PROSPECTUS SUPPLEMENT
(To Prospectus dated March 7, 1997)
$175,000,000
LOGO
THE MONEY STORE HOME IMPROVEMENT TRUST 1997-I
The Money Store Home Improvement Loan Certificates, Series 1997-I offered
hereby (the "Certificates"), will represent fractional undivided ownership
interests in a trust fund, designated as The Money Store Home Improvement Trust
1997-I (the "Trust"). The Certificates will consist of (i) three classes of
senior Certificates (the "Senior Certificates"): Class A-1 Certificates, Class
A-2 Certificates and Class A-3 Certificates (collectively, the "Class A
Certificates"); (ii) four classes of subordinated Certificates (the
"Subordinated Certificates"): Class M-1 Certificates and Class M-2 Certificates
(the "Class M Certificates") and Class B-1 Certificates and Class B-2
Certificates (the "Class B Certificates"); (iii) one class of interest-only
certificates (the "Class X Certificates"); and (iv) two classes of residual
certificates: Class R-1 Certificates and Class R-2 Certificates (the "Class R
Certificates"). Only the Class A Certificates, Class M Certificates and Class B
Certificates are being offered hereby.
(cover continued on next page)
-----------------
SEE "RISK FACTORS" ON PAGE S-35 HEREIN AND PAGE 18 OF THE PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE CERTIFICATES OFFERED HEREBY.
-----------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND, EXCEPT FOR THE
LIMITED GUARANTY OF THE MONEY STORE INC. PROVIDED HEREIN, DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE MONEY STORE INC. OR ANY OF ITS
AFFILIATES OR SUBSIDIARIES. EXCEPT FOR THE FHA LOANS, THE LOANS ARE NOT
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, AND NO GOVERNMENTAL
AGENCY HAS PASSED UPON THE ACCURACY OF THE INFORMATION CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Initial
Class Pass-
Certificate Through Price to Underwriting Proceeds to
Balance Rate Public (1) Discount Originators
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1
Certificates........... $ 48,000,000 6.580% 99.99809% 0.250% 99.74809%
- ------------------------------------------------------------------------------------------
Class A-2
Certificates........... $ 53,700,000 6.810% 99.99215% 0.350% 99.64215%
- ------------------------------------------------------------------------------------------
Class A-3
Certificates........... $ 19,487,000 7.025% 99.98333% 0.450% 99.53333%
- ------------------------------------------------------------------------------------------
Class M-1
Certificates........... $ 25,375,000 7.410% 99.97125% 0.500% 99.47125%
- ------------------------------------------------------------------------------------------
Class M-2
Certificates........... $ 12,250,000 8.070% 99.97407% 0.550% 99.42407%
- ------------------------------------------------------------------------------------------
Class B-1
Certificates........... $ 9,625,000 7.510% 99.99464% 0.650% 99.34464%
- ------------------------------------------------------------------------------------------
Class B-2
Certificates........... $ 6,563,000 8.095% 99.97169% 0.725% 99.24669%
- ------------------------------------------------------------------------------------------
Total.................. $175,000,000 $174,978,773.64 $700,035.75 $174,278,737.89
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1)Plus accrued interest at the applicable Pass-Through Rate from March 1, 1997
to but not including the Closing Date.
(2)Before deducting expenses payable by The Money Store Inc., estimated to be
$200,000.
-----------------
The Certificates are offered by the Underwriter, when, as and if issued to
and accepted by the Underwriter, subject to approval of certain legal matters
by counsel for the Underwriter. The Underwriter reserves the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Certificates will be made in book-entry form only
through the Same Day Funds Settlement System of The Depository Trust Company in
the United States or Cedel Bank, societe anonyme ("Cedel Bank") or the
Euroclear System ("Euroclear") in Europe on or about March 31, 1997 (the actual
such date being hereinafter referred to as the "Closing Date").
LEHMAN BROTHERS
March 27, 1997
<PAGE>
(cover continued from previous page)
The rights of the holders of the Class M-1, Class M-2, Class B-1 and Class
B-2 Certificates to receive distributions on each Remittance Date (as defined
herein) will be subordinated to such rights of the holders of the Class A-1,
Class A-2 and Class A-3 Certificates and, in addition, to such rights of the
holders of the Class M-1 Certificates (in the case of the Class M-2, Class B-1
and Class B-2 Certificates), of the Class M-2 Certificates (in the case of the
Class B-1 and Class B-2 Certificates) and of the Class B-1 Certificates (in the
case of the Class B-2 Certificates), all to the extent described herein.
The holders of the Class B-2 Certificates will have the benefit of a
limited guaranty (the "Limited Guaranty" of The Money Store Inc. (the "Company"
or the "Representative") to protect against losses that would otherwise be borne
by the holders of the Class B-2 Certificates. To the extent that funds in the
Certificate Account (as defined herein) are insufficient to distribute the Class
B-2 Formula Distribution Amount (as defined herein) to the holders of the Class
B-2 Certificates or in the event that there is a Class B-2 Principal Liquidation
Loss Amount (as defined herein) for any Remittance Date (as defined herein), the
Company will be obligated to make a Guaranty Payment (as defined herein) in
respect thereof. See "Description of the Limited Guaranty" herein.
The primary assets of the Trust will consist of a pool (the "Pool") of
loans (the "Loans") having the characteristics described herein. The Loans will
consist primarily of fixed rate, single family residential first, second and
more junior home improvement mortgage loans (the "Home Improvement Loans"),
certain of which loans (the "FHA Loans") are partially insured by the Federal
Housing Administration (the "FHA") of the United States Department of Housing
and Urban Development ("HUD") under Title I of the National Housing Act of 1934
("Title I"). The FHA Loans will have original terms to stated maturity of up to
20 years and the other Home Improvement Loans (the "Conventional Loans") will
have original terms to stated maturity of up to 25 years. The Trust will also
include funds on deposit in a separate trust account (the "Pre-Funding Account")
to be established with the Trustee (as defined herein). All of the Loans were
originated or purchased by certain wholly-owned subsidiaries (the "Originators")
of the Representative. The Money Store Inc. will act as the servicer (in such
capacity, the "Servicer") of the Loans and the administrator (in such capacity,
the "Claims Administrator") of the FHA Loans. Except for the Limited Guaranty,
certain representations and warranties relating to the Loans and certain other
matters, the Company's obligations with respect to the Loans are limited to its
contractual servicing obligations.
Additional loans (the "Subsequent Loans") may be purchased by the Trust
from the Originators from time to time on or before the close of business on
June 26, 1997 from funds on deposit in the Pre-Funding Account. Each of the
Subsequent Loans will have been originated and identified by the Closing Date.
On the Closing Date, an aggregate cash amount not to exceed $43,750,000 will be
deposited into the Pre-Funding Account. See "The Agreement--Pre-Funding Account"
herein.
Distributions of principal and interest to the holders of each Class of
Certificates will be made on the 15th day of each month or, if the 15th day is
not a business day, the first business day thereafter, commencing April 1997
(each such day, a "Remittance Date") to the owners of each such Class of
Certificates as of the preceding Record Date (as defined herein). Holders of any
Class of Certificates are referred to herein as "Holders" or
"Certificateholders."
There is currently no secondary market for any Class of Certificates. The
Underwriter intends to make a secondary market for the Certificates, but has no
obligation to do so. There can be no assurance that a secondary market for any
Class of Certificates will develop or, if one does develop, that it will offer
sufficient liquidity of investment or continue.
As described herein, two separate real estate mortgage investment conduit
("REMIC") elections will be made in connection with certain assets of the Trust
for federal income tax purposes. As described more fully herein, the Class A
Certificates, the Class M Certificates, the Class B Certificates and Class X
Certificates will be designated as "regular interests" in a REMIC and each class
of Class R Certificates will represent the "residual interest" in the related
REMIC. See "Federal Income Tax Consequences" in the Prospectus and "Federal
Income Tax Considerations" herein.
The Class A Certificates, Class M Certificates and Class B Certificates
offered by this Prospectus Supplement each constitute a separate class of one
series of Certificates being offered by the Representative and the Originators
pursuant to the Prospectus dated March 7, 1997 (the "Prospectus"), of which this
Prospectus Supplement is a part and which accompanies this Prospectus
Supplement. The Prospectus contains important information regarding this
offering which is not contained herein and prospective investors are urged to
read the Prospectus and this Prospectus Supplement in full. (end of cover page)
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE CLASS A CERTIFICATES, CLASS M CERTIFICATES AND CLASS B CERTIFICATES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE
COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
SUMMARY OF TERMS
This following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Capitalized terms used
but not defined in this Summary of Terms have the meanings assigned to such
terms elsewhere in this Prospectus Supplement.
Securities Offered................ The Money Store Home Improvement Loan
Certificates, Series 1997-I, Class A-1,
Class A-2, Class A-3, Class M-1, Class M-2,
Class B-1 and Class B-2. Each Class of
Certificates will be issued in the initial
Class Principal Balance (as defined herein)
and will bear interest for each Remittance
Date at the per annum rate set forth for
such Class on the cover page hereof.
The per annum rate at which a Class of
Certificates bears interest is referred to
herein as the "Pass- Through Rate" for such
Class.
The statistical information presented in
this Prospectus Supplement concerning the
Loans is based on the preliminary Pool
expected to be delivered to the Co-Trustee
on the Closing Date. The Representative
expects that loans (including the
Subsequent Loans) that were not contained
in the preliminary Pool will be added to
the final Pool. While the statistical
distribution of the characteristics for the
final Pool of Loans will vary somewhat from
the statistical distribution of such
characteristics for the preliminary Pool of
Loans presented in this Prospectus
Supplement, the Representative does not
believe that the characteristics of the
final Pool will differ materially.
References in this Prospectus Supplement to
the characteristics of the Loans as of the
Cut-Off Date (as defined herein) are deemed
to include the characteristics, as of the
date of their origination, of those Loans
originated after the Cut-off Date and up to
the Closing Date.
Transaction Structure............... The Money Store Home Improvement Trust
1997-I, is a trust to be formed under the
laws of the State of New York. The primary
assets of the Trust will consist of the
Loans. The Trust will issue the following
Classes of Certificates:
Senior Certificates............ Class A-1, Class A-2 and Class A-3
Certificates.
Subordinated Certificates...... Class M-1, Class M-2, Class B-1 and Class
B-2 Certificates.
Residual Certificates.......... Class R-1 and Class R-2 Certificates
(which also constitute Subordinated
Certificates).
Interest-Only Certificates..... Class X Certificates (which also
constitute Subordinated Certificates).
Issuer.............................. The Money Store Home Improvement Trust
1997-I
Cut-Off Date........................ February 28, 1997 (or the date of
origination of the Loan, if later) (the
"Cut-Off Date").
Closing Date........................ March 31, 1997.
Representative, Servicer and Claims
Administrator....................... The Money Store Inc., a New Jersey
corporation (in its capacity as sponsor of
the Trust, the "Representative," in its
capacity as the servicer of the Loans, the
"Servicer," and in its capacity as the
administrator of the insurance claims to
the FHA (the "Claims") with respect to the
FHA Loans, the "Claims Administrator"). In
the Agreement (as defined herein), the
Claims Administrator will appoint its
subsidiary, TMS Mortgage Inc., a New Jersey
corporation, to assist in performing the
functions of the Claims Administrator. The
principal offices of The Money Store Inc.
are located at 2840 Morris Avenue, Union,
New Jersey 07083 (telephone number (908)
686-2000) and 3301 C Street, Suite 100-M,
Sacramento, California 95816 (telephone
number (916) 446-5000). See "The
Representative and the Originators" herein
and in the Prospectus.
Trustee ............................ The Bank of New York, a New York banking
corporation, in its capacity as trustee.
See "The Agreement--The Trustee" herein.
Co-Trustee ......................... First Bank (N.A.), a national banking
association headquartered in Milwaukee,
Wisconsin or an affiliate of First Bank
(N.A.) or any other entity acceptance to
the Trustee and the Servicer will be the
co-trustee under the Agreement (the
"Co-Trustee"). First Bank (N.A.) is a
subsidiary of First Bank Systems,
Minneapolis, Minnesota. See "The
Agreement--The Co-Trustee" herein.
Custodian .......................... First Trust National Association, a
national
banking association, headquartered in St.
Paul, Minnesota will be the "Custodian"
with respect to the Loans. In such
capacity, it will retain the files relating
to the Loans. The Custodian is a subsidiary
of First Bank Systems, Minneapolis,
Minnesota. See "The Agreement--The
Custodian" herein.
Originators of the Loans............ Each Loan will have been originated and
underwritten, or purchased and
re-underwritten, by the Originators, all of
which are wholly-owned subsidiaries of the
Representative. Additionally, each
Subsequent Loan to be included in the Trust
will have been originated and underwritten,
or purchased and re-underwritten, by an
Originator.
Description of the Certificates
General.......................... Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the
"Agreement"), dated as of February 28,1997,
among the Representative, the Originators
and the Trustee.
The Certificates will represent fractional
undivided ownership interests in the Trust,
the assets of which will consist primarily
of Home Improvement Loans having the
characteristics described herein.
The projected last Remittance Dates for
each Class of Certificates is as set forth
herein under "Maturity, Prepayment and
Yield Considerations." It is expected that
the actual last Remittance Date for each
Class of Certificates will occur
significantly earlier than its projected
last Remittance Date. See "Maturity,
Prepayment and Yield Considerations"
herein.
The Certificates are issuable in book-entry
form in minimum denominations of $1,000
original principal amount and integral
multiples of $1,000 in excess thereof.
The Certificates are issued by, and payable
solely from the property of, the Trust. In
addition, the Class B-2 Certificates will
have the benefit of the Company's Limited
Guaranty. The undivided percentage interest
of the holder of any Certificate in the
distributions to be made to the related
Class (the "Percentage Interest") will be
equal to the percentage obtained by
dividing the denomination specified on such
Certificate by the original principal
balance of such Class.
Distributions.................... On each Remittance Date the Available
Remittance Amount will be distributed to
Class A Certificateholders, then Class M
Certificateholders and then Class B
Certificateholders in the amounts and order
of priority set forth below:
A. Class A Interest............ One calendar month's interest (computed on
the basis of a 360-day year of twelve
30-day months) will be paid concurrently to
the Holders of each Class of Class A
Certificates on each Remittance Date, to
the extent of the Available Remittance
Amount in the Certificate Account on such
date, at the related Pass-Through Rate on
the Current Principal Balance of each Class
of Class A Certificates.
The "Class A Current Principal Balance" as
of any Remittance Date is the sum of the
Class A-1 Current Principal Balance, the
Class A-2 Current Principal Balance and the
Class A-3 Current Principal Balance. With
respect to any Remittance Date, the amount
determined by multiplying the components of
the Class A Current Principal Balance by
one- twelfth of the respective Class A
Pass-Through Rates is hereinafter referred
to as the "Class A Interest Distribution
Amount."
In the event that, on a particular
Remittance Date, the Available Remittance
Amount in the Certificate Account is less
than the Class A Interest Distribution
Amount, the amount of interest to be
distributed in respect of the Class A
Certificates will be allocated among each
Class thereof (and within a Class among the
Certificates of such Class) pro rata in
accordance with their respective
entitlements to interest, and the amount of
the shortfall for each Class of Class A
Certificates (the "Class A-1 Interest
Shortfall Carryforward Amount," the "Class
A-2 Interest Shortfall Carryforward Amount"
and the "Class A-3 Interest Shortfall
Carryforward Amount," respectively, and,
collectively, the "Class A Interest
Shortfall Carryforward Amount") will be
carried forward and distributed as
described, and subject to the limitations
set forth, under "--Interest Shortfall
Carryforward Amounts" below. Any Class A
Interest Shortfall Carryforward Amounts
will bear interest at the applicable
Pass-Through Rate for each Class of Class A
Certificates, to the extent permitted by
law.
B. Class M-1 Interest.......... One calendar month's interest (computed on
the basis of a 360-day year of twelve
30-day months) will be paid to the Holders
of the Class M-1 Certificate on each
Remittance Date, to the extent of the
Available Remittance Amount, if any,
remaining in the Certificate Account on
such date (after distribution of interest
to the Holders of the Class A
Certificates), at the Class M-1
Pass-Through Rate on the Current Principal
Balance of the Class M-1 Certificates. With
respect to any Remittance Date, the amount
determined by multiplying the Class M-1
Current Principal Balance by one-twelfth of
the Class M-1 Pass-Through Rate is
hereinafter referred to as the "Class M-1
Interest Distribution Amount."
In the event that, on a particular
Remittance Date, the Available Remittance
Amount remaining in the Certificate Account
on such date (after distribution of
interest to the Holders of the Class A
Certificates) is less than the Class M-1
Interest Distribution Amount, the amount of
interest to be distributed in respect of
the Class M-1 Certificates will be
allocated among the Certificates of such
Class pro rata in accordance with their
respective entitlements to interest, and
any remaining deficiency (the "Class M-1
Interest Shortfall Carryforward Amount")
will be carried forward and distributed as
described, and subject to the limitations
set forth, under "--Interest Shortfall
Carryforward Amounts" below. Any Class M-1
Interest Shortfall Carryforward Amount will
bear interest at the Class M-1 Pass-Through
Rate, to the extent permitted by law.
C. Class M-2 Interest.......... One calendar month's interest (computed on
the basis of a 360-day year of twelve
30-day months) will be paid to the Holders
of the Class M-2 Certificate on each
Remittance Date, to the extent of the
Available Remittance Amount, if any,
remaining in the Certificate Account on
such date (after distribution of interest
to the Holders of the Class A and Class M-1
Certificates), at the Class M-2 Pass-
Through Rate on the Current Principal
Balance of the Class M-2 Certificates. With
respect to any Remittance Date, the amount
determined by multiplying the Class M-2
Current Principal Balance by one-twelfth of
the Class M-2 Pass-Through Rate is
hereinafter referred to as the "Class M-2
Interest Distribution Amount" (and,
together with the Class M-1 Interest
Distribution Amount, the "Class M Interest
Distribution Amount").
