Loans proposed to be included in
the related Mortgage Pool. Information regarding the actual composition of the
Mortgage Loans in the related Mortgage Pool will be set forth in a report on
Form 8-K to be filed with the Commission within 15 days after such Mortgage Pool
is complete (the "Detailed Description"). A schedule of the Mortgage Loans
relating to each Trust will be attached to the related Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS--GENERAL
The real properties (including condominiums and townhouses) which
secure repayment of the Mortgage Loans may be located in any one of the fifty
states or the District of Columbia. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered by Standard
Hazard Insurance Policies. The existence and extent of any such coverage will be
described in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Mortgage Loans, except the FHA Loans,
will not be insured or guaranteed by any governmental agency or covered wholly
or partially by primary mortgage insurance policies.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly on due dates occurring throughout the month.
The Mortgage Loans to be included in any Mortgage Pool will be
described in the related Prospectus Supplement. The Mortgage Loans will have
interest payable thereon at (i) fixed rates specified in the related Prospectus
Supplement, (ii) adjustable rates computed as specified in the related
Prospectus Supplement or (iii) graduated or other variable rates described in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Loan will require monthly payment of
principal and interest. Scheduled payments of principal on any Mortgage Loan may
be computed (i) on a level debt service basis that will result in full
amortization over the stated term of such Mortgage Loan, (ii) in the case of a
Balloon Loan, on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity of such Mortgage Loan
and will require payment of a substantial amount of principal at the stated
maturity specified in the related Mortgage Note or (iii) on such other basis as
is specified in the related Prospectus Supplement.
Certain of the Mortgage Loans may have been originated pursuant to
underwriting standards that rely primarily on the value and adequacy of the
Mortgaged Property as collateral and, to a much lesser extent, on the
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creditworthiness of the related Mortgagor. Accordingly, the rates of
delinquencies, foreclosures and losses on such Mortgage Loans, particularly in
periods during which the value of the related Mortgaged Properties has declined,
may be higher than those historically experienced by the mortgage lending
industry in general. See "The Originator -- Underwriting Guidelines" herein.
Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the applicable Originator.
The Prospectus Supplement for each Series of Certificates will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Originator, with respect to the Mortgage Loans
contained in the related Mortgage Pool, including (i) the expected aggregate
outstanding principal balance and the average outstanding principal balance of
the Mortgage Loans as of the applicable Cut-off Date, (ii) the largest expected
principal balance and the smallest principal balance of any of the Mortgage
Loans, (iii) the types of Mortgaged Properties securing the Mortgage Loans, (iv)
the original terms to maturity of the Mortgage Loans, (v) the expected weighted
average term to maturity of the Mortgage Loans as of the related Cut-off Date
and the range of the terms to maturity, (vi) the ranges of Combined
Loan-to-Value Ratios at origination, (vii) the weighted average Mortgage Rate
and ranges of Mortgage Rates borne by the Mortgage Loans and (viii) the
geographical distribution of the Mortgaged Properties on a state-by-state basis.
If specific information respecting the Mortgaged Loans is not known to the
Originator at the time the related Certificates are initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement and specific information will be set forth in the
Detailed Description. To the extent a significant portion of the Mortgage Loans
underlying a given Series of Certificates consist of FHA Loans and/or
Conventional Home Improvement Loans, the related Prospectus Supplement will
describe the material provisions of such Mortgage Loans and the programs under
which they were originated.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any given time
is the ratio, expressed as a percentage, determined by dividing (x) the sum of
the original principal balance of such Mortgage Loan plus the current principal
balance of any Senior Lien on the related Mortgaged Property, by (y) the
Appraised Value of such Mortgaged Property. "Appraised Value" is the appraised
value of a Mortgaged Property based upon the lesser of (i) the appraisal or
valuation made at the time of the origination of the related Mortgage Loan, and
(ii) in the case where such Mortgage represents a purchase money instrument, the
sales price of the related Mortgaged Property at such time of origination. To
the extent a significant portion of the Mortgage Loans underlying a given Series
of Certificates consists of FHA loans and/or Conventional Home Improvement
Loans, the related Prospectus Supplement may describe the method for calculating
the Combined Loan-to-Value Ratio, if deemed relevant by the Originator.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
secured by the same Mortgaged Properties) in a particular Mortgage Pool become
equal to or greater than the value of such Mortgaged Properties or if the
general condition of a Mortgaged Property declines, the actual rates of
delinquencies, foreclosures and losses on the related Mortgage Loans could be
higher than those now generally experienced in the mortgage lending industry.
Any overall decline in the market value of residential real estate, the general
condition of the Mortgaged Properties or other factors could adversely affect
the values of the Mortgaged Properties such that the
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outstanding principal balance of such Mortgage Loans, together with any
additional liens on the Mortgaged Properties, equals or exceeds the value of
such Mortgaged Properties and give rise to the consequences discussed in the
preceding sentence.
The Originator will cause the Mortgage Loans comprising each Mortgage
Pool to be assigned to the Trustee named in the related Prospectus Supplement
for the benefit of the Certificateholders of the related Series. The Servicer
will service the Mortgage Loans either directly, or through the Sub-Servicers,
pursuant to the Pooling and Servicing Agreement and will receive a fee for such
services. See "The Pooling and Servicing Agreement -- General Servicing
Procedures" herein. With respect to Mortgage Loans serviced through a
Sub-Servicer, the Servicer will remain liable for its servicing obligations
under the related Pooling and Servicing Agreement as if the Servicer alone were
servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Originator with respect to a Series of Certificates will
be to provide (or, where the Originator acquired a Mortgage Loan from another
originator, obtain from such originator) certain representations and warranties
concerning the Mortgage Loans and to assign to the Trustee for such Series of
Certificates the Originator's rights with respect to such representations and
warranties. See "The Agreement -- Assignment of Mortgage Loans."
The obligations of the Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Pooling and Servicing Agreement (including its obligations to make Servicing
Advances and to enforce the obligations of the Sub-Servicers) and its obligation
to make certain Monthly Advances in the event of delinquencies in payments on or
with respect to the Mortgage Loans in the amounts described herein under "The
Pooling and Servicing Agreement -- Monthly Advances and Compensating Interest."
The obligations of the Servicer to make Monthly Advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
PRE-FUNDING ACCOUNTS
If so specified in the related Prospectus Supplement, the original
principal amount of a Series of Certificates may exceed the principal balance of
the Mortgage Loans initially being delivered to the Trustee. Cash in an amount
equal to such difference will be deposited into a Pre-Funding Account maintained
with the Trustee. During the Funding Period set forth in the related Prospectus
Supplement, amounts on deposit in the Pre-Funding Account may be used to
purchase additional Mortgage Loans for the related Trust subject to the
satisfaction of certain conditions specified under the related Pooling and
Servicing Agreement. Any amounts remaining in the Pre-Funding Account at the end
of such period will be distributed as a principal prepayment to the holders of
the related Series of Certificates at the time and in the manner set forth in
the related Prospectus Supplement.
SINGLE FAMILY LOANS
Unless otherwise specified in the related Prospectus Supplement, Single
Family Loans will consist of mortgage loans, deeds of trust or participation or
other beneficial interests therein, secured by first or more junior liens on
one- to four-family residential properties. If so specified, the Single Family
Loans may include loans or participations therein secured by mortgages or deeds
of trust on condominium units in condominium buildings together with such
condominium units' appurtenant interests in the common elements of the
condominium buildings.
The Mortgaged Properties relating to Single Family Loans will consist
of detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in
condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties. A portion of a
dwelling unit may contain a commercial enterprise.
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MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings, mixed-use properties or projects containing five or
more residential units. Mortgaged Properties which secure Multifamily Loans may
include high-rise, mid-rise and garden apartments.
FHA LOANS
The FHA Loans will consist of home improvement loans originated under
Title I of the National Housing Act of 1934 (the "NHA Act"). Under the NHA Act,
the FHA, an agency of HUD, is authorized and empowered to insure qualified
lending institutions against losses on eligible loans. Loan processing and
credit determinations are done by an approved financial institution. Each lender
is required to use prudent lending standards in underwriting individual loans.
The FHA Loans may only be used by the Mortgagors for property improvements that
protect or improve the basic livability or utility of the property.
Under the Title I Loan Program, the FHA does not review individual
loans at the time of approval (as is typically the case with some other federal
loan programs), except when the amount of a Title I Property Improvement Loan
would result in any borrower having a total unpaid principal obligation on such
loans in excess of certain specified amounts, currently $25,000, in which case
HUD approval must be obtained.
The Title I Loan Program is a coinsurance program. The lender initially
is at risk for 10% of the principal balance of each loan. The FHA will insure
the remaining 90% of the principal balance of each loan, subject to the limits
of the reserve amount discussed below. Such FHA insurance is accorded the full
faith and credit of the United States of America. Thus, a lender under the
program risks the loss of up to 10% of the principal balance on every loan
submitted to the FHA for an insurance claim (or a greater amount if the lender's
reserve amount is diminished or exhausted), plus a portion of the interest on
such loans.
At the time the FHA receives a new loan origination or transfer of note
report from an approved lender, the FHA adds to the balance in the reserve
amount established by the FHA for the lender originating or purchasing such loan
an amount equal to 10% of the amount disbursed, advanced or expended by the
lender in originating or purchasing the loan. The balance in the reserve amount
limits the amount of claims the FHA is required to pay.
The reserve amount established by the FHA for each lender will be
reduced by the amount of all insurance claims approved for payment in
conjunction with losses on such loans. The lender's reserve amount will be
increased based upon additions made pursuant to the origination or purchase of
eligible loans registered for insurance.
The FHA charges a fee of 0.50% per annum of the original balance of
each loan it insures, on a non-declining basis. The FHA bills the lender
annually (on the anniversary date of origination) for the insurance premium,
unless the loan has a maturity of 25 months or less, in which case the insurance
charge is payable in one lump sum. If a loan is prepaid during the year, the FHA
will not rebate the insurance premium nor reduce the balance in the lender's
insurance coverage reserve account. The unused insurance charge will, however,
be rebated when a Title I loan is refinanced.
CONVENTIONAL HOME IMPROVEMENT LOANS
The Conventional Home Improvement Loans will consist of secured
conventional loans, the proceeds of which generally will be used for purposes
similar to those described under the heading "--FHA Loans", provided that such
loans will not be insured by FHA and no fee is due to the FHA with respect
thereto. Except
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as otherwise set forth in the related Prospectus Supplement, the
Conventional Home Improvement Loans will be fully amortizing and will bear
interest at a fixed or variable annual percentage rate.
USE OF PROCEEDS
The Originator intends to use the net proceeds to be received from the
sale of the Certificates of each Series to acquire, or to repay loans incurred
to finance the extension or purchase of, the Mortgage Loans to be deposited in
the related Trust, and to pay other expenses connected with the pooling of
Mortgage Loans and the issuing of Certificates. Any amounts remaining after such
payments may be used for general corporate purposes. The timing and amount of
offerings of Certificates by the Originator will be influenced by a number of
factors, including volume of Mortgage Loans purchased by the Originator,
prevailing interest rates, availability of funds and general market conditions.
THE ORIGINATOR
GENERAL
The Mortgage Loans will have been originated or acquired by Cityscape
Corp. Cityscape Corp. will act as the Servicer of the Mortgage Loans. Except for
certain representations and warranties relating to the Mortgage Loans and
certain other matters, the obligations of Cityscape Corp. with respect to the
Mortgage Loans will be limited to contractual servicing obligations.
Cityscape Corp. was incorporated in the State of New York in 1985 and
is a wholly-owned subsidiary of Cityscape Financial Corp. (the "Parent"). The
Originator is a consumer finance company engaged in the business of originating,
purchasing, selling and servicing mortgage loans secured primarily by
one-to-four family residences. The majority of the Originator's loans are made
to owners of single family residences who use the loan proceeds for such
purposes as debt consolidation and financing of home improvements and
educational expenditures, among others. The Originator is licensed or registered
to do business in 36 states and the District of Columbia. The Originator
maintains its principal offices at 565 Taxter Road, Elmsford, New York
10523-2300. Its telephone number is (914) 592-6677. Neither the Originator nor
any of its affiliates will insure or guarantee distributions on the Certificates
of any Series.
SINGLE FAMILY LOAN UNDERWRITING
The following is a description of the underwriting guidelines
customarily and currently employed by the Originator with respect to mortgage
loans which it originates or purchases from others. The Originator revises such
guidelines from time to time in connection with changing economic and market
conditions.
The Originator's business consists primarily of originating, purchasing
and servicing mortgage loans. The Originator specializes in mortgage loans that
do not conform to the underwriting standards of FNMA or FHLMC and typically
applied by banks and other primary lending institutions, particularly with
regard to a prospective borrower's credit history. In analyzing loan
applications, the Originator analyzes both the borrower's credit and the value
of the underlying property which will secure the loan, including the
characteristics of the underlying First lien, if any.
The Originator considers factors pertaining to the borrower's current
employment, stability of employment and income, financial resources, and
analysis of credit, reflecting not only the ability to pay, but also the
willingness to repay contractual obligations. The property's age, condition,
location, value and continued marketability are additional factors considered in
each risk analysis.
The Originator's underwriting standards are designed to provide a
program for all qualified applicants in an amount and for a period of time
consistent with their ability to repay. All of the Originator's underwriting
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determinations are made without regard to sex, marital status, race, color,
religion, age or national origin. Each application is evaluated on its
individual merits, applying the guidelines set forth below, to ensure that each
application is considered on an equitable basis.
The Originator originates mortgage loans with different credit
characteristics depending on the credit profiles of individual borrowers. Except
for Balloon Loans, the mortgage loans originated by the Originator generally
have amortization schedules ranging from 15 years to 30 years, bear interest at
fixed rates and require equal monthly payments (except for Balloon Loans, as
noted below) which are due as of a scheduled day of each month which is fixed at
the time of origination. The Originator also originates Balloon Loans, which
generally provide for scheduled amortization over 30 years with a due date and a
balloon payment at the end of the fifteenth year. The collateral securing loans
acquired or originated by the Originator are generally one- to four-family
residences, including condominiums, manufactured housing and townhomes and such
properties may or may not be occupied by the owner. It is the Originator's
policy not to accept mobile or commercial properties (other than mixed-use
properties) or unimproved land as collateral. However, the Originator will
accept small multi-family properties which consist of more than four residential
units.
The Originator's mortgage loan program includes: (i) a full
documentation program and (ii) a non-income verification program. Under the full
documentation program, the borrower's total monthly debt obligations (which
include principal and interest on the new loan and all other mortgages, loans,
charge accounts and scheduled indebtedness) generally cannot exceed 50% of the
borrower's monthly gross income. Loans to borrowers who are salaried employees
must be supported by current employment information in addition to employment
history. This information for full documentation programs is generally verified
based on written confirmation from employers, one or more pay-stubs, recent W-2
tax forms, recent tax returns or telephone confirmation from the employer. For
the Originator's non-income verification program, proof of employment or
self-employment is required.
The Originator requires that a full appraisal of the property used as
collateral for any loan that it acquires or originates be performed in
connection with the origination of the loan. All appraisals are performed by
third party, fee-based appraisers and generally conform to current FNMA/FHLMC
secondary market requirements for residential property appraisals. Each such
appraisal generally includes, among other things, an inspection of the exterior
and interior of the subject property and, where available, data from sales
within the preceding 12 months of similar properties within the same general
location as the subject property.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is required.
The credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit performance weighs heavily in the evaluation of risk
by the Originator. The credit report is used to evaluate the borrower's record
and must be current at the time of application. A lack of credit history will
not necessarily preclude a loan if the borrower has sufficient equity in the
property. Slow payments on the borrower's credit report must be satisfactorily
explained and will normally reduce the amount of the loan for which the
applicant can be approved.
The Originator requires title insurance coverage issued by an approved
ALTA title insurance company on all property securing mortgage loans it
originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of the
mortgage loan and protect the Originator against loss if the title or lien
position is not as indicated. The applicant is also required to secure hazard
and, in certain instances, flood insurance in an amount sufficient to cover the
lesser of (a) the new loan and any senior mortgage and (b) an amount sufficient
to cover replacement costs of the Mortgaged Property.
The Originator has established classifications with respect to the
credit profiles of loans based on certain of the borrower's characteristics.
Each loan applicant is placed into one of four letter ratings ("A"
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through "D," with subratings within those categories), depending upon a number
of factors including the applicant's credit history, based on credit bureau
reports and employment status. Terms of loans made by the Originator, as well as
the maximum loan-to-value ratio and debt service to income coverage (calculated
by dividing fixed monthly debt payments by gross monthly income), vary depending
upon the classification of the borrower. Borrowers with lower credit ratings
generally pay higher interest rates and loan origination fees.
UNDERWRITING GUIDELINES FOR SMALL MULTI-FAMILY AND MIXED-USE PROPERTIES
The Originator originates mortgage loans secured by residential
properties consisting of more than four units as well as mortgage loans secured
by mixed-use properties. A potential mortgagor of such a property must have
established credit and any charge-offs, judgment liens or bankruptcies generally
would disqualify the application. If a potential mortgagor is attempting to
obtain a mortgage on a small mixed-use property with 2 to 4 units, then such
small mixed-use property should have net income at least equal to debt service.
The maximum Loan-to-Value Ratio the Originator allows for a small mixed-use
property is usually no greater than 68%. The Originator may require a Phase I
Environmental Report for mortgage loans secured by properties with 7 or more
units depending on the location, the use of the subject property and any
indication in the related appraisal of a potential environmental problem.
UNDERWRITING GUIDELINES FOR FHA LOANS AND CONVENTIONAL HOME IMPROVEMENT LOANS
Borrowers of FHA Loans are evaluated primarily based upon the ratio of
their total monthly debt obligations to monthly gross income -- which generally
cannot exceed 45% - rather than the loan-to-value ratio on the underlying
property. All FHA Loans require a title search. Appraisals are only necessary
when the property is non-owner occupied and the loan amount exceeds $15,000 or
if the residence is newly constructed and occupied less than six months but more
than three months. The borrower must have at least a one-half interest in the
property and furnish the Originator with a detailed description of the
improvements to be financed. For loans in excess of $15,000, the borrower must
have equity in the property at least equal to the loan amount. In accordance
with the government requirements, the home improvements financed by the FHA
Loans are inspected within six months of their completion.
The loan proceeds from FHA Loans and Conventional Home Improvement
Loans are typically disbursed to an escrow agent which, according to the
Originator's guidelines, releases such proceeds to the borrower. Costs incurred
by the Mortgagor for loan origination, including origination points and
appraisal, legal and title fees, are often included in the amount financed.
REPRESENTATIONS BY ORIGINATOR
The Originator will make certain representations and warranties with
respect to the Mortgage Loans under the related Pooling and Servicing Agreement.
Such representations and warranties generally include, among other
things, that at the time of the conveyance by the Originator of each Mortgage
Loan to the Trust: (i) the information with respect to each Mortgage Loan set
forth in the Loan Schedule (as defined herein) and delivered upon conveyance of
the Mortgage Loan is true and correct as of the related Cut-off Date; (ii) the
proceeds of each Mortgage Loan have been fully disbursed and there are no
obligations to make further disbursements with respect to any Mortgage Loan;
(iii) each Mortgaged Property is improved by a single (one-to-four) family
residential dwelling, which may include a condominium, townhouse or manufactured
home which is permanently affixed to and treated as real property under local
law; (iv) each Mortgage Loan had, at the time of origination, either an
attorney's certification of title or a title search or title policy; (v) as of
the related Cut-off Date, each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Loan Schedule and subject in all cases to exceptions to
title set forth in the title insurance policy, if any, with respect to the
related Mortgage Loan; (vi) each Originator held good and indefeasible title to,
and was the
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sole owner of, each Mortgage Loan conveyed by such Originator; (vii) each
Mortgage Loan was originated in accordance with law and is the valid, legal and
binding obligation of the related Mortgagor; and (viii) any FHA Loan has been
serviced in compliance with FHA regulations and FHA insurance with respect
thereto is in full force and effect.
Unless otherwise described in the related Prospectus Supplement, all of
the representations and warranties of the Originator in respect of a Mortgage
Loan will be made as of the date on which the Originator conveys such Mortgage
Loan into the related Trust.
Upon a breach of a representation and/or warranty with respect to a
Mortgage Loan made by the Originator under the related Pooling and Servicing
Agreement, the Originator may be required to repurchase such Mortgage Loan from
such Trust or remove such Mortgage Loan from the Trust and convey a
substantially similar mortgage loan to the Trust in substitution therefor. The
Servicer will be required under the applicable Pooling and Servicing Agreement
to enforce such repurchase or substitution obligations for the benefit of the
Trustee and the Certificateholders, following the practices it would employ in
its good faith business judgment if it were the owner of such Mortgage Loan.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued in classes (each, a "Class")
pursuant to a pooling and servicing agreement, dated as of the related Cut-off
Date, among the Originator, the Servicer and the Trustee, for the benefit of the
holders of the Certificates of such Series. The provisions of each Pooling and
Servicing Agreement will vary depending upon the nature of the Certificates to
be issued thereunder and the nature of the related Trust. A form of a Pooling
and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summaries describe
the material provisions relating to the Certificates which may appear in the
Pooling and Servicing Agreement. The Prospectus Supplement for a Series of
Certificates will describe any material provision of the Pooling and Servicing
Agreement relating to such Series that materially differs from the description
thereof contained in this Prospectus. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Pooling and Servicing Agreement for each Series
of Certificates and the applicable Prospectus Supplement. A copy of the Pooling
and Servicing Agreement (without exhibits) relating to any Series of
Certificates will be provided to Certificateholders, without charge, upon
written request to the Originator at: Cityscape Corp., 565 Taxter Road,
Elmsford, New York 10523, Attention: Corporate Secretary.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Class of Certificates of a Series will evidence undivided beneficial ownership
interests in the assets of the related Trust specified in the related Prospectus
Supplement. A Series of Certificates may include one or more Classes of senior
certificates that receive certain preferential treatment with respect to one or
more subordinated Classes (collectively, "Subordinated Classes") of Certificates
of such Series. Certain Series or Classes of Certificates may be covered by or
entitled to the benefits of a Certificate Guaranty Insurance Policy, a Mortgage
Pool Insurance Policy, a Special Hazard Insurance Policy, a Bankruptcy Bond or
other insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other forms of credit enhancement,
in each case as described herein and in the related Prospectus Supplement.
Distributions on one or more Classes of a Series of Certificates may be made:
(i) prior to one or more other Classes, (ii) after the occurrence of specified
events, (iii) in accordance with a schedule or formula, (iv) on the basis of
collections from designated portions of the Mortgage Loans in the related Trust
or (v) on a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among Classes
or over time as specified in the related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement,
distributions on Certificates will be made only from the assets of the related
Trust, and the Certificates will not represent interests in or obligations of
the Originator, the Servicer, the Trustee or any other person. The assets of
each Trust will consist of one or more of the following, to the extent set forth
in the related Prospectus Supplement, (i) the Mortgage Loans that from time to
time are subject to the related Pooling and Servicing Agreement; (ii) the assets
of the Trust that from time to time are required by the Pooling and Servicing
Agreement to be deposited in the Certificate Account, the Collection Account and
any other accounts established pursuant to the related Pooling and Servicing
Agreement (collectively, the "Accounts"), or to be invested in Permitted
Investments (the Certificate Account, the Collection Account and Permitted
Investments, all being defined herein); (iii) property and any proceeds thereof
acquired by foreclosure, deed in lieu of foreclosure or a comparable conversion
of the Mortgage Loans in the related Mortgage Pool; (iv) any Certificate
Guaranty Insurance Policy; (v) any Mortgage Pool Insurance Policy; (vi) any
Special Hazard Insurance Policy; (vii) any Bankruptcy Bond; (viii) any funds on
deposit from time to time in any Reserve Account; and (ix) all rights under any
other insurance policies, guarantees, surety bonds, letters of credit or other
credit enhancement covering any Certificates, any Mortgage Loan in the related
Mortgage Pool or any related Mortgaged Property required pursuant to the related
Pooling and Servicing Agreement.
FORM OF CERTIFICATES
General. Unless otherwise specified in the Prospectus Supplement, the
Certificates of each Series will be issued as physical certificates in fully
registered form only in the denominations specified in the related Prospectus
Supplement. Definitive Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, the office of a Certificate Registrar appointed by the Trustee, in
either case as named in the related Prospectus Supplement. No service charge
will be incurred for any registration of exchange or transfer, but the Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge. If provided in the related Pooling and Servicing Agreement, a
certificate administrator may perform certain duties in connection with the
administration of the Certificates.
Book-Entry Registration. If so specified in the related Prospectus
Supplement, the Certificates may initially be registered in the name of Cede &
Co., the nominee of the DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participating
organizations ("Participants") and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Indirect access to the DTC system also is available to others such as brokers,
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participant").
Under a book-entry format, Certificateholders that are not Participants
or Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Certificates registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Certificateholders will receive all distributions of principal of and interest
on the Certificates from the Trustee through DTC and its Participants. Under a
book-entry format, Certificateholders will receive payments after the related
Distribution Date because, while payments are required to be forwarded to Cede,
as nominee for DTC, on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward them to Indirect
Participants or Certificateholders. Under a book-entry format, it is anticipated
that the only Certificateholder will be Cede, as nominee of DTC, and that the
beneficial holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Pooling and Servicing Agreement. The beneficial
holders of such Certificates will only be permitted to exercise the rights of
Certificateholders under the Pooling
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and Servicing Agreement indirectly through DTC and its Participants who in turn
will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit payments of principal of and interest on the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of such Certificateholders. Accordingly, although Certificateholders will
not possess physical certificates, such rules, regulations and procedures
provide a mechanism by which Certificateholders will receive distributions and
will be able to transfer their interests.
Certificateholders who are not Participants may transfer ownership of
Certificates only through Participants by instructing such Participants to
transfer Certificates, by book-entry transfer, through DTC for the account of
the purchasers of such Certificates, which account is maintained with their
respective Participants. Under the rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the respective Participants will make debits or credits, as
the case may be, on their records on behalf of the selling and purchasing
Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificateholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Certificates are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Certificateholders only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Certificates that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Certificates to the extent that such actions
are taken on behalf of Participants whose holdings include such current
principal amounts of outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee
of DTC, will be issued in fully registered form as Definitive Certificates to
Certificateholders or their nominees, rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement as
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the physical certificates representing the Certificates and instruction for
re-registration, the Trustee will issue the Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders. Thereafter, payments of
principal of and interest on the Certificates will be made by the Trustee
directly to Certificateholders in accordance with the procedures set forth
herein and in the Pooling and Servicing Agreement. The final distribution of any
Certificate (whether Definitive Certificates or Certificates registered in the
name of Cede), however, will be made only upon presentation and surrender of
such Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
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DISTRIBUTIONS ON CERTIFICATES
General. Unless otherwise specified in the related Prospectus
Supplement, distributions of principal and interest (or, if applicable, of
principal only or interest only) on the related Certificates will be made by the
Trustee on each Distribution Date specified in the related Prospectus
Supplement, in the amounts specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the record dates specified in the
Prospectus Supplement. Distributions will be made by check mailed to the persons
entitled thereto at the address appearing in the register maintained for
Certificateholders (the "Certificate Register") or, to the extent described in
the related Prospectus Supplement, by wire transfer or by such other means as
are described therein, except that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified in
the final distribution notice to Certificateholders.
Each Class of Certificates within a Series will evidence the interests
specified in the related Prospectus Supplement, which may include, among other
things, (i) the right to receive distributions allocable only to principal, only
to interest or to any combination thereof; (ii) the right to receive
distributions only of prepayments of principal throughout the lives of the
Certificates or during specified periods; (iii) interests that are subordinated
in their right to receive distributions of scheduled payments of principal,
prepayments of principal, interest or any combination thereof to one or more
other Classes of Certificates of such Series throughout the lives of the
Certificates or during specified periods or interests that are subordinated with
respect to certain losses or delinquencies; (iv) the right to receive
distributions only after the occurrence of events specified in the related
Prospectus Supplement; (v) the right to receive distributions in accordance with
a schedule or formula or on the basis of collections from designated portions of
the assets in the related Trust; (vi) as to Certificates entitled to
distributions allocable to interest, the right to receive interest at a fixed
rate or an adjustable rate; (vii) as to Certificates entitled to distributions
allocable to interest, the right to distributions allocable to interest only
after the occurrence of events specified in the related Prospectus Supplement;
and (viii) as to Certificates entitled to distributions allocable to interest
only after the occurrence of certain events, the accrual but deferment of
payment of interest until such events occur, in each case as specified in such
Prospectus Supplement.
In general, the method of determining the amount of distributions on a
particular Series of Certificates will depend on the type of credit support, if
any, that is used with respect to such Series. See "Credit Enhancement" herein.
Set forth below is a general description of certain methods that may be used to
determine the amount of distributions on the Certificates of a particular
Series. The Prospectus Supplement for each Series of Certificates will describe
the method to be used in determining the amount of distributions on the
Certificates of such Series.
Distributions allocable to principal and interest on the Certificates
of a Series will be made by the Trustee out of, and only to the extent of, funds
in a segregated account established and maintained by the Trustee for the
deposits of such amounts (the "Certificate Account"). The Certificate Account
may include funds transferred from any Reserve Account and funds received as a
result of any other form of credit enhancement. As between Certificates of
different Classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as specified in the Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement, distributions to any Class of Certificates will be
made pro rata to all Certificateholders of that Class.
Available Funds. All distributions on the Certificates of each Series
on any Distribution Date will be made from the funds available for distribution
on such Distribution Date as described below ("Available Funds"), in accordance
with the terms described in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, Available Funds for each
Distribution Date will equal the sum of the following amounts:
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(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust,
received by the Servicer during the related collection period (the
"Collection Period") except:
(a) all payments which were due before the Cut-off
Date;
(b) amounts received on particular Mortgage Loans as
late payments of principal or interest and, unless otherwise
specified in the related Prospectus Supplement, other amounts
required to be paid by the Mortgagors which are to be retained
by the Servicer (including any Sub-Servicer) as additional
compensation;
(c) amounts representing reimbursement, to the extent
permitted by the Pooling and Servicing Agreement and as
described under "The Pooling and Servicing Agreement --Monthly
Advances and Compensating Interest" and " -- Servicing and
Other Compensation and Payment of Expenses," for advances made
by the Servicer or any Sub-Servicers that were deposited into
the Certificate Account, and amounts representing
reimbursement for certain other losses and expenses incurred
by the Servicer or any Sub-Servicer as permitted under the
related Pooling and Servicing Agreement;
(d) that portion of each collection of interest on a
particular Mortgage Loan in such Trust representing servicing
compensation payable to the Servicer that is to be retained
from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds
of Mortgage Loans purchased pursuant to the related Pooling
and Servicing Agreement; and
(e) Trustee fees and other expenses or fees payable
by the related Trust as specified in the related Prospectus
Supplement;
(ii) all amounts received and retained, if any, in connection
with the liquidation of defaulted Mortgage Loans ("Liquidation
Proceeds"), net of unreimbursed liquidation expenses and insured
expenses incurred and unreimbursed advances made by the Servicer or any
Sub-Servicer ("Net Liquidation Proceeds"), including all proceeds (net
of unreimbursed Servicing Advances) of title insurance, hazard
insurance and primary mortgage insurance, if any ("Insurance
Proceeds"), all Principal Prepayments (as defined herein), all proceeds
received in connection with the condemnation of a Mortgaged Property or
the release of part of a Mortgaged Property and all proceeds of any
Mortgage Loan purchased by the Originator or any other entity pursuant
to the Pooling and Servicing Agreement;
(iii) the amount of any Monthly Advance (as defined herein) or
Compensating Interest Payment (as defined herein) made by the Servicer
or any Sub-Servicer, as deposited by such in the Certificate Account;
and
(iv) if applicable, amounts withdrawn from a Reserve Account
or received in connection with other credit enhancement.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, each Class of Certificates may bear interest at a different rate
which may be fixed or adjustable ("Pass-Through Rate"). Interest will accrue on
the Certificate Principal Balance (as defined herein) (or, in the case of
Certificates entitled only to distributions allocable to interest, the aggregate
notional principal balance) of each Class of Certificates entitled to interest,
at the Pass-Through Rate and for the periods specified in the Prospectus
Supplement. To the extent funds are available therefor, interest accrued during
each such specified period on each Class of Certificates entitled to interest
(other than a Class of Certificates that provides for interest that
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accrues, but is not currently payable, referred to hereafter as "Accrual
Certificates") will be distributable on the Distribution Dates specified in the
Prospectus Supplement until the aggregate Certificate Principal Balance of the
Certificates of such Class has been distributed in full or, in the case of
Certificates entitled only to distributions allocable to interest, until the
aggregate notional principal balance of such Certificates is reduced to zero or
for the period of time designated in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, distributions
allocable to interest on each Certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such Certificate. The notional principal balance of a Certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
With respect to any Class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Certificate Principal Balance
of such Class of Certificates on that Distribution Date. Unless otherwise
specified in the Prospectus Supplement, distributions of interest on each Class
of Accrual Certificates will commence only after the occurrence of the events
specified in the Prospectus Supplement. Prior to such time, the beneficial
ownership interest of such Class of Accrual Certificates in the Trust, as
reflected in the aggregate Certificate Principal Balance of such Class of
Accrual Certificates, will increase on each Distribution Date by the amount of
interest that accrued on such Class during the preceding interest accrual period
but that was not required to be distributed to such Class on such Distribution
Date. Any such Class of Accrual Certificates will thereafter accrue interest on
its outstanding Certificate Principal Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the
Prospectus Supplement, the aggregate principal balance amount of any Class of
Certificates entitled to distributions of principal will be the aggregate
original Certificate Principal Balance of such Class of Certificates specified
in the Prospectus Supplement, less all amounts previously distributed to such
Certificates as allocable to principal ("Certificate Principal Balance"). In the
case of Accrual Certificates, unless otherwise specified in the Prospectus
Supplement, the original Certificate Principal Balance will be increased by all
interest accrued but not then distributable on such Accrual Certificates. The
Prospectus Supplement will specify the method by which the amount of principal
payments on the Certificates will be calculated and the manner in which such
amount will be allocated among the Classes of Certificates entitled to
distributions of principal.
The Prospectus Supplement may provide that one or more Classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of any principal payments made by a Mortgagor which are received in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments in the
percentages and under the circumstances or for the periods specified in the
Prospectus Supplement. Any such allocation of Principal Prepayments to such
Class or Classes of Certificates will have the effect of accelerating the
amortization of such Senior Certificates while increasing the interests
evidenced by Subordinated Certificates in the Trust. Increasing the interests of
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates. See "Credit Enhancement -- Subordination" herein. The
timing and amounts of distributions allocable to interest and principal and, if
applicable, Principal Prepayments and scheduled payments of principal, to be
made on any Distribution Date, may vary among Classes over time, or otherwise,
as specified in the Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Except as otherwise set forth in the related Prospectus Supplement, the
related Pooling and Servicing Agreement will require that, on or before each
Distribution Date, either the Servicer, any Sub-Servicer or the Trustee forward
to each Certificateholder of record of the related Series of Certificates a
statement setting forth,
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to the extent applicable to such Series, the following information with respect
to the distribution for such Distribution Date:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and, if so specified in the related Prospectus Supplement,
any prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) if applicable, the aggregate amount (a) otherwise
allocable to the Subordinated Certificateholders on such Distribution
Date, and (b) withdrawn from a Reserve Account, if any, that is
included in the amounts distributed with respect to Senior
Certificates;
(iv) the total amount of the Insured Payment (as defined
herein) included in the amount distributed on such Distribution Date;
(v) the Pool Balance (as defined herein) and the Pool Factor
(as defined herein) of the Mortgage Loans for the following
Distribution Date;
(vi) if applicable, the percentage of principal payments on
the Mortgage Loans, if any, which each Class will be entitled to
receive on the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the
Pass-Through Rate applicable to the distribution on the Distribution
Date;
(viii) the number and aggregate principal balance of Mortgage
Loans in the related Mortgage Pool contractually delinquent (a) 30 to
59 days, (b) 60 to 89 days and (c) 90 days or more as of the end of the
related Collection Period;
(ix) the number and aggregate principal balance of all
Mortgage Loans in foreclosure or other similar proceedings, and the
book value of any real estate acquired through foreclosure or grant of
a deed in lieu of foreclosure;
(x) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after giving
effect to the distribution on the Distribution Date; and
(xii) the amount of Monthly Advances and/or Servicing
Advances, if any, made since the preceding Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Certificate of the relevant Class having the
denomination or interest specified either in the related Prospectus Supplement
or in the report to Certificateholders. The report to Certificateholders for any
Class or Series of Certificates may include additional or other information of a
similar nature to that specified above.
The "Pool Balance" means the aggregate outstanding principal balance of
a Class and the "Pool Factor" is the percentage obtained by dividing the Pool
Balance after giving effect to the distribution of principal on such
Distribution Date by the Cut-off Date Pool Balance.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer or the Trustee will mail to each person who was a
Certificateholder of record at any time during such calendar year (a) a report
as to the aggregate of amounts reported pursuant to clauses (i) and (ii) for
such calendar year or, in the event such person was a Certificateholder of
record during a portion of such calendar year, for the applicable
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portion of such year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
CREDIT ENHANCEMENT
Credit enhancement may be provided with respect to one or more Classes
of a Series of Certificates or with respect to the Mortgage Loans in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Certificates of such Series, (ii) the use of a Certificate
Guaranty Insurance Policy, a Mortgage Pool Insurance Policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond, a Reserve Account, Supplemental Interest
Payments or other insurance policies, cash accounts, letters of credit, a
limited financial guaranty insurance policies, third party guarantees, or other
forms of credit enhancement described in the related Prospectus Supplement, or
the use of a cross-support feature, or (iii) any combination of the foregoing.
The protection against losses afforded by any credit enhancement will be limited
and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur which exceed the maximum
amount covered by the credit enhancement or which are not covered by the credit
enhancement, Certificateholders will bear their allocable share of such
deficiency. If a form of credit enhancement applies to several Classes of
Certificates, and if principal payments of certain Classes will be distributed
prior to such distributions to other Classes, the Classes which receive
distributions at a later time are more likely to bear any losses which exceed
the amount covered by credit enhancement.
Unless otherwise specified in the Prospectus Supplement, coverage under
any credit enhancement may be cancelled or reduced by the Originator without the
consent of Certificateholders, if such cancellation or reduction would not
adversely affect the rating or ratings of the related Certificates.
SUBORDINATION
If so specified in the related Prospectus Supplement, scheduled
principal, Principal Prepayments, interest or any combination thereof that
otherwise would have been distributable to one or more Classes of Subordinated
Certificates of a Series will instead be distributed to holders of one or more
Classes of Senior Certificates, under the circumstances and to the extent
specified in such Prospectus Supplement. If specified in the related Prospectus
Supplement, the holders of Senior Certificates will receive the amounts of
principal and interest due to them on each Distribution Date, out of the funds
available for distribution on such date in the related Certificate Account,
prior to any such distribution being made to holders of the related Subordinated
Certificates, in each case under the circumstances and subject to the
limitations specified in such Prospectus Supplement. The protection afforded to
the holders of Senior Certificates through subordination also may be
accomplished by first allocating certain types of losses or delinquencies to the
related Subordinated Certificates, to the extent described in the related
Prospectus Supplement. If aggregate losses and delinquencies in respect of such
Mortgage Loans were to exceed the total amounts otherwise available for
distribution to holders of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, holders of Senior Certificates would
experience losses on such Certificates.
If so specified in the Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to the right to receive
certain types of payments or with respect to the allocation of certain types of
losses or delinquencies, and Subordinated Certificates with respect to the right
to receive other types of payments or with respect to the allocation of certain
types of losses or delinquencies. If specified in the Prospectus Supplement,
various Classes of Senior Certificates and Subordinated Certificates may
themselves be subordinate in their right to receive certain distributions to
other Classes of Senior and Subordinated Certificates, respectively, through a
cross-support mechanism or otherwise. As between Classes of Senior Certificates
and as between Classes of Subordinated Certificates, distributions may be
allocated among such Classes (i) in the order of their scheduled final
distribution dates, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of certain events or (iv) otherwise, in each case as
specified in the related Prospectus Supplement.
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The related Prospectus Supplement will set forth information concerning
the amount of subordination of a Class or Classes of Subordinated Certificates
in a Series, the circumstances in which such subordination will be applicable,
the manner, if any, in which the amount of subordination will decrease over
time, the manner of funding any Reserve Account, and the conditions under which
amounts in any such Reserve Account will be used to make distributions to Senior
Certificateholders or released to Subordinated Certificateholders from the
related Trust.
RESERVE ACCOUNTS
If so specified in the related Prospectus Supplement, cash, United
States Treasury securities, instruments evidencing ownership of principal or
interest payments thereon, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in such Prospectus
Supplement may be deposited by the Originator or the Servicer, as applicable, on
the date specified in the related Prospectus Supplement in one or more Reserve
Accounts established with the Trustee. In addition to or in lieu of the
foregoing, if so specified in such Prospectus Supplement, all or any portion of
amounts otherwise distributable to holders of Subordinated Certificates on any
Distribution Date may instead be deposited into a Reserve Account. Such deposits
may be made on the date specified in the related Prospectus Supplement, which
may include each Distribution Date, each Distribution Date for specified periods
or until the balance in the Reserve Account has reached a specified amount. See
" -- Subordination" above.
The cash and other assets in a Reserve Account will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the related Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust, to pay the
expenses of the Trust or for such other purposes specified in such Prospectus
Supplement. Any cash in a Reserve Account and the proceeds upon maturity or
liquidation of any other asset or instrument therein will be invested, to the
extent acceptable to the applicable Rating Agency, in Permitted Investments (as
defined herein), including obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks, certain repurchase
agreements of United States government securities with eligible commercial banks
and certain other instruments acceptable to the applicable Rating Agency. Unless
otherwise specified in the related Prospectus Supplement, any asset or
instrument deposited in any Reserve Account will name the Trustee, in its
capacity as trustee for the Certificateholders, as beneficiary and will be
issued by an entity acceptable to the applicable Rating Agency.
Any amounts on deposit in a Reserve Account will be available for
withdrawal from such Reserve Account for distribution to holders of certain
Classes of Certificates or release to holders of certain Classes of
Certificates, the Originator, the Servicer or another entity for the purposes,
in the manner and at the times specified in the related Prospectus Supplement.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a certificate
guaranty insurance policy or policies may be obtained and maintained for a Class
or Series of Certificates. The issuer of any Certificate Guaranty Insurance
Policy (a "Certificate Insurer") will be described in the related Prospectus
Supplement. A copy of any such Certificate Guaranty Insurance Policy will be
attached as an exhibit to the related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, a
Certificate Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that a certain amount will be available for
distribution to Certificateholders on a related Distribution Date. The Insured
Amount will equal the full amount of principal and interest distributable to
Certificateholders as of any Distribution Date under the related Pooling and
Servicing Agreement plus any other amounts specified therein or in the related
Prospectus Supplement.
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The specific terms of any Certificate Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. A Certificate Guaranty
Insurance Policy may have limitations including, but not limited to, limitations
on a Certificate Insurer's obligation to guarantee the Servicer's obligation to
repurchase or substitute for any Mortgage Loans, to guarantee any specified rate
of prepayments or to provide funds to redeem Certificates on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement, a
Certificate Insurer may be subrogated to the rights of Certificateholders to
receive payments under the Certificates to the extent of any payments by such
Certificate Insurer under the related Certificate Guaranty Insurance Policy that
were not previously reimbursed. However, any such subrogation rights of a
Certificate Insurer may not result in a reduction of the amount otherwise
distributable on any Distribution Date to holders of the Certificates covered by
such Certificate Guaranty Insurance Policy.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Mortgage Pool
Insurance Policy issued by the insurer (the "Mortgage Pool Insurer") named in
such Prospectus Supplement will be obtained and maintained for all or certain of
the Mortgage Loans. A Mortgage Pool Insurance Policy will, subject to the
limitations described below, cover losses on the related Mortgage Loans up to a
maximum amount specified in the related Prospectus Supplement. A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, since claims
thereunder may only be made respecting losses on certain Mortgage Loans and only
upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in a related Prospectus Supplement, a Mortgage Pool
Insurance Policy will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
primary mortgage insurance policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the Originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to a Mortgage Pool Insurance Policy, a bond or other credit support
may cover fraud in connection with the origination of Mortgage Loans. If so
specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the Originator's representations and, in such event, might give rise
to an obligation on the part of the Originator to repurchase the defaulted
Mortgage Loan if the breach cannot be cured by the Originator. No Mortgage Pool
Insurance Policy will cover losses in respect of a defaulted Mortgage Loan
occurring when the Servicer of such Mortgage Loan, at the time of default or
thereafter, was not approved by the applicable Mortgage Pool Insurer.
The original amount of coverage under a Mortgage Pool Insurance Policy
will be reduced over the life of the related Certificates by the aggregate
dollar amount of claims paid by the Servicer less the aggregate of the net
amounts realized by the Mortgage Pool Insurer upon disposition of all foreclosed
properties. The amount of claims paid will include certain expenses incurred by
the Servicer, as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under a
Mortgage Pool Insurance Policy reach the maximum amount, coverage under the
Mortgage Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Certificateholders.
The terms of any Mortgage Pool Insurance Policy will be described in
the related Prospectus Supplement.
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SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Special Hazard
Insurance Policy or policies will be obtained for the related Mortgage Pool and
will be issued by the insurer (the "Special Hazard Insurer") named in such
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect the related Certificateholders from (i)
loss by reason of damage to Mortgaged Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related water
damage) not insured against under the standard form of hazard insurance policy
for the respective states in which the Mortgaged Properties are located or under
a flood insurance policy if the Mortgaged Property is not located in a federally
designated flood area, and (ii) loss caused by reason of the application of the
coinsurance clause contained in a hazard insurance policy. See "The Pooling and
Servicing Agreement --Hazard Insurance" herein. A Special Hazard Insurance
Policy will not cover losses occasioned by war, civil insurrection, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, flood (if the Mortgaged Property
is located in a federally designated flood area), chemical contamination and
certain other risks. The amount of coverage under any Special Hazard Insurance
Policy will be specified in the related Prospectus Supplement. A Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the related Mortgaged Property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
The terms of any Special Hazard Insurance Policy will be described in
the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Pooling and Servicing Agreement will provide that, if the related
Mortgage Pool Insurance Policy shall have been terminated or been exhausted
through payment of claims, the Servicer will be under no further obligation to
maintain such Special Hazard Insurance Policy.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond
or bonds for proceedings under the federal Bankruptcy Code will be issued by an
insurer named in such Prospectus Supplement. A Bankruptcy Bond will cover
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal and interest on a Mortgage Loan or a reduction by such
court of the principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the filing
of a bankruptcy petition. The level of coverage and other terms of a Bankruptcy
Bond will be set forth in the related Prospectus Supplement. To the extent
specified in an applicable Prospectus Supplement, the Servicer may deposit cash,
an irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond.
CROSS SUPPORT
If so specified in the related Prospectus Supplement, the beneficial
ownership of separate Trusts or separate groups of assets in a single Trust may
be evidenced by separate Classes of the related Series of Certificates. In such
case, credit support may be provided by a cross-support feature which requires
that distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust. The Prospectus
Supplement for a Series of Certificates which includes a cross-support feature
will describe the manner and conditions for applying such cross-support feature.
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If so specified in the related Prospectus Supplement, the coverage
provided by one or more other forms of credit enhancement, such as Certificate
Guaranty Insurance Policies or Reserve Accounts, may apply concurrently to two
or more separate Trusts without priority among such Trust, until the credit
support is exhausted. If applicable, the Prospectus Supplement will identify the
Trusts to which such credit enhancement relates and the manner of determining
the amount of the coverage provided hereby and of the application of such
coverage to the identified Trusts or asset groups.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes
of Certificates may be entitled to receive limited acceleration of principal
relative to the amortization of the related Mortgage Loans. The accelerated
amortization will be achieved by applying certain excess interest collected on
the Mortgage Loans to the payment of principal on such Classes of Certificates.
This acceleration feature is intended to create a Spread Amount, resulting from,
and generally equal to, the excess of the aggregate principal balances of the
applicable Mortgage Loans over the principal balances of the applicable Classes
of Certificates. Once the required Spread Amount is reached, and subject to the
provisions described in the next sentence and in the related Prospectus
Supplement, the acceleration feature will cease, unless necessary to maintain
the required level of the Spread Amount. The applicable Pooling and Servicing
Agreement will provide that, subject to certain floors, caps and triggers, the
required level of the Spread Amount may increase or decrease over time. An
increase would result in a temporary period of accelerated amortization of the
applicable Classes of Certificates to increase the actual level of the Spread
Amount to its required level; a decrease would result in a temporary period of
decelerated amortization to reduce the actual level of the Spread Amount to its
required level. A Pooling and Servicing Agreement also may provide that after
one or more Classes of Certificates have been paid to the required level of the
Spread Amount, excess interest, together with certain other excess amounts, may
be applied to make-up shortfalls in, or accelerate the amortization of, other
Classes of Certificates.
SUPPLEMENTAL INTEREST PAYMENTS
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to receive supplemental interest payments under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Certificates on a Distribution Date and the interest that would be available
to pay such interest assuming no defaults or delinquencies on the Mortgage
Loans. Such differences may result if the interest rates on the applicable
Classes of Certificates are based upon an index that differs from the index used
in determining the interest rates on the Mortgage Loans. Except as otherwise
provided in a Prospectus Supplement, supplemental interest payments will not be
available to fund shortfalls resulting from delinquencies or defaults on the
Mortgage Loans.
MATURITY PROTECTION
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to third-party payments to help provide that the
holders of such Certificates receive their unpaid principal on or prior to a
specified date.
FHA INSURANCE
The FHA Loans, if any, included in a Trust, as specified in the related
Prospectus Supplement, will be FHA-insured. The nature of any such FHA insurance
is described generally below.
The regulations governing FHA insurance provide that insurance benefits
are payable upon the repossession and resale of the collateral and assignment of
the loan to HUD. With respect to a defaulted FHA Loan, the Servicer must follow
applicable regulations before initiating repossession procedures as a
prerequisite to payment. The regulations include requirements that the lender
arrange a face-to-face meeting with the
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borrower, initiate a modification or repayment plan, if feasible, and give the
borrower 30 days' notice of default prior to any repossession. The insurance
claim is paid in cash by HUD. The amount of insurance benefits generally paid by
the FHA currently is equal to 90% of the sum of (1) the unpaid principal amount
of the loan at the date of default and uncollected interest earned to the date
of default computed at the applicable loan interest rate, after deducting the
best price obtainable for the collateral (based in part on a HUD-approved
appraisal) and all amounts retained or collected by the lender from other
sources with respect to the loan; (2) accrued and unpaid interest on the unpaid
amount of the loan from the date of default to the date of submission of the
claim plus 15 calendar days (but in no event more than nine months) computed at
a rate of 7.00% per annum; (3) costs paid to a dealer or other third party to
repossess or preserve the related property; (4) the amount of any sales
commission paid to a dealer or other third party for the resale of the property;
(5) property taxes, special assessments and other similar charges and hazard
insurance premiums, prorated to the date of disposition of the property; (6)
uncollected court costs; (7) legal fees, not to exceed $1,000; and (8) expenses
for recording the assignment of the lien on the collateral to the United States,
in each case subject to applicable caps as set by regulations governing the FHA
from time to time.
The insurance available to a lender under FHA Title I insurance is
subject to the limit of a reserve amount equal to 10% of the original principal
balance of all Title I insured loans originated by the lender, which amount is
reduced by all claims paid to the lender, and which is increased by an amount
equal to 10% of the original principal balance of additional insured loans
originated by the lender. If the Originator were replaced as Servicer of the
Mortgage Loans in a Trust in accordance with the applicable Pooling and
Servicing Agreement, it is not clear from the FHA regulations what portion of
this reserve amount would be available for claims in respect of the FHA Loans
included in the related Trust Estate. The obligation to pay insurance premiums
to the FHA is the obligation of the Originator, as the Servicer of the FHA
Loans.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If so specified in the related Prospectus Supplement, a Trust may
include, in addition to or in lieu of some or all of the foregoing, letters of
credit, third party guarantees, and other arrangements for maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, paying administrative expenses, or accomplishing such
other purpose. The related Prospectus Supplement will describe any such
arrangements, including information as to the extent of coverage and any
conditions or limitations thereto. The Trust may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. Any such arrangement must be
acceptable to each Rating Agency named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the related Prospectus Supplement expressly provides
for credit enhancement and maintenance arrangements, the following paragraphs
shall apply.
If a form of credit enhancement has been obtained for a Series of
Certificates, the Originator or the Servicer will be obligated to exercise its
reasonable efforts to keep or cause to be kept such form of credit support in
full force and effect throughout the term of the related Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below.
In lieu of the obligation to maintain a particular form of credit
enhancement, the Originator or the Servicer may obtain a substitute or alternate
form of credit enhancement. If the Originator obtains such a substitute form of
credit enhancement, such form of credit enhancement will be maintained and kept
in full force and effect as provided herein. Prior to its obtaining any
substitute or alternate form of credit enhancement, the Originator or the
Servicer will obtain written confirmation from each applicable Rating Agency
that the
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substitute or alternate form of credit enhancement for the existing credit
enhancement will not adversely affect the then current ratings assigned to such
Certificates by each applicable Rating Agency.
The Servicer will provide the Trustee information required for the
Trustee to draw under a Certificate Guaranty Insurance Policy or any letter of
credit, will present claims to any Mortgage Pool Insurer, any Special Hazard
Insurer, or any issuer of a Bankruptcy Bond and will take such reasonable steps
as are necessary to permit recovery under such Certificate Guaranty Insurance
Policy, letter of credit, Bankruptcy Bond, Special Hazard Insurance Policy,
Mortgage Pool Insurance Policies or other applicable forms of credit
enhancement. Additionally, the Servicer will present such claims and take such
steps as are reasonably necessary to provide for the performance by another
party of its purchase obligations. All collections by the Servicer under any
Mortgage Pool Insurance Policy or any Bankruptcy Bond and, where the related
property has not been restored, any Special Hazard Insurance Policy are to be
deposited initially in the Collection Account and ultimately in the Certificate
Account, subject to withdrawal. All draws under any Certificate Guaranty
Insurance Policy or letter of credit will be deposited directly in the
Certificate Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any applicable form of credit
enhancement, the Servicer is not required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to one or more Classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement to the Servicer for its expenses and (ii) that
such expenses will be recoverable out of related Liquidation Proceeds or
Insurance Proceeds. If recovery under any applicable form of credit enhancement
is not available because the Servicer has been unable to make the above
determinations or has made such determinations incorrectly or recovery is not
available for any other reason, the Servicer is nevertheless obligated to follow
such normal practices and procedures (subject to the preceding sentence) as it
deems necessary or advisable to realize upon the defaulted Mortgage Loan and, in
the event such determination has been incorrectly made, is entitled to
reimbursement of its expenses in connection with such restoration.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the
amount and timing of principal payments on or in respect of the Mortgage Loans
included in the related Trusts, the allocation of available funds to various
Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given
Mortgage Pool will vary depending upon the type of Mortgage Loans included
therein. Each Prospectus Supplement will contain information with respect to the
type and maturities of the Mortgage Loans in the related Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, Mortgage Loans may be
prepaid without penalty in full or in part at any time, although a prepayment
fee or penalty may be imposed in connection therewith.