In the event that, on a particular
Remittance Date, the Available Remittance
Amount remaining in the Certificate Account
on such date (after distribution of
interest to the Holders of the Class A and
Class M-1 Certificates) is less than the
Class M-2 Interest Distribution Amount, the
amount of interest to be distributed in
respect of the Class M-2 Certificates will
be allocated among the Certificates of such
Class pro rata in accordance with their
respective entitlements to interest, and
any remaining deficiency (the "Class M-2
Interest Shortfall Carryforward Amount"
and, together with the Class M-1 Interest
Shortfall Carryforward Amount, the "Class M
Interest Shortfall Carryforward Amounts")
will be carried forward and distributed as
described, and subject to the limitations
set forth, under "--Interest Shortfall
Carryforward Amounts" below. Any Class M-2
Interest Shortfall Carryforward Amount will
bear interest at the Class M-2 Pass-Through
Rate, to the extent permitted by law.
D. Class B-1 Interest.......... One calendar month's interest (computed on
the basis of a 360-day year of twelve
30-day months) will be paid to the Holders
of the Class B-1 Certificate on each
Remittance Date, to the extent of the
Available Remittance Amount, if any,
remaining in the Certificate Account on
such date (after distribution of interest
to the Holders of the Class A and Class M
Certificates), at the Class B-1 Pass-
Through Rate on the Current Principal
Balance of the Class B-1 Certificates. With
respect to any Remittance Date, the amount
determined by multiplying the Class B-1
Current Principal Balance by one-twelfth of
the Class B-1 Pass-Through Rate is
hereinafter referred to as the "Class B-1
Interest Distribution Amount."
In the event that, on a particular
Remittance Date, the Available Remittance
Amount remaining in the Certificate Account
on such date (after distribution of
interest to the Holders of the Class A and
Class M Certificates) is less than the
Class B-1 Interest Distribution Amount, the
amount of interest to be distributed in
respect of the Class B-1 Certificates will
be allocated among the Certificates of such
Class pro rata in accordance with their
respective entitlements to interest, and
any remaining deficiency (the "Class B-1
Interest Shortfall Carryforward Amount")
will be carried forward and distributed as
described, and subject to the limitations
set forth, under "--Interest Shortfall
Carryforward Amounts" below. Any Class B-1
Interest Shortfall Carryforward Amount will
bear interest at the Class B-1 Pass-Through
Rate, to the extent permitted by law.
E. Class B-2 Interest.......... One calendar month's interest (computed on
the basis of a 360-day year of twelve
30-day months) will be paid to the Holders
of the Class B-2 Certificate on each
Remittance Date, to the extent of the sum
of (i) the Available Remittance Amount, if
any, remaining in the Certificate Account
on such date (after giving effect to
distributions of interest to Holders of the
Class A, Class M and Class B-1
Certificates) and (ii) the amount, if any,
paid pursuant to the Limited Guaranty. Such
interest on the outstanding Class B-2
Certificates will be paid at the Class B-2
Pass-Through Rate on the Current Principal
Balance of the Class B-2 Certificates. With
respect to any Remittance Date, the amount
determined by multiplying the Class B-2
Current Principal Balance by one-twelfth of
the Class B-2 Pass-Through Rate is
hereinafter referred to as the "Class B-2
Interest Distribution Amount (and, together
with the Class B-1 Interest Distribution
Amount, the "Class B Interest Distribution
Amount").
In the event that, on a particular
Remittance Date, the Available Remittance
Amount in the Certificate Account (after
giving effect to distributions of interest
to the Holders of Class A, Class M and
Class B-1 Certificates) is less than the
Class B-2 Interest Distribution Amount and
the Company fails to pay such amount under
the Limited Guaranty, the amount of
interest to be distributed in respect of
the Class B-2 Certificates will be
allocated among the Certificates of such
Class pro rata in accordance with their
respective entitlements to interest, and
the amount of such deficiency (the "Class
B-2 Interest Shortfall Carryforward Amount"
and, together with the "Class B-1 Interest
Shortfall Carryforward Amount", the "Class
B Interest Shortfall Carryforward Amounts")
will be carried forward and distributed as
described, and subject to the limitations
set forth, under "--Interest Shortfall
Carryforward Amounts" below. Any Class B-2
Interest Shortfall Carryforward Amount will
bear interest at the Class B-2 Pass-Through
Rate, to the extent permitted by law.
F. Class A Principal........... Holders of each Class of Class A
Certificates will be entitled to receive on
each Remittance Date as payments of
principal, in the order of priority set
forth below and to the extent of the
Available Remittance Amount in the
Certificate Account on such Remittance Date
after payment of the Class A, Class M and
Class B Interest Distribution Amounts
(collectively, the "Interest Distribution
Amounts"), the Senior Percentage of the sum
(such sum being referred to hereinafter as
the "Principal Distribution Amount"),
without duplication, of (i) all payments
and other recoveries of principal of a Loan
(net of amounts reimbursable to the
Servicer pursuant to the Agreement)
received by the Servicer or any Subservicer
in the related Due Period; (ii) the
principal portion of any Loan actually
purchased by the Seller for breach of a
representation and warranty or other defect
and actually received by the Trustee as of
the related Determination Date; (iii) any
adjustments with respect to substitutions
of Loans for which the Seller has breached
a representation or warranty deposited in
the Principal and Interest Account and
transferred to the Certificate Account as
of the related Determination Date; (iv) the
then outstanding Principal Balance of any
Loan which, during the related Due Period,
has become a Liquidated Loan; and (v)
amounts, if any, released from the
Pre-Funding Account on the Remittance Dates
during the Funding Period. When the Current
Principal Balance of a Class of Class A
Certificates is reduced to zero, no further
distributions of principal will be made to
the holders of such Class. The amount
determined by multiplying the Senior
Percentage by the Principal Distribution
Amount is hereinafter referred to as the
"Class A Formula Principal Distribution
Amount."
The "Senior Percentage" for any Remittance
Date prior to the Class B Cross-over Date,
and for any Remittance Date on or after the
Class B Cross-over Date on which the Class
B Principal Distribution Test is not
satisfied (as described under "Description
of the Certificates--Distribution
Amounts--Class B-l Principal"), will be
100%. For any Remittance Date on or after
the Class B Cross-over Date on which the
Class B Principal Distribution Test is
satisfied, the "Senior Percentage" will
equal a fraction, expressed as a
percentage, the numerator of which is the
sum of the Current Principal Balance of the
Class A Certificates and the Current
Principal Balance of the Class M
Certificates as of the immediately
preceding Remittance Date and the
denominator of which is the aggregate
outstanding principal balances of the Loans
as of the immediately preceding Remittance
Date. A "Liquidated Loan" is a defaulted
Loan or a Mortgaged Property (a) as to
which all amounts that the Servicer expects
to recover on account of such Loan have
been received (including from FHA Payments)
or (b) is a 90 Day Delinquent Loan.
The "Class A Principal Distribution Amount"
for any Remittance Date is intended to be
equal to the Class A Formula Principal
Distribution Amount. If the Class A Formula
Principal Distribution Amount exceeds the
Available Remittance Amount in the
Certificate Account on such Remittance Date
(after payment of all Interest Distribution
Amounts), then the Class A Principal
Distribution Amount shall instead equal the
Available Remittance Amount and, if the
Class B-2 Certificates are no longer
outstanding or if the Company has defaulted
on the Limited Guaranty, then the amount of
such deficiency (the "Class A Principal
Shortfall Carryforward Amount") will be
carried forward and distributed as
described, and subject to the limitations
set forth, under "--Principal Shortfall
Carryforward Amounts" below.
The Class A Principal Distribution Amount
will be distributed first to the Holders of
the Class A-1 Certificates until the Class
A-1 Current Principal Balance has been
reduced to zero, then to the Holders of the
Class A-2 Certificates until the Class A-2
Principal Balance has been reduced to zero,
and then to the Holders of the Class A-3
Certificates until the Class A-3 Principal
Balance has been reduced to zero. Holders
of each Class of Class A Certificates will
be paid principal on each Remittance Date
in accordance with their respective
Percentage Interests.
G. Class M-1 Principal......... On each Remittance Date on and after the
Class A Current Principal Balance has been
reduced to zero, the Holders of the Class
M-1 Certificates will be entitled to
receive, as payments of principal, the
Senior Percentage (as described under
"--Class A Principal" above) of the
Principal Distribution Amount (the "Class
M-1 Formula Principal Distribution
Amount"), subject to the prior payment of
all Interest Distribution Amounts payable
on such Remittance Date and Class A
Principal Distribution Amounts, if any,
payable on such Remittance Date, until the
Class M-1 Current Principal Balance is
reduced to zero.
The "Class M-1 Principal Distribution
Amount" for any Remittance Date is intended
to be equal to the Class M-1 Formula
Principal Distribution Amount. If the Class
M-1 Formula Principal Distribution Amount
exceeds the Available Remittance Amount in
the Certificate Account on such Remittance
Date (after payment of all Interest
Distribution Amounts, and, if any, the
Class A Principal Distribution Amounts),
then the Class M-1 Principal Distribution
Amount shall instead equal the remaining
Available Remittance Amount and, if the
Class B-2 Certificates are no longer
outstanding or the Company has defaulted on
the Limited Guaranty, the amount of such
deficiency (the "Class M-1 Principal
Shortfall Carryforward Amount") will be
carried forward and distributed as
described, and subject to the limitations
set forth, under "--Principal Shortfall
Carryforward Amounts" below.
On each Remittance Date on or after the
Class B Cross-over Date on which the Class
B Principal Distribution Test is satisfied,
payments of principal will be made to Class
B-1 or Class B-2 Certificateholders, even
if Class M-1 Certificateholders are not yet
entitled to receive payments of principal
because the Class A Current Principal
Balance has not been reduced to zero.
H. Class M-2 Principal......... On each Remittance Date on and after the
Class A Current Principal Balance and the
Class M-1 Current Principal Balance have
been reduced to zero, the Holders of the
Class M-2 Certificates will be entitled to
receive, as payments of principal, the
Senior Percentage (as described under
"--Class A Principal" above) of the
Principal Distribution Amount (the "Class
M-2 Formula Principal Distribution
Amount"), subject to the prior payment of
all Interest Distribution Amounts payable
on such Remittance Date and Class A and
Class M-1 Principal Distribution Amounts,
if any, payable on such Remittance Date,
until the Class M-2 Current Principal
Balance is reduced to zero.
The "Class M-2 Principal Distribution
Amount" for any Remittance Date is intended
to be equal to the Class M-2 Formula
Principal Distribution Amount. If the Class
M-2 Formula Principal Distribution Amount
exceeds the Available Remittance Amount in
the Certificate Account on such Remittance
Date (after payment of all Interest
Distribution Amounts and, if any, the Class
A Principal Distribution Amounts and the
Class M-1 Principal Distribution Amount),
then the Class M-2 Principal Distribution
Amount shall instead equal the Available
Remittance Amount and, if the Class B-2
Certificates are no longer outstanding or
the Company has defaulted on the Limited
Guaranty, the amount of such deficiency
(the "Class M-2 Principal Shortfall
Carryforward Amount") will be carried
forward and distributed as described, and
subject to the limitations set forth, under
"--Principal Shortfall Carryforward
Amounts" below.
On each Remittance Date on or after the
Class B Cross-over Date on which the Class
B Principal Distribution Test is satisfied,
payments of principal will be made to Class
B-1 or Class B-2 Certificateholders, even
if Class M-2 Certificateholders are not yet
entitled to receive payments of principal
because either the Class A Current
Principal Balance or the Class M-1 Current
Principal Balance has not been reduced to
zero.
I. Class B-1 Principal......... Prior to the Class B Cross-over Date,
there will be no distributions of principal
on the Class B-1 Certificates. The "Class B
Cross-over Date" will be the earlier of (A)
the Remittance Date on which the Class M-2
Principal Balance is reduced to zero, and
(B) the first Remittance Date on or after
the Remittance Date in April 2000 on which
the fraction, expressed as a percentage,
the numerator of which is the Class B
Current Principal Balance as of the
immediately preceding Remittance Date and
the denominator of which is the sum of the
Class A, Class M and Class B Current
Principal Balances as of the immediately
preceding Remittance Date, is equal to or
greater than 18.5%.
On each Remittance Date on or after the
Class B Cross-over Date and prior to the
Remittance Date on which the Class A and
Class M Current Principal Balances have
been reduced to zero, holders of Class B
Certificates will be entitled to
distributions of principal only if the
Class B Principal Distribution Test (as
described under "Description of the
Certificates--Distribution Amounts--Class
B-1 Principal" herein) is satisfied on such
Remittance Date.
On each Remittance Date on or after the
Class B Cross-over Date, if the Class B
Principal Distribution Test is satisfied on
such Remittance Date, the Holders of the
Class B-1 Certificates will be entitled to
receive, as payments of principal, the
Class B Percentage (as described under
"Description of the
Certificates--Distribution Amounts--Class
B-1 Principal" herein) of the Principal
Distribution Amount (the "Class B-1 Formula
Principal Distribution Amount"), subject to
the prior payment of all Interest
Distribution Amounts and all Class A and
Class M Principal Distribution Amounts, if
any, payable on such Remittance Date until
the Class B-1 Current Principal Balance is
reduced to zero.
The "Class B-1 Principal Distribution
Amount" for any Remittance Date is intended
to be equal to the Class B-1 Formula
Principal Distribution Amount. If the Class
B-1 Formula Principal Distribution Amount
exceeds the Available Remittance Amount in
the Certificate Account on such Remittance
Date (after payment of all Interest
Distribution Amounts and, if any, the Class
A Principal Distribution Amounts and the
Class M Principal Distribution Amounts),
then the Class B-1 Principal Distribution
Amount shall instead equal the remaining
Available Remittance Amount and, if the
Class B-2 Certificates are no longer
outstanding or the Company has defaulted on
the Limited Guaranty, the amount of such
deficiency (the "Class B-1 Principal
Shortfall Carryforward Amount") will be
carried forward and distributed as
described, and subject to the limitations
set forth, under "--Principal Shortfall
Carryforward Amounts" below.
J. Class B-2 Principal......... Except for distributions of any amounts
representing a Class B-2 Principal
Liquidation Loss Amount (as described
below), payments of principal on the Class
B-2 Certificates will not commence until
the Remittance Date on which the Class B-1
Current Principal Balance has been reduced
to zero, and will be made on that
Remittance Date and each Remittance Date
thereafter only if the Class B Principal
Distribution Test is satisfied on such
Remittance Date (unless the Class A Current
Principal Balance and the Class M Current
Principal Balance have been reduced to
zero). On any such Remittance Date, the
Holders of the Class B-2 Certificates will
be entitled to receive, as payments of
principal, the Class B Percentage of the
Principal Distribution Amount (the "Class
B-2 Formula Principal Distribution Amount")
and any amounts payable under the Limited
Guaranty, subject to the prior payment of
all Interest Distribution Amounts and Class
A, Class M and Class B-1 Principal
Distribution Amounts, if any, payable on
such Remittance Date, until the Class B-2
Principal Balance has been reduced to zero.
On each Remittance Date, the Holders of the
Class B-2 Certificates will be entitled to
receive pursuant to the Limited Guaranty
the amount (the "Class B-2 Principal
Liquidation Loss Amount"), if any, by which
the sum of the Class A Current Principal
Balance, the Class M Current Principal
Balance and the Class B Current Principal
Balance for such Remittance Date exceeds
the sum of the outstanding principal
balances of all Loans outstanding on such
Remittance Date (after giving effect to all
distributions of principal on such
Remittance Date but exclusive of any
Guaranty Payments with respect to such
Remittance Date).
Interest Shortfall Carryforward
Amounts.......................... On each Remittance Date, after all
payments of interest and principal as set
forth above, the aggregate Class A Interest
Shortfall Carryforward Amounts will be paid
concurrently to the Holders of each Class
of Class A Certificates to the extent of
the lesser of (i) the remaining Available
Remittance Amount in the Certificate
Account on such date and (ii) the Available
Maximum Subordination Amount (as defined
below), together with interest on such
Class A Interest Shortfall Carryforward
Amounts at the applicable Pass-Through
Rates. In the event that, on a particular
Remittance Date, the remaining Available
Remittance Amount in the Certificate
Account is less than the aggregate Class A
Interest Shortfall Carryforward Amounts,
the portion of the remaining Available
Remittance Amount to be distributed in
respect of each Class of Class A
Certificates will be allocated among the
Classes (and within a Class among the
Certificates of such Class) pro rata in
accordance with their respective
entitlements to Class A Interest Shortfall
Carryforward Amounts, and any Class A
Interest Shortfall Carryforward Amounts or
interest thereon not paid shall be carried
forward to the next Remittance Date,
subject to the Available Maximum
Subordination Amount.
On each Remittance Date, after all payments
of interest, principal and Class A Interest
Shortfall Carryforward Amounts as set forth
above, the aggregate Class M-1 Interest
Shortfall Carryforward Amounts will be paid
to the Holders of the Class M- 1
Certificates to the extent of the lesser of
(i) the remaining Available Remittance
Amount in the Certificate Account on such
date and (ii) the Available Maximum
Subordination Amount, together with
interest on such Class M-1 Interest
Shortfall Carryforward Amounts at the Class
M-1 Pass- Through Rate. In the event that,
on a particular Remittance Date, the
remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class M-1 Interest Shortfall
Carryforward Amounts, the portion of the
Available Remittance Amount to be
distributed in respect of the Class M-1
Certificates will be allocated among the
Certificates of such Class pro rata, and
any Class M-1 Interest Shortfall
Carryforward Amounts or interest thereon
not paid shall be carried forward to the
next Remittance Date, subject to the
Available Maximum Subordination Amount.