The rate of prepayments with respect to mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall below the
Mortgage Rates borne by the Mortgage Loans, such Mortgage Loans are likely to be
subject to higher prepayment rates than if prevailing interest rates remain at
or above such Mortgage Rates. Conversely, if prevailing interest rates rise
appreciably above the Mortgage Rates borne by the Mortgage Loans, such Mortgage
Loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Mortgage Rates. However, there can be no assurance that
such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayments on Mortgage
Loans may be affected by changes in mortgagors' housing needs, job transfers,
unemployment, Mortgagors' net equity in the related Mortgaged Properties, the
enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans,
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graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
Generally, mortgage loans secured by junior liens have smaller average
principal balances than senior or first mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, such mortgage loans may
experience a higher rate of prepayment than mortgage loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on second mortgage loans for federal income tax purposes may
result in a higher rate of prepayment of such mortgage loans. The obligation of
the Servicer to enforce due-on-sale provisions of the mortgage loans may also
increase prepayments. The prepayment experience of the Mortgage Pools may be
affected by a wide variety of factors, including general and local economic
conditions, mortgage market interest rates, the availability of alternative
financing and homeowner mobility. The Originator is unaware of any reliable
studies that would accurately project the prepayment risks associated with the
Mortgage Loans.
Unless otherwise provided in the related Prospectus Supplement, all of
the Mortgage Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the Mortgage Loan upon sale or certain transfers
by the Mortgagor of the underlying Mortgaged Property. Unless otherwise provided
in the related Prospectus Supplement, the Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Servicer
will not take any enforcement action that would materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan. See "The Pooling and Servicing Agreement -- Enforcement of
Due-on-Sale Clauses" herein.
The weighted average lives of Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Mortgage Loans and foreclosed Mortgaged Properties result in principal
payments on the Mortgage Loans faster than otherwise scheduled.
When a full prepayment occurs on a Mortgage Loan, the Mortgagor will be
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Interest shortfalls also could result
from the application of the Relief Act, as described under "Certain Legal
Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act"
herein. Unless otherwise specified in the related Prospectus Supplement, in the
event that less than 30 days' interest is collected on a Mortgage Loan during a
Collection Period, the Servicer or any Sub-Servicer, if applicable, will be
obligated to make Compensating Interest Payments with respect thereto, but only
to the extent of the aggregate Servicing Fee for the related Distribution Date.
To the extent such shortfalls exceed the amount of Compensating Interest
Payments that the Servicer or any Sub-Servicer is obligated to make, the yield
on the Certificates could be adversely affected. Partial prepayments in a given
month may be applied to the outstanding principal balances of the Mortgage Loans
so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month.
Under certain circumstances, the Originator, the Servicer, the holders
of REMIC Residual Certificates or certain other entities specified in the
related Prospectus Supplement may have the option to purchase the Mortgage Loans
and other assets of a Trust, thereby effecting early retirement of the related
Series of Certificates, subject to the principal balance of the related Mortgage
Loans being less than the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Loans at the
Cut-off Date for the related Series. Typically, the Originator, the Servicer or
such other entity will cause the
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retirement of a Series of Certificates at the point at which servicing of the
remaining relatively small pool of Mortgage Loans becomes inefficient. See "The
Pooling and Servicing Agreement -- Termination; Optional Termination" herein.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on the Certificates from the first
day of each month, the distribution of such interest will not be made earlier
than a specified date in the month following the month of accrual.
The timing of payments on the Mortgage Loans may significantly affect
an investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate faster (or slower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal payments.
In addition, if so specified in the related Prospectus Supplement,
prepayments may result from amounts on deposit, if any, in the Pre-Funding
Account at the end of the Funding Period being applied to the payment of
principal of the Certificates.
The Prospectus Supplement relating to a Series of Certificates may
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Certificates, including the effect of prepayments and
allocation of realized losses on the Mortgage Loans as they relate to specific
Classes of Certificates. Factors other than those identified herein and in the
related Prospectus Supplement could significantly affect principal prepayments
at any time and over the lives of the Certificates. The relative combination of
the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal of the Mortgage Loans
at any time or over the lives of the Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of the material provisions of each Pooling
and Servicing Agreement that are not described elsewhere in this Prospectus. The
summary does not purport to describe all provisions of each Pooling and
Servicing Agreement and is subject to, and qualified in its entirety by
reference to, the provisions of each Pooling and Servicing Agreement. Where
provisions or terms used in a particular Pooling and Servicing Agreement are
different than as described herein, a description of such provisions or terms
will be included in the related Prospectus Supplement.
ASSIGNMENT OF THE MORTGAGE LOANS
Assignment of the Mortgage Loans. At the closing date (each, a "Closing
Date") for a Series of Certificates, the Originator will cause the Mortgage
Loans comprising the related Trust to be sold and assigned to the Trustee,
without recourse, together with all principal and interest received by or on
behalf of the Originator on or with respect to such Mortgage Loans on or after
the Cut-off Date, other than principal and interest due before the Cut-off Date.
The Trustee will, concurrently with such assignment, deliver the Certificates to
the Originator in exchange for the Mortgage Loans. In no event will any FHA Loan
be transferred or delivered in violation of Title I of the rules and regulations
promulgated thereunder.
Each Mortgage Loan assigned to the Trustee will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing Agreement
(a "Loan Schedule"). The Loan Schedule will include information as to the
outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate, the maturity date of the Mortgage Loan, the Combined Loan-to-Value Ratio
at origination and certain other information.
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In addition, to the extent specified in the related Prospectus
Supplement, the net proceeds received from the sale of the Certificates of a
given Series will be applied to the deposit of the Pre-Funded Amount into the
Pre-Funding Account. The aggregate principal balance of additional Mortgage
Loans to be purchased for the related Trust generally will be equal to the
Pre-Funded Amount on the date of the issuance of the related Series. On each
applicable purchase date, the Originator will sell to the related Trust, without
recourse, the entire interest of the Originator in the additional Mortgage Loans
identified in a Loan Schedule attached to a supplemental conveyance relating to
such additional Mortgage Loans executed on such date by the Originator. In
connection with each purchase of additional Mortgage Loans, the related Trust
will be required to pay to the Originator a cash purchase price equal to the
outstanding principal balance of each additional Mortgage Loan as of its related
Cut-off Date. The purchase price will be withdrawn from the Pre-Funding Account
and paid to the Originator so long as the representations and warranties set
forth in "--Representations and Warranties" below apply to each additional
Mortgage Loan to be conveyed, and the conditions set forth in the paragraph
below and in the related Agreement are satisfied. The Originator conveys the
additional Mortgage Loans to the related Trust on the applicable purchase date
pursuant to the Agreement.
Any conveyance of additional Mortgage Loans will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Mortgage Loan must satisfy the eligibility
criteria specified in the preceding paragraph as of its applicable Cut-off Date
and such additional criteria as may be specified in the related Prospectus
Supplement; (ii) if and to the extent specified in the relate Prospectus
Supplement, the third-party credit enhancement provider, if any, shall have
approved the transfer of such additional Mortgage Loans to the related Trust;
(iii) the Originator will not have selected such additional Mortgage Loans in a
manner that it believes is adverse to the interests of Certificateholders; (iv)
the Originator will deliver certain opinions of counsel to the Trustee(s) and
the Rating Agencies with respect to the validity of the conveyance of such
additional Mortgage Loans; and (v) with respect to any Mortgage Loan that is
also an FHA Loan, each FHA Loan will comply with, in all respects, Title I and
the rules and regulations promulgated thereunder.
In connection with the sale, the Originator will be required to deliver
or cause to be delivered to the Trustee certain specified items (collectively,
with respect to each Mortgage Loan, the "Mortgage File"). Unless otherwise
specified in the related Prospectus Supplement, each Mortgage File will be
required to include:
(i) the original Mortgage Note, with all intervening endorsements
sufficient to show a complete chain of endorsement to the Originator, endorsed
by the Originator, without recourse, to the order of the Trustee;
(ii) the original Mortgage with evidence of recording indicated
thereon;
(iii) an assignment of the Mortgage in recordable form;
(iv) originals of all assumption, modification and substitution
agreements, if any, in those instances where the terms or provisions of a
Mortgage or Mortgage Note have been modified or such Mortgage or Mortgage Note
have been assumed;
(v) originals of all intervening mortgage assignments with evidence of
recording indicated thereon sufficient to show a complete chain of assignment
from the originator of the Mortgage Loan to the Originator; and
(vi) except with respect to FHA Loans, the original lender's title
insurance policy or marked-up title report issued on the date of the origination
of such Mortgage Loan, and (2) with respect to FHA Loans, the written Mortgage
Loan application, title report, credit reconciliation worksheet, credit
investigation receipts and approval sheet.
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Unless otherwise specified in the related Prospectus Supplement, the
Originator will promptly cause the assignments of the related Mortgage Loans to
be recorded in the appropriate public office for real property records, except
in states in which, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the Originator or the originator of such Mortgage Loans.
If the Originator cannot deliver the original Mortgage or mortgage
assignment with evidence of recording thereon on the Closing Date because of a
delay caused by the public recording office where such original Mortgage or
mortgage assignment has been delivered for recordation or because such original
Mortgage is lost, the Originator shall deliver to the Trustee an Officer's
Certificate, with a photocopy of such Mortgage attached thereto, stating that
such original Mortgage or mortgage assignment has been delivered to the
appropriate public recording official for recordation or that such original
Mortgage is lost, as the case may be. The Originator shall promptly deliver to
the Trustee such original Mortgage or mortgage assignment with evidence of
recording indicated thereon upon receipt thereof from the public recording
official. If the Originator within 12 months from the Closing Date shall not
have received such original Mortgage or mortgage assignment from the public
recording official, it shall obtain, and deliver to the Trustee within 12
months from the Closing Date, a copy of such original Mortgage or mortgage
assignment certified by such public recording official to be a true and complete
copy of such original Mortgage or mortgage assignment as recorded by such public
recording office.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Review of the Mortgage File. The Trustee will agree, for the benefit of
the Certificateholders, to review each Mortgage File and the specified items
delivered by or on behalf of the Originator within 45 days after the Closing
Date or applicable purchase date, to determine if the documents described in
clauses (i) through (vi) above have been executed and received, and that such
documents relate to the Mortgage Loans in the related Loan Schedule. The Trustee
is under no duty or obligation to inspect, review or examine any such documents,
instruments, certificates or other papers to determine that they are genuine,
enforceable, or appropriate for the represented purpose or that they are other
than what they purport to be on their face, nor is the Trustee under any duty to
determine independently whether there are any intervening assignments or
assumption or modification agreements with respect to any Mortgage Loan.
If within such 45-day period the Trustee finds any document
constituting a part of a Mortgage File is not properly executed, has not been
received (except any original recorded Mortgage or mortgage assignment as
discussed above), or is unrelated to the Mortgage Loans identified in the
related Loan Schedule, or that any Mortgage Loan does not conform in a material
respect to the description thereof as set forth in the related Loan Schedule,
the Trustee will be required to promptly notify the Originator of any defect.
The Originator will use reasonable efforts to remedy a material defect in a
document constituting part of a Mortgage File within 60 days after the Trustee's
notice. Thereafter, the Trustee shall also certify that it has received all of
the documents referred to in clauses (i) through (vi) and that all corrections
or curative actions required to be taken by the Originator within the 60-day
period have been completed or effected, or that the related Mortgage Loans
will be repurchased or substituted, as specified below.
Repurchase or Substitution of Mortgage Loans. Unless otherwise
specified in the related Prospectus Supplement, if, within 60 days after the
Trustee's notice of defect, the Originator has not remedied the defect and the
defect materially and adversely affects the interest of the Certificateholders
in the related Mortgage Loan, the Originator will be required to, prior to the
next Distribution Date, at its option, (i) substitute in lieu of such Mortgage
Loan another Mortgage Loan of like kind (a "Qualified Replacement Mortgage
Loan") or (ii) repurchase such Mortgage Loan at a price equal to its principal
balance together with one month's interest at the Mortgage Rate, less any
payments received during the related Collection Period ("Loan Purchase Price").
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If as provided above, the Originator, rather than repurchase the
Mortgage Loan, removes a Mortgage Loan (a "Deleted Mortgage Loan") from the
related Trust and substitutes in its place a Qualified Replacement Mortgage
Loan, such substitution must be effected within 90 days of the date of the
initial issuance of the Certificates of a Series with respect to which no REMIC
election is made. With respect to a Trust for which a REMIC election is to be
made, except as otherwise provided in the related Prospectus Supplement, such
substitution of a defective Mortgage Loan must be effected within two-years of
the date of the initial issuance of the Certificates, and may not be made if
such substitution would cause the Trust to not qualify as a REMIC or result in a
prohibited transaction tax under the Code. Except as otherwise provided in the
related Prospectus Supplement, any Qualified Replacement Mortgage Loan generally
will, on the date of substitution, (i) have an outstanding principal balance,
after deduction of all scheduled payments due in the month of substitution, not
in excess of and not substantially less than the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall to be paid to the
related Trust in the month of substitution for distribution to the
Certificateholders as a reduction of principal), (ii) have a Mortgage Rate
neither one percentage point less than nor one percentage point greater than the
Mortgage Rate of the Deleted Mortgage Loan as of the date of substitution, (iii)
have a remaining term to maturity neither one year earlier than nor one year
later than that of the Deleted Mortgage Loan, (iv) comply with all of the
representations and warranties set forth in the related Pooling and Servicing
Agreement as of the date of substitution, and (v) with respect to any Qualified
Replacement Mortgage Loan that is an FHA Loan, comply with Title I and the rules
and regulations promulgated thereunder. The related Pooling and Servicing
Agreement may include additional provisions relating to meeting the foregoing
requirements on an aggregate basis where a number of substitutions occur
contemporaneously.
Representations and Warranties. Unless otherwise specified in the
related Prospectus Supplement, the Originator will make representations and
warranties in respect of the Mortgage Loans sold by the Originator and evidenced
by a Series of Certificates. Such representations and warranties generally
include, among other things: (i) that with respect to Mortgage Loans other than
Home Improvement Loans, title insurance (or in the case of Mortgaged Properties
located in areas where such policies are generally not available, an attorney's
certificate of title) was in effect on the Closing Date; (ii) that the
Originator had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first or junior lien on the Mortgaged Property (subject only
to permissible title insurance exceptions, if applicable, and certain other
exceptions described in the Pooling and Servicing Agreement) and that the
Mortgaged Property was free from damage and was in acceptable condition; (iv)
that there were no delinquent tax or assessment liens against the Mortgaged
Property at the time of origination; (v) that no required payment on a Mortgage
Loan was more than thirty days delinquent as of the related Cut-off Date; and
(vi) that each Mortgage Loan was made in compliance with, and is enforceable
under, all applicable state and federal laws and regulations in all material
respects. Upon the discovery by the Originator or the Trustee that the
representations in the applicable Pooling and Servicing Agreement are untrue in
any material respect as of the dates specified therein, with the result that the
interests of the Certificateholders in the related Mortgage Loan are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties. Upon the earliest to occur of the
Originator's discovery, its receipt of notice of breach from any of the other
parties or such time as a situation resulting from a representation which is
untrue and materially and adversely affects the interests of the
Certificateholders, the Originator is required promptly to cure such breach in
all material respects or the Originator will, on the Distribution Date next
succeeding such discovery, receipt of notice or such other time, repurchase, or
provide a Qualified Replacement Mortgage Loan, as set forth above. The
obligation of the Originator so to cure, substitute or repurchase any Mortgage
Loan as to which breach has not been remedied constitutes the sole remedy
available to the Certificateholders or the Trustee respecting such breach.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to establish and
maintain one or more accounts (each, a "Collection Account") at one or more
institutions meeting the requirements set forth in the related Pooling and
Servicing Agreement. Pursuant to
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the related Pooling and Servicing Agreement, the Servicer will be required to
deposit all collections (other than amounts escrowed for taxes and insurance)
related to the Mortgage Loans into the Collection Account no later than the
second business day after receipt. All funds in the Collection Accounts will be
required to be invested in instruments designated as Permitted Investments. Any
investment earnings on funds held in the Collection Accounts are for the benefit
of the Servicer.
The Servicer may make withdrawals from the Collection Account only for
the following purposes: (i) to make deposits into the Certificate Account and
the FHA Premium Account, as set forth below; (ii) to pay itself any monthly
Servicing Fees; (iii) to make any Servicing Advance or to reimburse itself for
any Servicing Advance or Monthly Advance previously made; (iv) to withdraw
amounts that have been deposited to the Collection Account in error (including,
without limitation, any overpayments in connection with repayments of Mortgage
Loans paid in full); and (v) to clear and terminate the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, not
later than the third day prior to any Distribution Date (the "Deposit Date"),
the Servicer will be required to wire transfer to the Trustee for deposit in the
Certificate Account the sum (without duplication) of all amounts on deposit in
the Collection Account that constitute any portion of Available Funds for the
related Distribution Date. See "Description of Certificates -- Distribution on
Certificates -- Available Funds" herein. Prior to each Distribution Date, the
Servicer will be required to transfer to the Trustee for deposit in a trust
account maintained with the Trustee (the "FHA Premium Account") the sum (without
duplication) of all amounts ("FHA Premium Amounts") received by the Servicer in
respect of FHA Insurance Premiums.
INVESTMENT OF ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement, all or
a portion of any Account, including the Collection Account, may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount. The Trustee or any affiliate thereof may be the obligor on any
investment in any Account which otherwise qualifies as a Permitted Investment.
No investment in the Collection Account may mature later than the Deposit Date
next succeeding the date of investment.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Permitted Investment
included therein.
Unless otherwise specified in the related Prospectus Supplement, all
income or other gain from investments in any Account will be held in such
Account for the benefit of the Servicer and will be subject to withdrawal from
time to time as permitted by the related Pooling and Servicing Agreement. Any
loss resulting from such investments will be for the account of the Servicer.
The Servicer will be required to deposit the amount of any such loss immediately
upon the realization of such loss to the extent such loss is not offset by other
income or gain from investments in such Account and then available for such
application.
PERMITTED INVESTMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will define "Permitted Investments" generally as
follows:
(i) Direct general obligations of the United States or the
obligations of any agency or instrumentality of the United States, the
timely payment or the guarantee of which constitutes a full faith and
credit obligation of the United States (but excluding any such
securities whose terms do not provide for payment of a fixed dollar
amount upon maturity or call for redemption).
(ii) Federal Housing Administration debentures (but excluding
any such securities whose terms do not provide for payment of a fixed
dollar amount upon maturity or call for redemption).
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(iii) Federal Home Loan Mortgage Corporation senior debt
obligations, but excluding any such securities whose terms do not
provide for payment of a fixed dollar amount upon maturity or call for
redemption.
(iv) Federal National Mortgage Association senior debt
obligations, but excluding any such securities whose terms do not
provide for payment of a fixed dollar amount upon maturity or call for
redemption.
(v) Federal funds, certificates of deposit, time and demand
deposits, and bankers' acceptances (having original maturities of not
more than 365 days) of any domestic bank or trust company, the
short-term debt obligations of which have been assigned a minimum
rating specified in the related Pooling and Servicing Agreement by the
applicable Rating Agency.
(vi) Deposits of any bank or savings and loan association
which has combined capital, surplus and undivided profits of at least
$100,000,000 which deposits are not in excess of the applicable limits
insured by the Bank Insurance Fund or the Savings Association Insurance
Fund of the Federal Deposit Insurance Corporation.
(vii) Commercial paper (having original maturities of not more
than 180 days) assigned a minimum rating specified in the related
Pooling and Servicing Agreement by the applicable Rating Agency.
(viii) Investments in money market funds assigned a minimum
rating specified in the related Pooling and Servicing Agreement by the
applicable Rating Agency.
(ix) Other investments acceptable to the applicable Rating
Agency.
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest to
Certificateholders (rather than to guarantee or insure against losses), unless
otherwise provided in the related Prospectus Supplement, each Pooling and
Servicing Agreement will require that, on each Distribution Date, the Servicer
or any Sub-Servicer deposit in the Collection Account an amount of its own funds
or funds in the Collection Account which do not constitute Available Funds for
such Distribution Date (a "Monthly Advance"). Unless otherwise specified in the
related Prospectus Supplement, a Monthly Advance will be equal to the sum of the
interest portions of the aggregate amount of monthly payments (net of the
Servicing Fee) due on the Mortgage Loans during the related Collection Period,
but delinquent as of the close of business on the last day of the related
Collection Period, plus, with respect to each Mortgaged Property which was
acquired in foreclosure or similar action (each, an "REO Property") during or
prior to the related Collection Period and as to which final sale did not occur
during the related Collection Period, an amount equal to the excess, if any, of
interest on the outstanding principal balance of the Mortgage Loan relating to
such REO Property for the related Collection Period at the related Mortgage Rate
(net of the Servicing Fee) over the net income from the REO Property transferred
to the Certificate Account for such Distribution Date.
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The Servicer or any Sub-Servicer, if applicable, may recover Monthly
Advances, if not recovered from the Mortgagor on whose behalf such Monthly
Advance was made, from late collections on the related Mortgage Loans, including
Liquidation Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Servicer from the Mortgagor or otherwise relating to the
Mortgage Loan. To the extent the Servicer, in its good faith business judgment,
determines that any Monthly Advance will not be ultimately recoverable from late
collections, insurance proceeds, Liquidation Proceeds on the related Mortgage
Loans or otherwise, the Servicer may reimburse itself or a Sub-Servicer, if
applicable, on the next Distribution Date from Available Funds remaining in the
Certificate Account after making required payments on such Distribution Date.
With respect to each Mortgage Loan as to which a prepayment is
received, which becomes a Liquidated Mortgage Loan or is otherwise charged-off
during the Collection Period related to a Distribution Date, unless otherwise
specified in the related Prospectus Supplement, the Servicer will be required
with respect to such Distribution Date to remit to the Trustee, from amounts
otherwise payable to the Servicer as the Servicing Fee, a certain amount, as
shall be specified in the related Prospectus Supplement as "Compensating
Interest Payments." The Servicer will not be entitled to be reimbursed from
collections on the Mortgage Loans or any assets of the Trust for any
Compensating Interest Payments made. If the Servicing Fee in respect of such
Collection Period is insufficient to make the entire required Compensating
Interest Payment, the resulting shortfall will reduce the amount of interest
payable to the Certificateholders on such Distribution Date and such reduction
will not be recoverable thereafter.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Servicer, on behalf of the Trustee, of Mortgaged
Properties relating to defaulted Mortgage Loans (and in the case of FHA Loans,
for which a claim is not submitted to the FHA) as to which no satisfactory
arrangements can be made for collection of delinquent payments and which the
Originator or the Servicer has not purchased pursuant to its purchase option
described below, unless the Servicer reasonably believes that Liquidation
Proceeds with respect to such Mortgage Loan would not be increased as a result
of such foreclosure or other action, in which case the Mortgage Loan will be
charged off and will be liquidated (a "Liquidated Mortgage Loan"). In connection
with such foreclosure or other conversion, the Servicer is required to exercise
or use foreclosure procedures with the same degree of care and skill as it would
ordinarily exercise or use under the circumstances in the conduct of its own
affairs. Any amounts advanced in connection with such foreclosure or other
action will constitute Servicing Advances.
Unless otherwise specified in the related Prospectus Supplement, if a
REMIC election has been made, the Servicer will be required to sell REO Property
within 24 months of its acquisition by the Trustee, unless an opinion of counsel
experienced in federal income tax matters, addressed to the Trustee, the
Originator and the Servicer is obtained to the effect that the holding by the
Trust of such REO Property for a greater specified period will not result in the
imposition of taxes on "prohibited transactions" of the Trust as defined in
Section 860F of the Code or cause the Trust to fail to qualify as a REMIC.
In servicing the Mortgage Loans, the Originator is required to
determine, with respect to each defaulted Mortgage Loan, when it has recovered,
whether through trustee's sale, foreclosure sale or otherwise, all amounts, if
any, it expects to recover from or on account of such defaulted Mortgage Loan,
whereupon such Mortgage Loan shall become a Liquidated Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Originator or the Servicer may have the right and the option under the related
Pooling and Servicing Agreement, but not the obligation, to purchase for its own
account any Mortgage Loan which becomes delinquent, in whole or in part, as to
three consecutive monthly installments or any Mortgage Loan as to which
enforcement proceedings have been brought by the Servicer. Any such Mortgage
Loan so purchased will be purchased on a Deposit Date at the Loan Purchase Price
thereof.
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GENERAL SERVICING PROCEDURES
The Servicer will service the Mortgage Loans, either directly or
through Sub-Servicers, in accordance with the provisions of each related Pooling
and Servicing Agreement and the policies and procedures customarily employed by
the Servicer in servicing other comparable mortgage loans. Servicing includes,
but is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations. In connection with each FHA
Loan, the Originator, the Servicer will comply at all times with the provisions
of Title I and the rules and regulations promulgated thereunder in servicing
each FHA Loan and making claims for reimbursement with respect to any FHA Loan.
The Servicer, in its own name or in the name of any Sub-Servicer, will
be authorized and empowered pursuant to the related Pooling and Servicing
Agreement (i) to execute and deliver any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all other comparable
instruments with respect to the Mortgage Loans and with respect to the Mortgaged
Properties, (ii) to institute foreclosure proceedings or obtain a deed in lieu
of foreclosure so as to effect ownership of any Mortgaged Property in its own
name on behalf of the Trustee, and (iii) to hold title in its own name to any
Mortgaged Property upon such foreclosure or deed in lieu of foreclosure on
behalf of the Trustee.
During a foreclosure, any expenses incurred by the Servicer are added
to the amount owed by the Mortgagor, as permitted by applicable law. Upon
completion of the foreclosure, the property is sold to an outside bidder, or
passes to the mortgagee, in which case the Servicer will proceed to liquidate
the asset. Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in its
real estate loan portfolio and applicable laws and regulations.
The Servicer may not assign its obligations under any Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, the Certificate Guaranty
Insurer, if any, the Trustee and the Certificateholders evidencing Voting
Interests represented by all Certificates aggregating not less than 51%, or upon
the determination that the Servicer's duties thereunder are no longer
permissible under applicable law and such incapacity cannot be cured by the
Servicer. No such resignation shall become effective until a successor has
assumed that Servicer's responsibilities and obligations in accordance with the
related Pooling and Servicing Agreement.
Within six months of their completion, the Servicer will inspect all
home improvements financed with FHA Loans.
SUB-SERVICERS
The Servicer will be permitted under the related Pooling and Servicing
Agreement to enter into sub-servicing arrangements with certain mortgage
servicing institutions meeting the requirements of such Pooling and Servicing
Agreement to service the Mortgage Loans in a Mortgage Pool. Any material
sub-servicing arrangements, if any, will be described in the related Prospectus
Supplement, and in any case, will not relieve the Servicer of any liability it
might otherwise have, had the sub-servicing arrangement not been entered into.
Compensation for the services of the Sub-Servicer with respect to the Mortgage
Loans shall be paid by the Servicer. See "The Pooling and Servicing Agreement --
Servicing and Other Compensation and Payment of Expenses" herein.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, as
compensation for its servicing activities under a Pooling and Servicing
Agreement, the Servicer will be entitled to retain the amount of the "Servicing
Fee" (as defined in the related Pooling and Servicing Agreement) with respect to
each Mortgage Loan. Additional servicing compensation in the form of prepayment
charges, release fees, bad check charges,
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assumption fees, extension fees, late payment charges, and any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Collection Account and similar items may, to the extent collected from
Mortgagors, be retained by the Servicer.
The Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Properties, (ii) any enforcement or
judicial proceedings, including foreclosures, (iii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans and (iv) the payment of any premium charged by FHA as payment for
insurance coverage of FHA Loans ("FHA Insurance Premiums") not otherwise
satisfied by FHA Premium Amounts received. Such expenditures (each, a "Servicing
Advance") may include costs of collection efforts, reappraisals, forced
placement of hazard insurance if a borrower allows his hazard policy to lapse,
legal fees in connection with foreclosure actions, advancing payments due under
any Senior Lien, if any, advancing delinquent property taxes, and upkeep and
maintenance of the Mortgaged Property if it is acquired through foreclosure and
similar types of expenses. The Servicer will be obligated to make the Servicing
Advances incurred in the performance of its servicing obligations. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will be
entitled to recover Servicing Advances, if not theretofore recovered from the
Mortgagor on whose behalf such Servicing Advance was made, from late collections
on the related Mortgage Loans, including Liquidation Proceeds, Insurance
Proceeds, FHA Payment and such other amounts. Servicing Advances will be
reimbursable to the Servicer from the sources described above out of the funds
on deposit in the Collection Account. The Servicer is not required to make any
Servicing Advance which it determines would be nonrecoverable.
In addition, a Sub-Servicer may be entitled to a monthly servicing fee
in a minimum amount set forth in the related Prospectus Supplement. The
Sub-Servicer may also be entitled to collect and retain, as part of its
servicing compensation, any late charges or prepayment penalties provided in the
Mortgage Note or related instruments. The Sub-Servicer will be reimbursed by the
Servicer for certain expenditures that it makes, generally to the same extent
that the Servicer would be reimbursed for such expenditures under the related
Pooling and Servicing Agreement. Unless specified in the related Prospectus
Supplement and Pooling and Servicing Agreement, compensation for the services of
the Sub-Servicer shall be paid by the Servicer as a general corporate obligation
of the Servicer.
MAINTENANCE OF HAZARD INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be required to cause to be maintained fire and hazard insurance
with extended coverage customary in the area where each Mortgaged Property is
located in an amount which is at least equal to the least of (i) the outstanding
principal balance owing on the Mortgage Loan and the related Senior Lien, if
any, (ii) the full insurable value of the related Mortgaged Property and (iii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis. Unless otherwise specified in the related Prospectus Supplement, if
the Mortgaged Property is in an area identified in the Federal Register by the
Flood Emergency Management Agency as having special flood hazards, the Servicer
will be required to cause to be purchased a flood insurance policy with a
generally acceptable insurance carrier, in an amount representing coverage not
less than the least of (a) the outstanding principal balance of the Mortgage
Loan and the Senior Lien, if any, (b) the minimum amount required to compensate
for damages or loss on a replacement cost basis, or (c) the maximum amount of
insurance available under the National Flood Protection Act of 1973, as amended,
provided that such flood insurance is available. The Servicer will also be
required to maintain fire, hazard and, if applicable, flood insurance on each
REO Property in the respective amounts described above, as well as liability
insurance, in each case to the extent such insurance is available. Any amounts
collected by the Servicer under any such policies (other than amounts to be
applied to the restoration or repair of the Mortgaged Property, or to be
released to the Mortgagor in accordance with customary mortgage servicing
procedures) are required to be deposited by the Servicer in the Collection
Account.
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In the event that the Servicer obtains and maintains a blanket policy
insuring against fire and hazards of extended coverage on all of the Mortgage
Loans, then, to the extent such policy names the Trustee as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balances
of the Mortgage Loans without co-insurance, and otherwise complies with the
requirements of the preceding paragraph, the Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage. If such blanket policy contains a deductible clause, the
Servicer will be required to pay to the Trustee the difference between the
amount that would have been payable under a policy described in the preceding
paragraph and the amount paid under the blanket policy.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when a
Mortgaged Property has been or is about to be conveyed by the Mortgagor, the
Servicer, on behalf of the Trustee, in performing its servicing functions will,
to the extent it has knowledge of such conveyance or prospective conveyance, be
required to enforce the rights of the Trustee as the mortgagee of record to
accelerate the maturity of the related Mortgage Loan under any due-on-sale
clause contained in the related Mortgage or Mortgage Note; provided, however,
that the Servicer will not be required to exercise any such right if the
due-on-sale clause, in the reasonable belief of the Servicer, is not enforceable
under applicable law or if such enforcement would materially increase the risk
of default or delinquency on, or materially decrease the security for, such
Mortgage Loan. In such event, the Servicer will attempt to enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, to the extent permitted by applicable law or the
mortgage documents, the Mortgagor remains liable thereon. The Servicer also will
be authorized to enter into a substitution of liability agreement with such
person, pursuant to which the original Mortgagor is released from liability and
such person is substituted as Mortgagor and becomes liable under the Mortgage
Note. The Servicer will not enter into an assumption agreement unless permitted
by applicable law and unless such assumption agreement would not materially
increase the risk of default or delinquency on, or materially decrease the
security for, such Mortgage Loan.
VOTING
Unless otherwise specified in the related Pooling and Servicing
Agreement, with respect to any provisions of the Pooling and Servicing Agreement
providing for the action, consent or approval of the holders of all Certificates
evidencing specified "Voting Interests" in the Trust, the holders of any Class
of Certificates will collectively be entitled to the then-applicable percentage
of such Class of Certificates of the aggregate Voting Interests represented by
all Certificates. Each Certificateholder of a Class will have a Voting Interest
equal to the product of the Voting Interest to which such Class is collectively
entitled and the Certificateholder's Percentage Interest (as such term is
defined in the related Pooling and Servicing Agreement) in such Class. With
respect to any provisions of the Pooling and Servicing Agreement providing for
action, consent or approval of a specified Class or Classes of Certificates,
each Certificateholder of such specified Class will have a Voting Interest in
such Class equal to such Certificateholder's Percentage Interest in such Class.
Any Certificate registered in the name of the Originator or any affiliate
thereof will be deemed not to be outstanding and the Percentage Interest
evidenced thereby shall not be taken into account in determining whether the
requisite amount of Percentage Interests necessary to take any such action, or
effect any such consent, has been obtained.
AMENDMENTS
Unless otherwise specified in the related Prospectus Supplement, the
Trustee, the Originator and the Servicer may, at any time and from time to time,
without the consent of the Certificateholders, amend the related Pooling and
Servicing Agreement, for the purposes of (i) curing any ambiguity, or correcting
or supplementing any provision of such agreement which may be inconsistent with
any other provision of such agreement, (ii) if a REMIC election has been made
and if accompanied by an approving opinion of counsel experienced in federal
income tax matters, removing the restriction against the transfer of a Residual
Certificate to a Disqualified
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Organization (as such term is defined in the Code)
or (iii) complying with the requirements of the Code; provided, however, that
such action shall not, as evidenced by an opinion of counsel delivered to the
Trustee, materially and adversely affect the interests of any Certificateholder.
Unless otherwise specified in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may also be amended by the Trustee, the
Originator and the Servicer, at any time and from time to time, with the prior
written approval of not less than a majority of the Percentage Interests
represented by each affected Class of Certificates then outstanding, for the
purpose of adding any provisions or changing in any manner or eliminating any of
the provisions thereof or of modifying in any manner the rights of the
Certificateholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Certificateholder without the consent of
such Certificateholder or (b) change the aforesaid percentages of Percentage
Interests which are required to consent to any such amendments, without the
consent of the Certificateholders of all Certificates of the Class or Classes
affected then outstanding. If a REMIC election has been made with respect to the
related Trust, any such amendment must be accompanied by an opinion of tax
counsel as to REMIC matters.
The Trustee will be required to furnish a copy of any such amendment to
each Certificateholder in the manner set forth in the related Pooling and
Servicing Agreement.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, events
of default (each, an "Event of Default") under a Pooling and Servicing Agreement
will consist of (i) any failure by the Servicer to deposit in the Collection
Account or Certificate Account any amount (including an amount representing a
Monthly Advance or an FHA Insurance Premium) required to be so deposited under
the related Pooling and Servicing Agreement, which failure continues unremedied
for two business days after the giving of written notice of such failure to the
Servicer by the Trustee or to the Servicer and the Trustee by Certificateholders
evidencing Voting Interest represented by all Certificates aggregating not less
than 51%; (ii) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which materially and adversely affects the rights of
Certificateholders and continues unremedied for 30 days after the giving of
written notice of such failure to the Servicer by the Trustee or the
Certificateholders evidencing Voting Interests represented by all Certificates
aggregating not less than 51%; (iii) certain events of insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings regarding
the Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations; (iv) the occurrence of delinquencies and/or
losses in respect of the Mortgage Loans in excess of a level, and for a period
of time, as specified in the Pooling and Servicing Agreement and (v) if the
Originator or any affiliate thereof is the Servicer any failure of the
Originator to duly observe or perform in any material respect any of its
covenants or agreements in the Pooling and Servicing Agreement which materially
and adversely affects the rights of Certificateholders and continues unremedied
for 30 days after the giving of written notice of such failure to the Originator
by the Trustee or to the Servicer and the Trustee by Certificateholders
evidencing Voting Interests represented by all Certificates aggregating not less
than 51%.
RIGHTS UPON EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement,
Certificateholders evidencing Voting Interests represented by all Certificates
aggregating not less than 51% or the Trustee may terminate all of the rights and
obligations of the Servicer under the related Pooling and Servicing Agreement,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under the related Pooling and Servicing Agreement
and will be entitled to such compensation as the Servicer would have been
entitled to under the related Pooling and Servicing Agreement. In the event that
the Trustee would be obligated to succeed the Servicer but is unwilling or
legally unable to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, any established housing and home finance
institution or any institution that regularly services
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mortgage loans that is currently servicing a mortgage loan portfolio that has
all licenses, permits and approvals required by applicable law and a net worth
of at least $10,000,000 (and, in the case of FHA Loans, is a Title I approved
lender pursuant to the FHA Regulations) to act as successor to the Servicer
under the related Pooling and Servicing Agreement, provided that the appointment
of any such successor Servicer will not result in the qualification, reduction
or withdrawal of the rating assigned to the Certificates by any applicable
Rating Agency. Pending appointment of a successor Servicer, unless the Trustee
is prohibited by law from so acting, the Trustee shall be obligated to act as
Servicer. The Trustee and such successor Servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
described above.
Unless otherwise specified in the related Prospectus Supplement, no
Certificateholder, solely by virtue of its status as a Certificateholder, will
have any right under the related Pooling and Servicing Agreement to institute
any action, suit or proceeding with respect to the related Pooling and Servicing
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless Certificateholders evidencing Voting
Interests represented by all Certificates aggregating not less than 51% have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity for costs, expenses and liabilities to be incurred, and the
Trustee for 60 days has neglected or refused to institute any such action, suit
or proceeding. However, the Trustee will be under no obligation to exercise any
of the rights or powers vested in it by the related Pooling and Servicing
Agreement or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Pooling and Servicing
Agreement, the obligations created by each Pooling and Servicing Agreement for
each Series of Certificates will terminate upon the payment to the related
Certificateholders of all amounts held in any Accounts or by the Servicer, and
required to be paid to them pursuant to such Pooling and Servicing Agreement
following the later of (i) the final payment or other liquidation of the last of
the Mortgage Loans subject thereto or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any such Mortgage Loans
remaining in the Trust and (ii) the purchase by the Originator, the Servicer, or
other entity specified in the related Prospectus Supplement including, if REMIC
treatment has been elected, the holder of the residual interest in the REMIC
(see "Certain Federal Income Tax Consequences" below), from the related Trust of
all of the remaining Mortgage Loans and all property acquired in respect of such
Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement,
any such purchase of Mortgage Loans and property acquired in respect of Mortgage
Loans evidenced by a Series of Certificates will be made at the option of the
Originator, the Servicer or other entity at a price, and in accordance with the
procedures, specified in the Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the right
of the Originator, the Servicer or other entity to so purchase is subject to the
principal balance of the related Mortgage Loans being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of such Mortgage Loans at the Cut-off Date for the Series. The foregoing
is subject to the provisions that if a REMIC election is made with respect to a
Trust, any repurchase pursuant to clause (ii) above will be made only in
connection with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Pooling and Servicing
Agreement, each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, on the basis of certain
procedures substantially in conformance with the Uniform Single Audit Program
for Mortgage Bankers (to the extent the procedures are applicable to the
servicing obligations set forth in the Pooling and Servicing Agreement), the
servicing by or on
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behalf of the Servicer of the related Mortgage Loans, under agreements
substantially similar to each other (including the related Pooling and Servicing
Agreement), was conducted in compliance with such agreements and such procedures
have disclosed no exceptions or errors in records relating to the Mortgage Loans
subject to the related Pooling and Servicing Agreement which, in the opinion of
such firm, are material, except for such exceptions as will be referred to in
the report. Unless otherwise specified in the related Pooling and Servicing
Agreement, each Pooling and Servicing Agreement will provide that the Originator
will be required to deliver to the Trustee, on or before a specified date in
each year, an annual statement signed by an officer of the Originator to the
effect that the Servicer has fulfilled its material obligations under the
related Pooling and Servicing Agreement throughout the preceding year.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE ORIGINATOR
The related Pooling and Servicing Agreement will provide that neither
the Originator nor any of its directors, officers, employees or agents shall
have any liability to the related Trust created thereunder or to any of the
Certificateholders, except with respect to liabilities resulting from willful
malfeasance, bad faith or gross negligence or from the reckless disregard of
obligations or duties arising under the related Pooling and Servicing Agreement.
The related Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, the Originator and its directors, officers, employees
and agents are entitled to be indemnified and held harmless by the related Trust
against any loss, liability or expense incurred in connection with legal actions
relating to such Pooling and Servicing Agreement or the Certificates.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Pooling and Servicing Agreement. The Trustee will be required to have and
maintain a valid FHA contract of insurance, or else appoint a co-trustee that is
so insured to act as trustee with respect to the FHA Loans. The Pooling and
Servicing Agreement will provide that the Trustee may resign at any time, upon
notice to the Originator, the Servicer and any Rating Agency, in which event the
Originator will be obligated to appoint a successor Trustee. The Originator may
remove the Trustee if the Trustee ceases to be eligible to continue as such
under the Pooling and Servicing Agreement or if the Trustee becomes insolvent.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor.
Each Pooling and Servicing Agreement will provide that the Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Pooling
and Servicing Agreement at the request or direction of any of the
Certificateholders, unless such Certificateholders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. The Trustee may execute any of the rights or powers granted by the
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee is responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder. Pursuant to the Pooling and Servicing
Agreement, the Trustee is not liable for any action it takes or omits to take in
good faith which it reasonably believes to be authorized by an authorized
officer of any person or within its rights or powers under the Pooling and
Servicing Agreement. The Trustee and any director, officer, employee or agent of
the Trustee may rely and will be protected in acting or refinancing from acting
in good faith in reliance on any certificate, notice or other document of any
kind prima facie properly executed and submitted by the authorized officer of
any person respecting any matters arising under the Pooling and Servicing
Agreement.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries, which are general in
nature, of material legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state laws (which laws may
differ substantially from one state to another), the summaries do not purport to
be complete or
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to encompass the laws of all states in which Mortgaged Properties are situated.
The summaries are qualified in their entirety by reference to the appropriate
laws of the states in which Mortgage Loans may be originated.
NATURE OF MORTGAGE LOANS
The Mortgage Loans will be secured by mortgages, deeds of trust,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the Mortgaged Property is located. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments and other charges
under governmental police powers. Priority between mortgages depends on their
terms and generally on the order of recording in the appropriate state or county
office. There are two parties to a mortgage: the mortgagor, who is the borrower
and owner of the mortgaged property, and the mortgagee, who is the lender. The
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust has three parties: the
borrower and property owner who is typically referred to as the trustor (similar
to a mortgagor), the lender who is referred to as the beneficiary (similar to a
mortgagee), and a third-party grantee who takes title to the encumbered property
and is referred to as the trustee. Under a deed of trust, the borrower
irrevocably grants the property to the trustee to secure payment of the
borrower's obligation to the lender. Title to the property is held in trust
until the debt is paid or until a default occurs and the lender exercises its
remedies which generally includes a power of sale. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to the subject property to the grantee
until such time as the underlying debt is repaid, as opposed to merely creating
a lien upon such property. The lender's authority to take action upon a default,
including without limitation its ability to exercise remedies, whether under a
mortgage, a deed of trust, a security deed or deed to secure debt is governed
primarily by the laws of the jurisdiction in which the encumbered property is
located.
Certain of the Mortgage Loans may be loans secured by condominium
units. The condominium units may be part of a multi-unit building or buildings,
or a group of buildings whether or not attached to each other, located on
property subject to condominium ownership. Condominium ownership is a form of
ownership of real property wherein each owner is entitled to the exclusive
ownership and possession of his or her individual condominium unit together with
a proportionate undivided interest in all parts of the condominium building
(other than the individual condominium units) and all areas or facilities, if
any, for the common use of the condominium units. The condominium unit owners
appoint or elect the condominium association to govern the affairs of the
condominium.
FORECLOSURE/REPOSSESSION
In most states that use a deed of trust to secure Mortgage Loans,
foreclosure can be accomplished by a non-judicial sale if the deed of trust
contains a specific provision which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. A deed of trust may also be judicially foreclosed. In addition
to any notice requirements contained in a deed of trust, in certain states the
trustee must record a notice of default and send a copy to the borrower-trustor,
to any person who has recorded a request for a copy of any notice of default and
notice of sale, to any successor-in-interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and others given such rights by the laws
of that state. Before a non-judicial sale takes place, typically a notice of
sale must be posted in a public place and published during a specific period of
time in one or more newspapers, posted on the property, and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the
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mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In some states, the borrower under a mortgage or a deed of trust will
have the right to reinstate the loan at any time following default until shortly
before the foreclosure sale. In such states, the borrower and other persons
holding junior liens on the encumbered real estate may, during a statutorily
prescribed reinstatement period, cure monetary defaults by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, while the mortgage or related loan documents may
require the borrower to pay the costs incurred by the lender in exercising its
remedies, state law controls the amount of foreclosure expenses and costs,
including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including liability for the
environmental condition of the property, obtaining and maintaining casualty
insurance and making such repairs as are necessary to render the property
suitable for sale, etc. In addition, the lender will typically be required to
retain the services of a real estate broker and pay the broker's commission in
connection with any subsequent sale of the property. Depending upon the
condition of the property and prevailing market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. In certain states, if the amount of the proceeds received by the
lender at the sale, or if the value of the real property foreclosed upon, is
less than the loan amount, the lender may be entitled to a deficiency judgment.
In many jurisdictions, courts have imposed general equitable principles
upon foreclosure, which are designed to mitigate the legal consequences to the
borrower of the borrower's defaults under the loan documents. Such equitable
limitations may, in those jurisdictions, limit the ability of the lender to
exercise its remedies for certain defaults.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienholders are given a
statutory period in which to redeem the property from the foreclosure sale. In
some cases, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run.
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ANTI-DEFICIENCY LEGISLATION, BANKRUPTCY LAWS AND OTHER LIMITATIONS
Certain states, such as California, have adopted statutory prohibitions
restricting the right of a beneficiary or mortgagee to obtain a deficiency
judgment against borrowers financing the purchase of their residence following
sale under a deed of trust or certain other foreclosure proceedings. Such
statutes provide that there can be only one action for recovery of any debt,
including an action to enforce the lien securing such debt. A deficiency
judgment is a personal judgment against the borrower for an amount equal to the
difference between the amount due to the lender and the net amount received by
the lender at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in those states that have statutes restricting actions for
deficiency judgments, the Servicer may not seek deficiency judgments against
Mortgagors who are in default.
In addition to such "one action" laws limiting or prohibiting
deficiency judgments, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of the secured mortgage lender
to foreclose against collateral (including mortgaged real estate) or to obtain
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
to cure a monetary default in respect of a mortgage loan on the debtor's
residence by paying arrearages within a reasonable time period and reinstating
the original mortgage loan payment schedule even though the lender accelerated
the mortgage loan and final judgment of foreclosure had been entered in state
court (provided no sale of the residence had yet occurred) prior to the filing
of the debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction also have the power to
modify the terms of a mortgage loan secured by a lien on real property. Such
courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
The effect of any such proceedings under the federal bankruptcy code,
including but not limited to any automatic stay, could result in considerable
delays in receiving payments on the Mortgage Loans underlying a Series of
Certificates and possible reductions in the aggregate amount of such payments.
Some states also have homestead exemption laws which would protect a principal
residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of such loans.
These laws include the federal Truth in Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities upon lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
ENFORCEABILITY OF DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which provides that if the
Mortgagor sells, transfers or conveys the Mortgaged Property, the Mortgage Loan
may be accelerated by the mortgagee. The Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by such Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property
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may have occurred. The inability to enforce a due-on-sale clause may result in
transfer of the related Mortgaged Property to an uncreditworthy person, which
could increase the likelihood of a default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed at all
or after a certain period of time following origination of the mortgage loans
with respect to prepayments on mortgage loans secured by liens encumbering
residential properties. It is anticipated that prepayment charges may not be
imposed with respect to many of the Mortgage Loans. The absence of such
restraint on prepayment may increase the likelihood of refinancing or other
early retirement of such Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), generally overrides
usury limitations imposed by state constitutions, state statutes or state
regulations as they apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute, however, authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. Several states have adopted laws to override Title V and reimpose interest
rate limits and/or to limit discount points or other charges. In addition, even
where Title V is not so rejected, states are authorized by the law to adopt
provisions limiting discount points or other charges on mortgage loans covered
by Title V.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the Certificateholders. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the Mortgagor's period of active duty status.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the Mortgaged
Property in a timely fashion.
ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency (the "EPA") may
impose a lien on property where the EPA has incurred clean-up costs. However, a
CERCLA lien is subordinate to pre-existing, perfected security interests.
Under CERCLA and certain State laws, a lender may be held liable for
the costs of remediating releases or threatened releases of hazardous substances
("Cleanup Costs") at mortgaged properties. While an exception
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exists in CERCLA and most State laws for lenders holding indicia of ownership
solely for the purpose of protecting their security interest, the scope of that
exception is still unclear. Although it is unusual for a lender that has not
participated in the management of a contaminated facility to be found liable for
Cleanup Costs, it is possible that such liability could attach. Furthermore,
under CERCLA and certain State laws, a secured party taking a deed in lieu of
foreclosure or purchasing a mortgaged property at a foreclosure sale may become
liable for Cleanup Costs, regardless of whether such costs were caused by
actions of a prior owner or operator of the property. In either case, such
Cleanup Costs may be substantial. It is possible that such costs could become a
liability of a Trust and reduce the amounts otherwise distributable to the
Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, at the
time the Mortgage Loans were originated, no environmental assessment or a very
limited environmental assessment of the Mortgaged Properties was conducted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of (i) alternative federal income tax treatments
of the Trust and (ii) certain of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is for
general information only. This summary is based on the Code, regulations,
including proposed and temporary regulations, promulgated thereunder, and
judicial and administrative rulings and decisions now in effect, all of which
are subject to change either prospectively or retroactively. Except as otherwise
indicated, this summary assumes that the Certificates will be held as "capital
assets" within the meaning of Section 1221 of the Code, by investors who are
citizens or residents of the United States. This summary does not address the
federal income tax consequences of an investment in Certificates applicable to
all categories of investors, some of which (for example, foreign persons,
tax-exempt organizations, dealers in stocks and securities, banks and insurance
companies) may be subject to special rules. PROSPECTIVE INVESTORS SHOULD CONSULT
THEIR TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CERTIFICATES.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending upon whether an election is made to treat the Trust (or certain assets
of the Trust) relating to a particular Series of Certificates as a REMIC under
the Code. The Prospectus Supplement for each Series of Certificates will specify
whether a REMIC election will be made. This summary will discuss first the
federal income tax consequences to Certificateholders if the Trust (or certain
assets of the Trust) in which they hold Certificates elects to be treated as a
REMIC and then will discuss such consequences if no such election is made.
TAX STATUS AS A REMIC
The Trust relating to a Series of Certificates may elect to be treated
(or to treat a certain portion of its assets) as a REMIC. (References to a
"REMIC Trust" are to the Trust or the portion of the assets of the Trust in
respect of which a REMIC election is made.) Qualification as a REMIC requires
ongoing compliance with certain conditions. Although a REMIC is not generally
subject to federal income tax (see, however, "Prohibited Transactions and Other
Taxes"), if a Trust with respect to which a REMIC election is made fails to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, including the implementation of certain restrictions on
the purchase and transfer of the residual interest in the REMIC as described
below under "Residual Certificates," the Code provides that such Trust will not
be treated as a REMIC for such year and thereafter. In the event a
REMIC-electing Trust is not treated as a REMIC, the classification of the Trust
for federal income tax purposes is uncertain, although it is likely that, if
such Trust has two classes of Regular Certificates outstanding, such Trust would
be treated as a taxable mortgage pool (a "TMP") for federal income tax purposes.
If the Trust were treated as a TMP, any residual income of the Trust
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(i.e., income from the Mortgage Loans less interest and original issue discount
expense allocable to such of the Regular Certificates as are treated as debt
thereof and any administrative expenses of the Trust) would be subject to
corporate income tax at the Trust level. See "Grantor Trust Status -- Taxable
Mortgage Pools." On the other hand, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury Regulations, and certain of the Regular Certificates may be
treated as equity interests therein, with the result that amounts paid on such
recharacterized interests would not be deductible in calculating the
entity-level income of the Trust. Under yet another possible classification, an
entity with only one class of Regular Certificates outstanding may be treated as
a grantor trust, with the consequences described below. See "Grantor Trust
Status -- Grantor Trust with a Single Class of Senior Certificates."
Although the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of REMIC
status (if steps are taken to correct the conditions that caused
disqualification within a reasonable time after discovery of the disqualifying
event), no such regulations have been issued. Any such relief, moreover, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the income of the REMIC for the period in which the requirements for
such status are not satisfied. Each Trust that elects REMIC status will receive
an opinion from counsel to the Originator, generally to the effect that, under
then existing law and assuming compliance with all provisions of the related
Pooling and Servicing Agreement, such Trust (or the portion of the assets of
such Trust in respect of which the REMIC election is made) will qualify as a
REMIC and the related Certificates will be considered to be regular interests or
residual interests in the REMIC.
To the extent provided in the Prospectus Supplement for a series,
holders of Regular Certificates who are entitled to payments of supplemental
interest pursuant to yield supplement agreements ("Yield Supplement Agreements")
in the event of a basis risk shortfall will be required for federal income tax
purposes to allocate the purchase price of their Regular Certificates between
their beneficial ownership interests in the related REMIC regular interests and
the related Yield Supplement Agreements. Such holders will be required to report
income realized with respect to each for federal income tax purposes taking into
account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the Regular Certificate.
No representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative value of the REMIC regular interests and
the Yield Supplement Agreements upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. Such Certificateholders are
advised to consult their own tax advisors concerning the determination of such
fair market values. Holders of applicable classes of Regular Certificates will
be required to agree that, for federal income tax purposes, they will be treated
as owners of the respective class of regular interests and of the corresponding
Yield Supplement Agreement.