On each Remittance Date, after all payments
of interest, principal and Class A and
Class M-1 Interest Shortfall Carryforward
Amounts as set forth above, the aggregate
Class M-2 Interest Shortfall Carryforward
Amounts will be paid to the Holders of the
Class M-2 Certificates to the extent of the
lesser of (i) the remaining Available
Remittance Amount in the Certificate
Account on such date and (ii) the Available
Maximum Subordination Amount, together with
interest on such Class M-2 Interest
Shortfall Carryforward Amounts at the Class
M-2 Pass-Through Rate. In the event that,
on a particular Remittance Date, the
remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class M-2 Interest Shortfall
Carryforward Amounts, the portion of the
Available Remittance Amount to be
distributed in respect of the Class M-2
Certificates will be allocated among the
Certificates of such Class pro rata, and
any Class M-2 Interest Shortfall
Carryforward Amounts or interest thereon
not paid shall be carried forward to the
next Remittance Date, subject to the
Available Maximum Subordination Amount.
On each Remittance Date, after all payments
of interest, principal and Class A and
Class M Interest Shortfall Carryforward
Amounts as set forth above, the aggregate
Class B-1 Interest Shortfall Carryforward
Amounts will be paid to the Holders of the
Class B-1 Certificates to the extent of the
lesser of (i) the remaining Available
Remittance Amount in the Certificate
Account on such date and (ii) the Available
Maximum Subordination Amount, together with
interest on such Class B-1 Interest
Shortfall Carryforward Amounts at the Class
B-1 Pass-Through Rate. In the event that,
on a particular Remittance Date, the
remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class B-1 Interest Shortfall
Carryforward Amounts, the portion of the
Available Remittance Amount to be
distributed in respect of the Class B-1
Certificates will be allocated among the
Certificates of such Class pro rata, and
any Class B-1 Interest Shortfall
Carryforward Amounts or interest thereon
not paid shall be carried forward to the
next Remittance Date, subject to the
Available Maximum Subordination Amount.
To the extent that Class B-2 Interest
Shortfall Carryforward Amounts are not paid
by the Company pursuant to the Limited
Guaranty, on each Remittance Date, after
all payments of interest, principal and
Class A, Class M and Class B-1 Interest
Shortfall Carryforward Amounts as set forth
above, the aggregate Class B-2 Interest
Shortfall Carryforward Amounts will be paid
to the Holders of the Class B-2
Certificates to the extent of the lesser of
(i) the remaining Available Remittance
Amount in the Certificate Account on such
date and (ii) the Available Maximum
Subordination Amount, together with
interest on such Class B-2 Interest
Shortfall Carryforward Amounts at the Class
B-2 Pass-Through Rate. In the event that,
on a particular Remittance Date, the
remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class B-2 Interest Shortfall
Carryforward Amounts, the portion of the
Available Remittance Amount to be
distributed in respect of the Class B-2
Certificates will be allocated among the
Certificates of such Class pro rata, and
any Class B-2 Interest Shortfall
Carryforward Amounts or interest thereon
not paid shall be carried forward to the
next Remittance Date, subject to the
Available Maximum Subordination Amount.
When the Available Maximum Subordination
Amount shall be reduced to zero, provided
the Company is not in default under the
Limited Guaranty, (i) no further Interest
Distribution Amount or Principal
Distribution Amount Shortfalls shall be
carried forward to succeeding Remittance
Dates, (ii) interest shall cease to accrue
on all remaining Interest Shortfall
Carryforward Amounts, and (iii) all future
shortfalls of principal shall result in
corresponding writedowns of the Current
Principal Balances of the Certificates,
which writedowns will be allocated first to
Class B-2 Certificates, then to the Class
B-1 Certificates, then to the Class M-2
Certificates, then to the Class M-1
Certificates, and then to the Class A
Certificates.
Principal Shortfall Carryforward
Amounts........................... On each Remittance Date, after all
payments of interest, principal and
Interest Shortfall Carryforward Amounts as
set forth above, the aggregate Class A,
Class M-1, Class M-2 and Class B-1
Principal Shortfall Carryforward Amounts
will be paid sequentially to the Holders of
each such Class of Certificates in such
order to the extent of the lesser of (i)
the remaining Available Remittance Amount
in the Certificate Account on such date and
(ii) the Current Maximum Subordination
Amount. In the event that, on a particular
Remittance Date, the remaining Available
Remittance Amount in the Certificate
Account is less than the aggregate
Principal Shortfall Carryforward Amounts,
any Principal Shortfall Carryforward
Amounts not paid shall be carried forward
to the next Remittance Date, subject in all
cases to the Available Maximum
Subordination Amount described above under
"--Interest Shortfall Carryforward
Amounts."
Subordination of Class M and Class B
Certificates...................... The rights of the Holders of the Class M
Certificates and the Class B Certificates
to receive distributions with respect to
the Loans will be subordinated to such
rights of the Class A Certificateholders.
This subordination is intended to enhance
the likelihood of regular receipt by the
holders of the Class A Certificates of the
full amount of their monthly payments of
principal and interest and to afford such
holders protection against losses on
Liquidated Loans. The protection afforded
to the Holders of the Class A Certificates
by means of the subordination feature will
be accomplished by the preferential right
of the Holders of the Class A Certificates
(i) to receive, prior to any distribution
being made on a Remittance Date in respect
of principal or interest on the Class M
Certificates and the Class B Certificates,
the amount of interest due them on each
Remittance Date out of the Amount Available
on deposit on such date in the Certificate
Account, (ii) to receive, prior to any
distribution being made on a Remittance
Date in respect of principal on the Class M
Certificates and the Class B Certificates,
the amount of principal due them on each
Remittance Date out of the Available
Remittance Amount on deposit on such date
in the Certificate Account.
In addition, the rights of the Holders of
the Class M-2 Certificates and Class B
Certificates to receive distributions with
respect to the Loans will be subordinate to
such rights of the Holders of the Class M-1
Certificates. This subordination is
intended to enhance the likelihood of
regular receipt by the Holders of the Class
M-1 Certificates of the full amount of
their monthly payments of principal and
interest and to afford such holders
protection against losses on Liquidated
Loans. The protection afforded to the
Holders of the Class M-1 Certificates by
means of the subordination feature will be
accomplished by the preferential right of
the Holders of the Class M-1 Certificates
(i) to receive, prior to any distribution
being made on a Remittance Date in respect
of principal or interest on the Class M-2
Certificates and the Class B Certificates,
the amount of interest due them on each
Remittance Date out of the Available
Remittance Amount on deposit on such date
in the Certificate Account, (ii) to
receive, prior to any distribution being
made on a Remittance Date in respect of
principal on the Class M-2 Certificates and
the Class B Certificates, the amount of
principal due them on each Remittance Date
out of the Available Remittance Amount on
deposit on such date in the Certificate
Account.
In addition, the rights of the Holders of
the Class B-1 Certificates and Class B-2
Certificates to receive distributions with
respect to the Loans will be subordinate to
such rights of the Holders of the Class M-2
Certificates. This subordination is
intended to enhance the likelihood of
regular receipt by the Holders of the Class
M-2 Certificates of the full amount of
their monthly payments of principal and
interest and to afford such holders
protection against losses on Liquidated
Loans. The protection afforded to the
Holders of the Class M-2 Certificates by
means of the subordination feature will be
accomplished by the preferential right of
the Holders of the Class M-2 Certificates
(i) to receive, prior to any distribution
being made on a Remittance Date in respect
of principal or interest on the Class B
Certificates, the amount of interest due
them on each Remittance Date out of the on
deposit on such date in the Certificate
Account, (ii) to receive, prior to any
distribution being made on a Remittance
Date in respect of principal on the Class B
Certificates, the amount of principal due
them on each Remittance Date out of the
Available Remittance Amount on deposit on
such date in the Certificate Account.
In addition, the rights of the Holders of
the Class B- 2 Certificates to receive
distributions with respect to the Loans
will be subordinate to such rights of the
Holders of the Class B-1 Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the
Holders of the Class B-1 Certificates of
the full amount of their monthly payments
of principal and interest and to afford
such holders protection against losses on
Liquidated Loans. The protection afforded
to the Holders of the Class B-1
Certificates by means of the subordination
feature will be accomplished by the
preferential right of the Holders of the
Class B-1 Certificates (i) to receive,
prior to any distribution being made on a
Remittance Date in respect of principal or
interest on the Class B-2 Certificates, the
amount of interest due them on each
Remittance Date out of the Available
Remittance Amount on deposit on such date
in the Certificate Account, (ii) to
receive, prior to any distribution being
made on a Remittance Date in respect of
principal on the Class B-2 Certificates,
the amount of principal due them on each
Remittance Date out of the Available
Remittance Amount on deposit on such date
in the Certificate Account.
Limited Guaranty.................... In order to mitigate the effect of the
subordination of the Class B-2 Certificates
and liquidation losses and delinquencies on
the Loans, the Holders of the Class B-2
Certificates are entitled to receive on
each Remittance Date an amount equal to the
Guaranty Payment, if any, under the Limited
Guaranty. Prior to the Class B Cross-over
Date, and on any Remittance Date on or
after the Class B Cross-over Date on which
Class B Principal Distribution Test is not
satisfied (unless the Class A Principal
Balance and the Class M Principal Balance
have been reduced to zero), the Guaranty
Payment will equal the amount, if any, by
which (a) the sum of (i) the Class B-2
Formula Distribution Amount (which will be
equal to accrued and unpaid interest on the
Class B-2 Certificates) for such Remittance
Date and (ii) the Class B-2 Principal
Liquidation Loss Amount, if any, for such
Remittance Date, exceeds (b) the Class B-2
Distribution Amount for such Remittance
Date. On each Remittance Date on or after
the Class B Cross-over Date on which the
Class B Principal Distribution Test is
satisfied (or on which the Class A
Principal Balance and the Class M Principal
Balance have been reduced to zero), the
Guaranty Payment will equal the amount, if
any, by which (a) the sum of (i) the Class
B-2 Formula Distribution Amount (which will
include both interest and principal) for
such Remittance Date and (ii) the Class B-2
Principal Liquidation Loss Amount, if any,
for such Remittance Date exceeds (b) the
Class B-2 Distribution Amount for such
Remittance Date.
The Limited Guaranty will be an unsecured
general obligation of the Company. The
Limited Guaranty will not directly benefit
in any way, or result in any payment to,
Holders of the Class A-1, Class A-2, Class
A-3, Class M-l, Class M-2 or Class B-1
Certificates.
Alternate Credit Enhancement........ If, at the Company's option, Alternate
Credit Enhancement (as defined below) is
provided and the Rating Agencies shall have
notified the Company that substitution of
such Alternate Credit Enhancement will not
result in the downgrade or withdrawal by
the Rating Agencies of the then current
rating of the Certificates, and upon the
delivery of an opinion of counsel that such
action would not cause the Trust to fail to
qualify as a "REMIC," the Limited Guaranty
will be released and terminated. The
Alternate Credit Enhancement may consist of
cash or securities deposited in a
segregated escrow, trust or collateral
account or a letter of credit, certificate
insurance policy or surety bond provided by
a third party or any other credit
enhancement or support approved by the
Rating Agencies ("Alternate Credit
Enhancement").
Pre-Funding Account................. On the Closing Date, an aggregate cash
amount (the "Pre-Funded Amount") will be
deposited into the Pre-Funding Account in
an amount not to exceed approximately
$43,750,000. Amounts in the Pre- Funding
Account may be used only (i) to acquire
Subsequent Loans and (ii) to make
accelerated payments of principal on the
Certificates. During the period (the
"Funding Period") from the Closing Date
until the earliest of (i) the date on which
the amount on deposit in the Pre-Funding
Account is less than $200,000, (ii) the
date on which an Event of Default (as
defined in the Agreement) occurs under the
Agreement or (iii) the close of business on
June 26, 1997, amounts will, from time to
time, be withdrawn from the Pre-Funding
Account to purchase Subsequent Loans in
accordance with the Agreement. Any
Pre-Funded Amount remaining at the end of
the Funding Period will be distributed as a
principal prepayment on the next Remittance
Date to the Certificates as set forth
herein under "--Remittance and Record
Dates." However, any Pre-Funded Amount
remaining at the close of business on June
26, 1997 will be distributed as a principal
prepayment on June 27, 1997 (the "Special
Remittance Date") to the Certificates.
Capitalized Interest Account........ On the Closing Date, the Representative
also will make a cash deposit in an account
(the "Capitalized Interest Account") in the
name of the Trustee on behalf of the Trust.
The amount deposited in the Capitalized
Interest Account will be used by the
Trustee on the Remittance Dates occurring
in April, May and June 1997 to fund the
excess, if any, of (i) the amount of
interest accrued for each such Remittance
Date at the weighted average Pass- Through
Rates of the Certificates on the portion of
the Certificates having principal balances
exceeding the principal balances of the
Loans over (ii) the amount of any earnings
on funds in the Pre-Funding Account that
are available to pay interest on the
Certificates on each such Remittance Date.
Additionally, if a principal prepayment is
made on the Special Remittance Date to any
Class of Certificates, such Certificates
also will receive on such date, from the
Capitalized Interest Account, accrued
interest at the applicable Pass-Through
Rates on the amount of such principal
prepayment. Any amounts remaining in the
Capitalized Interest Account on the Special
Remittance Date and not used for such
purposes are required to be paid directly
to the holders of the Class X and Class R
Certificates on such Special Remittance
Date.
Remittance and Record Dates......... Distributions on the Class A, Class M and
Class B Certificates will be made by or on
behalf of the Trustee on the 15th day of
each month, or if such day is not a
business day, on the first business day
thereafter, commencing April 15, 1997
(each, a "Remittance Date"), to each person
in whose name a Class A, Class M or Class B
Certificate is registered on the last day
of the preceding calendar month (the
"Record Date"), except that the final
distribution on each Class of each such
Class of Certificates will be made only
upon presentation and surrender of such
Certificates at the office or agency
designated for that purpose. Any Pre-Funded
Amount remaining at the close of business
on June 26, 1997 (together with interest
thereon) will be distributed by or on
behalf of the Trustee on the Special
Remittance Date to the Classes of Class A,
Class M or Class B Certificates of the
Trust then entitled to receive payments of
principal in the order and percentages as
described herein. Such distribution will be
made to each person in whose name a Class
A, Class M or Class B Certificate of any
such Class is registered on May 30, 1997.
FHA Insurance.......................Subject to the then remaining Reserve Amount
(as defined below) of the Co-Trustee, each
FHA Loan will be insured by the FHA in an
amount currently equal to 90% of the sum of
the following: (i) the unpaid principal and
uncollected interest earned to the date of
default, calculated on the actuarial method
even if the Note relating to such FHA Loan
provides for simple interest, reduced by
certain amounts received by the Claims
Administrator in connection with enforcing
a lien on the related Mortgaged Property,
if any, prior to the lien, if any, of the
related FHA Loan; (ii) the unpaid amount of
interest on the unpaid principal from the
date of default to the date of the initial
submission of the related Claim to the FHA
for payment plus 15 calendar days, but not
for any period greater than nine months
from the date of default, calculated at 7%
per annum; and (iii) the amount of certain
uncollected court costs, attorney's fees,
and expenses for recording the assignment
of the related Mortgage, if any, to the
United States. See "The Trust--FHA Loans"
in the Prospectus and "Risk
Factors--Limitations on FHA Insurance" and
"Lending Programs--The Home Improvement
Lending Program--FHA Loans" herein.
The Co-Trustee's Reserve Amount..... Each of the FHA Loans will be insured by
the FHA, to the extent described herein,
under each Originator's FHA contract of
insurance. In connection with the transfer
of the FHA Loans from the Originators to
the Co-Trustee, the Originators also will
file with the FHA all documents necessary
to effect the transfer of the FHA insurance
reserves applicable to the FHA Loans to the
Co-Trustee's FHA contract of insurance.
Based upon information provided by the FHA,
The Money Store Inc. believes that upon the
transfer referred to above and after the
Funding Period, the FHA insurance available
to the Co-Trustee will be equal to at least
(A) 10% of the principal balance of the FHA
Loans as of the Cut-Off Date or Subsequent
Cut-Off Date, as the case may be; or (B)
thereafter, 10% of the principal balance of
all Title I loans originated or purchased
and currently reported for FHA insurance by
the Co-Trustee, less amounts for annual
reductions as described below and for
insurance claims previously paid to the Co-
Trustee by the FHA, including payments in
respect of loans other than the FHA Loans,
and increased by an amount equal to 10% of
the lesser of the original principal
balance or the purchase price paid for
Title I loans subsequently originated or
purchased of record by the Co-Trustee (in
the case of clause (A) or (B), the "Reserve
Amount"). See "The Trust--FHA Insurance" in
the Prospectus and "Risk
Factors--Limitations on FHA Insurance"
herein.
FHA Claims paid to the Co-Trustee by the
FHA with respect to Title I loans other
than the FHA Loans may affect the total
amount of the Reserve Amount.
Since the adequacy of the Co-Trustee's
Reserve Amount is dependent upon future
events, including the reductions for the
payment of claims, no assurance can be
given that the Reserve Amount is or will be
adequate to cover 90% of all potential
losses on the FHA Loans. See "Risk
Factors--Limitations on FHA Insurance"
herein.
Obligation of the Claims
Administrator.................... If any FHA Loan becomes a 90 Day Delinquent
FHA Loan (as defined below), and if
sufficient coverage is available in the
Reserve Amount to make an FHA Payment with
respect to such FHA Loan, the Claims
Administrator may, in its sole discretion,
during any subsequent Due Period, determine
to file a Claim with the FHA with respect
to such 90 Day Delinquent FHA Loan. If the
Claims Administrator determines to file
such a Claim, the Claims Administrator will
so notify the Co-Trustee and the Custodian
no later than the Determination Date
following such determination and shall
request delivery of the related loan file
(the "Trustee's Loan File"). Upon receipt
of such certification and request, the
Custodian shall, no later than the related
Remittance Date, release to the Claims
Administrator the related Trustee's Loan
File and the Co-Trustee and the Custodian
shall execute and deliver such instruments
necessary to enable the Claims
Administrator to file a Claim with the FHA
on behalf of the Co-Trustee. Within 120
days of its receipt of the related
Trustee's Loan File, the Claims
Administrator shall, in its sole
discretion, either file a Claim with the
FHA for an FHA Payment with respect to such
90 Day Delinquent FHA Loan or, if the
Claims Administrator determines not to file
such a Claim, return to the Co-Trustee the
related Trustee's Loan File.
With respect to any 90 Day Delinquent FHA
Loan transferred to the Claims
Administrator as described above, the
Claims Administrator shall deposit (or, if
the Claims Administrator is not also the
Servicer, the Claims Administrator shall
instruct the Servicer to deposit) in the
applicable Certificate Account within 24
hours of receipt or determination thereof
the following amounts (such amounts to be
net of certain amounts that would be
reimbursable to the Servicer under the
Agreement with respect to amounts in the
applicable Certificate Account): (i) any
FHA Payments; (ii) the amount, if any, by
which the FHA Payment was reduced in
accordance with FHA regulations due to the
Claims Administrator enforcing a lien on
the related Mortgaged Property, if any,
prior to the lien, if any, of the related
90 Day Delinquent FHA Loan; and (iii) any
principal and interest payments received
with respect to a 90 Day Delinquent FHA
Loan after the Due Period in which the FHA
Loan is transferred to the Claims
Administrator and before either the related
FHA Payment is paid or the related
Co-Trustee's Loan File is returned to the
Trustee, as the case may be (the amounts
referred to in (ii) and (iii) above are
referred to herein as "Related Payments").
If an FHA Loan becomes a 90 Day Delinquent
FHA Loan when there is insufficient
coverage in the Reserve Amount or if the
Claims Administrator determines not to file
a Claim with the FHA with respect to such
90 Day Delinquent FHA Loan, the Co-Trustee
will not transfer such FHA Loan to the
Claims Administrator, no Claim will be made
to the FHA and the Servicer may take other
action, including the commencement of
foreclosure proceedings, on the related
Mortgaged Property, if any. The Servicer
will continue to make Monthly Advances with
respect to interest on 90 Day Delinquent
FHA Loans as described under "Monthly
Advances" herein.
The Certificateholders will not have any
direct right to receive the FHA Payments
from the FHA. See "Risk Factors--Dependence
on Claims Administrator, Representative and
Servicer for Making FHA Claims and Paying
the FHA Payments" herein.
A "90 Day Delinquent Loan" is a Loan with
respect to which four consecutive monthly
payments have not been received by the
Servicer as of the last day of the related
Due Period unless, on or prior to the last
day of the Due Period in which the fourth
Monthly Payment is due, the Servicer has
received from the related Obligor an amount
at least equal to one unpaid monthly
payment. A "90 Day Delinquent FHA Loan" is
a 90 Day Delinquent Loan that is also an
FHA Loan.
An "FHA Payment" is any amount paid by the
FHA pursuant to a Claim with respect to a
90 Day Delinquent FHA Loan.
FHA Premium Account................. The Trustee will establish with itself a
separate account with respect to the Trust
(the "FHA Premium Account") to reimburse
the Claims Administrator for the payment to
the FHA of the annual insurance premium
(the "FHA Insurance Premium") on each FHA
Loan in the Trust. The FHA Insurance
Premium is an annual premium equal to 0.5%
of the original principal balance of each
FHA Loan. If the related Obligor pays the
FHA Insurance Premium in addition to the
monthly payment, any payment of the FHA
Insurance Premium received during a Due
Period will be deposited in the FHA Premium
Account on the related Remittance Date by
the Trustee from the related Certificate
Account. In certain states, the Servicer is
prohibited from directly collecting the FHA
Insurance Premium from the Obligor. With
respect to FHA Loans secured by Mortgaged
Properties located in such states, the
Servicer will cause to be deposited in the
FHA Premium Account with respect to the
Trust a specified percentage of each
scheduled interest payment. Since an
Obligor pays interest on the declining
principal balance of the related FHA Loan
and the FHA Insurance Premium is based upon
the original principal balance of the FHA
Loan, the amount of interest allocated to
the FHA Premium Account may be more or less
than the amount of the related FHA
Insurance Premium. The Servicer has agreed
to satisfy any resulting shortfall from its
own funds.
The Pool............................ Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
concerning the Loans are measured by the
aggregate principal balances of the Pool of
Loans described herein at the close of
business on the Cut-Off Date and all dollar
amounts are based on the principal balances
of such Loan at the close of business on
the Cut-Off Date. The Loans that will
comprise the Trust as of the Closing Date
are referred to herein as the "Initial
Loans."
The Loans will consist of fixed rate home
improvement mortgages (the "Home
Improvement Mortgages") and the related
promissory notes, retail installment
contracts or obligations, or sales
agreements (the "Home Improvement Mortgage
Notes") secured, except as set forth below,
by one- to four-family residences, units in
planned unit developments ("PUDs") and
units in condominium developments (the
"Home Improvement Mortgaged Properties" or
"Mortgaged Properties").
As stated above, the Agreement will provide
that Subsequent Loans may be purchased by
the Trust from the Originators from time to
time on or before the close of business on
June 26, 1997 from funds on deposit in the
Pre-Funding Account. Prior to the Closing
Date, each Subsequent Loan (including
Dealer Loans, as defined herein under
"Lending Programs--The Home Improvement
Lending Program--Dealer/Contractor
Origination") will have been identified and
originated and underwritten, or purchased
and re-underwritten, by one of the
Originators, substantially in accordance
with the Originators' underwriting criteria
described herein under the caption "Lending
Programs--The Home Improvement Lending
Program--FHA Loans--Title I Underwriting
Requirements," in connection with
Subsequent Loans that are FHA Loans, and
"Lending Programs--The Home Improvement
Lending Program--Conventional Home
Improvement Loans--Underwriting Criteria,"
in connection with Subsequent Loans that
are Conventional Loans. The purchase price
for each Subsequent Loan will be no greater
than its unpaid principal balance as of the
related Subsequent Cut-Off Date. The
Agreement will provide that the Loans,
following the conveyance of any Subsequent
Loans to the Trust, must, in the aggregate,
conform to certain specified
characteristics. See "The
Agreement--Represent- ations and
Warranties" in the Prospectus.
Approximately 22% and 78% of the Initial
Loans will be FHA Loans and Conventional
Loans, respectively. The Loans will have
been originated and underwritten, or
purchased and re-underwritten, by one of
the Originators substantially in accordance
with the Originators' underwriting criteria
described herein under the caption "Lending
Programs--The Home Improvement Lending
Program--FHA Loans--Title I Underwriting
Requirements," in connection with FHA
Loans, and "Lending Programs--The Home
Improvement Lending Program--Conventional
Home Improvement Loans--Underwriting
Criteria," in connection with Conventional
Loans.
No more than approximately 35%, 15%, 15%,
10% 10%, 10%, 10% and 10% of the Home
Improvement Loans will be secured by Home
Improvement Mortgaged Properties located in
California, New York, Louisiana, Illinois,
Nevada, Arizona, Texas and Georgia,
respectively. No more than approximately 5%
of the Home Improvement Loans will be
secured by Home Improvement Mortgaged
Properties located in any other state.
Based on representations made by the
mortgagor on a Home Improvement Mortgage
Note (the "Mortgagor" or "Obligor"), no
less than approximately 99% of the Home
Improvement Loans will be secured by one-
to four-family residences, no more than
approximately 2% of the Home Improvement
Loans will be secured by vacation homes,
secondary residences, or investment
properties, no more than approximately 2%
of the Home Improvement Loans will be
secured by individual units in low rise
condominiums, no more than approximately 2%
of the Home Improvement Loans will be
secured by two-, three- or four-family
houses, no more than approximately 1% of
the Home Improvement Loans will be secured
by five or more unit residential or
mixed-use residential and commercial
properties ("Multifamily Mortgaged
Properties") and no Home Improvement Loan
will be secured by individual units of
other types including high rise
condominiums and mixed-use buildings. No
more than approximately 2% of the Home
Improvement Loans will be secured by
manufactured homes.
Approximately 2% of the Home Improvement
Loans will be secured by first mortgage
liens on the related Home Improvement
Mortgaged Property, approximately 5% of the
Home Improvement Loans will be secured by
second mortgage liens on the related Home
Improvement Mortgaged Property and the
remainder of the Home Improvement Loans
will be secured by more junior mortgage
liens on the related Home Improvement
Mortgaged Property.
The FHA Loans are insured by the FHA to the
extent described herein. The Conventional
Loans are not insured by any governmental
entity.
The Home Improvement Loans will provide for
a schedule of payments which will be, if
timely paid, sufficient to amortize fully
the principal balance of the Home
Improvement Loan on or before its maturity
date. The Home Improvement Loans will be
"simple interest" loans. However, with
respect to FHA Loans secured by Mortgaged
Properties located in states where the
Servicer collects the FHA Insurance Premium
directly from the related Obligor, payments
are applied to the FHA Insurance Premium
prior to accrued interest. The Home
Improvement Loans will bear interest at
fixed rates (each, a "Home Improvement
Interest Rate").
The weighted average Home Improvement
Interest Rate of the Initial Loans will be
approximately 12.86%. The lowest principal
balances of any Initial Loan as of the
Cut-Off Date will be approximately $1,000,
and the highest will be approximately
$100,000. As of the Cut-Off Date, the
average principal balance of the Initial
Loans will be approximately $23,500. As of
the Cut-Off Date, the weighted average
remaining term to stated maturity of the
Initial Loans will be approximately 216
months. The weighted average term to stated
maturity of the Initial Loans at
origination will be approximately 218
months. Each Home Improvement Loan that is
a first lien is covered by a title
insurance policy.
Servicing of the Loans ............. The Servicer will serve as master servicer
for the Loans in accordance with the
Agreement. The Servicer may act through
subservicers, including the Originators or
other affiliates of the Servicer.
Monthly Advances ................... The Servicer is required to remit to the
Trustee no later than the day of each month
which is at least three business days prior
to the Remittance Date and is in no case
earlier than the seventh business day of
such month (the "Determination Date") the
amount (a "Monthly Advance"), if any, by
which, for the Trust (a) the sum of (x) 30
days' interest at the weighted average
Adjusted Loan Remittance Rates of the Trust
on the aggregate outstanding Principal
Balances of each Class of Certificates
immediately prior to the related Remittance
Date and (y) the Monthly Excess Spread, if
any, for the related Remittance Date
relating to the Loans exceeds (b) the
amount received by the Servicer in respect
of interest on the Loans as of the related
Record Date (and with respect to the
Remittance Dates in April, May and June
1997, the sum of (i) all funds to be
transferred to the Certificate Account from
the Capitalized Interest Account for such
Remittance Date and (ii) certain investment
earnings on amounts in the Pre-Funding
Account for the applicable Remittance
Date). Such advances by the Servicer are
reimbursable in the first instance from
late collections of interest including
amounts received in connection with the
liquidation of defaulted Loans
("Liquidation Proceeds"), amounts paid by
any insurer pursuant to any insurance
policy covering a Loan, Mortgaged Property
or REO Property ("Insurance Proceeds"), FHA
Payments and proceeds received by the
Servicer in connection with condemnation,
eminent domain or a release of lien
("Released Mortgaged Property Proceeds")
collected with respect to the related Loan
as to which the advances were made, and any
other amount that otherwise would be
distributed on the Class X and Class R
Certificates.
The "Adjusted Loan Remittance Rate," for a
Class of Certificates will equal the sum of
the Pass-Through Rate for such Class and a
rate used to determine certain expenses of
the Trust. Certain of the Loans may bear
interest at a rate below the Adjusted Loan
Remittance Rate for the related Class. Any
such Loan will be sold to the Trust at a
discount so as to create, for each such
Loan, a mortgage interest rate that, when
applied to the purchase price paid by the
Trust for such Loan, will at least equal
the related Adjusted Loan Remittance Rate.
Compensating Interest............... Not later than each Determination Date,
with respect to each Loan to which the
Servicer received a principal payment in
full in advance of the final scheduled due
date (a "Principal Prepayment") or received
a principal payment that is in excess of
five times the scheduled monthly payment
due, but which was not intended by the
Mortgagor or Obligor to satisfy the Loan in
full or to cure a delinquency (a
"Curtailment") during the related Due
Period, the Servicer is required to remit
to the Trustee from amounts otherwise
payable to the Servicer as servicing
compensation (including the Contingency
Fee), an amount ("Compensating Interest")
equal to any excess of (a) 30 days'
interest on the principal balance of each
such Loan as of the beginning of the
related Due Period, at the weighted average
Adjusted Loan Remittance Rates of the Trust
applicable to the Remittance Date on which
the Compensating Interest will be
distributed over (b) the amount of interest
actually received on the related Loan
during such Due Period.
Servicing and Contingency Fees ..... The Servicer is entitled to a servicing fee
of 0.25% per annum of the principal balance
of each Loan (the "Servicing Fee"), and a
contingency fee of 0.25% per annum of the
principal balance of each Loan (the
"Contingency Fee"), each calculated and
payable monthly from the interest portion
of scheduled monthly payments, Liquidation
Proceeds and certain other amounts
collected.
Rating.............................. It is a condition to the issuance of the
Class A Certificates that each Class be
rated "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"), and "Aaa" by
Moody's Investors Service, Inc. ("Moody's"
and, together with S&P, the "Rating
Agencies"). It is a condition to the
issuance of the Class M-1 Certificates that
they be rated "AA" by S&P and "Aa2" by
Moody's. It is a condition to the issuance
of the Class M-2 Certificates that each
such Class be rated "A" by S&P and "A2" by
Moody's. It is a condition to the issuance
of the Class B-1 Certificates that such
Class be rated "BBB" by S&P and "Baa1" by
Moody's. It is a condition to the issuance
of the Class B-2 Certificates that such
Class be rated "BBB" by S&P and "Baa3" by
Moody's. The ratings assigned by S&P and
Moody's to the Certificates are based on,
among other things, the creditworthiness of
the Servicer and the Limited Guaranty. A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time. No person is obligated to maintain
the rating on any Class of Certificates.
See "Rating of the Certificates" herein.
Optional Termination by the
Servicer........................ On any Remittance Date from and after the
Remittance Date on which the aggregate
principal balances of the Loans are less
than 10% of the sum of (i) the aggregate
principal balances of the Initial Loans as
of the Cut-Off Date and (ii) the original
Pre-Funded Amount (such date, the "Optional
Servicer Termination Date"), the Servicer
may, at its option, purchase, on the next
succeeding Remittance Date, all of the
Loans and any related Mortgaged Property
title to which has been acquired in
foreclosure or by deed in lieu of
foreclosure (an "REO Property") at a price
set forth in the Agreement (the
"Termination Price") at least equal to the
sum of (x) 100% of the Principal Balances
of the Loans, including those evidenced by
REO Properties, and including the portion
of the principal balance of each 90 Day
Delinquent FHA Loan for which the
Certificateholders have not received
payment and for which a Claim was submitted
to the FHA, and (y) 30 days' interest
thereon at the then applicable weighted
average Pass-Through Rates of the
Certificates. See "The Agreement" herein
and in the Prospectus.
REMIC Election and Tax Status ...... For Federal income tax purposes, two
separate elections will be made to treat
certain assets of the Trust as real estate
mortgage investment conduits ("REMICs").
The Class A, Class M, Class B and Class X
of Certificates will constitute "regular
interests" in a REMIC and each class of
Class R Certificates will constitute the
sole "residual interest" in the related
REMIC. See "Federal Income Tax
Considerations" herein and "Federal Income
Tax Consequences" in the Prospectus.
ERISA Considerations................ As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by a pension or other employee
benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or by individual
retirement accounts or certain types of
Keogh plans which are not subject to ERISA
but are subject to Section 4975 of the Code
("Plans"), pursuant to certain exemptions
from potential prohibited transaction rules
of ERISA which would otherwise prohibit a
broad range of transactions involving Plan
assets and persons having certain specified
relationships to a Plan and related excise
tax provisions of Section 4975 of the Code.
One such exemption is Prohibited
Transaction Exemption 91-14, 56 Fed. Reg.
7,413 (February 22, 1991) (the
"Exemption"), which provides an exemption
for transactions involving the purchase,
holding or transfer of certain asset backed
certificates by Plans. See "ERISA
Considerations" herein and in the
Prospectus. No Class M or Class B
Certificates may be purchased for, or on
behalf of, any Plan or any entity whose
underlying assets include plan assets by
reason of such plan or account investing in
such entity (including insurance company
separate or general accounts and collective
investment funds). By its acceptance of a
Class M or Class B Certificate, each Holder
of a Class M or Class B Certificate will be
deemed to have represented and warranted
that it is not subject to the foregoing
limitations. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment Considerations..... No Class of Certificates will constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"). Investors should consult
their own legal advisers in determining
whether and the extent to which a Class of
Certificates constitutes legal investments
for such investors. See "Legal Investment
Considerations" herein.
Registration of the Certificates.... The Certificates will be represented by
global certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of
The Depository Trust Company ("DTC"). No
Certificateholder will be entitled to
receive definitive certificates
("Definitive Certificates") representing
such person's interest, except in the event
that Definitive Certificates are issued
under the limited circumstances described
herein. All references herein to
"Certificateholders" or "Holders" will
reflect the rights of the beneficial owners
of Certificates, as such rights may be
exercised through DTC and Participants
except as otherwise specified herein. See
"Risk Factors--Book-Entry Registration" in
the Prospectus and "Book-Entry
Certificates" herein.
RISK FACTORS
Prospective Certificateholders should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following factors.
DEPENDENCE ON CLAIMS ADMINISTRATOR, REPRESENTATIVE, AND SERVICER FOR MAKING
FHA CLAIMS AND PAYING THE FHA PAYMENTS
The Trustee, Co-Trustee and the Certificateholders are dependent on the
Claims Administrator to (1) assure that the FHA Loans will be insured by the
FHA, (2) make Claims on 90 Day Delinquent FHA Loans and (3) remit all FHA
Payments received from the FHA to the Trustee in accordance with the terms of
the Agreement. See "The Agreement--Obligations of The Claims Administrator"
herein.