Treatment of Certain Owners
The Prospectus Supplement for each Series of Certificates will indicate
whether the Trust will make a REMIC election and whether a Class of Certificates
will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) Certificates held by a thrift institution taxed as a
"mutual savings bank" or "domestic building and loan association" will represent
interests in "qualifying real property loans" within the meaning of Section
593(d) of the Code (assuming that at least 95% of the Trust's assets are
"qualifying real property loans," determined as if such holder held the assets
of the Trust); (ii) Certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Section 7701(a)(19)(C) of the Code (assuming that at least 95% of the Trust's
assets are "qualifying real property loans" determined as if such holder held
the assets of the Trust); (iii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code (assuming that at least 95% of the Trust's assets are
"real estate assets" determined as if such holder held the assets of the Trust);
and (iv) interest on Certificates will be
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considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code (assuming that at least
95% of the Trust's assets are "real estate assets" determined as if such holder
held the assets of the Trust). If less than 95% of the REMIC's assets consist of
assets referred to in the parentheticals in clauses (i) through (iv), the
Certificates will qualify for the tax treatment described in such clauses in the
proportion that the REMIC's assets are qualifying assets for such clauses. None
of clauses (i) through (iv) will apply to the extent of any Yield Supplement
Agreement. In addition, payments on Mortgage Loans held in cash flow investments
pending distributions on the Regular Certificates will be treated as qualifying
real property loans for purposes of Section 593(d)(1) of the Code (assuming that
at least 95% of the Trust's assets are "qualifying real property loans"
determined as if such holder held the assets of the Trust) and real estate
assets for purposes of Section 856(c) of the Code (assuming that at least 95% of
the Trust's assets are "real estate assets" determined as if such holder held
the assets of the Trust).
Tiered REMIC Structures
For certain Series of Certificates, two separate elections may be made
to treat designated portions of the related Trust as REMICs (respectively, the
"Subsidiary REMIC" and the "Master REMIC") for federal income tax purposes.
Counsel to the Originator, upon the issuance of any such Series of Certificates,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement and any related
agreements, the Subsidiary REMIC and the Master REMIC will each qualify as a
REMIC and the REMIC Certificates issued by the Subsidiary REMIC and the Master
REMIC, respectively, will be considered to evidence ownership of Regular
Certificates or Residual Certificates in the related REMIC within the meaning of
the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be offered
hereunder. The Subsidiary REMIC and the Master REMIC will be treated as one
REMIC solely for purposes of determining whether the REMIC Certificates will be
(i) "qualifying real property loans" under Section 593(d) of the Code, (ii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code (iii) "real estate assets" within the meaning of Section 856(c)(6)(B)
of the Code, and (iv) whether the income on such Certificates is interest
described in Section 856(c)(3)(B) of the Code.
Taxation of Regular Certificates
Interest and Original Issue Discount. The following discussion is based
in part on Treasury regulations issued on January 27, 1994, under Sections 1271
through 1273 and 1275 of the Code (the "OID Regulations"), and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act").
The Regular Certificates will be treated as having been issued on the
"Startup Day" of the REMIC Trust, which is the day the REMIC Trust issues all of
its regular and residual interests or any day during a 10- day period during
which all interests are issued and all transfers to the REMIC Trust occur and
that is designated by the REMIC Trust. The Prospectus Supplement for each Series
of Certificates for which a REMIC election is made will specify the Startup Day
of the REMIC.
Regular Certificates generally will be taxable to holders in the same
manner as debt instruments. Accordingly, payments of "qualified stated interest"
on the Regular Certificates will be includible in the gross income of
Certificateholders for federal income tax purposes as ordinary income.
Certificateholders, however, will be required to use the accrual method of
accounting for such payments, regardless of each Certificateholder's normal
method of accounting for federal income tax purposes. Qualified stated interest
is defined generally as any one of a series of payments on a debt instrument
that is payable unconditionally at least annually in cash or property (other
than debt instruments of the issuer) in an amount equal to the product of (i)
the outstanding principal balance of the debt instrument and (ii) a single fixed
rate, or certain variable rates of interest, including variable rates the
fluctuation in value of which is reasonably expected to measure the
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variations in the cost of newly borrowed funds (see the discussion below under
the caption "Variable Rate Regular Certificates)."
Tax returns of the REMIC Trust will take the position that all of the
stated interest required to be paid on a current basis on the Regular
Certificates constitutes "qualified stated interest." Because the failure to pay
interest on Regular Certificates (which could occur as a result of a default in
payment of the Mortgage Loans) may not entitle the Certificateholders to
exercise remedies to compel payment (other than by exercising remedies under the
Mortgage Loans), it is possible that stated interest on such Regular
Certificates may not be considered to be "unconditionally payable" for purposes
of determining whether such payments constitute qualified stated interest. In
such event, none of the stated interest on any of such Regular Certificates
would constitute qualified stated interest, and all of the income derived from
such Regular Certificates would be treated as original issue discount ("OID"),
as described below.
Even if the position of the REMIC Trust that stated interest
constitutes qualified stated interest is accepted by the Internal Revenue
Service (the "Service"), the Regular Certificates may be issued with OID within
the meaning of Section 1273 of the Code. In general, OID, if any, on a debt
instrument will equal the excess of (i) the stated redemption price at maturity
of the debt instrument over (ii) its issue price. Under a de minimis exception,
there is no OID if the excess of the stated redemption price at maturity of a
debt obligation over its issue price is less than 0.25% of the stated redemption
price at maturity multiplied by the number of complete years to maturity (taking
into account the timing of the scheduled payments included in stated redemption
price at maturity and, presumably the "Prepayment Assumption" as defined below).
The "issue price" of a Regular Certificate generally will be the initial
offering price at which a substantial amount is sold to the public (not taking
into account sales to bond houses, brokers or similar persons acting in the
capacity of underwriters, wholesalers or placement agents). The "stated
redemption price at maturity" of a Regular Certificate generally will include
all payments to be made on such Certificate other than payments of qualified
stated interest; all interest on any Regular Certificates the stated interest on
which is not payable at least annually will be included in the stated redemption
price at maturity of such Regular Certificates.
The OID Regulations do not address certain aspects of the tax treatment
of securities, such as the Regular Certificates, on which principal is required
to be prepaid based on prepayments of the underlying assets. Accordingly, the
treatment of the Regular Certificates under the OID provisions of the Code is
uncertain. The discussion below as it relates to accrual of OID is based on the
relevant provisions of the Code and the legislative history thereto. The amount
of OID to be included in income by a holder of a debt instrument, such as a
Regular Certificate, that is subject to acceleration due to prepayments on other
debt obligations securing such instrument, is generally computed by taking into
account the anticipated rate of prepayments assumed in pricing such debt
instrument (the "Prepayment Assumption"). Under the Code, the Prepayment
Assumption must be determined in the manner prescribed by regulations which have
not yet been issued. The relevant legislative history provides, however, that
Congress intended the regulations to require that the Prepayment Assumption be
the prepayment assumption that is used in determining the initial offering price
of such debt instrument. The Prospectus Supplement for each Series of Regular
Certificates will specify the Prepayment Assumption to be used for the purpose
of determining the amount and rate of accrual of OID. No representation is made
that the Regular Certificates will prepay at the Prepayment Assumption or at any
other rate.
The holder of a Regular Certificate issued with OID must include in
gross income for federal income tax purposes as ordinary income for all days
during its taxable year during which it holds such Regular Certificate the sum
of the "daily portions" of such OID determined under a method taking into
account an economic accrual of the discount. The amount of OID that will accrue
during an accrual period (generally the period between interest payments or
compounding dates) is the excess (if any) of (i) the sum of (a) the present
value of all payments remaining to be made on the Regular Certificate as of the
close of the accrual period and (b) the payments during the accrual period of
amounts included in the stated redemption price at maturity of the Regular
Certificate, over (ii) the "adjusted issue price" of the Regular Certificate at
the beginning of the accrual period.
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The "adjusted issue price" of a Regular Certificate is the sum of its
issue price and prior accruals of OID, reduced by the total payments made with
respect to such Regular Certificate in all prior periods, other than payments of
qualified stated interest. The present value of the remaining payments is
determined on the basis of three factors: (i) the original "yield to maturity"
of the Regular Certificate (which is the interest rate, determined on the basis
of compounding at the end of each accrual period and properly adjusted for the
length of the accrual period, that causes the present values of all future
payments on the Regular Certificate (determined in accordance with the
Prepayment Assumption) to equal its issue price on the issue date), (ii) events
which have occurred before the end of the accrual period and (iii) the
Prepayment Assumption. The effect of this method would be to increase the
portions of OID required to be included in income by a Certificateholder to take
into account prepayments with respect to the Mortgage Loans that occur at a rate
that exceeds the Prepayment Assumption.
The OID accrued during an accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the accrual period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of OID must be determined according to
an appropriate allocation under any reasonable method.
Distributions of interest on Regular Certificates the stated interest
of which is not payable at least annually will not constitute qualified stated
interest payments; such Regular Certificates will be issued with the OID.
Special rules also apply to Regular Certificates that provide for accrual of
interest when one or more Mortgage Loans are adding interest to their principal
balance, see "Deferred Interest," interest only Regular Certificates, see
"Interest Only Certificate" below and Regular Certificates with "Payment Lags,"
see "Accrued Interest Certificates" below. Further, certain additional amounts
would be includible in the gross income of certain Certificateholders if the
REMIC Trust were treated as a "single class REMIC," as described below under
"Pass-Through of Miscellaneous Itemized Deductions" below.
Acquisition Premium. The amount of OID required to be included in gross
income for federal income tax purposes by a holder that acquires a Regular
Certificate by "purchase" would be reduced as described below if such holder's
tax basis in the Offered Certificate immediately after such acquisition (i)
exceeds the adjusted issue price of the Regular Certificate and (ii) is less
than or equal to its stated redemption price at maturity (reduced by any payment
made on the Regular Certificate prior to the purchase date other than a payment
of qualified stated interest). Any such excess of adjusted basis over adjusted
issue price is considered "acquisition premium." For purposes of these rules,
the term "purchase" means any acquisition of a Regular Certificate.
The amount of the reduction in OID would be equal to the amount of the
daily portion of OID multiplied by a fraction, the numerator of which is the
amount of acquisition premium on the date of purchase and the denominator of
which is the excess of (i) the stated redemption price at maturity of the
Regular Certificate (reduced as described above) over (ii) its adjusted issue
price on the date of purchase. Under the OID Regulations, Certificateholders may
elect to amortize acquisition premium on a constant interest basis. If a
subsequent holder acquires a Regular Certificate for a price lower than the
adjusted issue price of the Regular Certificate, such Certificateholder's OID
would not exceed that of the original Certificateholder. See, however, the
discussion below under "Market Discount."
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. Interest on a debt obligation payable at
a variable rate is treated as qualified stated interest and not as contingent
interest if, generally, (i) the issue price of such obligation does not exceed
the amount of non-contingent principal payments by more than a specified amount
and (ii) such debt obligation provides for stated interest, paid or compounded
at least annually, at (a) one or more qualified floating rates, (b) a single
fixed rate and one or more qualified floating rates, (c) a single objective rate
or (d) a single fixed rate and a single objective rate that is a qualified
inverse floating rate. A "qualified floating rate" is any variable rate where
variations in the value of such rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds in the currency
in which the debt instrument is denominated. Certain multiples of
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a qualified floating rate will also constitute a qualified floating rate for
purposes of the OID Regulations. Subject to certain limitations, an "objective
rate" is a rate that is not itself a qualified floating rate but which is
determined using a single fixed formula and which is based upon (i) one or more
qualified floating rates, (ii) one or more rates where each rate would be a
qualified floating rate for a debt instrument denominated in a currency other
than the currency in which the debt instrument is denominated, (iii) either the
yield on or changes in the price of one or more items of actively traded
personal property or (iv) a combination of rates described in (i), (ii) and
(iii). An objective rate will qualify as a "qualified inverse floating rate" if
such rate is equal to a fixed rate minus a qualified floating rate and
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the cost of newly-borrowed funds. Subject to the
discussion above under "Interest and Original Issue Discount," the variable
interest generally will be qualified stated interest to the extent it is
unconditionally payable at least annually and, to the extent successive variable
rates are used, interest is not significantly accelerated or deferred.
The amount of OID with respect to a Regular Certificate that provides
for interest at a single qualifying floating rate or a single objective rate
(or, in certain circumstances, a single fixed rate for less than one year
followed, for the remainder of the term of the debt instrument, by a qualified
floating rate or objective rate) will accrue in the manner described above under
"Original Issue Discount," by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the Certificate, either
at the value thereof on the issue date or, in the case of certain objective
rates, at the reasonably expected yield thereof. Appropriate adjustments are
made for the actual variable rate. In general, any other variable rate debt
instrument not treated as bearing contingent interest will be converted into an
"equivalent" fixed rate debt instrument for purposes of determining the amount
and accrual of original issue discount thereon, generally by substituting a
fixed rate in the manner described above for any qualified floating rate or
objective rate at which interest in respect of the debt instrument is
calculated. The original issue discount rules described above would then be
applied to such "equivalent" debt instrument.
The OID Regulations do not clearly address the treatment of a Regular
Certificate the interest accrual on which is based on a weighted average of the
interest rates on underlying Mortgage Loans. Under the OID Regulations, interest
payments on such a Regular Certificate may be characterized as qualified stated
interest which is includible in income in a manner similar to that described in
the previous paragraph. Unless otherwise stated in the relevant Prospectus
Supplement, the REMIC Trust will so treat and report such payments. However, it
is also possible that interest payments on such a Regular Certificate would be
treated as contingent interest (possibly includible in income when the payments
become fixed) or in some other manner. In such event, it is not clear under
current law how a Regular Certificate would be taxed. Such treatment may effect
the timing of income accruals on such Regular Certificates. Additionally, if
some or all of the Mortgage Loans are subject to "teaser rates" (i.e., the
initial rates on the Mortgage Loans are less than subsequent rates on the
Mortgage Loans), the interest paid on some or all of the Regular Certificates
may be subject to accrual using a constant yield method notwithstanding the fact
that such Certificates may not have been issued with "true" non-de minimis
original issue discount.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount provisions of the Code. Except as discussed
below, gain recognized on the disposition of a Regular Certificate that has
accrued market discount will be treated as ordinary income, and not as capital
gain, to the extent of the accrued market discount. "Market discount" in respect
of a Regular Certificate equals the excess, if any, of (i) the Regular
Certificate's stated redemption price at maturity or, in the case of a Regular
Certificate issued with OID, its adjusted issue price over (ii) the tax basis of
the Regular Certificate in the hands of the holder immediately after its
acquisition. Market discount with respect to a Regular Certificate will be
considered to be zero if the amount of such discount allocable to the Regular
Certificate is less than 0.25% of the Regular Certificate's stated redemption
price at maturity multiplied by the number of complete years in the Regular
Certificate's weighted average maturity remaining after the date of purchase. If
market discount on a Regular Certificate is considered to be zero under this
rule, the actual amount of market discount must be allocated to the
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remaining principal payments on the Regular Certificate and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made.
Unless the holder elects to include market discount on a constant yield
basis, the accrued market discount at any time generally would be the amount
calculated by multiplying the market discount by a fraction, the numerator of
which is the number of days the obligation has been held by the holder and the
denominator of which is the number of days after the holder's acquisition of the
obligation up to and including its maturity date. Accrued market discount
generally would be required to be recognized upon sale or exchange of the
Regular Certificate. If a holder of a Regular Certificate acquired with market
discount disposes of such Regular Certificate in any transaction other than a
sale, exchange or involuntary conversion, such holder will be deemed to have
realized an amount equal to the fair market value of the Regular Certificate and
will be required to recognize as ordinary income any accrued market discount. In
the case of obligations on which partial principal payments may be made, a
portion of each such principal payment must be included in income for federal
income tax purposes as ordinary income to the extent such payment does not
exceed the entire amount of market discount that has accrued during the period
that the obligation was held. In general terms, until regulations are
promulgated under the Code, market discount in such cases may be treated as
accruing, at the election of the Certificateholder, either (i) under a constant
yield method, taking into account the Prepayment Assumption or (ii) in
proportion to accruals of OID (or, if there is no OID, in proportion to accruals
of stated interest).
A holder of a Regular Certificate that acquires such Regular
Certificate with market discount also may be required to defer, until the
maturity date of such Regular Certificate or its earlier disposition in a
taxable transaction, the deduction of the portion of interest that the holder
paid or accrued during the taxable year on indebtedness incurred or maintained
to purchase or carry the Regular Certificate in excess of the aggregate amount
of interest (including OID) includible in such holder's gross income for the
taxable year with respect to such Regular Certificate. The amount of such net
interest expense deferred in a taxable year may not exceed the amount of market
discount accrued on the Regular Certificate for the days during the taxable year
on which the holder held the Regular Certificate and, in general, would be
deductible when such market discount is includible in income (i.e., upon
disposition or partial principal payment). The amount of any remaining deferred
deduction generally is allowed as a deduction in the taxable year in which the
Regular Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition, and any remaining deferred deduction will carry
over with the property received.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. This election would apply to all market
discount obligations acquired by the electing Certificateholder on or after the
first day of the first taxable year to which the election applies. The election
may be revoked only with the consent of the Service. Purchasers that acquire a
Regular Certificate with market discount should consult their tax advisors
regarding the manner in which accrued market discount is calculated and the
election to include such market discount currently in income.
Bond Premium. A purchaser of a Regular Certificate who purchases the
Regular Certificate at a cost (not including accrued qualified stated interest)
greater than its remaining stated redemption price at maturity will be
considered to have purchased the Regular Certificate with bond premium, which
such Certificateholder may elect to amortize as an offset to interest income
(and not as a separate deduction item) on a constant yield method. Such
Certificateholder would not be required to include any OID in respect of such
Regular Certificate in its gross income for federal income tax purposes. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the Regular Certificate for purposes of determining the
amount of amortizable bond premium allocable to any particular payment. Although
no regulations have been issued, the legislative history of the 1986 Act could
be read to provide that the same rules that apply to accrual of market discount
(which rules require use of a prepayment assumption in accruing market discount
with respect to a debt
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instrument without regard to whether such debt instrument has OID) also apply in
amortizing bond premium. Accordingly, although there is no authority directly on
point, it appears that the accrual of premium on a Regular Certificate should be
calculated using the Prepayment Assumption. If a Certificateholder makes an
election to amortize premium on a Regular Certificate, such election will apply
to all taxable debt instruments (including all REMIC regular interests) held by
the Certificateholder at the beginning of the taxable year in which the election
is made, and to all taxable debt instruments acquired thereafter by such
Certificateholder. Such election may be revoked only with the consent of the
Service. Purchasers that pay a premium for Regular Certificates should consult
their tax advisors regarding the election to amortize premium and the method to
be employed.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market discount or original issue discount) and premium in income as
interest, based on a constant yield method. If such an election were to be made
with respect to a Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. See "Market Discount". Similarly, a Certificateholder
that makes this election for a Certificate that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Certificateholder
owns or acquires. See "Bond Premium". The election to accrue interest, discount
and premium on a constant yield method with respect to a Certificate cannot be
revoked without the consent of the Service.
Deferred Interest. Certain of the Regular Certificates may provide for
the accrual of interest when one or more Mortgage Loans are adding interest to
their principal balance by reason of negative amortization ("Deferred
Interest"). Any Deferred Interest that accrues with respect to a class of
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear under the OID Regulations whether any of the stated
interest on such Certificates will constitute qualified stated interest or
whether all or a portion of the interest payable on the Certificate must be
included in the stated redemption price at maturity of the Certificate and
accounted for as OID (which could accelerate such inclusion). Unless otherwise
stated in the relevant Prospectus Supplement, the REMIC Trust will treat and
report such payments as payments of qualified stated interest. Interest on
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates, and therefore applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such Regular Certificates.
Interest Only Certificates. As of the date hereof, there is no
authority directly on point regarding the federal income tax consequences of the
issuance by a REMIC of an "interest-only" regular certificate. In the absence of
such authority, unless otherwise provided in the relevant Prospectus Supplement,
the Trust intends to report income from any such classes of Regular Certificates
to the Service and to holders of interest-only Regular Certificates based on the
assumption that the stated redemption price at maturity of such Regular
Certificates is equal to the sum of all payments required to be made in respect
of such Regular Certificates, determined on the basis of the relevant Prepayment
Assumption. As a result, such interest-only Regular Certificates will be treated
as having original issue discount. The treatment of a holder of such a Regular
Certificate in such event is unclear in the event that the calculation of
accrued OID on the Certificate results in a negative amount, although such
holder in such event might be permitted to claim a loss. Alternatively, all
payments on an interest-only Regular Certificate may be treated as payments of
qualified stated interest and the holder of such Certificate may be treated as
having purchased such Certificate at a premium in an amount equal to the excess
of the amount paid for such Certificate over the amount payable at maturity
thereon, if any. The amount of such premium generally would be amortized over
the life of such Regular Certificate taking into account the Prepayment
Assumption if the holder elects the application of the bond premium rules, see
"Bond Premium," although the application of such rules to such a Certificate in
certain circumstances is unclear.
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Accrued Interest Certificates. Certain of the Regular Certificates may
provide for payments of interest based on a period that corresponds to the
interval between Distribution Dates but that ends prior to each such
Distribution Date ("Payment Lag Certificates"). The period between the Closing
Date for Payment Lag Certificates and their first Distribution Date may or may
not exceed such interval. Purchasers of Payment Lag Certificates for which the
period between the Closing Date and the first Distribution Date does not exceed
such interval could pay upon purchase of the Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a Regular
Certificate is allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the Regular Certificate provides for a
payment of stated interest on the first payment date, within one year of the
issue date, that equals or exceeds the amount of the pre-issuance accrued
interest, then the Regular Certificate's issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the Regular Certificate. No similar rule
applies to debt instruments, such as the Payment Lag Certificate described
above, that are issued with pre-issuance accrued interest in excess of the
amount of such interest that is payable within one year. Accordingly, in the
case of such a Payment Lag Certificate, it is anticipated that accrued interest
will be included in the issue price and that interest payments made on the first
Distribution Date will be reported as interest to the extent such payments
represent interest for the number of days which the initial Certificateholder
would hold such Payment Lag Certificate during the first accrual period were
such Certificateholder to hold the Certificate for the entire accrual period.
Investors should consult their own tax advisors concerning the treatment of
Payment Lag Certificates for federal income tax purposes.
Effects of Defaults and Delinquencies. Certificateholders will be
required to report interest income with respect to Regular Certificates under an
accrual method without giving effect to delays and reductions in distributions
attributable to a default or delinquency on the Mortgage Loans and without
regard to whether the Certificates bear OID, except to the extent that it can be
established that such amounts are uncollectible. Further, it is the position of
the Service that OID must be included as income as described above
notwithstanding its uncollectibility. As a result, the amount of income reported
by a Certificateholder in any period could exceed significantly the amount of
cash distributed to such Certificateholder in that period. The Certificateholder
will eventually be allowed a loss (or will be allowed to report a lesser amount
of income) to the extent that the aggregate amount of distributions on the
Certificate is reduced as a result of a Mortgage Loan default. However, the
timing and character of such losses or reductions in income are uncertain and,
accordingly, Certificateholders should consult their own tax advisors on this
point.
Tax Basis. In general, a Certificateholder's tax basis in its Regular
Certificate will be increased by any amounts of OID included in income pursuant
to the foregoing rules through the day preceding the day of disposition and
reduced by any payments received (other than payments of qualified stated
interest) and any amortized bond premium. In addition, to the extent a
Certificateholder recognizes interest income without the receipt of cash in
respect thereof, such Certificateholder will be treated as having tax basis in a
separate asset represented by such interest receivable.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those Regular Certificateholders that are
"pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the Regular Certificates. See "Pass-Through of
Miscellaneous Itemized Deductions" below.
Sale, Exchange or Redemption of Regular Certificates. The sale,
exchange, redemption or other disposition of a Regular Certificate generally
will be a taxable event for federal income tax purposes. The seller will
recognize gain or loss in an amount equal to the difference, if any, between (i)
the amount realized on the sale, exchange or redemption and (ii) the seller's
adjusted tax basis in the Regular Certificate. Similarly, a Certificateholder
who receives a payment which is part of the stated redemption price at maturity
of a Regular
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Certificate will recognize gain equal to the excess, if any, of the amount of
the payment over his adjusted tax basis in the Regular Certificate. Subject to
the discussion above under "Market Discount" and to that in the next paragraph,
any such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if the Regular Certificate has been held for the requisite holding
period (currently more than one year).
Gain from the sale or other disposition of a Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the Regular
Certificate had the yield thereon equaled 110% of the applicable federal rate
(generally, an average yield of U.S. Treasury Obligations published monthly by
the Service) determined as of the date of purchase of such Regular Certificate
over (ii) the amount of ordinary income actually includible in such holder's
income. Further, Regular Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from the sale of a Regular Certificate by a bank or a thrift institution to
which such Section applies will be ordinary income or loss.
Treatment of Realized Losses. Holders of Regular Certificates that are
corporations should, in general, be allowed to deduct as an ordinary loss any
loss sustained during the taxable year on account of any such Certificates
becoming wholly or partially worthless, and, in general, holders of Certificates
that are not corporations should be allowed to deduct as a short-term capital
loss any loss sustained during the taxable year on account of any such
Certificates becoming wholly worthless. Although the matter is unclear,
non-corporate holders of Certificates may be allowed a bad debt deduction at
such time that the principal balance of any such Certificate is reduced to
reflect realized losses resulting from any liquidated Mortgage Loans. The
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Mortgage
Loans remaining in the related Trust have been liquidated or the Certificates of
the related Series have been otherwise retired. Potential investors and
Certificateholders are urged to consult their own tax advisors regarding the
appropriate timing, amount and character of any loss sustained with respect to
such Certificates, including any loss resulting from the failure to recover
previously accrued interest or discount income. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Certificates.
Information Reporting. Information relating to OID accruing during the
calendar year will be furnished annually to the Service and to
Certificateholders to whom such information is required to be furnished.
Certificateholders will be required to determine for themselves whether, by
reason of the rules described above, they are eligible to report a reduced
amount of OID for federal income tax purposes. Although OID will be reported to
each Certificateholder based on the Prepayment Assumption for the particular
Series of Regular Certificates held by such Certificateholder, no representation
is made to Certificateholders that the Mortgage Loans will be prepaid at that
rate or at any other rate
Non-U.S. Persons. Generally, payments of interest and any payment in
respect of accrued OID on the Regular Certificates to a Regular
Certificateholder who is not a U.S. Person (as defined below) not engaged in a
trade or business within the United States, will not be subject to federal
withholding tax if such Regular Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Regular Certificateholder under penalties of perjury, certifying that such
Regular Certificateholder is a foreign person and providing the name and address
of such Regular Certificateholder). If a Regular Certificateholder does not
comply with the certification requirements, payments of interest, including
payments in respect of accrued OID, to such holder may be subject to a 30%
withholding tax, subject to reduction under any applicable tax treaty.
For purposes of this discussion, a "U.S. Person" means a citizen or
resident of the United States, a corporation or a partnership organized in or
under the laws of the United States, or any political subdivision thereof or an
estate or trust, the income of which, from sources outside the United States, is
includible in gross
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income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States.
Backup Withholding
Under the Code, Certificateholders may be subject to, under certain
circumstances, "backup withholding" at the rate of 31% in respect of cash
payments of interest or OID on the Regular Certificates. This withholding
generally applies if the Certificateholder (i) fails to furnish the Principal
Paying Agent with its taxpayer identification number ("TIN"); (ii) furnishes the
Principal Paying Agent an incorrect TIN; (iii) is notified by the Service that
it has failed to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Principal Paying Agent or such Certificateholder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the Certificateholder is not subject to
backup withholding. Any amount withheld from a payment to a Certificateholder
under the backup withholding rules is allowable as a credit against such
Certificateholder's federal income tax liability, provided that the required
information is furnished to the Service. Backup withholding will not apply with
respect to payments made to certain Certificateholders, including payments to
certain exempt recipients (such as corporations and exempt organizations) and to
certain nonresident alien individuals, foreign corporations or other Non-U.S.