LIMITATIONS ON FHA INSURANCE
The FHA Loans are covered by FHA insurance to the extent described herein.
The Agreement provides that if an FHA Loan becomes a 90 Day Delinquent FHA Loan
and if sufficient coverage is available in the related Reserve Amount, the
Claims Administrator may, in its sole option, file a Claim with the FHA with
respect to such 90 Day Delinquent FHA Loan. If such a Claim is submitted and
assuming the Representative, the Originators and the Claims Administrator comply
with the provisions described herein, the FHA will pay with respect to such 90
Day Delinquent FHA Loan the amount set forth under "The Home Improvement Lending
Program--FHA Loans--Insurance Claims Procedures for Title I Loans" herein
regardless of whether, in the case of FHA Loans, the related Mortgaged Property,
if any, has available equity over and above all liens on such property.
The availability of FHA insurance following a default on an FHA Loan is
subject to a number of conditions, including strict compliance with FHA
regulations in originating and servicing the FHA Loan and limits on the
aggregate insurance coverage available with respect to all FHA Title I loans
then owned and reported for FHA insurance by the Co-Trustee. Although the Claims
Administrator is an FHA-approved lender and believes, and represents and
warrants in the Agreement, that it has complied with FHA regulations, such
regulations are susceptible to substantial interpretation. The Claims
Administrator is not required to obtain, and has not obtained, approval from the
FHA of its origination and servicing practices. Failure to comply with FHA
regulations may result in a denial of FHA insurance claims, and there can be no
assurance that the FHA's enforcement of its regulations will not change in the
future. In addition, any Claim paid by the FHA will cover only 90% of the sum of
the unpaid principal (determined on the actuarial basis) on the FHA Loan, a
portion of the unpaid interest and certain other liquidation costs.
Prior to the transfer of the FHA Loans to the Co-Trustee, the FHA Loans
will be insured by the FHA, to the extent described herein, under the related
Originator's FHA contract of insurance. In connection with the transfer of the
FHA Loans from the Originators to the Trustee, the Originators also will file
with the FHA all documents necessary to effect the transfer of the FHA insurance
reserves applicable to the FHA Loans to the Trustee's FHA contract of insurance.
Based upon information provided by the FHA, The Money Store Inc. believes
that upon the transfer referred to above and after the Funding Period, the FHA
insurance available to the Trustee will be equal to at least (A) 10% of the
principal balance of the FHA Loans as of the Cut-Off Date or Subsequent Cut-Off
Date, as the case may be; or (B) thereafter, 10% of the principal balance of all
Title I loans originated or purchased and currently reported for FHA insurance
by the Trustee, less amounts for insurance claims previously paid to the Trustee
by the FHA, including payments in respect of loans other than the FHA Loans, and
increased by an amount equal to 10% of the lesser of the original principal
balance or the purchase price paid for Title I loans subsequently originated or
purchased of record by the Trustee.
FHA Claims paid to the Co-Trustee by the FHA with respect to Title I loans
other than the FHA Loans may affect the total amount of the Reserve Amount.
Since the adequacy of the Trustee's Reserve Amount is dependent upon future
events, including the annual reductions in the Reserve Amount and the reductions
for the payment of claims, no assurance can be given that the Reserve Amount is
or will be adequate to cover 90% of all potential losses on the FHA Loans.
In connection with the FHA Loans, pursuant to FHA underwriting criteria in
effect at the time substantially all the FHA Loans were originated, there was no
requirement that the Mortgaged Property have any available equity over and above
the total of all liens on such property, including the Title I loan. However,
loans originated between October 18, 1991 and August 15, 1994 that exceeded
$15,000 were limited to a maximum encumbrance of 100% loan to value of all liens
on such property, including the Title I loan, and non-owner occupied property
loans originated after October 18, 1991 were limited to a maximum encumbrance of
100% loan to value of all liens on such property, including the Title I loan.
See "The Trusts--FHA Loans" in the Prospectus and "Lending Programs--The Home
Improvement Lending Program--FHA Loans--The Title I Loan Program-General"
herein.
LIMITED GUARANTY
The Limited Guaranty will be an unsecured obligation of the Company and
will not be supported by any letter of credit or other enhancement arrangement.
The ratings of the Class B Certificates are based, in part, on an assessment of
the Company's ability to make payments under the Limited Guaranty. Any change in
the ratings assigned to the unsecured long-term debt obligations of the Company
by S&Ps or Moody's may result in a reduction of the rating of the Class B
Certificates.
ALTERNATE CREDIT ENHANCEMENT
If the Limited Guaranty of the Company is replaced with an Alternate Credit
Enhancement and such Alternate Credit Enhancement is exhausted, neither the
Company nor any other person will be obligated to replace such enhancement. See
Description of the Limited Guaranty - "Alternate Credit Enhancement" herein.
HOME IMPROVEMENT LENDING PROGRAMS
Prospective Certificateholders should consider, in addition to the
information described under "The Single Family Loan Lending Program" in the
Prospectus, the following with respect to the Home Improvement Loans.
FHA LOANS
THE TITLE I LOAN PROGRAM-GENERAL
The National Housing Act of 1934 (the "NHA Act"), in Sections 1 and 2(a)
thereof, authorized the creation of the FHA and the Title I credit insurance
program (the "Title I Loan Program"). Several types of loans may be made under
the Title I Loan Program, including, among others, property improvement loans
(the "Title I Property Improvement Loans") which may be made by approved lenders
to finance alterations, repair or improvement of existing single family,
multifamily and nonresidential structures. See "The Trusts--FHA Loans" in the
Prospectus for a general description of the Title I Loan Program.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS
The following is a description of the requirements for Title I Property
Improvement Loans currently in effect.
A Title I Property Improvement Loan cannot be used to purchase property.
The loan proceeds may only be used to finance property improvements which
substantially protect or improve the basic livability or utility of the property
to be improved. The loan amount may include the cost of the proposed
improvements and (i) architectural and engineering services; (ii) building
permit costs; (iii) flood insurance premiums; (iv) credit report costs; (v) a
fee for an actual inspection of the property by the lender or its agent, not to
exceed $75, but only where the total principal obligation is $7,500 or more;
(vi) title examination costs; (vii) appraisal fees in connection with a loan or
combination of loans on the same property with a total principal balance in
excess of $15,000; and (viii) commencing June 5, 1995, origination fees charged
by the lender.
One borrower may have multiple loans on multiple properties. In addition, a
borrower may obtain more than one loan to improve one property as long as the
total balance does not exceed the maximum permitted for the particular type of
loan involved.
The following maximum dollar limits applied to Title I property improvement
loans when the FHA Loans were originated:
TYPE OF PROPERTY LOAN LIMIT
Single Family $25,000 per property
Multifamily $60,000 per property or an average
of $12,000 per unit
Nonresidential $25,000 per property
Unsecured $7,500 per property
Title I loans bear fixed rates of interest and are fully amortizing with
equal installment payments (except for the first or last payments, which may not
exceed 150% of the regular installment payment). Weekly, biweekly, semi-monthly
or monthly payments are permitted at the lender's option. Where the borrower has
an irregular flow of income, the loan may be repaid in quarterly or semi-annual
installments which correspond with the borrower's flow of income. The loan
maturity may not be less than six months nor greater than 20 years plus 32 days.
The interest rate is established by each lender. Lenders may not charge any
prepayment penalty.
The lender is entitled to recover the following costs from the borrower:
(i) origination fee; (ii) discount points (which may be payable by the borrower
or dealer, if applicable); and (iii) certain other specified fees and charges.
These costs set forth in item (i) with respect to loans for which the credit
application was received prior to June 5, 1995, and the costs set forth in items
(ii) and (iii) cannot be paid out of the loan proceeds.
An eligible borrower of a secured Title I loan must have at least a
one-half interest in one of the following: (i) fee simple title to the related
mortgaged property; (ii) a lease on the mortgaged property which runs at least
six months longer than the loan term; or (iii) a recorded land installment
contract on the mortgaged property.
There are two different types of FHA Loans and Conventional Loans: (1)
direct loans ("Direct Loans") and (2) dealer or dealer-contractor loans ("Dealer
Loans"). On a Direct Loan, the proceeds of the loan are disbursed directly to
the borrower, and there is no participation in the loan application process by a
dealer-contractor. On a Dealer Loan, the dealer-contractor participates in the
financing in some fashion, such as presenting the loan application to the
lending institution, receiving the check or money order (although made payable
to the borrower) or accompanying the borrower to the institution for the purpose
of receiving payment. On Dealer Loans, before it may disburse funds, the lender
must have in its possession a properly signed and dated completion certificate,
a copy of the dealer-contractor's contract or sales agreement, and a borrower's
authorization certificate, if the loan proceeds are to be disbursed to the
dealer-contractor.
TITLE I UNDERWRITING REQUIREMENTS
Specified loan underwriting requirements must be satisfied prior to loan
approval and disbursement of funds. For secured Title I loans the lender must
verify that the borrower has at least a one-half interest in the mortgaged
property. Additionally, the Originator requires that all owners in fee simple
have signed the lien instrument. A copy of the cost estimated on a direct loan
or a contract signed by the contractor and borrower must be reviewed with the
nature of the work to be done specifically described in the contract. In
addition, the loan file must contain the promissory note, lien instrument and
other documents required by regulation.
The borrower's current paying habits and previous credit history must be
ascertained by obtaining a consumer credit report and by other credit
investigation. Written verification of income and employment is also required.
This may include any one of the following: (i) recent payroll stubs
(year-to-date plus current); (ii) verification of employment forms; (iii) signed
tax returns (self-employed); or (iv) financial statements (self- employed).
Generally, any Title I loan originated after August 1994 in excess of
$7,500 must be secured by a recorded lien on the improved property which is
evidenced by a mortgage or deed of trust executed by the borrower and all other
owners in fee simple. Prior to August 1994, any Title I loan in excess of $5,000
was required to be secured by such a recorded lien. In order to facilitate the
financing of small home improvement projects, the FHA does not require loans of
$7,500 or less, in the case of Title I loans originated after August 1994, and
$5,000 or less, in the case of Title I loans originated prior to August 1994, to
be secured by the property being improved. Notwithstanding the preceding
sentence, such loans must be secured by a recorded lien on the improved
property, if, including such loan, the total amount of all Title I loans
obtained by the borrower exceeds $7,500, or $5,000, as the case may be.
Effective November 18, 1991, for any secured Title I loan or combination of
loans on the same property with a total unpaid principal balance in excess of
$15,000, the borrower is required to have equity in the property being improved
in an amount at least equal to the loan amount, except for certain loans
originated by a governmental institution.
Effective August 15, 1994, for secured Title I loans the requirement that
the borrower have equity in the property was eliminated for owner-occupied
properties if the structure being improved has been completed and occupied at
least six months prior to the date of the related application. For non-owner
occupied properties, or owner occupied properties not meeting this requirement,
the borrower is required to have equity in the property being improved in an
amount at least equal to the loan amount and all existing liens on such
property.
INSURANCE CLAIMS PROCEDURES FOR TITLE I LOANS
The FHA has specific requirements for servicing of loans in default and
filing of claims. The FHA requires the lender to make a reasonable effort to
contact the borrower and have a face-to-face meeting prior to accelerating the
maturity of the note and filing an insurance claim.
If the lender's efforts to have the loan brought current are unsuccessful,
the lender is required to notify credit reporting agencies, file a claim with
the FHA for insurance and assign the loan to the United States government,
unless the lender chooses to proceed against the mortgaged property under its
Title I security instrument. If the lender chooses so to proceed, it may not,
without the approval of FHA, also file an insurance claim. However, if the
lender holds an obligation secured by the mortgaged property which is senior to
the Title I loan, it may both proceed against the mortgaged property under the
senior lien instrument and file an insurance claim for the Title I loan. When a
lender files an insurance claim with the FHA, the FHA reviews the claim, the
submitted loan documents relating to the loan and the lender's servicing
practices in order to verify compliance with FHA Title I requirements. Based
upon this review, the loan is either accepted or rejected for insurance claims.
Subject to the then remaining reserve amount, the amount of the insurance
claim payment, when made, is equal to 90% of the sum of the following amounts:
(1) The unpaid amount of the loan obligation (net of unpaid
principal and the uncollected interest earned to the date of default calculated
according to the actuarial method).
(2) The unpaid amount of interest on the unpaid amount of the
loan obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days, calculated at the rate of 7% per
annum. (However, interest will not be paid for any period greater than nine
months from the date of default).
(3) The amount of uncollected court costs including fees
paid for issuing, serving and filing a summons.
(4) The amount of attorneys' fees on an hourly or other basis
for time actually expended and billed, not to exceed $500.
(5) The amount of expenses for recording the assignment of
the loan to the United States.
Because Certificateholders do not hold a contract of insurance, the FHA
will not recognize the Certificateholders as owners of the FHA Loans, or any
portion thereof, who are entitled to submit Claims to the FHA.
Certificateholders will have no direct right to receive insurance payments from
the FHA.
DEALER/CONTRACTOR ORIGINATION
The Originators originate loans through and purchase contracts from home
improvement contractors located in various states throughout the United States.
An Originator employs account executives who contact home improvement
contractors and explain the merits and features of the Originator's available
financing plans. Account executives review contractor needs and discuss the
Originator's prevailing home improvement loan rates, terms, credit standards and
policies. If a contractor desires to utilize the Originator's financing
programs, it must make application to the Originator for contractor approval.
The Originator has a contractor approval process pursuant to which the financial
condition, business experience, and qualifications of the contractor are
reviewed prior to its approval to sell or refer loans to the Originator. An
approved contractor's qualifications are reviewed annually in order to determine
whether such approval will be continued. The annual re-approval process includes
the updating of financial and business reference information. Contractors are
also monitored as to default levels, delinquency trends and customer complaint
resolution.
All contractor loans are written on an Originator's approved documents and
are either executed by the borrower in the presence (i) of the Originator's
employees or designated agents or (ii) of the contractor. All contracts which
are purchased are written on forms provided or approved by the Originator. Each
loan or contract is individually approved in accordance with the Originator's
guidelines. The contractor submits the customer credit application and
construction contract to the appropriate Originator office where the customer's
credit worthiness is determined. Credit analysis includes a review of the
customer's previous credit experience, paying habits, length and likelihood of
continued employment, ability to repay the debt, and other factors. The credit
analysis also includes the determination of the ratio of a customer's long-term
debt payments in relation to their gross monthly income.
The Originators require that all secured home improvement loans and
contracts be secured by a recorded lien on the property to be improved. Liens
may be in first, second or more junior position. Certain other criteria for FHA
insured loans and contracts are described under the caption "--FHA Loans." If an
Originator determines that the application meets the Originator's underwriting
guidelines (and FHA regulations where applicable) and the credit is approved,
the Originator originates the loan or purchases the contract. Unless a customer
has specifically requested staged funding of a contract, contracts are not
purchased until the customer has verified satisfactory completion of the home
improvement project. Where staged funding is used, the Originator requests a
completion certificate from the customer within 60 days of funding.
Property values are generally determined by a drive-by "as-is" appraisal
with the cost of the improvement added to the appraisal to reflect the "after
improvement" value of the property. Title insurance is required on some FHA
Loans where the mortgage is in first position.
CONVENTIONAL LOANS - UNDERWRITING CRITERIA
Conventional Loans are underwritten in the same manner as the FHA Loans
except that the loan proceeds may be used for projects that do not qualify for
FHA Loans, the amount of the loan may exceed applicable FHA limits and the loan
maturity may be for up to 25 years from origination. However, the maximum amount
of an unsecured Conventional Home Improvement Loan is $10,000.
Conventional Loans and contracts are not insured by the FHA.
The original principal amount of a Conventional Loan generally may not
exceed $35,000 for the Originator's secured no equity program, a program in
which no appraisal is required and no loan-to-value ratio is calculated, and
generally may not exceed $75,000 for the Originator's other secured contractor
programs.
THE REPRESENTATIVE AND THE ORIGINATORS
The Money Store Inc. will act as the Servicer of the Loans. Except for the
Limited Guaranty, certain representations and warranties relating to the Loans
and certain other matters, The Money Store Inc.'s obligations with respect to
the Loans are limited to its contractual servicing obligations.
The Money Store Inc. is a New Jersey corporation and the parent company of
the Originators and their affiliates. The Money Store Inc. is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store Inc. is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store Inc.
and its subsidiaries primarily consist of home equity loans, including Home
Improvement Loans (collectively, "Home Equity Loans"), loans (the "SBA Loans")
guaranteed in part by the United States Small Business Administration (the
"SBA") and government guaranteed student loans ("Student Loans"). The Money
Store Inc. began providing financing for new and used vehicles (the "Auto
Loans") in early 1995.
Since 1967, The Money Store Inc. and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States. Based upon industry sources, the Representative believes that during
1995 The Money Store Inc. and its subsidiaries were among the largest
originators, by principal amount, of home equity loans in the United States. In
1979, The Money Store Inc. and its subsidiaries began to originate SBA Loans
and, based upon statistics compiled by the SBA, the Representative believes that
during each of the last 14 SBA fiscal years it originated a greater principal
amount of SBA Loans than any other originator of such loans in the United
States. In 1984, The Money Store Inc. and its subsidiaries entered into the
government guaranteed student loan origination market.
For the years ended December 31, 1995 and 1996, The Money Store Inc. and
its subsidiaries originated or purchased approximately $3.8 billion and $5.7
billion of loans, respectively. Of those loans, approximately 75% and 73%,
respectively, by principal amount were home equity loans, approximately 12% and
11%, respectively, by principal amount were SBA Loans, approximately 10% and 8%,
respectively, by principal amount were Student Loans and approximately 3% and
8%, respectively, by principal amount were Auto Loans. The business strategy of
The Money Store Inc. has been to identify and pursue niche lending opportunities
which management believes have had widespread unsatisfied demand.
At December 31, 1996, The Money Store Inc. and its subsidiaries operated
out of 217 branch locations in 50 states, the District of Columbia and the
Commonwealth of Puerto Rico.
The following table shows the originations and portfolio balances of The
Money Store Inc. and its subsidiaries for the periods indicated:
<TABLE>
<CAPTION>
ORIGINATIONS AND SERVICED LOAN PORTFOLIO BY LOAN TYPE
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------------------------------------------------------------
1994 1995
---- ----
Originations Originations
----------------------------------- --------------------------------
Number of Serviced Loan Number of Serviced Loan
Amount Loans Portfolio Amount Loans Portfolio
<S> <C> <C> <C> <C> <C>
Home Equity Loans...... $2,013,027 38,644 $3,725,918 $2,885,044 67,828 $5,751,677
% of Total............. 72.4% 63.2% 75.5% 66.7%
SBA Loans.............. 420,416 1,143 1,605,645 440,728 1,461 1,907,050
% of Total............. 15.1% 27.2% 11.5% 22.1%
Student Loans.......... 345,965 136,354 566,906 369,129 139,946 845,501
% of Total............. 12.5% 9.6% 9.7% 9.8%
Auto Loans............. 128,070 13,141 117,239
% of Total............. 3.3% 1.4%
--------- -----
Total......... $2,779,408 $176,141 $5,898,469 $3,822,971 $222,376 $8,621,467
========== ======== ========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996
Originations
-------------------------------
Number Serviced Loan
Amount of Loans Portfolio
<S> <C> <C> <C>
Home Equity Loans................... $4,150,992 104,519 $8,230,776
% of Total.......................... 72.9% 67.5%
SBA Loans........................... 635,498 1,769 2,282,384
% of Total.......................... 11.2% 18.7%
Student Loans....................... 458,459 168,837 1,203,739
% of Total.......................... 8.0% 9.9%
Auto Loans.......................... 448,105 45,124 475,533
% of Total.......................... 7.9% 3.9%
------ -----
$5,693,054 $320,249 $12,192,432
========== ======== ===========
</TABLE>
<PAGE>
Although the Originators have no maximum dollar amount for Home Equity
Loans, the actual maximum amount that the Originators will lend is determined by
the applicant's ability to repay the loan, the value of the borrower's equity in
the real estate and the ratio of such equity to the home's appraised value. For
Home Equity Loans originated in 1994, 1995 and 1996, the average loan size was
approximately $52,000, $43,000 and $40,000, respectively.
In July 1993, the Originators introduced a revised program of originating
home equity loans (the "Equity Advantage Loans") with combined loan-to-value
ratios exceeding 80%. Equity Advantage Loans are secured by first or second
liens, generally possess lower debt-to-income ratios and bear a higher rate of
interest than home equity loans with lower combined loan-to-value ratios.
The following table illustrates The Money Store Inc.'s delinquency and
charge-off experience with respect to Home Equity Loans in its servicing
portfolio. The Money Store Inc. does not separately report the delinquency and
charge-off experience of its Home Improvement Loans and there can be no
assurance, and no representation is made, that the delinquency and charge-off
experience with respect to the Home Improvement Loans will be similar to that
reflected in the table below.
<TABLE>
<CAPTION>
HOME EQUITY LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
As and for the Years
ENDED DECEMBER 31,
1994 1995 1996
-------- --------- ------
<S> <C> <C> <C>
30-59 days past due.............................. 1.77% 1.76% 1.31%
60-89 days past due.............................. 0.42% 0.68% 0.81%
90+ days past due................................ 1.86% 2.42% 3.83%
Loans charged-off, net........................... $19,942 $24,205 $37,039
Loans charged-off, net, as a percentage of
the home equity loan portfolio(1)............. 0.54% 0.42% 0.45%
(1) The percentage of Home Equity Loan charge-offs is calculated based upon the
dollar amount of charge-offs divided by the dollar amount of Home Equity Loans
contained in the Company's serviced loan portfolio.
</TABLE>
While the above delinquency and charge-off experience represents the
Servicer's recent experience, there can be no assurance that the future
delinquency and charge-off experience on the Loans included in the Trust will be
similar. The Servicer can neither quantify the impact of any recent property
value declines on the Loans nor predict whether, to what extent or how long such
declines may continue. In a period of such decline, the rates of delinquencies,
foreclosures and losses on the Loans could be higher than those heretofore
experienced in the mortgage lending industry in general. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses. See "Description of the Certificates" herein for a
discussion of the effect to Certificateholders of delinquencies in payments on
the Loans.
LEGAL PROCEEDINGS
Because the nature of the business of The Money Store Inc. involves the
collection of numerous accounts, the validity of liens and compliance with state
and federal lending laws, The Money Store Inc. is subject to claims and legal
actions in the ordinary course of its business. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect
to such claims and actions, The Money Store Inc. believes that the aggregate
amount of such liabilities will not result in monetary damage which would have a
material adverse effect on the financial condition of The Money Store Inc.
THE LOAN POOL
GENERAL
Certain data with respect to the Initial Loans expected to be included in
the Trust is set forth below. References in this Prospectus Supplement to the
characteristics of the Loans as of the Cut-Off Date are deemed to include the
characteristics, as of the date of their origination, of those Loans originated
after the Cut-Off Date and up to the Closing Date. A Current Report on Form 8-K
containing a detailed description (the "Detailed Description") of the Initial
Loans will be available to purchasers of the Certificates upon request and will
be filed with the Securities and Exchange Commission within 15 days after
issuance of the Certificates. The Detailed Description will specify the
principal balance of the Loans as of the Cut-Off Date, the initial principal
balance of each Class of the Certificates and will also include the following
information regarding the Loans (in each case, presented by (i) principal
balance of the Trust as of the Cut-Off Date; (ii) percentage of the Trust by
principal balance and (iii) number of Initial Loans for the Trust): geographical
distribution of the Mortgaged Properties, interest rates, original principal
balances, number of months since origination and months remaining to stated
maturity.
The statistical information presented in this Prospectus Supplement
concerning the Loans is based on the preliminary Pool expected to be delivered
to the Co-Trustee on the Closing Date. The Representative expects that loans
(including the Subsequent Loans) that were not contained in the preliminary Pool
will be added to the final Pool. While the statistical distribution of the
characteristics for the final Pool of Loans will vary somewhat from the
statistical distribution of such characteristics for the preliminary Pool of
Loans presented in this Prospectus Supplement, the Representative does not
believe that the characteristics of the final Pool will differ materially.
The Agreement will provide that Subsequent Loans may be purchased by the
Trust from the Originators from time to time on or before the close of business
on June 26, 1997 from funds on deposit in the Pre-Funding Account. Each of the
Subsequent Loans will have been originated and identified prior to the Closing
Date. Any Subsequent Loan so acquired will have been originated and
underwritten, or purchased and re-underwritten, by one of the Originators,
substantially in accordance with the Originator's underwriting criteria
described herein under the caption "Lending Programs--The Home Improvement
Lending Program--FHA Loans--Title I Underwriting Requirements," in the case of
FHA Loans, or "Lending Programs--The Home Improvement Lending
Program--Conventional Home Improvement Loans--Underwriting Criteria," in the
case of Conventional Loans. The purchase price for each Subsequent Loan will be
no greater than its unpaid principal balance as of the related Subsequent
Cut-Off Date. The Agreement will provide that the Pool, following the conveyance
of any Subsequent Loans to the Pool, must, in the aggregate, conform to certain
specified characteristics. See "The Agreement--Representations and Warranties"
in the Prospectus.
HOME IMPROVEMENT LOANS
The Home Improvement Loans consist of fixed-rate, residential home
improvement mortgages, deeds of trust or other security instruments (the "Home
Improvement Mortgages" or "Mortgages"), and the related promissory notes, retail
installment contracts or obligations, or sales agreements (the "Home Improvement
Mortgage Notes" or "Notes") secured, except as set forth below, by one- to
four-family residences, units in planned unit developments and units in
condominium developments (the "Home Improvement Mortgaged Properties" or
"Mortgaged Properties"). Approximately 22% and 78% of the Initial Loans will be
FHA Loans and Conventional Loans, respectively. The Initial Loans will have been
originated and underwritten, or purchased and re-underwritten, by one of the
Originators, substantially in accordance with the Originators' underwriting
criteria described herein under the caption "Lending Programs--The Home
Improvement Lending Program--Title I Underwriting Requirements," in the case of
FHA Loans, or "Lending Programs--The Home Improvement Lending
Programs--Conventional Home Improvement Loans--Underwriting Criteria," in the
case of Conventional Loans. Certain of the Conventional Loans may contain
provisions requiring the related Mortgagor to pay a penalty in connection with
certain prepayments. Unless otherwise noted, all percentages in this general
discussion are measured by the expected principal balance of the Initial Loans
described herein on the Cut-Off Date and the statistics are given as of the
Cut-Off Date.
Approximately 2% of the Loans will be secured by first mortgage liens,
approximately 5% of the Loans will be secured by second mortgage liens and the
remainder of the Loans will be secured by more junior mortgage liens. Based on
representations made by the Obligors, no less than approximately 99% of the
Loans will be secured by one-to four-family residences, no more than
approximately 2% of the Loans are secured by vacation homes, secondary
residences, or investment properties, no more than approximately 2% of the Loans
will be secured by individual units in low-rise condominiums, no more than
approximately 2% of the Loans will be secured by two-, three- or four-family
houses, no more than approximately 1% of the Loans will be secured by
Multifamily Mortgaged Properties and no Loan will be secured by individual units
of other types including high-rise condominiums and mixed-use buildings. No more
than approximately 2% of the Loans will be secured by manufactured homes.
No more than approximately 35%, 15%, 15%, 10%, 10%, 10%, 10% and 10% of the
Loans are secured by Mortgaged Properties located in California, New York,
Louisiana, Illinois, Nevada, Arizona, Texas and Georgia, respectively. No more
than approximately 5% of the Loans will be secured by Mortgaged Properties
located in any other state.
The FHA Loans are insured by the FHA to the extent described herein. The
Conventional Loans are not insured or guaranteed by any governmental entity.
The Initial Loans will bear interest at fixed rates which range from
approximately 9% to 17% per annum. The weighted average Mortgage Interest Rate
on the Initial Loans will be approximately 12.86% per annum. The lowest
principal balance of any Initial Loans will be approximately $1,000 and the
highest will be approximately $100,000. The average principal balance of the
Initial Loans will be approximately $23,500. The weighted average remaining
terms to stated maturity of the Initial Loans will be approximately 216 months.
The weighted average terms to stated maturity of the Initial Loans at
origination will be approximately 218 months. None of the Loans will be Loans
which provide for a stated maturity of less than the period of time of the
corresponding amortization schedule ("Balloon Loans").
PAYMENTS ON THE LOANS
The Initial Loans will generally provide for a schedule of payments which
will be, if timely paid, sufficient to amortize fully the principal balance of
the related Initial Loan on or before its maturity date. Interest with respect
to the Initial Loans will accrue on either an actuarial interest method or a
simple interest method.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments on such Loans received either earlier
or later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
The simple interest method provides for the amortization of the amount of
each loan over a series of equal monthly payments. However, unlike the monthly
payment under the actuarial interest method, each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance at the stated interest rate and based upon the period elapsed
since the preceding payment of principal was made, using the method permitted by
applicable law. As payments are received under the loan, the amount received is
applied first to interest accrued to the date of payment and the balance, if
any, is applied to reduce the unpaid principal balance; provided, however, that
with respect to FHA Loans secured by Mortgaged Properties located in states
where the Servicer collects the FHA Insurance Premium directly from the related
Mortgagor, payments are applied first to the FHA Insurance Premium. Accordingly,
if a borrower pays a fixed monthly installment on such a loan before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment on the loan after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would be had
the payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly reduced. In
addition, a late charge may be imposed with respect to the past due amount.
The amount of interest payable to the Holders of Certificates on each
Remittance Date will not be affected by interest accruing on the Loans based on
the simple interest method. On each Remittance Date, the Holders of Certificates
are entitled to receive 30 days' interest at the applicable Pass-Through Rate on
the outstanding principal balances of the applicable Class of Certificates. The
Servicer is required to remit to the Trustee the excess, if any, of the amount
of interest the Holders of Certificates are entitled to receive on each
Remittance Date over the interest collected on the Loans during the related Due
Period and available to pay interest on the Certificates. See "The
Agreement--Monthly Advances and Compensating Interest" herein.
Similarly, the compensation payable to the Servicer will not be affected by
interest accruing on the Loans based on the simple interest method. The Servicer
is entitled to receive a fee based on the principal balance of the Loans, not
upon the portion of a monthly payment allocable to interest. See "The
Agreement--Servicing and Other Compensation and Payment of Expenses" herein.
With respect to simple interest Loans, if a payment is received on such a
Loan before its due date, more of such payment will be used on the related
Remittance Date to pay principal on the Certificates than if such payment was
received on such due date. Conversely, if a payment is received on such a Loan
after its scheduled due date, less of such payment will be used on the related
Remittance Date to pay principal on the Certificates than if such payment was
received on its due date. This will not affect the total amount of principal to
be received by the Holders of Certificates over the life of the transaction, but
it may affect the weighted average lives of the Certificates.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The effective yield on the Certificates will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate because, while
interest will accrue on such Certificates from the first day of each month, the
distribution of such interest will not be made until the 15th day (or if such
15th day is not a business day, the next succeeding business day) of the month
following the month of accrual.
In general, because the Loans will bear fixed interest rates, when the
level of prevailing interest rates for similar loans significantly declines, the
rate of prepayment of such Loans is likely to increase, although the prepayment
rate is influenced by a number of other factors, including general economic
conditions and homeowner mobility. Similarly, when the level of interest rates
for similar loans significantly rises, the rate of prepayment of such Loans may
decrease. No prediction can be made as to the prepayment rate that the Loans
will actually experience.
Generally, junior priority mortgage loans have smaller average principal
balances than first priority mortgage loans and are not viewed by borrowers as
permanent financing. Accordingly, the Loans that are secured by junior liens may
experience a higher rate of prepayment than traditional first priority mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on mortgage loans for Federal income tax purposes may result
in a higher rate of prepayment of such junior Loans. The obligation of the
Servicer to enforce the "due-on-sale" provisions of the Loans may also increase
prepayments. The prepayment experience of the Pool 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 Company is unaware of any reliable studies that would project the
prepayment risks associated with the Loans based upon current interest rates and
economic conditions and the historical prepayment experience of the Company's
portfolio of Home Improvement Loans.
Unscheduled payments, delinquencies, repurchases of defective Loans,
defaults on the Loans and distributions from the Pre-Funding Account will affect
the amount of funds available to make distributions on each Remittance Date. In
addition, the Servicer may, at its option, on any Remittance Date on and after
the Optional Servicer Termination Date, purchase from the Trust all of the Loans
in the Trust and any related REO Properties at the Termination Prices.
If prepayments of principal are received on the Loans at a rate greater
than that assumed by an investor (including distributions from the Pre-Funding
Account and receipt of Subordination Increase Amount), the yield will be
increased on Certificates purchased by such investor at a price less than par
(i.e., the principal balance of a Certificate at the time of its purchase).
Similarly, if prepayments of principal are received on the Loans at a rate
greater than that assumed by an investor, the yield will be decreased on
Certificates purchased at a price greater than par. The effect on an investor's
yield of principal prepayments on the Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Certificates may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of the Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Loans and the
liquidations of defaulted Loans, respectively. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders since
the Servicer is not obligated to advance for delinquent payments of principal.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Loans and foreclosed Mortgaged Properties result in principal payments
on the Loans faster than otherwise scheduled. Additionally, the Holders of the
Certificates will be entitled to any FHA Payments received by the Claims
Administrator.
As described herein, certain Classes of Certificates will be entitled to
receive payments of principal prior to other Classes of Certificates. As a
result, the Classes of Certificates receiving payments of principal first will
immediately be affected by the prepayment rate on the Loans in the Trust.
However, the timing of commencement of principal distributions and the weighted
average lives of each Class of Certificates will be affected by the prepayment
rate experienced both before and after the commencement of principal
distributions on any such Class.
If during the Funding Period the entire original Pre-Funded Amount has not
been used to purchase Subsequent Loans, on the Special Remittance Date, certain
Classes of Certificates will be prepaid in part from and to the extent of such
remaining amounts. Although no assurances can be given, it is anticipated by the
Representative that the principal amount of Subsequent Loans sold to the Trust
will require the application of substantially all the amounts on deposit in the
Pre-Funding Account, and that there should be no material principal prepaid on
the Certificates from such amounts.
The Loans are either (i) "simple interest" or "date-of-payment loans" or
(ii) "actuarial method" loans. If a payment is received on a Loan which is a
"simple interest" loan later than scheduled, a smaller portion of such payment
will be applied to principal and a greater portion will be applied to interest
than would have been the case had the payment been received on the scheduled due
date, resulting in such Loan having a longer weighted average life than would
have been the case had the payment been made as scheduled. Conversely, if a
payment on a Loan is received earlier than scheduled, more of such payment will
be applied to principal and less to interest than would have been the case had
the payment been received on its scheduled due date, resulting in such Loan
having a shorter weighted average life than would have been the case had the
payment been made as scheduled.
In the event that less than 30 days' interest is collected on a Loan during
a Due Period, whether due to prepayment in full or a Curtailment, the Servicer
is obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of Compensating
Interest that the Servicer is obligated to pay, and are not otherwise covered by
Monthly Excess Spread, the yield on the Certificates of the Trust will be
adversely affected. Any shortfall in collections of interest resulting from the
early receipt of a scheduled payment will not be covered by Compensating
Interest, but will be covered by Monthly Advances.