Persons. Certificateholders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trust generally must report annually to the Service and to each
Certificateholder that is a Non-U.S. Person the amount of interest and cash in
respect of OID paid to, and the amount, if any, of tax withheld in respect of
each such Certificateholder. These reporting requirements apply whether or not
withholding is reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which such
Certificateholder resides.
The United States 31% backup withholding tax will generally not apply
to payments of interest and cash in respect of OID that are exempt from
withholding tax as described above (provided that neither the Trust nor its
paying agent has actual knowledge that the Certificateholder is a United States
person). See "Taxation of Regular Certificate -- Non-U.S. Persons."
The payments of the proceeds from the disposition of Regular
Certificates effected by the United States office of any broker, U.S. or
foreign, will be subject to information reporting and possible backup
withholding tax unless the owner of the Regular Certificate certifies its
non-U.S. status under penalty of perjury, or otherwise establishes an exemption,
and the broker has no actual knowledge to the contrary. In the case of the
payment of proceeds from the disposition of Regular Certificates effected by a
non-U.S. office of a broker that is either a U.S. person or a "U.S. related
person," existing Treasury regulations require information reporting on the
payment, unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Person and the broker has no actual knowledge to the contrary. For
this purpose, a "U.S. related person" is (i) a "controlled foreign corporation"
for United States federal income tax purposes (generally, a foreign corporation
controlled by United States shareholders) or (ii) a foreign person 50% or more
of whose gross income from all sources for a certain period is derived from
activities that are effectively connected with the conduct of a United States
trade or business. Temporary Treasury regulations provide that reportable
payments of proceeds from the disposition of Certificates effected by a non-U.S.
office of a broker that is a U.S. person or a U.S. related person are not
subject to backup withholding tax until provided otherwise, and the preamble to
recently finalized regulations (which adopted no rule on this point) states that
such temporary regulation is to continue in effect. The payment of the proceeds
from the disposition of Certificates effected by a non-U.S. office of a non-U.S.
broker that is not a U.S. related person generally will not be subject to
information reporting and backup withholding tax.
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Any amounts withheld under the backup withholding rules from a payment
to a Certificateholder that is a Non-U.S. Person will be allowed as a credit
against such Certificateholder's United States federal income tax liability will
be refunded, provided that certain information is timely furnished to the
Service.
Residual Certificates
A REMIC will not be subject to federal income tax except with respect
to income from prohibited transactions and certain other transactions. See
"Prohibited Transactions and Other Taxes" herein. Instead, each original holder
of a Residual Certificate will report on its federal income tax return, as
ordinary income, its share of the taxable income (or loss) of the REMIC for each
day during the taxable year on which such holder owns any Residual Certificates.
An entity cannot qualify as a REMIC absent reasonable arrangements
designed to ensure that (1) residual interests in such entity are not held by
disqualified organizations and (2) information necessary to calculate the tax
due on transfers to disqualified organizations is made available by the REMIC.
The governing instruments of a Trust will contain provisions designed to ensure
the foregoing, and any transferee of a Residual Certificate must execute and
deliver an affidavit stating that neither the transferee nor any person for
whose account such transferee is acquiring the Residual Certificate is a
disqualified organization. In addition, as to the requirement that reasonable
arrangements be made to ensure that disqualified organizations do not hold a
residual interest in the REMIC, the REMIC regulations require that notice of the
prohibition be provided either through a legend on the certificate that
evidences ownership, or through a conspicuous statement in the prospectus or
other offering document used to offer the residual interest for sale. As to the
requirement that sufficient information be made available to calculate the tax
on transfers to disqualified organizations, the REMIC regulations further
require that such information also be provided to the Service.
UNLESS OTHERWISE SPECIFIED IN A RELATED PROSPECTUS SUPPLEMENT, NO
RESIDUAL CERTIFICATES WILL BE OFFERED PURSUANT TO THIS PROSPECTUS. TO THE EXTENT
RESIDUAL CERTIFICATES ARE OFFERED HEREUNDER, AT A LATER DATE, ADDITIONAL
INFORMATION RELEVANT TO THE RESIDUAL CERTIFICATES OFFERED WILL BE PROVIDED IN
THE RELATED PROSPECTUS SUPPLEMENT.
Pass-Through of Miscellaneous Itemized Deductions
As a general rule, all of the expenses of a REMIC will be taken into
account by the holder or holders of the Residual Certificates. In the case of a
"single-class REMIC", however, certain expenses will be allocated, under
Treasury regulations, among the holders of the Regular Certificates and the
holders of the Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a Regular Certificate who is an individual, trust,
estate or a "pass-through interest holder" as defined in the Code, such
Certificateholder's allocable share of the non-interest expenses of the Trust
would be required to be added to its gross income, and an equivalent amount
would be treated as an investment expense. Such expenses would be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Certificateholder, exceed 2% of such Certificateholder's
adjusted gross income. In addition, itemized deductions of individuals with
adjusted gross incomes above particular levels (in 1996, $117,950, or $58,975 in
the case of a separate return by a married individual within the meaning of
Section 7703 of the Code, which amounts shall be adjusted for inflation in
subsequent years) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. Further, personal
exemptions are subject to phase-out above certain levels of adjusted gross
income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the Regular Certificate. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such Certificateholders' alternative minimum taxable
income. In general terms, a single class REMIC is one that either (i) would be
classified as an
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investment trust under Treas. Reg. Section 301.7701-4(c)(i) but for its
qualification as a REMIC (treating all interests as ownership interests, even if
they would be classified as debt for federal income tax purposes) because the
existence of multiple classes of ownership is merely incidental to facilitating
a direct investment in the trust assets (the Mortgage Loans in this case), or
(ii) is substantially similar to such a trust and is structured with the
principal purpose of avoiding the allocation of investment expenses described
above required by the single class REMIC rules. Unless otherwise stated in the
applicable Prospectus Supplement, the expenses of the REMIC will be allocated to
holders of the related Residual Certificates in their entirety and not to
holders of the related Regular Certificates.
Prohibited Transactions and Other Taxes
A REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions." In general, a prohibited transaction is
the disposition of a Mortgage Loan other than pursuant to certain specified
exceptions, the receipt of investment income from a source other than a Mortgage
Loan or certain other permitted investments, or the disposition of an asset
representing a temporary investment of payments on the Mortgage Loans pending
distributions on the Residual Certificates or Regular Certificates. Further, the
assumption of a Mortgage Loan by a subsequent purchaser could cause the REMIC to
recognize gain, which would also be subject to the 100% tax on prohibited
transactions. In addition, certain contributions to a REMIC made after the
Closing Date could result in the imposition of a tax on the REMIC equal to 100%
of the value of the contributed property.
It is not anticipated that the Trust in respect of which an election to
be taxed as a REMIC is made will engage in any prohibited transactions or
receive any contributions subject to the contributions tax. However, in the
event that any such Trust is subject to any such tax, unless otherwise disclosed
in the related Prospectus Supplement, such tax would be borne first by the
Residual Certificateholders, to the extent of amounts distributable to them, and
then by the Servicer.
Liquidation and Termination
If a Trust in respect of which an election to be taxed as a REMIC is
made adopts a plan of complete liquidation, which may be accomplished by
designating in such Trust's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets (other than cash) within a 90-day
period beginning on such date, such Trust will recognize no gain or loss on the
sale of its assets, provided that such Trust credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular and Residual Certificates within
the 90-day period.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the Trust in respect of which an election to be taxed as a REMIC is made will be
treated as a partnership and the Residual Certificateholders will be treated as
the partners thereof; however, under Temporary Regulations if there is at no
time during the taxable year more than one Residual Certificateholder, a REMIC
shall not be subject to the rules of Subchapter C of chapter 63 of the Code,
relating to the treatment of partnership items for a taxable year. The Trust
will file an annual tax return on Form 1066, U.S. Real Estate Mortgage
Investment Conduct Income Tax Return. In addition, certain other information
will be furnished quarterly to each Residual Certificateholder who held such
Residual Certificate on any day in the previous calendar quarter.
GRANTOR TRUST STATUS
If a REMIC election is not made in respect of a Trust (or any portion
of the assets thereof), counsel to the Originator will deliver its opinion that
the Trust will be classified as a grantor trust under subpart E, Part I of
subchapter J of Chapter 1 of subtitle A of the Code. In this case, owners of
Certificates will be treated for
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federal income tax purposes as owners of a
portion of the Trust's assets as described below, and no entity level tax will
be imposed on the Trust.
Grantor Trust with a Single Class of Senior Certificates
Characterization. The Trust may be created with one class of Senior
Certificates and one class of Subordinated Certificates (which will represent
the equity in the Trust). In this case, each Senior Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust represented by that Senior Certificate and will
be considered the equitable owner of a pro rata undivided interest in each of
the Mortgage Loans in the Mortgage Pool. Any amounts received by a Senior
Certificateholder in lieu of amounts due with respect to any Mortgage Loan
because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans in the Trust represented by such Senior Certificate, including
interest, original issue discount, if any, prepayment fees, assumption fees, any
gain recognized upon an assumption and late payment charges received by the
Servicer in accordance with such Senior Certificateholder's method of
accounting. Under Section 162 or 212 of the Code, each Senior Certificateholder
will be entitled to deduct its pro rata share of servicing fees, prepayment
fees, assumption fees, any loss recognized upon an assumption and late payment
charges retained by the Servicer provided that such amounts are reasonable
compensation for services rendered to the Trust. Senior Certificateholders that
are individuals, estates or trusts will be entitled to deduct their share of
expenses only to the extent such expenses plus all other miscellaneous itemized
deductions (as defined in the Code) exceed two percent of such
Certificateholder's adjusted gross income. A Senior Certificateholder using the
cash method of accounting must take into account its pro rata share of income
and deductions as and when collected by or paid to the Servicer. A Senior
Certificateholder using an accrual method of accounting must take into account
its pro rata share of income and deductions as they become due or are paid to
the Servicer, whichever is earlier. If the Servicing Fees paid to the Servicer
were deemed to exceed reasonable servicing compensation, the amount of such
excess could be considered as a retained ownership interest by the Servicer (or
any person to whom the Servicer assigned for value all or a portion of the
Servicing Fees) in a portion of the interest payments on the Mortgage Loans. In
such event, the Mortgage Loans could be subject to the "coupon stripping" rules
of the Code discussed below. See "Grantor Trust with Multiple Classes of Senior
Certificates -- Striped Bonds and Stripped Coupons."
Treatment of Certain Owners. Unless otherwise specified in the related
Prospectus Supplement, as to each Series of Certificates, counsel to the
Originator will have advised the Originator that:
(i) a Senior Certificate held by a thrift institution taxed as
a "mutual savings bank" or "domestic building and loan association"
representing principal and interest payments on Mortgage Loans will
represent "qualifying real property loans" within the meaning of
Section 593(d) of the Code to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such
Code section;
(ii) a Senior Certificate held by a thrift institution taxed
as a "domestic building and loan association" representing principal
and interest payments on Mortgage Loans will represent "loans . . .
secured by an interest in real property which is . . . residential
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code
to the extent that the Mortgage Loans represented by that Senior
Certificate are of a type described in such Code section;
(iii) a Senior Certificate owned by a real estate investment
trust representing an interest in Mortgage Loans will be considered to
represent "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code, and interest income on the Mortgage Loans
will be considered "interest on
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obligations secured by mortgages on real property" within the meaning
of Section 856(c)(3)(B) of the Code, to the extent that the Mortgage
Loans represented by that Senior Certificate are of a type described in
such Code Section; and
(iv) a Senior Certificate owned by a REMIC will be an
"obligation . . . which is principally secured, directly or indirectly,
by an interest in real property" within the meaning of Section
860G(a)(3) of the Code.
Tax Basis. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's undivided
interest in each Mortgage Loan will have its own tax basis. Such tax basis will
be reduced to the extent of payments in respect of the Mortgage Loans (other
than payments of qualified stated interest), and to the extent that amortizable
premium is applied to offset interest payments, and will be increased by the
amount of any OID required to be included in income, in each case as described
below. See "Bond Premium" and "Original Issue Discount."
Bond Premium. A Senior Certificateholder that acquires an interest in
Mortgage Loans at a premium may elect to amortize such premium under a constant
interest method, provided that such Mortgage Loan was originated after September
27, 1985. See the discussion above under the caption "Tax Status as a REMIC
- --Taxation of Regular Certificates -- Bond Premium" for a discussion of the
election to amortize bond premium. Any amortizable bond premium in respect of
which such election is made will be treated as an offset of interest income on
such Senior Certificate. Premium allocable to a Mortgage Loan originated on or
before September 27, 1985 should be allocated among the principal payments on
the Mortgage Loan and allowed as an ordinary deduction as principal payments are
made.
Although not free from doubt, the amortization of bond premium should
be based on scheduled payments on the Mortgage Loans or using a reasonable
prepayment assumption. If a premium is not subject to amortization using a
reasonable prepayment assumption, the holder of a Senior Certificate acquired at
a premium should recognize a loss, if a Mortgage Loan prepays in full, equal to
the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to the Mortgage Loan. If a
reasonable prepayment assumption is used to amortize such premium, it appears
that such a loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment rate. It is not
clear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
Original Issue Discount. The Service has stated in published rulings
that, in circumstances similar to those described herein, the OID rules of the
Code will be applicable to a Senior Certificateholder's interest in those
Mortgage Loans meeting the conditions necessary for such rules to apply. Rules
regarding periodic inclusion of OID are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. OID could arise by the financing of points or
other charges by the originator of the mortgages in an amount greater than the
statutory de minimis amount described above to the extent that the points are
not currently deductible under applicable Code provisions or are not for
property or for services provided by the lender.
Under the Code, the Mortgage Loans underlying the Senior Certificates
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of each such Mortgage Loan's stated redemption
price at maturity over its issue price. The issue price of a Mortgage Loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a Mortgage Loan is the sum of all payments to be made on such Mortgage Loan
other than payments that are treated as qualified stated interest payments.
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OID generally must be included in income for federal income tax
purposes as ordinary income as it accrues under a constant interest method. See
"Multiple Classes of Senior Certificates -- Accrual of Original Issue Discount"
below.
Market Discount. A purchaser of a Senior Certificate that acquires an
undivided interest in Mortgage Loans may be subject to the market discount
provisions of the Code to the extent an undivided interest in a Mortgage Loan is
considered to have been purchased at a "market discount." Except as discussed
below, gain recognized on the disposition of a debt obligation that has accrued
market discount will be treated as ordinary income, and not as capital gain, to
the extent of the market discount accrued during such holder's holding period.
Under the market discount provisions, market discount equals the excess, if any,
(i) of the portion of the stated redemption price at maturity (adjusted issue
prices in the case of a Mortgage Loan issued with OID) of such Mortgage Loan
allocable to such holder's undivided interest over (ii) the tax basis of such
interest in the hands of the holder immediately after its acquisition. Market
discount with respect to a Mortgage Loan (and Senior Certificate) will be
considered to be zero if the amount allocable to the Mortgage Loan (and Senior
Certificate) is less than 0.25% of the Mortgage Loan's (or Senior Certificate's)
stated redemption price at maturity multiplied by the number of complete years
in the weighted average maturity remaining after the date of purchase. If market
discount on a Regular Certificate is considered to be zero under this rule, the
actual amount of market discount must be allocated to the remaining principal
payments on the Regular Certificate and gain equal to such allocated amount will
be recognized when the corresponding principal payment is made.
For a discussion of the rules applicable to calculating the amount of
accrued market discount, the possibility that certain interest deductions on
debt incurred to purchase or carry market discount bonds would be deferred and
the election to include market discount currently in income, see the discussion
above under the caption "Tax Status as a REMIC -- Taxation of Regular
Certificates -- Market Discount."
Election to Treat All Interest as OID. The OID Regulations (as defined
herein) permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market discount or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
to be made with respect to a Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. See "Tax Status as a REMIC -- Taxation of Regular
Certificates -- Market Discount." Similarly, a Certificateholder that makes this
election for a Senior Certificate that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns or
acquires. See "Tax Status as a REMIC -- Taxation of Regular Certificates --Bond
Premium." The election to accrue interest, discount and premium on a constant
yield method with respect to a Senior Certificate cannot be revoked without the
consent of the Service.
Grantor Trust with Multiple Classes of Senior Certificates
Characterization. Except as discussed below, the characterization and
consequence of ownership of Senior Certificates will be as described above under
the caption "Grantor Trust with a Single Class of Senior Certificates
- --Characterization."
Stripped Bonds and Stripped Coupons. Pursuant to Section 1286 of the
Code, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments on such obligation results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons" with
respect to interest payments. For purposes of the OID and market discount
provisions of the Code, a stripped bond or a stripped coupon is treated as a
debt obligation issued on the date that such a stripped interest is purchased.
If a Trust is created with two classes of Senior Certificates, one class of
Senior Certificates will represent the right to receive either principal and
interest, or principal only, on all or a portion of the Mortgage Loans (the
"Stripped Bond Certificates"), and
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the second class of Senior Certificates will represent the right to some or all
of the interest on such portion (the "Stripped Coupon Certificates").
Although not entirely clear, based on recent guidance issued by the
Service, a Stripped Bond Certificate generally should be treated as a single
debt instrument (rather than a fractional interest in each of the Mortgage
Loans) issued on the day it is purchased for purposes of the calculation and
accrual of OID. Generally, if the Stripped Bond Certificate is so treated and
the discount thereon is larger than a de minimis amount (as calculated for
purposes of the OID rules), a purchaser of such a Certificate will be required
to accrue the discount under the OID rules of the Code (although if the
Certificate were treated as a fractional interest in each Mortgage Loan, a
holder could be required to make such determination on a loan-by-loan basis).
See "Tax Status as a REMIC -- Taxation of Regular Certificates -- Interest and
Original Issue Discount" herein. Notwithstanding the foregoing, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Certificate as market discount rather than OID if either (i) the amount of OID
with respect to the Certificate was treated as zero under the OID de minimis
rule when the Certificate was stripped or (ii) no more than 100 basis points
(including any amount of servicing fees in excess of reasonable servicing fees)
is stripped off of the Trust's Mortgage Loans. See "Grantor Trust with a Single
Class of Senior Certificates -- Market Discount" herein.
The precise tax treatment of Stripped Coupon Certificates is also
uncertain. It appears, based on one reading of the OID Regulations, that a
holder of a Stripped Coupon Certificate could take the position that such
Certificate should be treated as a single installment obligation subject to the
OID rules of the Code. As a result, all payments on a Stripped Coupon
Certificate would be included in the Certificate's stated redemption price at
maturity for purposes of calculating income on such Certificate under the OID
rules of the Code. Unless otherwise disclosed in the Prospectus Supplement for a
Senior Certificate, the Trust will take such position. The Code, however, could
be read to require that OID computations be made on a loan-by-loan (or
coupon-by-coupon) basis.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Loans will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Senior Certificate, it appears that no loss
may be available as a result of any particular prepayment unless aggregate
prepayments occur at a rate faster than the assumed prepayment rate. However, if
such Certificate is treated as an interest in discrete Mortgage Loans, or if no
prepayment assumption is so used, then when a Mortgage Loan is prepaid, the
holder of such Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of such Certificate that is allocable to
such Mortgage Loan.
It is unclear whether, if a Stripped Coupon Certificate were treated as
an interest in discrete mortgage loans, the worthlessness of a coupon (resulting
from prepayment of the underlying Mortgage Loan) would give rise to an ordinary
or capital loss. If the coupons constitute "securities" (that is, evidences of
indebtedness issued in registered form), their worthlessness would give rise to
a capital loss. It is unclear whether the treatment of coupons as evidences of
indebtedness for purposes of the rules described above extends to other areas of
the Code. Further, guidance issued by the Service pre-dating the issuance of
such rules indicates that coupons are not issued in registered form. If coupons
are not securities, their worthlessness in the case of a corporate holder would
give rise to an ordinary deduction. In such event, in the case of an individual
holder, their worthlessness could give rise to an ordinary loss or to a
short-term capital loss. Holders are urged to consult their own tax advisors
regarding the treatment of a worthless coupon.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in mortgage loans of the type that
will be included in a Trust. With respect to these Code provisions,
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no specific legal authority exists regarding whether the character of the
Stripped Bond Certificates and Stripped Coupon Certificates described above, for
federal income tax purposes, will be the same as that of the underlying Mortgage
Loans. Although a stripped obligation is treated as a separate obligation for
purposes of the calculation of the amount and accrual of OID, it is not clear
that such characterization would apply with regard to these other Code sections.
Although the issue is not free from doubt, based on policy considerations, each
class of Senior Certificates should be treated in the manner described above
under the caption "Grantor Trust With a Single Class of Certificates --
Treatment of Certain Owners" except that a Senior Certificate owned by a REMIC
will be "obligation[s] (including any participation or certificate of beneficial
ownership therein) which [are] principally secured, directly or indirectly, by
an interest in real property" within the meaning of Section 860G(a)(3) of the
Code. Prospective purchasers to which such characterization of an investment in
Senior Certificates is material should consult their own tax advisors regarding
the characterization of the Senior Certificates and the income therefrom.
Interest and Original Issue Discount. The following discussion is based
in part on the OID Regulations. The OID Regulations generally are effective for
debt instruments issued on or after April 4, 1994, but may be relied upon as
authority with respect to debt instruments issued after December 21, 1992.
Alternatively, proposed Treasury regulations issued December 21, 1992 may be
treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 (the "Proposed OID Regulations") may be treated as authority for
instruments issued before December 21, 1992. In applying these dates, the issue
date of the Mortgage Loans should be used, except in the case of Stripped Bond
Certificates or Stripped Coupon Certificates, for which the relevant date is the
date such Certificates are acquired. Further, as discussed above, it is unclear
in the case of Stripped Bond Certificates and Stripped Coupon Certificates
whether the determination of the amount and accrual of OID should be made for
each Certificate or by treating each Certificate as a fractional interest in
each of the Mortgage Loans. In the case of Stripped Bond Certificates and
Stripped Coupon Certificates, and in the absence of additional guidance, unless
disclosed in the Prospectus Supplement with respect to a particular Series of
Certificates, the Trust will take the position that such determinations should
be made by treating each of such Certificates as a single debt instrument.
A holder of a Senior Certificate will be required to include payments
of "qualified stated interest" in its income for federal income tax purposes in
accordance with its method of accounting for federal income tax purposes. See
the discussion above under the caption "Tax Status as a REMIC -- Taxation of
Regular Certificates -- Interest and Original Issue Discount" for a discussion
of the definition of qualified stated interest. A holder of a Senior Certificate
issued with OID will be required to include such OID in income on a constant
yield basis over the term of the Certificate. See the discussion above under the
caption "Tax Status as a REMIC -- Taxation of Regular Certificates -- Interest
and Original Issue Discount" for a discussion of the definition of OID.
Accrual of Original Issue Discount. At the date hereof, no legal
authority provides guidance with regard to the proper method for accruing OID on
obligations that are subject to prepayment other than debt instruments
collateralized by other debt instruments. Such rules are described above under
the caption "Tax Status as a REMIC -- Taxation of Regular Certificates --
Interest and Original Issue Discount." Because the Senior Certificates represent
a direct interest in the underlying Mortgage Loans for federal income tax
purposes, such authority is not directly applicable to the Senior Certificates.
In the absence of direct legal authority, however, and consistent with the
authority referred to above, the accrual of OID on the Senior Certificates
should be determined based on the original yield to maturity of the Senior
Certificates calculated based on a reasonable assumed prepayment rate for the
Mortgage Loans underlying the Senior Certificates, and taking into account
events that occur after the issuance of the Senior Certificates. No
representation is made that any Senior Certificate will prepay at the Prepayment
Assumption or at any other rate. Until further guidance is issued, and, unless
otherwise specified in the related Prospectus Supplement, if such guidance is
available at the time such Supplement is issued, the Servicer intends to
calculate and report the accrual of OID under the method described
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below. It is possible, however, that a different method is required, in which
event a holder would be required to include a different amount of OID in its
gross income for federal income tax purposes.
The holder of a Senior Certificate issued with OID must include in
gross income for federal income tax purposes as ordinary income for all days
during its taxable year on which it holds such Senior Certificate the sum of the
"daily portions" of such OID determined under a method taking into account an
economic accrual of the discount. Under the method the Servicer intends to use
to calculate the accrual of OID, the amount of OID that will accrue during an
accrual period (generally the period between interest payments or compounding
dates) is the excess (if any) of (i) the sum of (a) the present value of all
payments remaining to be made on the Senior Certificate as of the close of the
accrual period and (b) the payments during the accrual period of amounts
included in the stated redemption price at maturity of the Senior Certificate,
over (ii) the "adjusted issue price" of the Senior Certificate at the beginning
of the accrual period. The "stated redemption price at maturity" of a Senior
Certificate generally will include all payments to be made on such Certificate
other than payments of qualified stated interest; all interest on Senior
Certificates the stated interest on which is not payable at least annually will
be included in the stated redemption price at maturity of such Senior
Certificates. The adjusted issue price of a Senior Certificate is the sum of its
issue price and prior accruals of OID, reduced by the total payments made with
respect to such Senior Certificate in all prior periods, other than payments of
qualified stated interest. The present value of the remaining payments is
determined on the basis of three factors: (i) the original "yield to maturity"
of the Senior Certificate (which is the interest rate, determined on the basis
of compounding at the end of each accrual period and properly adjusted for the
length of the accrual period, that causes the present values of all future
payments on the Senior Certificate (determined in accordance with the Prepayment
Assumption) to equal its issue price on the issue date), (ii) events which have
occurred before the end of the accrual period and (iii) the Prepayment
Assumption. The effect of this method would be to increase the portions of OID
required to be included in income by a Certificateholder to take into account
prepayments with respect to the Mortgage Loans that occur at a rate that exceeds
the Prepayment Assumption.
Acquisition Premium. The amount of OID required to be included in gross
income for federal income tax purposes by a holder that acquires a Senior
Certificate by "purchase" would be reduced if such holder's tax basis in the
Senior Certificate immediately after such acquisition (i) exceeds the adjusted
issue price of the Senior Certificate and (ii) is less than or equal to its
stated redemption price at maturity (reduced by any payment made on the Senior
Certificate prior to the purchase date other than a payment of qualified stated
interest). For a discussion of the rules relating to the amortization of such
"acquisition premium," see the discussion above under the caption "Tax Status as
a REMIC -- Taxation of Regular Certificate --Acquisition Premium."
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as certain Senior Certificates, which represent interests in ARM Loans.
Additionally, the Service has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Servicer or the Trustee for the related Series of Certificates
will report OID on Senior Certificates attributable to ARM Loans ("Stripped ARM
Obligations") to holders in a manner it believes is consistent with the rules
described above and with the OID Regulations. In general, application of these
rules may require inclusion of income on a Stripped ARM Obligation in advance of
the receipt of cash attributable to such income. Further, the addition of
interest deferred by reason of negative amortization to the principal balance of
an ARM Loan may require the inclusion of such amount in the income of the
Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Certificate's principal balance will result in
additional income (including possibly OID income) to the Certificateholder and
the Stripped Coupon Certificateholder over the remaining life of such Senior
Certificates. See the discussion above under "Tax Status as a REMIC --Taxation
of Regular Certificates -- Deferred Interest."
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
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Sale or Exchange of a Senior Certificate
The sale, exchange, redemption or other disposition of a Senior
Certificate generally will be a taxable event for federal income tax purposes.