The projected last Remittance Dates for each Class of Certificates is as
follows:
PROJECTED LAST
CLASS REMITTANCE DATE
A-1 June 15, 2005
A-2 July 15, 2001
A-3 November 15, 2013
M-1 May 15, 2017
M-2 May 15, 2023
B-1 June 15, 2020
B-2 May 15, 2023
The projected last Remittance Date for the Class B-2 Certificates is the
Remittance Date following the latest date upon which a Loan in the Trust
matures, including Subsequent Loans, plus 12 months. The projected last
Remittance Date for each other Class of Certificates is the date on which the
Principal Balance of the respective Class would be reduced to zero, assuming
that no prepayments are received on the Loans, that payment of principal of and
interest on each of the Loans is timely received, each Class of Certificates
receives payments of principal as described herein. The weighted average lives
of the Certificates are likely to be shorter than would be the case if payments
actually made on the Loans conformed to the foregoing assumptions, and the final
Remittance Dates with respect to each Class of Certificates could occur
significantly earlier than the last projected Remittance Dates because the
Servicer may purchase all of the Loans under the limited circumstances described
herein. In addition, prepayments are likely to occur on the Loans, which also
would shorten the weighted average life of the Certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Certificates will be influenced by the priorities established in the Agreement,
and by the rate at which principal payments on the Loans in the Trust are paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes Principal Prepayments, Curtailments, FHA
Payments and liquidations due to default). Prepayments on mortgage loans are
commonly measured relative to a prepayment standard or model.
The following tables have been prepared assuming that the Trust is
comprised of loan groups having the following characteristics:
<TABLE>
<CAPTION>
ASSUMED Initial Original Remaining Amortization Assumed
CUT-OFF DATE Mortgage Term of Term to Method Delivery of
PRINCIPAL Interest Amortization Maturity Loans
BALANCE Rate (in months) (in months)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2,432,614.50 12.623% 57 54 Level Closing
$19,750,078.50 12.977% 113 111 Level Closing
$33,011,431.50 12.774% 179 177 Level Closing
$43,864,371.00 13.186% 240 239 Level Closing
$32,191,504.50 12.452% 300 299 Level Closing
$43,750,000.00 12.860% 215 215 Level April 1997
=======================================================================================================================
</TABLE>
<PAGE>
The following tables also have been prepared assuming (i) all distributions
with respect to the Certificates will be made at the scheduled times as
described below under "Description of the Certificates," (ii) distributions on
the Certificates are received in cash on the 15th day of each month, commencing
April 1997, (iii) prepayments represent payment in full of individual Loans and
are received on the last day of each month (commencing in March 1997) and
include 30 days' interest thereon at the applicable Home Improvement Interest
Rate, (iv) the Servicing Fee and Contingency Fee for each Loan will be 0.25% and
0.25% per annum, respectively, of the principal balance thereof, (v) no
delinquencies or defaults in payments by Obligors of principal and interest on
the Loans are experienced, (vi) no right of optional termination is exercised
except as noted below, and (vii) the Certificates are purchased on March 31,
1997.
For each Class of Certificates, the scenarios presented below assume that
the Representative exercises its option to establish the Pre-Funding Account and
that the Pre-Funded Amount equals its maximum permitted amount. The scenarios
also assume that the entire Pre-Funded Amount is used to purchase Subsequent
Loans by April 1997.
The model used in this Prospectus Supplement is a prepayment assumption
(the "Prepayment Assumption") which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. The tables relating to the
Certificates are priced at various Home Equity Prepayment ("HEP") assumptions.
HEP assumes that a pool of loans prepays in the first month at a constant
prepayment rate ("CPR") that corresponds in CPR to one-tenth the given HEP
percentage and increases by an additional one-tenth each month thereafter until
the tenth month, where it remains at a CPR equal to the given HEP percentage.
The "100% Prepayment Assumption" assumes a CPR of 1.7% per annum of the then
outstanding principal balance of the Loans in the first month in the life of
such Loans and an additional 1.7% per annum in each month thereafter until the
tenth month. Beginning in the tenth month and in each month thereafter during
the life of the Loans, 100% Prepayment Assumption assumes a CPR of 17% per annum
each month. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption, i.e., no prepayments
on the Loans having the characteristics described below. Correspondingly, 100%
Prepayment Assumption assumes a prepayment rate equal to 100% of the related
Prepayment Assumption, 125% Prepayment Assumption assumes 125% of each of the
rates described above; and so forth. The Prepayment Assumption does not purport
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of the Pool, including the related Loans.
Neither the Prepayment Assumption nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Loans included in the Trust. Variations in the actual
prepayment experience and the balance of the Loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such Loans
equals any of the specified percentages of the Prepayment Assumption.
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES
PERCENTAGE WEIGHTED
OF PREPAYMENT AVERAGE EXPECTED
ASSUMPTION LIFE (YEARS) MATURITY
<S> <C> <C>
0% 4.69 6/15/05
75% 1.22 7/15/99
100% (1) 1.00 1/15/99
125% 0.86 10/15/98
150% 0.76 7/15/98
CLASS A-2 CERTIFICATES
PERCENTAGE Weighted
OF PREPAYMENT Average Expected
ASSUMPTION LIFE (YEARS) MATURITY
0% 11.32 7/15/11
75% 3.77 12/15/02
100% (1) 3.00 10/15/01
125% 2.48 12/15/00
150% 2.11 4/15/00
CLASS A-3 CERTIFICATES
PERCENTAGE Weighted
OF PREPAYMENT Average Expected
ASSUMPTION LIFE (YEARS) MATURITY
0% 15.41 11/15/13
75% 6.73 2/15/05
100% (1) 5.39 8/15/03
125% 4.42 6/15/02
150% 3.63 7/15/01
CLASS M-1 CERTIFICATES
PERCENTAGE WEIGHTED EARLIEST
OF PREPAYMENT AVERAGE Expected RETIREMENT
ASSUMPTION LIFE (YEARS) MATURITY DATE (2)
0% 18.14 5/15/17 12/15/16
75% 10.05 3/15/10 8/15/09
100% (1) 8.20 1/15/08 6/15/07
125% 6.80 3/15/06 10/15/05
150% 5.67 11/15/04 7/15/04
CLASS M-2 CERTIFICATES
PERCENTAGE WEIGHTED EARLIEST
OF PREPAYMENT AVERAGE Expected RETIREMENT
ASSUMPTION LIFE (YEARS) MATURITY DATE (2)
0% 22.76 2/15/22 12/15/16
75% 15.96 2/15/22 8/15/09
100% (1) 13.86 2/15/22 6/15/07
125% 11.91 2/15/22 10/15/05
150% 10.22 2/15/22 7/15/04
CLASS B-1 CERTIFICATES
PERCENTAGE WEIGHTED
OF PREPAYMENT AVERAGE EXPECTED
ASSUMPTION LIFE (YEARS) MATURITY
0% 15.18 10/15/14
75% 6.58 6/15/06
100% (1) 5.28 9/15/04
125% 4.39 6/15/03
150% 4.16 12/15/02
CLASS B-2 CERTIFICATES
PERCENTAGE Weighted EARLIEST
OF PREPAYMENT Average Expected RETIREMENT
ASSUMPTION LIFE (YEARS) MATURITY DATE (2)
0% 20.44 2/15/22 12/15/16
75% 13.07 2/15/22 8/15/09
100% (1) 11.03 2/15/22 6/15/07
125% 9.39 2/15/22 10/15/05
150% 8.47 2/15/22 7/15/04
- --------------------
(1) Pricing Assumption.
(2) Assuming early termination of the Trust when the aggregate principal
balance of the Loans declines to a level equal to 10% of the sum of (i)
the Original Pool Principal Balance and (ii) the original Pre-Funded
Amount.
</TABLE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement, a copy of
which will be filed in a Current Report on Form 8-K with the Securities and
Exchange Commission after the initial issuance of the Certificates. The
following summaries describe material provisions of the Certificates and the
Agreement, but do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement. Terms used herein and not otherwise defined will have the meanings
set forth in the Agreement. See "The Agreement" herein.
GENERAL
The Certificates generally will represent the right to receive payments
distributable on or with respect to the Loans. The Trust also will issue the
Class X and the Class R Certificates. Only the Class A, Class B and Class M
Certificates are offered hereby.
The Certificates will not represent obligations of the Representative, the
Originators of any of their respective affiliates. The Certificates will be
issued in book-entry form in minimum denominations of $1,000 original principal
amount and integral multiples of $1,000 in excess thereof.
Definitive Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee or, at the election of the Trustee,
at the office of a certificate registrar appointed by the Trustee. No service
charge will be made 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.
The assets of the Trust will consist of (a) the Loans that from time to
time are subject to the Agreement; (b) amounts that from time to time are
required by the Agreement to be deposited in the Certificate Accounts, the
Principal and Interest Account, the Expense Account, the Pre-Funding Account and
the Capitalized Interest Account, or to be invested in Permitted Investments;
(c) all rights under any insurance policy covering a Loan or the related
Mortgaged Property; and (d) property and any proceeds thereof acquired by
foreclosure of a Loan, deed in lieu of foreclosure or a comparable conversion.
DISTRIBUTIONS ON THE CERTIFICATES
On the 15th day of each month or, if such 15th day is not a Business Day,
the first Business Day immediately following, commencing in April 1997 (each
such day being a "Remittance Date," provided, however, that in no event shall
the Remittance Date occur less than three business days following the
Determination Date) until the Current Principal Balance of each Class of
Certificates has been reduced to zero, the Trustee or the Paying Agent will be
required to distribute to the persons in whose name a Certificate is registered
at the close of business on the last day of the month immediately preceding the
month of the related Remittance Date (the "Record Date"), such Holder's
Percentage Interest multiplied by that portion of the Distribution Amount
allocable to the respective Class of Certificates for such Remittance Date. Any
Pre-Funded Amount remaining at the close of business on June 26, 1997 will be
distributed by or on behalf of the Trustee on the Special Remittance Date
(together with accrued interest) at the applicable Pass-Through Rates on the
amount of such prepayment) to the Classes of Certificates then entitled to
receive payments of principal as described herein under "--The Distribution
Amounts." Such distribution will be made to each person in whose name a
Certificate of any such Class is registered on May 30, 1997. For so long as the
Certificates are in book-entry form with DTC, the only "Holder" of the
Certificates will be Cede. See "--Book-Entry Certificates."
The "Current Principal Balance" of any Class of Certificates as of any
Remittance Date is the Original Principal Balance of such Class less (i) all
amounts previously distributed to holders of such Class on account of principal
and (ii) all Actual Loss Amounts previously allocated to such Class. The
"Original Principal Balance" of any Class of Certificates is the principal
balance thereof set forth on the cover page of this Prospectus Supplement.
A Certificateholder's "Percentage Interest" is that fraction, expressed as
a percentage, the numerator of which is the original denomination of such
Certificateholder's Certificate and the denominator of which is the Original
Principal Balance of the applicable Class of Certificate.
A "Business Day" is any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York, New Jersey,
Minnesota or Wisconsin are authorized or obligated by law or executive order to
be closed.
DISTRIBUTION AMOUNTS
On each Remittance Date the Available Remittance Amount will be distributed
to Class A Certificateholders, then Class M Certificateholders and then Class B
Certificateholders in the amounts and order of priority set forth below.
CLASS A INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid concurrently to the Holders of each Class of
Class A Certificates on each Remittance Date, to the extent of the Available
Remittance Amount in the Certificate Account on such date, at the related
Pass-Through Rate on the Current Principal Balance of each Class of Class A
Certificates.
The "Class A Current Principal Balance" as of any Remittance Date is the
sum of the Class A-1 Current Principal Balance, the Class A-2 Current Principal
Balance and the Class A-3 Current Principal Balance. With respect to any
Remittance Date, the amount determined by multiplying the components of the
Class A Current Principal Balance by one-twelfth the respective Class A
Pass-Through Rates is hereinafter referred to as the "Class A Interest
Distribution Amount."
In the event that, on a particular Remittance Date, the Available
Remittance Amount in the Certificate Account is less than the Class A Interest
Distribution Amount, the amount of interest to be distributed in respect of the
Class A Certificates will be allocated among each Class thereof (and within a
Class among the Certificates of such Class) pro rata in accordance with their
respective entitlements to interest, and the amount of the shortfall for each
Class of Class A Certificates (the "Class A-1 Interest Shortfall Carryforward
Amount," the "Class A-2 Interest Shortfall Carryforward Amount" and the "Class
A-3 Interest Shortfall Carryforward Amount," respectively, and, collectively,
the "Class A Interest Shortfall Carryforward Amount") will be carried forward
and distributed as described, and subject to the limitations set forth, under
"--Interest Shortfall Carryforward Amounts" below. Carryforward Amounts will
bear interest at the applicable Pass-Through Rate for each Class of Class A
Certificates, to the extent permitted by law.
CLASS M-1 INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class M-1 Certificate
on each Remittance Date, to the extent of the Available Remittance Amount, if
any, remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A Certificates), at the Class M-1
Pass-Through Rate on the Current Principal Balance of the Class M-1
Certificates. With respect to any Remittance Date, the amount determined by
multiplying the Class M-1 Current Principal Balance by one-twelfth of the Class
M-1 Pass-Through Rate is hereinafter referred to as the "Class M-1 Interest
Distribution Amount."
In the event that, on a particular Remittance Date, the Available
Remittance Amount remaining in the Certificate Account on such date (after
distribution of interest to the Holders of the Class A Certificates) is less
than the Class M-1 Interest Distribution Amount, the amount of interest to be
distributed in respect of the Class M-1 Certificates will be allocated among the
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency (the "Class M-1 Interest
Shortfall Carryforward Amount") will be carried forward and distributed as
described, and subject to the limitations set forth, under "--Interest Shortfall
Carryforward Amounts" below. Any Class M-1 Interest Shortfall Carryforward
Amount will bear interest at the Class M-1 Pass-Through Rate, to the extent
permitted by law.
CLASS M-2 INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class M-2 Certificate
on each Remittance Date, to the extent of the Available Remittance Amount, if
any, remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A and Class M-1 Certificates), at the Class
M-2 Pass-Through Rate on the Current Principal Balance of the Class M-2
Certificates. With respect to any Remittance Date, the amount determined by
multiplying the Class M-2 Current Principal Balance by one-twelfth of the Class
M-2 Pass-Through Rate is hereinafter referred to as the "Class M-2 Interest
Distribution Amount" (and, together with the Class M-1 Interest Distribution
Amount, the "Class M Interest Distribution Amount").
In the event that, on a particular Remittance Date, the Available
Remittance Amount remaining in the Certificate Account on such date (after
distribution of interest to the Holders of the Class A and Class M-1
Certificates) is less than the Class M-2 Interest Distribution Amount, the
amount of interest to be distributed in respect of the Class M-2 Certificates
will be allocated among the Certificates of such Class pro rata in accordance
with their respective entitlements to interest, and any remaining deficiency
(the "Class M-2 Interest Shortfall Carryforward Amount") will be carried forward
and distributed as described, and subject to the limitations set forth, under
"--Interest Shortfall Carryforward Amounts" below. Any Class M-2 Interest
Shortfall Carryforward Amount will bear interest at the Class M-2 Pass-Through
Rate, to the extent permitted by law.
CLASS B-1 INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class B-1 Certificate
on each Remittance Date, to the extent of the Available Remittance Amount, if
any, remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A and Class M Certificates), at the Class
B-1 Pass-Through Rate on the Current Principal Balance of the Class B-1
Certificates. With respect to any Remittance Date, the amount determined by
multiplying the Class B-1 Current Principal Balance by one-twelfth the Class B-1
Pass-Through Rate is hereinafter referred to as the "Class B-1 Interest
Distribution Amount."
In the event that, on a particular Remittance Date, the Available
Remittance Amount remaining in the Certificate Account on such date (after
distribution of interest to the Holders of the Class A and Class M Certificates)
is less than the Class B-1 Interest Distribution Amount, the amount of interest
to be distributed in respect of the Class B-1 Certificates will be allocated
among the Certificates of such Class pro rata in accordance with their
respective entitlements to interest, and any remaining deficiency (the "Class
B-1 Interest Shortfall Carryforward Amount") will be carried forward and
distributed as described, and subject to the limitations set forth, under
"--Interest Shortfall Carryforward Amounts" below. Any Class B-1 Interest
Shortfall Carryforward Amount will bear interest at the Class B-1 Pass-Through
Rate, to the extent permitted by law.
CLASS B-2 INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class B-2 Certificate
on each Remittance Date, to the extent of the sum of (i) the Available
Remittance Amount, if any, remaining in the Certificate Account on such date
(after giving effect to distributions of interest to Holders of the Class A,
Class M and Class B-1 Certificates) and (ii) the amount, if any, paid pursuant
to the Limited Guaranty. Such interest on the outstanding Class B-2 Certificates
will be paid at the Class B-2 Pass-Through Rate on the Current Principal Balance
of the Class B Certificates. With respect to any Remittance Date, the amount
determined by multiplying the Class B-2 Current Principal Balance by one-twelfth
of the Class B-2 Pass-Through Rate is hereinafter referred to as the "Class B-2
Interest Distribution Amount (and, together with the Class B-1 Interest
Distribution Amount, the "Class B Interest Distribution Amount").
In the event that, on a particular Remittance Date, the Available
Remittance Amount in the Certificate Account (after giving effect to
distributions of interest to the Holders of Class A, Class M and Class B-1
Certificates) is less than the Class B-2 Interest Distribution Amount and the
Company fails to pay such amount under the Limited Guaranty, the amount of
interest to be distributed in respect of the Class B-2 Certificates will be
allocated among the Certificates of such Class pro rata in accordance with their
respective entitlements to interest, and the amount of such deficiency (the
"Class B-2 Interest Shortfall Carryforward Amount") will be carried forward and
distributed as described, and subject to the limitations set forth, under
"--Interest Shortfall Carryforward Amounts" below. Any Class B-2 Interest
Shortfall Carryforward Amount will bear interest at the Class B-2 Pass-Through
Rate, to the extent permitted by law.