The seller will recognize gain or loss in an amount equal to the difference, if
any, between (i) the amount realized on the sale, exchange or redemption and
(ii) the seller's adjusted tax basis in the Senior Certificate. Similarly, a
Certificateholder who receives a payment which is part of the stated redemption
price at maturity of a Senior Certificate will recognize gain equal to the
excess, if any, of the amount of the payment over his adjusted tax basis in the
Senior Certificate. Subject to the discussion above under "Market Discount" and
to that in the next paragraph, any such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if the Senior Certificate has
been held for the requisite holding period (currently more than one year).
Senior Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a Senior Certificate by a bank or a thrift institution to which such
Section applies will be ordinary income or loss.
Non-U.S. Persons - Senior Certificates
Generally, to the extent that a Senior Certificate evidences ownership
in Mortgage Loans that are issued on or before July 18, 1984, interest or
payments in respect of OID paid by the person required to withhold tax under
Section 1441 or Section 1442 of the Code to (i) an owner that is not a U.S.
Person, or (ii) a Senior Certificateholder holding on behalf of an owner that is
not a U.S. Person, will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Senior Certificate also will be subject to federal income tax
at the same rate. Generally, such payments would not be subject to withholding
to the extent that a Senior Certificate evidences ownership in Mortgage Loans
issued after July 18, 1984, if (i) such Senior Certificateholder does not
actually or constructively own 10 percent or more of the combined voting power
of all classes of equity in the issuer (which for purposes of this discussion
may be defined as the Trust (the "Issuer")); (ii) such Senior Certificateholder
is not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such Senior Certificateholder complies with
certain identification requirements (including delivery of a statement, signed
by the Senior Certificateholder under penalties of perjury, certifying that such
Senior Certificateholder is not a U.S. Person and providing the name and address
of such Senior Certificateholder).
Information Reporting and Backup Withholding
Information relating to OID accruing during the calendar year will be
furnished annually to the Service and to Certificateholders to whom such
information is required to be furnished. Certificateholders will be required to
determine for themselves whether, by reason of the rules described above, they
are eligible to report a reduced amount of OID for federal income tax purposes.
Although OID will be reported to each Certificateholder based on the Prepayment
Assumption for the particular Series of Regular Certificates held by such
Certificateholder, no representation is made to Certificateholders that the
Mortgage Loans will be prepaid at that rate or at any other rate. For a
discussion of backup withholding, see the discussion above under "Tax Status as
a REMIC -- Backup Withholding."
Taxable Mortgage Pools
Effective January 1, 1992, an entity classified as a TMP is subject to
corporate-level tax on its net income (i.e., income from Mortgage Loans less
interest and original issue discount expenses and any administrative expenses).
A TMP is generally defined as an entity that meets the following requirements:
(i) the entity is not a REMIC, (ii) substantially all of the assets of the
entity are debt obligations, and more than 50 percent of such debt obligations
consist of real estate mortgages (or interests therein), (iii) the entity is the
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obligor under debt obligations with two or more maturities, and (iv) payments on
the debt obligations on which the entity is the obligor bear a relationship to
the payments on the debt obligations which the entity holds as assets. With
respect to requirement (iii), the Code authorizes the Service to provide by
regulations that equity interests may be treated as debt for purposes of
determining whether there are two or more maturities. If a Series of Senior
Certificates were treated as obligations of a TMP, the Trust would be ineligible
to file consolidated returns with any other corporation and could be liable for
corporate tax. Treasury regulations do not provide for the recharacterization of
equity as debt for purposes of determining whether an entity has issued debt
with two maturities, except in the case of transactions structured to avoid the
TMP rules.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described herein
under "Certain Federal Income Tax Considerations," potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Certificates. State 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. Therefore, potential
investors should consult their own tax advisors with respect to the various tax
consequences of investments in the Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended,
imposes certain requirements on employee benefit plans and collective investment
funds, separate accounts and insurance company general accounts in which such
plans or arrangements are invested to which it applies and on those persons who
are fiduciaries with respect to such benefit plans. Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA) and
certain church plans (as defined in Section 3(33) of ERISA), are not subject to
ERISA. In accordance with ERISA's general fiduciary standards, before investing
in a Certificate a benefit plan fiduciary should determine whether such an
investment is permitted under the governing benefit plan instruments, is being
undertaken for the exclusive benefit of the plan participants and beneficiaries,
and is appropriate for the benefit plan in view of its overall investment policy
and the composition and diversification of its portfolio and is prudent.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code are prohibited from engaging in a broad range of
transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Originator, the Certificate Guaranty Insurer, the Underwriter and the
Trustee and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition or holding or transfer of Certificates by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan,
which provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a Plan
makes an "equity" investment will be deemed for purposes of ERISA to be assets
of the investing Plan unless certain exceptions apply. If an investing Plan's
assets were deemed to include an interest in the Mortgage Loans and any other
assets of the Trust and not merely an interest in the Certificates, the assets
of the Trust would become subject to the fiduciary investment standards of
ERISA, and transactions occurring between the Representative, the Trustee, the
Servicer, the Certificate Guaranty Insurer or any of their affiliates might
constitute prohibited transactions, unless an administrative exemption applies.
Certain such exemptions which may be applicable to the acquisition and holding
of the Certificates or to the servicing of the Mortgage Loans are noted below.
85
<PAGE> 88
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1, 48 F.R. 895 (Jan. 7, 1983) ("PTCE
83-1"), which, under certain conditions, exempts from the application of the
prohibited transaction rules of ERISA and the excise tax provisions of Section
4975 of the Code certain transactions involving a Plan in connection with the
operation of a "mortgage pool" investment trust and the purchase, sale and
holding of "mortgage pool pass-through certificates" evidencing interests
therein. A "mortgage pool" is defined as an investment pool, the corpus of which
is held in trust and consists solely of interest bearing obligations secured by
first or second mortgages or deeds of trust on single-family residential
property, property which had secured such obligations and which has been
acquired in foreclosure, and undistributed cash. "Single - family residential
property" means non-farm property comprising one to four dwelling units, and
also includes condominiums. A "mortgage pool pass-through certificate" is
defined as a certificate which represents a beneficial undivided interest in a
mortgage pool which entitles the holder to pass-through payments of principal
and interest from the mortgage loans, less any fees retained by the pool
sponsor.
For the exemption to apply, PTCE 83-1 requires that (i) the
Representative and the Trustee maintain a system of insurance or other
protection for the Mortgage Loans and the property securing such Mortgage Loans,
and for indemnifying holders of Certificates relying on the exemption against
reductions in pass-through payments due to defaults in loan payments or property
damage in an amount at least equal to the greater of 1% of the aggregate
principal balance of the Mortgage Loans, or the principal balance of the largest
covered pooled Mortgage Loan; (ii) the Trustee may not be an affiliate of the
Representative; and (iii) the payments made to and retained by the
Representative in connection with the Trust, together with all funds inuring to
its benefit for administering the Trust, represent no more than "adequate
consideration" for selling the Mortgage Loans, plus reasonable compensation for
services provided to the Trust.
If the above conditions are met, then, except as provided below, PTCE
83-1 exempts the initial sale of Certificates to a Plan and continued holding of
such Certificates by a Plan, with respect to which the Representative, the
Certificate Guaranty Insurer, or the Trustee is a party in bearing interest (or
if the Servicer is a party in interest by virtue of providing services to the
Plan, or by virtue of being affiliated with such a service provider, solely
because of the Plan's ownership of Certificates), if the Plan does not pay more
than the fair market value for such Certificates and the rights and interests
evidenced by such Certificates are not subordinated to the rights and interests
evidenced by other Certificates of the same pool. PTCE 83-1 also exempts from
the prohibited transaction rules certain transactions in connection with the
servicing and operation of the Pool, provided that any payments made to the
Servicer in connection with the servicing of the Trust are made in accordance
with a binding pooling and servicing agreement, copies of which must be made
available to prospective investors.
PTCE 83-1 also exempts the initial sale, exchange, or transfer of
Certificates where the Representative, the Certificate Guaranty Insurer, or the
Trustee is a fiduciary, if, in addition of the other requirements: (i) the
initial sale, exchange or transfer of Certificates is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Certificates; (ii) the Plan pays no more for the Certificates
than would be paid in an arm's length transaction; (iii) no investment
management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Representative with regard to the sale, exchange or
transfer of Certificates to the Plan; (iv) the total value of the Certificates
purchased by such Plan does not exceed 25% of the amount of Certificates issued;
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the Representative, the Trustee, the Servicer, and the
Certificate Guaranty Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust is a "mortgage pool," that the Certificates constitute "mortgage
pool pass-through certificates," and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should also consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificate on
behalf of a Plan.
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<PAGE> 89
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
exemptions, which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL
may be available to the Plan investing in Certificates, depending in part upon
the type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including but not limited to:
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds, and PTCE
95-60, regarding investments by insurance company general accounts. However,
even if the conditions specified in one of the individual underwriter or
placement agent exemptions or one or more of these other exemptions are met, the
scope of the relief provided might or might not cover all acts which might be
construed as prohibited transactions.
Accordingly, any Plan fiduciary considering the purchase of a
Certificate should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment. Moreover, each Plan
fiduciary should determine whether, under the general fiduciary standards of
exclusive benefit, investment prudence, and diversification, an investment in
the Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT CONSIDERATIONS
SMMEA
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans or deeds of trust may
not be legally authorized to invest in the Certificates. No representation is
made herein as to whether the Certificates will constitute legal investments for
any entity under any applicable statute, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the Certificates as legal investments for such purchasers prior to
investing in any Class of Certificates.
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Certificates Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain type of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulation may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
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<PAGE> 90
The Policy Statement provides that a "high-risk mortgage security" is
not suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
A depository institution must ascertain and document prior to purchase
and no less frequently than annually thereafter that a no-high-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative
product possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
collateralized mortgage obligations ("CMOs"), REMICs, CMO and REMIC residuals
and stripped mortgage-backed securities. A mortgage derivative product that, at
the time of purchase or at a subsequent testing date, meets any one of three
tests will be considered a high-risk mortgage security. When the characteristics
of a mortgage derivative product are such that the first two tests cannot be
applied (such as interest-only strips), the mortgage derivative product remains
subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i)
the mortgage derivative product has an expected weighted average life greater
than 10 years; (ii) the expected weighted average life of the mortgage
derivative product: (a) extends by more than 4 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points, or (b)
shortens by more than 6 years, assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; and (iii) the estimated
change in the price of the mortgage derivative product is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
When performing the price sensitivity test, the same prepayment
assumptions and same cash flows that were used to estimate average life
sensitivity must be used. The discount rate assumptions should be determined by
(i) calculating that the discount rate for the security equals the yield on a
comparable average life U.S. Treasury security plus a constant spread, (ii)
calculating the spread over Treasury rates from the bid side of the market for
the mortgage derivative product, and (iii) assuming the spread remains constant
when the Treasury curve swings up or down 300 basis points. Discounting the cash
flows by their respective discount rates estimates a price in the plus or minus
300 basis point environments. The initial price must be determined by the offer
side of the market and used as the base price from which the 17% price
sensitivity test will be measured.
Generally, a floating-rate debt class will not be subject to the
average life and average life sensitivity tests described above if it bears a
rate that, at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate (LIBOR). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Certificates and other products, whether carried on or off balance
sheet (such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total
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<PAGE> 91
investment portfolio or total capital of a depository institution are considered
an imprudent investment practice. Long-maturity generally means a remaining
maturity exceeding 10 years.
GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplement will
be offered in Series, either directly by the Originator or through one or more
underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series will set forth the terms of the offering of such
Series and of each Class within such Series, including the name or names of the
Underwriters, the proceeds to the Originator, and either the initial public
offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Certificates will be
determined.
The Certificates in a Series may be acquired by Underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. It is anticipated that the
underwriting agreement pertaining to the sale of any Series of Certificates will
provide that the obligations of any Underwriters will be subject to certain
conditions precedent, and such Underwriters will be severally obligated to
purchase all of a Series of Certificates described in the related Prospectus
Supplement, if they are purchased and that in limited circumstances the
Originator will indemnify any Underwriters against certain civil liabilities,
including liabilities under the Securities Act, or will contribute to
payments any Underwriters may be required to make in respect thereof.
If Certificates of a Series are offered other than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Certificates of such Series.
The Originator anticipates that the Certificates will be sold primarily
to institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection
with reoffers and sales by them of Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates of
each Series, including certain federal income tax consequences with respect
thereto, will be passed upon by Gibson, Dunn & Crutcher LLP, New York, New York.
FINANCIAL INFORMATION
The Originator has determined that its financial statements are not
material to the offering made hereby.
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<PAGE> 92
A new Trust will be formed to own the Mortgage Loans and to issue each
Series of Certificates. Each such Trust will have no assets or obligations prior
to the issuance of the Certificates and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts will be included in this Prospectus or any Prospectus Supplement.
RATING
Unless otherwise specified in the related Prospectus Supplement, it is
a condition to the issuance of the Certificates of each Series offered hereby
that they shall have been rated in one of the four highest rating categories by
the nationally recognized statistical rating agency or agencies specified in the
related Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in extreme cases might fail to recoup their
underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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<PAGE> 93
INDEX OF DEFINED TERMS
Term Page
---- ----
1
1933 Act..............................................3
1986 Act.............................................67
A
Accounts.............................................34
Accrual Certificates.................................38
Adjusted Issue Price.................................69
Appraised Value......................................27
ARM Loans............................................23
Available Funds......................................36
B
Balloon Loan.........................................20
Bankruptcy Bond......................................13
C
Cede.................................................18
CERCLA...............................................64
Certificate Account..................................36
Certificate Guaranty Insurance Policy ...............12
Certificate Insurer..................................41
Certificate Principal Balance........................38
Certificate Register.................................36
Certificateholders....................................1
Certificates..........................................1
Class.................................................1
Cleanup Costs........................................64
Closing Date.........................................48
CMOs.................................................88
Code.................................................16
Collection Account...................................51
Collection Period....................................37
Combined Loan-to-Value Ratio.........................27
Commission............................................3
Compensating Interest Payments.......................54
Conventional Home Improvement Loans ..................8
Cut-off Date.........................................10
D
Deferred Interest....................................72
Definitive Certificates..............................18
Deleted Mortgage Loan................................51
Deposit Date.........................................52
Detailed Description.................................26
Distribution Date.....................................1
DOL..................................................85
DTC..................................................18
E
EPA..................................................64
ERISA................................................17
Event of Default.....................................58
Exchange Act..........................................3
F
FHA...................................................9
FHA Insurance Premium................................56
FHA Loans.............................................8
FHA Premium Account..................................52
FHA Premium Amounts..................................52
FHLMC................................................24
FNMA.................................................24
Funding Period.......................................10
G
Garn-St Germain Act..................................63
H
Home Improvement Loans................................8
HUD...................................................9
I
Indirect Participant.................................34
Insurance Proceeds...................................37
Insured Amount.......................................12
Interest Weighted Class..............................24
Issuer...............................................84
J
Junior Lien..........................................20
L
Liquidated Mortgage Loan.............................54
Liquidation Proceeds.................................37
Loan Purchase Price..................................50
Loan Schedule........................................48
lockout periods......................................27
M
Master REMIC.........................................67
91
<PAGE> 94
INDEX OF DEFINED TERMS
Term Page
- ---- ----
Mixed Use Loans.......................................8
Monthly Advance......................................53
Mortgage File........................................49
Mortgage Loans........................................1
Mortgage Note.........................................8
Mortgage Pool.........................................1
Mortgage Pool Insurance Policy.......................13
Mortgage Pool Insurer................................42
Mortgaged Property....................................9
Mortgagor............................................12
Multi-Family Loans....................................8
N
Net Liquidation Proceeds.............................37
NHA Act..............................................29
Non-REMIC Certificates...............................17
O
OID..................................................68
OID Regulations......................................67
Originator............................................1
P
Parent...............................................30
Participants.........................................34
Pass-Through Rate....................................37
Payment Lag Certificates.............................73
Permitted Investments................................52
Plan Asset Regulations...............................18
Plan(s)..............................................17
Policy Statement.....................................87
Pool Balance.........................................39
Pool Factor..........................................39
Pooling and Servicing Agreement.......................7
Pre-Funded Amount....................................10
Pre-Funding Account..................................10
pre-issuance accrued interest........................73
Prepayment Assumption................................68
Principal Prepayment.................................15
Principal Weighted Class.............................24
Proposed OID Regulations.............................82
Prospectus Supplement.................................1
PTCE 83-1............................................86
Q
Qualified Replacement Mortgage Loan .................50
R
Rating Agency........................................15
Regular Certificates.................................16
Relief Act...........................................25
REMIC.................................................1
REO Property.........................................53
Reserve Account......................................12
Residual Certificates................................16
S
Senior Certificates...................................7
Senior Lien..........................................20
Series................................................1
Service..............................................68
Servicer..............................................1
Servicing Advance....................................56
Single Family Loans...................................8
SMMEA................................................18
Special Hazard Insurance Policy......................13
Special Hazard Insurer...............................43
Spread Amount........................................14
Standard Hazard Insurance Policies ...................9
Stripped ARM Obligations.............................83
Stripped Bond Certificates...........................80
Stripped Coupon Certificates.........................81
Subordinated Certificates.............................7
Subordinated Classes.................................33
Sub-Servicer..........................................7
Subsidiary REMIC.....................................67
Supplemental Interest Payments.......................14
T
TIN..................................................75
Title V..............................................64
Title I Loan Program..................................9
TMP..................................................65
Trust.................................................1
U
U.S. Person..........................................74
U.S. related person..................................75
Underwriters.........................................89
V
Voting Interest......................................57
92
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the
offering described in this registration statement will be as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee........... $ 206,896.55
Printing expenses............................................. 52,000.00
Accounting fees and expenses.................................. 48,000.00
Legal fees and expenses....................................... 436,000.00
Listing fees.................................................. 0.00
Fees and expenses (including legal fees) for
qualifications under state securities laws.................... 0.00
Trustee's fees and expenses................................... 40,000.00
Rating Agency fees and expenses 330,000.00
Miscellaneous................................................. 284,000.00
-------------
Total..................................................... $1,396,896.55
=============
</TABLE>
All amounts except the Securities and Exchange Commission
registration fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 721 through 725 of the Business Corporation Law of
the State of New York (the "BCL"), the Registrant has broad powers to indemnify
its directors, officers and other employees. These sections (i) provide that the
statutory indemnification and advancement of expenses provisions of the BCL are
not exclusive, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled, (ii) establish
procedures for indemnification and advancement of expenses that may be contained
in the certificate of incorporation or by-laws, or, when authorized by either of
the foregoing, set forth in a resolution of the shareholders or directors or an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled. Section 726 of the
BCL permits the purchase of insurance to indemnify a corporation or its officers
and directors to the extent permitted.
The Registrant's Certificate of Incorporation provides that the
Registrant may, to the fullest extent permitted by Section 721 through 726 of
the BCL, indemnify any and all directors and officers whom it shall have power
to indemnify under the said sections from and against any and all of the
expenses, liabilities or other matters referred to in or covered by such
sections and that the indemnification provided for in the Certificate of
Incorporation shall not be deemed exclusive of any other rights to which the
persons so
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<PAGE> 96
indemnified may be entitled under any by-law, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in such person's
official capacities and as to action in other capacities by holding such
offices, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of such person's heirs, executors and
administrators.
The Company presently maintains policies of directors' and
officers' liability insurance in the amount of $10.0 million.
ITEM 16. EXHIBIT SCHEDULE
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the Originator and
Servicer and the Underwriter named therein, relating to the
distribution of the Class A Certificates**
3.1 Certificate of Incorporation of Cityscape Corp.*
3.2 By-laws of Cityscape Corp.*
4.1 Form of Pooling and Servicing Agreement**
5.1 Opinion of Gibson, Dunn & Crutcher as to legality of securities
being issued**
8.1 Opinion of Gibson, Dunn & Crutcher with respect to tax matters
(contained in Exhibit 5.1)**
23.3 Consent of Gibson, Dunn & Crutcher (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of Registration
Statement)
99.1 Form of Prospectus Supplement**
* Filed herewith
** To be filed by amendment
b) FINANCIAL STATEMENTS
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
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<PAGE> 97
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes to
provide to the Underwriter at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such names as
required by the Underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Village of
Elmsford, State of New York, on May 23, 1996.
CITYSCAPE CORP.
/s/ Robert Grosser
By: -----------------------------
ROBERT GROSSER
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert C. Patent and Jonah L. Goldstein
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorneys-in-fact and agents or any
of them or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
indicated on May 23, 1996.
II-4
<PAGE> 99
SIGNATURE TITLE
/s/ Robert Grosser Chairman of the Board,
- -------------------------------- President and Director
Robert Grosser (Principal Executive Officer)
/s/ Robert C. Patent
- -------------------------------- Executive Vice President,
Robert C. Patent Treasurer, Assistant Secretary
and Director
/s/ Cheryl P. Carl
- --------------------------------
Cheryl P. Carl Director
/s/ Asher Fensterheim
- --------------------------------
Asher Fensterheim Director
/s/ Jonah L. Goldstein
- --------------------------------
Jonah L. Goldstein Director
/s/ Robert M. Stata
- --------------------------------
Robert M. Stata Director
/s/ Steven P. Weiss
- --------------------------------
Steven P. Weiss Director
/s/ Tim S. Ledwick
- -------------------------------- Vice President and Chief Financial Officer
Tim S. Ledwick (Principal Financial and Accounting Officer)
<PAGE> 100
EXHIBIT INDEX
- -------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the Originator and
Servicer and the Underwriter named therein, relating to the
distribution of the Class A Certificates**
3.1 Certificate of Incorporation of Cityscape Corp.*
3.2 By-laws of Cityscape Corp.*
4.1 Form of Pooling and Servicing Agreement**
5.1 Opinion of Gibson, Dunn & Crutcher as to legality of securities
being issued**
8.1 Opinion of Gibson, Dunn & Crutcher with respect to tax matters
(contained in Exhibit 5.1)
23.3 Consent of Gibson, Dunn & Crutcher (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of Registration
Statement)
99.1 Form of Prospectus Supplement**
* Filed herewith
** To be filed by amendment
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
RSSG CORP.
Under Section 402 of the
Business Corporation Law
Parker Chapin Flattau & Klimpl
1211 Avenue of the Americas
New York, New York 10036
<PAGE> 2
CERTIFICATE OF INCORPORATION
OF
RSSG CORP.
Under Section 402 of the
Business Corporation Law
The undersigned, being of legal age, in order to form a
corporation under and pursuant to the laws of the State of New York, does hereby
set forth as follows:
FIRST: The name of the corporation is
RSSG CORP.
SECOND: This corporation is formed to engage in any lawful act or
activity for which corporations may be organized under the Business Corporation
Law of the State of New York, provided that it is not formed to engage in any
act or activity which requires the consent or approval of any state official,
department, board, agency or other body, without such approval or consent first
being obtained.
THIRD: The office of the corporation in the State of New York
shall be located in the City of New York, County of New York.
FOURTH: The corporation shall be authorized to issue the
following shares:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
----- ---------------- ---------
<S> <C> <C>
COMMON 200 NONE
</TABLE>
FIFTH: The Secretary of State is designated as the agent of the
corporation upon whom process against the corporation may be served, and the
address to which the Secretary of
<PAGE> 3
State shall mail a copy of any process against the corporation served upon him
is c/o Parker Chapin Flattau & Klimpl, 1211 Avenue of the Americas, New York,
New York 10036.
SIXTH: The shareholders, or the Board of Directors of the
corporation without the assent or vote of the shareholders, shall have the power
to adopt, alter, amend or repeal the By-Laws of the corporation.
SEVENTH: The corporation may, to the fullest extent permitted by
Section 721 through 726 of the Business Corporation Law of New York, indemnify
any and all directors and officers whom it shall have power to indemnify under
the said sections from and against any and all of the expenses, liabilities or
other matters referred to in or covered by such section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which
the persons so indemnified may be entitled under any By-law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in this
official capacity and as to action in another capacity by holding such office,
and shall continue as to a person who has ceased to be a director or officer and
shall inure to the benefits of the heirs, executors and administrators of such a
person.
EIGHTH: A director or officer of the Corporation shall not, in
the absence of fraud, be disqualified by his office from dealing with or
contracting with the Corporation as vendor, purchaser or otherwise.
In absence of fraud, no transaction, contract or act of the
Corporation, the Board of Directors, the Executive Committee of the Board of
Directors, or any other duly constituted committee, shall be void, voidable or
affected by reason of the fact that any director or officer of the Corporation,
or any firm of which any director or officer of the Corporation is a member, or
2
<PAGE> 4
any corporation of which any director or officer of the Corporation is an
officer, director, or shareholder, is in any way interested in the transaction,
contract or act, if either:
(a) the fact of such common directorship, officership, or
financial or other interest is disclosed or known to the Board of
Directors or the Executive Committee, and the Board of Directors
or the Exective Committee approves the transaction, contract, or
act by a vote sufficient for such purposes without the vote of
such interested director, if any: provided that any such director
may be counted in determining the presence of a quorum at any such
meeting of the Board of Directors or the Executive Committee or:
(b) the fact of such common directorship, officership or
financial or other interest is disclosed or known to the
shareholders entitled to vote on the transaction, contract or act
and the transaction, contract or act is approved by vote of the
shareholders entitled to vote thereon, whether or not the Board of
Directors of the Executive Committee has approved the transaction,
contract or act.
Any such transaction, contract or act which is ratified by a
majority in interest of a quorum of the shareholders of the Corporation having
voting power at any annual or special meeting called for such purpose, shall, if
such common ownership or financial or other interest is disclosed in the notice
of the meeting, be valid and as binding as though approved or ratified by every
shareholder of the Corporation, except as otherwise provided by the laws of the
State of New York.
IN WITNESS WHEREOF, we hereunto sign our names and affirm that
the statements made herein are true under the penalties of perjury, this first
day of March, 1985.
NAME ADDRESS
/S/ MARK SKUBICKI 9 East 40th Street
- ---------------------------------------------- New York, New York 10016
Mark Skubicki, Incorporator
/S/ MARIA R. FISCHETTI 9 East 40th Street
- ---------------------------------------------- New York, New York 10016
Maria R. Fischetti, Incorporator
3
<PAGE> 5
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
RSSG CORP.
(Under Section 805 of the Business Corporation Law)
Parker Chapin Flattau & Klimpl
1211 Avenue of the Americas
New York, New York 10036
<PAGE> 6
Certificate of Amendment of the Certificate of Incorporation
of
RSSG CORP.
(Under Section 805 of the Business Corporation Law)
It is hereby certified that:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is RSSG CORP.
SECOND: The Certificate of Incorporation of the Corporation was filed
by the Department of State on March 4, 1985.
THIRD: The amendment of the Certificate of Incorporation of the
Corporation effected by this Certificate of Amendment is to change the name of
the Corporation.
FOURTH: To accomplish the foregoing amendment, Article FIRST of the
Certificate of Incorporation of the Corporation, relating to the name of the
Corporation, is hereby amended to read as follows:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is Cityscape Corp.
FIFTH: The foregoing amendment of the Certificate of Incorporation of
the Corporation was authorized by the consent in writing by the sole member of
the Board of Directors of the Corporation followed by the consent in writing of
the holder of all of the outstanding shares of the Corporation entitled to vote
on the said amendment of the Certificate of Incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by us and are true and correct.
Date: October 28, 1985
/s/ ROY A. CRAVAN
--------------------------
Roy A. Cravan, President
and
/s/ RUTH CRAVEN
--------------------------
Ruth Craven, Secretary
<PAGE> 7
Certificate of Change
of
Cityscape Corp.
Under Section 805-A of the Business Corporation Law
Fink Weinberger, P.C.
11 Martine Avenue
White Plains, New York 10606
<PAGE> 8
CERTIFICATE OF CHANGE
OF
CITYSCAPE CORP.
Under Section 805-A of the Business Corporation Law
The undersigned, President and Secretary of Cityscape Corp., hereby
certify that:
1. The name of the corporation is CITYSCAPE CORP.
2. The Certificate of Incorporation was filed by the Department of
State on March 4, 1985 under the name of RSSG Corp. An amendment changing the
corporation's name to Cityscape Corp. was filed on November 7, 1985.
3. The Certificate of Incorporation is changed to change the post
office address to which the Secretary of State shall mail a copy of process
against the corporation served upon her.
Paragraph FIFTH of the Certificate of Incorporation is amended to read
as follows:
"FIFTH: The Secretary of State is designated as the
agent of the corporation upon whom process against
it may be served. The post office address to which
the Secretary of State shall mail a copy of any
process against the corporation served on her is:
Fink Weinberger p.c.
11 Martine Avenue
White Plains, New York 10606
Attn: Lawrence Rigie, Esq."
4. The change to the Certificate of Incorporation was approved by the
Board of Directors.
<PAGE> 9
IN WITNESS WHEREOF, this Certificate has been subscribed to this
15th day of January, 1990 by the undersigned who affirm under penalties of
perjury that the statements made herein are true.
/s/ ROBERT GROSSER
------------------------------
Robert Grosser, President
/s/ ROBIN F. GROSSER
------------------------------
Robin F. Grosser, Secretary
2
<PAGE> 10
---------------------------------------------------------------------
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION OF
CITYSCAPE CORP.
Under Section 805 of the Business Corporation Law
----------------------------------------------------------------------
Filed by: Fink, Weinberger, Fredman, Berman,
Lowell & Fensterheim, P.C.
Address: 11 Martine Avenue
White Plains, New York 10606
<PAGE> 11
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION OF
CITYSCAPE CORP.
Under Section 805 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is CITYSCAPE CORP.
2. The Certificate of Incorporation was filed by the Department
of State on the 4TH day of March, 1985, and was amended by
Certificate of Amendment to Certificate of Incorporation filed
by the Department of State on the 7th day of November, 1985,
and was further amended by Amendment to Certificate of
Incorporation filed by the Department of State on the 16th day
of February, 1990.
3. The Certificate of Incorporation of this corporation is hereby
amended to increase the number of shares from the presently
authorized 200 common shares, without par value, to 400 common
shares, without par value.
4. Paragraph FOURTH of the certificate of incorporation is
therefore hereby amended in its entirety to read as follows:
"FOURTH:" The aggregate number of shares which the corporation
shall have authority to issue is Four Hundred (400), all of
which shares shall be without par value."
5. This amendment to the Certificate of Incorporation was
authorized: first, by vote of the board of directors, and then
by unanimous written consent of the holders of all the
outstanding shares entitled to vote thereon.
IN WITNESS WHEREOF, this Certificate has been subscribed to this 17th
day of August, 1990 by the undersigned who, affirms that the statements made
herein are true under the penalties of perjury.
/s/ ASHER FENSTERHEIM
---------------------------------
Asher Fensterheim, Vice President
/s/ ROBIN F. GROSSER
---------------------------------
Robin F. Grosser, Secretary
<PAGE> 12
WRITTEN CONSENT
OF
THE SOLE STOCKHOLDER
OF
ATLANTIS CATHETER COMPANY, INC.
The undersigned, constituting the holder of 100% of the issued and
outstanding shares of stock of Atlantis Catheter Company, Inc., a Delaware
corporation (the "Corporation"), takes the following action by written consent
in lieu of a meeting pursuant to Section 228 of the Delaware General
Corporation Law:
CHANGE OF CORPORATE NAME
WHEREAS, the undersigned has determined that it is in the best interest
of the Corporation to amend the Certificate of Incorporation of the Corporation
to change the name of the Corporation to "Biocompatibles Cardiovascular Inc.";
NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation
be, and it hereby is, amended to replace Article ONE thereof in its entirety to
read as follows:
1. The name of the corporation (hereinafter called the "Corporation")
is Biocompatibles Cardiovascular Inc.
FURTHER RESOLVED, that the appropriate officers of the Corporation be,
and they hereby are, authorized, empowered and directed to execute and file any
documents necessary to effect the foregoing resolution.
IN WITNESS WHEREOF, the undersigned has executed this Written Consent
as of the __th day of May, 1996
BIOCOMPATIBLES INTERNATIONAL PLC
By: _____________________________
Name: Alistair H. Taylor
Title: President and CEO
<PAGE> 1
AMENDED AND RESTATED BYLAWS
OF
CITYSCAPE CORP.
(a New York corporation)
ARTICLE FIRST
Offices
1.1 Principal Office. The principal office of Cityscape Corp.
(hereinafter called the Company) in the State of New York shall be at 565 Taxter
Road, City of Elmsford, County of Westchester, and the name of the registered
agent in charge thereof shall be the Secretary of the Company.
1.2 Other Offices. The Company may also have an office or
offices at such other place or places, either within or without the State of New
York, as the Board of Directors (hereinafter called the Board) may from time to
time determine or as the business of the Company may require.
ARTICLE SECOND
Meetings of Shareholders
2.1 Annual Meetings. Annual meetings of the shareholders of
the Company for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time, date and place as the Board shall determine by resolution.
2.2 Special Meetings. A special meeting of the shareholders
for the transaction of any proper business may be called at any time by the
Board, the Chairman of the Board or the Vice Chairman of the
Board.
2.3 Place of Meetings. All meetings of the shareholders shall
be held at such places, within or without the State of New York, as may from
time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
2.4 Notice of Meetings. Except as otherwise required by law,
notice of each meeting of the shareholders, whether annual or special, shall be
given not less than ten (10) nor more than fifty (50) days before the date of
the meeting to each shareholder of record entitled to vote at such meeting by
delivering a typewritten or printed notice thereof to him personally, or by
depositing such notice in the United
<PAGE> 2
States mail, in a postage prepaid envelope, directed to him at his post office
address furnished by him to the Secretary of the Company for such purpose or, if
he shall not have furnished to the Secretary his address for such purpose, then
at his post office address last known to the Secretary, or by transmitting a
notice thereof to him at such address by telegraph, cable, facsimile or
wireless. Except as otherwise expressly required by law, no publication of any
notice of a meeting of the shareholders shall be required. Every notice of a
meeting of the shareholders shall state the place, date and hour of the meeting,
and, in the case of a special meeting, shall also state the purpose or purposes
for which the meeting is called. Notice of any meeting of shareholders shall not
be required to be given to any shareholder who shall have waived such notice and
such notice shall be deemed waived by any shareholder who shall attend such
meeting in person or by proxy, except as a shareholder who shall attend such
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Except as otherwise expressly required by law, notice of any adjourned
meeting of the shareholders need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken.
2.5 Quorum. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the Company
entitled to be voted thereat, present in person or by proxy, shall constitute a
quorum for the transaction of business at any meeting of the shareholders of the
Company or any adjournment thereof. For purposes of the foregoing: (i) where a
separate vote by class or classes is required or permitted for any matter, the
holders of a majority in voting power of the outstanding shares of such class or
classes, present in person or represented by proxy shall constitute a quorum to
take action with respect to that vote on that matter, and (ii) two or more
classes or series of stock shall be considered a single class if the holders
thereof are entitled to vote together as a single class at the meeting. In the
absence of a quorum at any meeting or any adjournment thereof of the holders of
any class of stock entitled to vote on a matter, a majority in voting interest
of the holders of such class so present in person or by proxy and entitled to
vote thereat or, in the absence therefrom of all such holders, any officer
entitled to preside at, or to act as secretary of, such meeting may adjourn the
meeting of such class from time to time. At any such adjourned meeting at which
a quorum is present any business may be transacted which might have been
transacted at the meeting as originally called.
2.6 Voting.
(a) Each shareholder shall, at each meeting of the
shareholders, be entitled to vote in person or by proxy each share or fractional
share of the stock of the Company having voting rights on the matter in question
and which shall have been held by him and registered in his name on the books of
the Company:
<PAGE> 3
(i) on the date fixed pursuant to Section 7.5 of these
Bylaws as the record date for the determination of shareholders
entitled to notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed,
then (a) at the close of business on the day next preceding the
day on which notice of the meeting shall be given or (b) if
notice of the meeting shall be waived, at the close of business
on the day next preceding the day on which the meeting shall be
held.
(b) Shares of its own stock belonging to the Company or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Company, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Company in a fiduciary capacity shall be
entitled to vote such stock. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Company he shall
have expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon. Stock having
voting power standing of record in the names of two or more persons, whether
fiduciaries, members of a partnership, joint tenants in common, tenants by
entirety or otherwise, or with respect to which two or more persons have the
same fiduciary relationship, shall be voted in accordance with the provisions of
the Business Corporation Law of the State of New York.
(c) Any such voting rights may be exercised by the
shareholder entitled thereto in person or by his proxy appointed by an
instrument in writing, subscribed by such shareholder or by his attorney
thereunto authorized and delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted or acted upon after three years from its
date unless said proxy shall provide for a longer period. The attendance at any
meeting of a shareholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless he shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of the
shareholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority in voting interest of the shareholders present in person or by proxy
and entitled to vote thereat and thereon, a quorum being present. Where a
separate vote by class or classes is required or permitted, the affirmative vote
of the holders of a majority in voting power of the shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class or classes, except as otherwise provided by law or by the
Certificate of Incorporation or these Bylaws. The vote at any meeting of the
shareholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot each ballot shall be signed by the
shareholder voting, or by his proxy, if there be such proxy, and it shall state
the number of shares voted.
<PAGE> 4
2.7 List of Shareholders. The Secretary of the Company shall
prepare and make, at least ten (10) days before every meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder who is present.
2.8 Organization. Meetings of shareholders shall be presided
over by the Chairman of the Board, or in the absence of the Chairman of the
Board by the Vice Chairman of the Board, or in the absence of the foregoing
persons by a chairman designated by the Board, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary, or in the
absence of the Secretary an Assistant Secretary, shall act as secretary of the
meeting, but in the absence of the Secretary and any Assistant Secretary the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
2.9 Action Without Meeting. Any action required to be taken
at any annual or special meeting of shareholders of the Company, or any action
which may be taken at any annual or special meeting of such shareholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those shareholders who have not consented in writing.
ARTICLE THIRD
Board of Directors
3.1 General Powers. The property, business and affairs of the
Company shall be managed by the Board.
3.2 Number and Term of Office. The Board shall consist of one
or more members, the number thereof to be determined from time to time by
resolution of the Board. Directors need not be shareholders. Each of the
directors of the Company shall hold office until his successor shall have been
duly elected and shall qualify or until he shall resign or shall have been
removed in the manner hereinafter provided.
<PAGE> 5
3.3 Election of Directors. The directors shall be elected
annually by the shareholders of the Company and the persons receiving the
greatest number of votes, up to the number of directors to be elected, shall be
the directors.
3.4 Resignations. Any director of the Company may resign at
any time by giving written notice to the Board or to the Secretary of the
Company. Any such resignation shall take effect at the time specified therein,
or, if the time be not specified, it shall take effect immediately upon its
receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.5 Vacancies. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors, or
any other cause, may be filled by vote of the majority of the remaining
directors, although less than a quorum. Each director so chosen to fill a
vacancy shall hold office until his successor shall have been elected and shall
qualify or until he shall resign or shall have been removed in the manner
hereinafter provided.
3.6 Place of Meeting, Etc. The Board may hold any of its
meetings at such place or places within or without the State of New York as the
Board may from time to time by resolution designate or as shall be designated by
the person or persons calling the meeting or in the notice or a waiver of notice
of any such meeting. Directors may participate in any regular or special meeting
of the Board by means of conference telephone or similar communications
equipment pursuant to which all persons participating in the meeting of the
Board can hear each other, and such participation shall constitute presence in
person at such meeting.
3.7 First Meeting. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
3.8 Regular Meetings. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution determine.
If any day fixed for a regular meeting shall be a legal holiday at the place
where the meeting is to be held, then the meeting shall be held at the same hour
and place on the next succeeding business day not a legal holiday. Except as
provided by law, notice of regular meetings need not be given.
3.9 Special Meetings. Special meetings of the Board shall be
held whenever called by the Chairman of the Board, the Vice Chairman of the
Board or a majority of the authorized number of directors. Except as otherwise
provided by law or by these Bylaws, notice of the time and place of each such
special meeting shall be mailed to each director, addressed to him at his
residence or usual place of business, at least five (5) days before the day on
which the meeting is to be held, or shall be sent to him at such place by
telegraph or cable or be delivered personally not less than forty-
<PAGE> 6
eight (48) hours before the time at which the meeting is to be held. Except
where otherwise required by law or by these Bylaws, notice of the purpose of a
special meeting need not be given. Notice of any meeting of the Board shall not
be required to be given to any director who is present at such meeting, except a
director who shall attend such meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
3.10 Organization. Meetings of the Board shall be presided
over by the Chairman of the Board, or in the absence of the Chairman of the
Board by the Vice Chairman of the Board, or in the absence of the foregoing
persons by a chairman designated by the Board, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary, or in the
absence of the Secretary an Assistant Secretary, shall act as secretary of the
meeting, but in the absence of the Secretary and any Assistant Secretary the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
3.11 Quorum and Manner of Acting. Except as otherwise provided
in these Bylaws or by law, the presence of a majority of the authorized number
of directors shall be required to constitute a quorum for the transaction of
business at any meeting of the Board, and all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have no
power as such.
3.12 Action by Consent. Any action required or permitted to be
taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
3.13 Telephone Conference Call. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, members of the Board, or any
committee designated by the Board, may participate in a meeting of the Board or
any committee, by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.14 Removal of Directors. Subject to the provisions of the
Certificate of Incorporation, any director may be removed at any time, either
with or without cause, by the affirmative vote of the shareholders having a
majority of the voting power of the Company given at a special meeting of the
shareholders called for the purpose.
<PAGE> 7
3.15 Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Company shall reimburse each such
director for any expense incurred by him on account of his attendance at any
meetings of the Board or Committees of the Board. Neither the payment of such
compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Company or its subsidiaries in any other
capacity and receiving compensation therefor.
3.16 Committees. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Company. Any such committee, to
the extent provided in the resolution of the Board and except as otherwise
limited by law, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Company, and may
authorize the seal of the Company to be affixed to all papers which may require
it. Any such committee shall keep written minutes of its meetings and report the
same to the Board at the next regular meeting of the Board. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board to
act at the meeting in the place of any such absent or disqualified member.
ARTICLE FOURTH
Notices
4.1 Form of Notice. Whenever, under the provisions of
applicable statutes of the Certificate of Incorporation or of these Bylaws,
notice is required to be given to any director or shareholders, such notice
shall not be construed to mean personal notice, and may be given in writing, by
mail, addressed to such director or shareholder, at his address as it appears on
the records of the Company, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to directors may also be given by telegram or facsimile.
4.2 Waiver of Notice of Meetings of Shareholders, Directors
and Committees. Whenever notice is required to be given by law or under any
provision of the Certificate of Incorporation or these Bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the
<PAGE> 8
shareholders, directors or members of a committee of directors need be specified
in any written waiver of notice unless so required by the Certificate of
Incorporation or these Bylaws.
ARTICLE FIFTH
Officers
5.1 Number. The officers of the Company may include a
Chairman of the Board, a Vice-Chairman of the Board, a President, a Treasurer, a
Secretary and such Vice Presidents (the number thereof, if any, and their
respective titles to be determined by the Board) as the Board shall in its
discretion from time to time designate. Except for the offices of President and
Secretary, any two offices or more may be held by one person. The offices of
President and Secretary may be held by one person if there is only one
shareholder of the Company.
5.2 Duties. The officers of the Company shall have such
powers and perform such duties as the Board may from time to time prescribe.
5.3 Election, Term of Office and Qualifications. The officers
of the Company, except such officers as may be appointed in accordance with 5.4,
shall be elected annually by the Board at the first meeting thereof held after
the election thereof. Each officer shall hold office until his successor shall
have been duly chosen and shall qualify or until his resignation or removal in
the manner hereinafter provided.
5.4 Assistants, Agents and Employees, Etc. In addition to the
officers specified in Section 5.1, the Board may appoint other assistants,
agents and employees as it may deem necessary or advisable, including one or
more Assistant Secretaries, and one or more Assistant Treasurers, each of whom
shall hold office for such period, have such authority, and perform such duties
as the Board may from time to time determine. The Board may delegate to any
officer of the Company or any committee of the Board the power to appoint,
remove and prescribe the duties of any such assistants, agents or employees.
5.5 Removal. Any officer, assistant, agent or employee of the
Company may be removed, with or without cause, at any time: (i) in the case of
an officer, assistant, agent or employee appointed by the Board, only by
resolution of the Board; and (ii) in the case of an officer, assistant, agent or
employee, by any officer of the Company or committee of the Board upon whom or
which such power of removal may be conferred by the Board.
5.6 Resignations. Any officer or assistant may resign at any
time by giving written notice of his resignation to the Board or the Secretary
of the Company. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, upon receipt thereof by the Board or
the Secretary, as the
<PAGE> 9
case may be; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
5.7 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or other cause, may be filled for the
unexpired portion of the term thereof in the manner prescribed in these Bylaws
for regular appointments or elections to such office.
5.8 Chairman of the Board. The Chairman of the Board, if one
be elected, shall preside at all meetings of the Board and shall perform such
other duties as may be assigned by the Board or the Executive Committee (if such
Committee be formed).
5.9 President. The President, who need not be a director,
shall, in the absence or non-election of a Chairman of the Board, preside at all
meetings of the shareholders and directors. While the directors are not in
session, he or she shall have general management and control of the business and
affairs of the Company.
5.10 Vice President. The Vice President, or if there are more
than one, the senior Vice President, as determined by the Board, in the absence
or disability of the President, shall exercise the powers and perform the duties
of the President and each Vice President shall exercise such other powers and
perform such other duties as shall be prescribed by the directors.
5.11 Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Company. He or she shall
deposit all moneys and other valuables in the name and to the credit of the
Company in such depositaries as may be designated by the Board.
The Treasurer shall disburse the funds of the Company as may be
ordered by the Board, or the President, taking proper vouchers for such
disbursements. He or she shall render to the President and the Board at the
regular meetings of the Board, or whenever they may request it, an account of
all his or her transactions as Treasurer and of the financial condition of the
Company. If required by the Board, he or she shall give the Company a bond for
the faithful discharge of his or her duties in such amount and with such surety
as the Board shall prescribe.
5.12 Secretary. The Secretary shall give, or cause to be
given, notice of all meetings of shareholders and directors, and all other
notices required by the law or by these Bylaws, and in case of his or her
absence or refusal or neglect so to do, any such notice may be given by any
person thereunto directed by the President, or by the directors, or
shareholders, upon whose requisition the meeting is called as provided in these
Bylaws. The Secretary shall record all the proceedings of the meetings of the
Company and of the directors in a book to be kept for that purpose, and shall
perform such other duties as may be assigned to him by the directors or the
<PAGE> 10
President. He or she shall have the custody of the seal of the Company and shall
affix the same to all instruments requiring it, when authorized by the directors
or the President, and attest the same.
5.13 Compensation. The compensation of the officers of the
Company shall be fixed from time to time by the Board. None of such officers
shall be prevented from receiving such compensation by reason of the fact that
he is also a director of the Company. Nothing contained herein shall preclude
any officer from serving the Company, or any subsidiary corporation, in any
other capacity and receiving such compensation by reason of the fact that he is
also a director of the Company. Nothing contained herein shall preclude any
officer from serving the Company, or any subsidiary corporation, in any other
capacity and receiving proper compensation therefor.
ARTICLE SIXTH
Contracts, Checks, Drafts, Bank Accounts, Etc.
6.1 Execution of Contracts. The Board, except as in these
Bylaws otherwise provided, may authorize any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the Company, and such authority may be general or confined to
specific instances; and unless so authorized by the Board or by these Bylaws, no
officer, agent or employee shall have any power or authority to bind the Company
by any contract or engagement or to pledge its credit or to render it liable for
any purpose or in any amount.
6.2 Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Company, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such officer, assistant, agent or attorney shall
give such bond, if any, as the Board may require.
6.3 Deposits. All funds of the Company not otherwise employed
shall be deposited from time to time to the credit of the Company in such banks,
trust companies or other depositories as the Board may select, or as may be
selected by any officer or officers, assistant or assistants, agent or agents,
or attorney or attorneys of the Company to whom such power shall have been
delegated by the Board. For the purpose of deposit and for the purpose of
collection for the account of the Company, the Chairman of the Board, the
President, any Vice President or the Treasurer (or any other officer or
officers, assistant or assistants, agent or agents, or attorney or attorneys of
the Company who shall from time to time be determined by the Board) may endorse,
assign and deliver checks, drafts and other orders for the payment of money
which are payable to the order of the Company.
<PAGE> 11
6.4 General and Special Bank Accounts. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Company to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE SEVENTH
Shares and Their Transfer
7.1 Certificates for Stock. Certificates of stock of the
Company shall be in such form as required by the laws of the State of New York
and as shall be adopted by the Board. The certificates representing shares of
such stock shall be numbered in the order in which they shall be issued and
shall be signed in the name of the Company by the Chairman of the Board, the
President or a Vice President, and by the Secretary or an Assistant Secretary or
by the Treasurer or an Assistant Treasurer. Any of or all of the signatures on
the certificates may be a facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, any
such certificate, shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may nevertheless
be issued by the Company with the same effect as though the person who signed
such certificate, or whose facsimile signature shall have been placed thereupon,
were such officer, transfer agent or registrar at the date of issue. A record
shall be kept of the respective names of the persons, firms or corporations
owning the stock represented by such certificates, the number and class of
shares represented by such certificates, respectively, and the respective dates
thereof, and in case of cancellation, the respective dates of cancellation.
Every certificate surrendered to the Company for exchange or transfer shall be
canceled, and no new certificate or certificates shall be issued in exchange for
any existing certificate until such existing certificate shall have been so
canceled, except in cases provided for in Section 7.4.
7.2 Transfers of Stock. Transfers of shares of stock of the
Company shall be made only on the books of the Company by the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary, or with a transfer clerk or a transfer
agent appointed as provided in Section 7.3, and upon surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon. The person in whose name shares of stock stand on the books
of the Company shall be deemed the owner thereof for all purposes as regards the
Company. Whenever any transfer of shares shall be made for collateral security,
and not absolutely, such fact shall be so expressed in the entry of transfer if,
when the certificate or certificates shall be presented to the
<PAGE> 12
Company for transfer, both the transferor and the transferee request the Company
to do so.
7.3 Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Company. It may appoint, or authorize any officer or officers
to appoint, one or more transfer clerks or one or more transfer agents and one
or more registrars, and may require all certificates for stock to bear the
signature or signatures of any of them.
7.4 Lost, Stolen, Destroyed, and Mutilated Certificates. In
any case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction,
or mutilation and upon the giving of a bond of indemnity to the Company in such
form and in such sum as the Board may direct; provided, however, that a new
certificate may be issued without requiring any bond when, in the judgment of
the Board, it is proper so to do.
7.5 Fixing Date for Determination of Shareholders of Record.
In order that the Company may determine the shareholders entitled to notice of
or to vote at any meeting of shareholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any other change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 50
nor less than 10 days before the date of such meeting, nor more than 50 days
prior to any other action. If in any case involving the determination of
shareholders for any purpose other than notice of or voting at a meeting of
shareholders or expressing consent to corporate action without a meeting the
Board shall not fix such a record date, the record date for determining
shareholders for such purpose shall be the close of business on the day on which
the Board shall adopt the resolution relating thereto. A determination of
shareholders entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of such meeting; provided, however, that the Board may
fix a new record date for the adjourned meeting.
7.6 Registered Shareholders. The Company shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner of shares, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of the State of New York.
<PAGE> 13
ARTICLE EIGHTH
Indemnification
8.1 Action, Etc. Other Than by or in the Right of the
Company. The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding (other than an action by or in the right of the Company to procure
judgment in its favor), whether civil or criminal, including an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust or other enterprise, which any director or
officer of the corporation served in any capacity at the request of the
corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
The termination of any such civil or criminal action or
proceeding by judgment, settlement, conviction, or upon a plea of nolo
contendere, or its equivalent, shall not in itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or, in the case of service for any other corporation or any partnership,
joint venture, trust or other enterprise, not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
8.2 Actions, Etc., by or in the Right of the Company. The
Company shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the Company to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee or agent of the Company, or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against reasonable expenses (including attorneys' fees) and amount
paid in settlement actually and necessarily incurred by him in connection with
the defense or settlement of such action, or in connection with an appeal
therein, if he acted in good faith and in a manner he reasonably believed to be
in or, in the case of service for any other corporation or any partnership,
joint venture, trust or other enterprise, not opposed to, the best interests of
the Company, except that no indemnification shall be made in respect of (1) a
threatened action , or a pending action which is settled or otherwise disposed
of, or (2) any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Company, unless and only to the extent that the
court in which such action was
<PAGE> 14
brought, or, if no action was brought, any court of competent jurisdiction,
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court shall deem proper.
8.3 Determination of Right of Indemnification. Any
indemnification under Section 8.1 or 8.2 (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in Section 8.1 and 8.2. Such determination shall be made (i) by the Board
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or,
even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (iii) by the shareholders.
8.4 Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that a
director, officer, employee or agent of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
Section 8.1 or 8.2, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
8.5 Prepaid Expenses. Expenses incurred by an officer or
director in defending a civil or criminal action, suit or proceeding may be paid
by the Company in advance of the final disposition of such action, suit or
proceeding as authorized by the Board in the specific case upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount
unless it shall ultimately be determined that he is entitled to be indemnified
by the Company as authorized in this Article. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board deems appropriate.
8.6 Other Rights and Remedies. The indemnification provided
by this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
8.7 Insurance. Upon resolution passed by the Board, the
Company may purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership,
<PAGE> 15
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Company would have the power to indemnify him against
such liability under the provisions of this Article.
8.8 Constituent Corporations. For the purposes of this
Article, references to "the Company" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, employee or
agent of such a constituent corporation or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise shall
stand in the same position under the provisions of this Article with respect to
the resulting or surviving corporation as he would if he had served the
resulting or surviving corporation in the same capacity.
8.9 Other Enterprises, Fines, and Serving at Company's
Request. For purposes of this Article, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Company" shall include any service
as a director, officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer, employee, or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and a person who acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Company" as referred to in this Article.
ARTICLE NINTH
Miscellaneous
9.1 Dividends. Subject to the provisions of the Certificate
of Incorporation, if any, dividends upon the capital stock of the Company may be
declared by the Board at any regular or special meeting, pursuant to law. To the
extent permitted by law, and subject to the provisions of the Certificate of
Incorporation, if any, dividends may be paid in cash, in property, or in shares
of the capital stock.
9.2 Seal. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Company and
words and figures showing that the Company was incorporated in the State of New
York and the year of incorporation.
9.3 Waiver of Notices. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
<PAGE> 16
9.4 Amendments. These Bylaws, or any of them, may be altered,
amended or repealed, and new Bylaws may be made, (i) by the Board, by vote of a
majority of the number of directors then in office as directors, acting at any
meeting of the Board, or (ii) by the shareholders, at any annual meeting of
shareholders, without previous notice, or at any special meeting of
shareholders, provided that notice of such proposed amendment, modification,
repeal or adoption is given in the notice of special meeting. Any Bylaws made or
altered by the shareholders may be altered or repealed by either the Board or
the shareholders.