CLASS A PRINCIPAL
Holders of each Class of Class A Certificates will be entitled to receive
on each Remittance Date as payments of principal, in the order of priority set
forth below and to the extent of the Available Remittance Amount in the
Certificate Account on such Remittance Date after payment of the Class A, Class
M and Class B Interest Distribution Amounts (collectively, the "Interest
Distribution Amounts"), the Senior Percentage of the sum (such sum being
referred to hereinafter as the "Principal Distribution Amount") of (i) all
payments and other recoveries of principal of a Loan (net of amounts
reimbursable to the Servicer pursuant to the Agreement) received by the Servicer
or any Subservicer in the related Due Period; (ii) the principal portion of any
Loan actually purchased by the Seller for breach of a representation and
warranty or other defect and actually received by the Trustee as of the related
Determination Date; (iii) any adjustments with respect to substitutions of Loans
for which the Seller has breached a representation or warranty deposited in the
Principal and Interest Account and transferred to the Certificate Account as of
the related Determination Date; (iv) the then outstanding Principal Balance of
any Loan which, during the related Due Period, has become a Liquidated Loan; and
(v) amounts, if any, released from the Pre-Funding Account on the Remittance
Dates during the Funding Period. When the Current Principal Balance of a Class
of Class A Certificates is reduced to zero, no further distributions of
principal will be made to the holders of such Class. When calculated with
respect to the Class A Certificates, the amount determined by multiplying the
Senior Percentage by the Principal Distribution Amount is hereinafter referred
to as the "Class A Formula Principal Distribution Amount."
The "Senior Percentage" for any Remittance Date prior to the Class B
Cross-over Date, and for any Remittance Date on or after the Class B Cross-over
Date on which the Class B Principal Distribution Test is not satisfied (as
described under "--Class B-l Principal" below), will be 100%. For any Remittance
Date on or after the Class B Cross-over Date on which the Class B Principal
Distribution Test is satisfied, the "Senior Percentage" will equal a fraction,
expressed as a percentage, the numerator of which is the sum of the Current
Principal Balance of the Class A Certificates and the Current Principal Balance
of the Class M Certificates as of the immediately preceding Remittance Date and
the denominator of which is the aggregate outstanding principal balances of the
Loans as of the immediately preceding Remittance Date. A "Liquidated Loan" is a
defaulted Loan or a Mortgaged Property (a) as to which all amounts that the
Servicer expects to recover on account of such Loan have been received
(including from FHA Payments) or (b) is a 90 Day Delinquent Loan.
The "Class A Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class A Formula Principal Distribution Amount. If
the Class A Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts), then the Class A Principal
Distribution Amount shall instead equal the Available Remittance Amount and the
amount of such deficiency (the "Class A Principal Shortfall Carryforward
Amount") will be carried forward and distributed as described, and subject to
the limitations set forth, under "--Principal Shortfall Carryforward Amounts"
below.
The Class A Principal Distribution Amount will be distributed first to the
Holders of the Class A-1 Certificates until the Class A-1 Current Principal
Balance has been reduced to zero, then to the Holders of the Class A-2
Certificates until the Class A-2 Principal Balance has been reduced to zero, and
then to the Holders of the Class A-3 Certificates until the Class A-3 Principal
Balance has been reduced to zero. Holders of each Class of Class A Certificates
will be paid principal on each Remittance Date in accordance with their
respective Percentage Interests.
CLASS M-1 PRINCIPAL
On each Remittance Date on and after the Class A Current Principal Balance
has been reduced to zero, the Holders of the Class M-1 Certificates will be
entitled to receive, as payments of principal, the Senior Percentage (as
described under "--Class A Principal" above) of the Principal Distribution
Amount (the "Class M-1 Formula Principal Distribution Amount"), subject to the
prior payment of all Interest Distribution Amounts payable on such Remittance
Date and Class A Principal Distribution Amount, if any, payable on such
Remittance Date, until the Class M-1 Current Principal Balance is reduced to
zero.
The "Class M-1 Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class M-1 Formula Principal Distribution Amount. If
the Class M-1 Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts and, if any, the Class A Principal
Distribution Amounts), then (i) if such Remittance Date occurs prior to the
Class B Cross-over Date, the Class M-1 Principal Distribution Amount shall
instead equal the Available Remittance Amount and the amount of such deficiency
(the "Class M-1 Principal Shortfall Carryforward Amount") will be carried
forward and distributed as described, and subject to the limitations set forth,
under "--Principal Shortfall Carryforward Amounts" below, or (ii) if such
Remittance Date occurs on or after the Class B Cross-over Date then such portion
of the Available Remittance Amount as would otherwise be distributed to the
Holders of Class B Certificates in respect of principal as is necessary to make
up such shortfall shall be allocated to the Class M-1 Certificates and shortfall
thereafter remaining shall be deemed to be the Class M-1 Principal Shortfall
Carryforward Amount.
On each Remittance Date on or after the Class B Cross-over Date on which
the Class B Principal Distribution Test is satisfied, payments of principal will
be made to Class B-1 or Class B-2 Certificateholders, even if Class M-1
Certificateholders are not yet entitled to receive payments of principal because
the Class A Current Principal Balance has not been reduced to zero.
CLASS M-2 PRINCIPAL
On each Remittance Date on and after the Class A Current Principal Balance
and the Class M-1 Current Principal Balance have been reduced to zero, the
Holders of the Class M-2 Certificates will be entitled to receive, as payments
of principal, the Senior Percentage (as described under "--Class A Principal"
above) of the Principal Distribution Amount (the "Class M-2 Formula Principal
Distribution Amount"), subject to the prior payment of all Interest Distribution
Amounts payable on such Remittance Date and Class A and Class M-1 Principal
Distribution Amounts, if any, payable on such Remittance Date, until the Class
M-2 Current Principal Balance is reduced to zero.
The "Class M-2 Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class M-2 Formula Principal Distribution Amount. If
the Class M-2 Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts and, if any, the Class A Principal
Distribution Amounts and the Class M-1 Principal Distribution Amount), then the
Class M-2 Principal Distribution Amount shall instead equal the Available
Remittance Amount and the amount of such deficiency (the "Class M-2 Principal
Shortfall Carryforward Amount") will be carried forward and distributed as
described, and subject to the limitations set forth, under "--Principal
Shortfall Carryforward Amounts" below.
On each Remittance Date on or after the Class B Cross-over Date on which
the Class B Principal Distribution Test is satisfied, payments of principal will
be made to Class B-1 or Class B-2 Certificateholders, even if Class M-2
Certificateholders are not yet entitled to receive payments of principal because
either the Class A Current Principal Balance or the Class M-2 Current Principal
Balance has not been reduced to zero.
CLASS B-1 PRINCIPAL
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B-1 Certificates. The Class B Cross-over Date will be the
earlier of (A) the Remittance Date on which the Class M-2 Principal Balance is
reduced to zero, and (B) the first Remittance Date on or after the Remittance
Date in April 2000 on which the fraction, expressed as a percentage, the
numerator of which is the Class B Current Principal Balance as of such the
immediately preceding Remittance Date and the denominator of which is the sum of
the Class A, Class M and Class B Current Principal Balances as of the
immediately preceding Remittance Date, is equal to or greater than 18.5%.
On each Remittance Date on or after the Class B Cross-over Date and prior
to the Remittance Date on which the Class A and Class M Current Principal
Balances have been reduced to zero, holders of Class B Certificates will be
entitled to distributions of principal only if the following test (the "Class B
Principal Distribution Test") is satisfied on such Remittance Date: both (i) the
Sixty-Day Delinquency Ratio (as defined in the Agreement) as of such Remittance
Date must not exceed 50% of the Class A Subordination Percentage (as defined
below); and (ii) either (A) both (x) the Weighted Average Five-Month Average
Sixty-Day Delinquency Ratio (as defined in the Agreement) as of such Remittance
Date must not exceed 9% and (y) the Cumulative Realized Losses (as defined in
the Agreement) as of such Remittance Date must not exceed a $19,425,000; or (B)
both (x) the Weighted Average Five- Month Average Sixty-Day Delinquency Ratio as
of such Remittance Date must not exceed 15% and (y) the Cumulative Realized
Losses as of such Remittance Date must not exceed $6,475,000. The "Class A
Subordination Percentage" is that amount, expressed as a percentage, determined
by dividing (i) the sum of the Current Principal Balances of the Class M-1,
Class M-2, Class B-1 and Class B-2 Certificates on the immediately preceding
Remittance Date by (ii) the sum of the Current Principal Balances of the Class
A-1, Class A-2, Class A-3, Class M-1, Class M-2, Class B-1 and Class B-2
Certificates on the immediately preceding Remittance Date.
On each Remittance Date on or after the Class B Cross-over Date, if each
Class B Principal Distribution Test is satisfied on such Remittance Date, the
Holders of the Class B-1 Certificates will be entitled to receive, as payments
of principal, the Class B Percentage (as described below) of the Principal
Distribution Amount (the "Class B-1 Formula Principal Distribution Amount"),
subject to the prior payment of all Interest Distribution Amounts and all Class
A and Class M Principal Distribution Amounts, if any, payable on such Remittance
Date until the Class B-1 Current Principal Balance is reduced to zero. Until
such time as the Class A and Class M Current Principal Balances have been
reduced to zero, the "Class B Percentage" for any Remittance Date will be equal
to 100% minus the Senior Percentage. The "Class B Percentage" for each
Remittance Date, if any, after the Class A and Class M Current Principal
Balances have been reduced to zero will be equal to 100%.
The "Class B-1 Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class B-1 Formula Principal Distribution Amount. If
the Class B-1 Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts and, if any, the Class A Principal
Distribution Amounts and the Class M Principal Distribution Amounts), then the
Class B-1 Principal Distribution Amount shall instead equal the remaining
Available Remittance Amount and the amount of such deficiency (the "Class B-1
Principal Shortfall Carryforward Amount") will be carried forward and
distributed as described, and subject to the limitations set forth, under
"--Principal Shortfall Carryforward Amounts" below.
CLASS B-2 PRINCIPAL
Except for distributions of any amounts representing a Class B-2 Principal
Liquidation Loss Amount (as described below), payments of principal on the Class
B-2 Certificates will not commence until the Remittance Date on which the Class
B-1 Current Principal Balance has been reduced to zero, and will be made on that
Remittance Date and each Remittance Date thereafter only if the Class B
Principal Distribution Test is satisfied on such Remittance Date (unless the
Class A Current Principal Balance and the Class M Current Principal Balance have
been reduced to zero). On any such Remittance Date, the Holders of the Class B-2
Certificates will be entitled to receive, as payments of principal, the Class B
Percentage of the Principal Distribution Amount (the "Class B-2 Formula
Principal Distribution Amount") and any amounts payable under the Limited
Guaranty, subject to the prior payment of all Interest Distribution Amounts and
Class A, Class M and Class B-1 Principal Distribution Amounts, if any payable on
such Remittance Date, until the Class B-2 Principal Balance has been reduced to
zero. On each Remittance Date, the Holders of the Class B-2 Certificates will be
entitled to receive pursuant to the Limited Guaranty the amount (the "Class B-2
Principal Liquidation Loss Amount"), if any, by which the sum of the Class A
Current Principal Balance, the Class M Current Principal Balance and the Class B
Current Principal Balance for such Remittance Date exceeds the sum of the
outstanding principal balances of all Loans on such Remittance Date (after
giving effect to all distributions of principal on such Remittance Date but
exclusive of any Guaranty Payments with respect to such Remittance Date).
INTEREST SHORTFALL CARRYFORWARD AMOUNTS
On each Remittance Date, after all payments of interest and principal as
set forth above, the aggregate Class A Interest Shortfall Carryforward Amounts
will be paid concurrently to the Holders of each Class of Class A Certificates
to the extent of the lesser of (i) the remaining Available Remittance Amount in
the Certificate Account on such date and (ii) the Current Maximum Subordination
Amount (as defined below), together with interest on such Class A Interest
Shortfall Carryforward Amounts at the applicable Pass-Through Rates. In the
event that, on a particular Remittance Date, the Available Remittance Amount in
the Certificate Account is less than the aggregate Class A Interest Shortfall
Carryforward Amounts, the portion of the remaining Available Remittance Amount
to be distributed in respect of each Class of Class A Certificates will be
allocated among the Classes (and within a Class among the Certificates of such
Class) pro rata in accordance with their respective entitlements to Class A
Interest Shortfall Carryforward Amounts, and any Class A Interest Shortfall
Carryforward Amounts or interest thereon not paid shall be carried forward to
the next Remittance Date, subject to the Available Maximum Subordination Amount.
On each Remittance Date, after all payments of interest, principal and
Class A Interest Shortfall Carryforward Amounts as set forth above, the
aggregate Class M-1 Interest Shortfall Carryforward Amounts will be paid to the
Holders of the Class M-1 Certificates to the extent of the lesser of (i) the
Amount Available in the Certificate Account on such date and (ii) the Current
Maximum Subordination Amount (as defined below), together with interest on such
Class M-1 Interest Shortfall Carryforward Amounts at the Class M-1 Pass-Through
Rate. In the event that, on a particular Remittance Date, the Amount Available
in the Certificate Account is less than the aggregate Class M-1 Interest
Shortfall Carryforward Amounts, the amount of the Amount Available to be
distributed in respect of the Class M-1 Certificates will be allocated among the
Certificates of such Class pro rata, and any Class M-1 Interest Shortfall
Carryforward Amounts or interest thereon not paid shall be carried forward to
the next Remittance Date, subject to the Available Maximum Subordination Amount.
On each Remittance Date, after all payments of interest, principal and
Class A and Class M-1 Interest Shortfall Carryforward Amounts as set forth
above, the aggregate Class M-2 Interest Shortfall Carryforward Amounts will be
paid to the Holders of the Class M-2 Certificates to the extent of the lesser of
(i) the remaining Available Remittance Amount in the Certificate Account on such
date and (ii) the Current Maximum Subordination Amount (as defined below),
together with interest on such Class M-2 Interest Shortfall Carryforward Amounts
at the Class M-2 Pass-Through Rate. In the event that, on a particular
Remittance Date, the remaining Available Remittance Amount in the Certificate
Account is less than the aggregate Class M-2 Interest Shortfall Carryforward
Amounts, the portion of the remaining Available Remittance Amount to be
distributed in respect of the Class M-2 Certificates will be allocated among the
Certificates of such Class pro rata, and any Class M-2 Interest Shortfall
Carryforward Amounts or interest thereon not paid shall, subject to the
Available Maximum Subordination Amount, be carried forward to the next
Remittance Date, subject to the Available Maximum Subordination Amount.
On each Remittance Date, after all payments of interest, principal and
Class A and Class M Interest Shortfall Carryforward Amounts as set forth above,
the aggregate Class B-1 Interest Shortfall Carryforward Amounts will be paid to
the Holders of the Class B-1 Certificates to the extent of the lesser of (i) the
remaining Available Remittance Amount in the Certificate Account on such date
and (ii) the Current Maximum Subordination Amount (as defined below), together
with interest on such Class B-1 Interest Shortfall Carryforward Amounts at the
Class B-1 Pass- Through Rate. In the event that, on a particular Remittance
Date, the remaining Available Remittance Amount in the Certificate Account is
less than the aggregate Class B-1 Interest Shortfall Carryforward Amounts, the
portion of the remaining Available Remittance Amount to be distributed in
respect of the Class B-1 Certificates will be allocated among the Certificates
of such Class pro rata, and any Class B-1 Interest Shortfall Carryforward
Amounts or interest thereon not paid shall, subject to the Available Maximum
Subordination Amount, be carried forward to the next Remittance Date, subject to
the Available Maximum Subordination Amount.
To the extent that Class B-2 Interest Shortfall Carryforward Amounts are
not paid by the Company pursuant to the Limited Guaranty, on each Remittance
Date, after all payments of interest, principal and Class A, Class M and Class
B-1 Interest Shortfall Carryforward Amounts as set forth above, the aggregate
Class B-2 Interest Shortfall Carryforward Amounts will be paid to the Holders of
the Class B-2 Certificates to the extent of the lesser of (i) the remaining
Available Remittance Amount in the Certificate Account on such date and (ii) the
Current Maximum Subordination Amount (as defined below), together with interest
on such Class B-2 Interest Shortfall Carryforward Amounts at the Class B-2
Pass-Through Rate. In the event that, on a particular Remittance Date, the
remaining Available Remittance Amount in the Certificate Account is less than
the aggregate Class B-2 Interest Shortfall Carryforward Amounts, the portion of
the remaining Available Remittance Amount to be distributed in respect of the
Class B-2 Certificates will be allocated among the Certificates of such Class
pro rata, and any Class B-2 Interest Shortfall Carryforward Amounts or interest
thereon not paid shall be carried forward to the next Remittance Date, subject
to the Available Maximum Subordination Amount.
When the Available Maximum Subordination Amount shall be reduced to zero,
provided that the Company is not in default under the Limited Guaranty, (i) no
further Interest Distribution Amount or Principal Distribution Amount Shortfalls
shall be carried forward to succeeding Remittance Dates, (ii) interest shall
cease to accrue on all remaining Interest Shortfall Carryforward Amounts, and
(iii) all future shortfalls of principal shall result in corresponding
writedowns of the Current Principal Balances of the Certificates, which
writedowns will be allocated first to Class B-2 Certificates, then to the Class
B-1 Certificates, then to the Class M-2 Certificates, then to the Class M-1
Certificates, and then to the Class A Certificates.
For so long as any Certificates shall be outstanding, at no time shall the
cumulative sum of (i) all Interest Shortfall Carryforward Amounts, (ii) interest
at the applicable Pass-Through Rates on Interest Shortfall Carryforward Amounts,
and (iii) Principal Shortfall Carryforward Amounts (such shortfall amounts and
interest being hereinafter referred to collectively as "Shortfall Amounts")
exceed $8,285,127 (the "Maximum Subordination Amount"). The "Available Maximum
Subordination Amount" at any time shall be the Maximum Subordination Amount less
all distributions theretofore made in respect of Shortfall Amounts.
PRINCIPAL SHORTFALL CARRYFORWARD AMOUNTS
On each Remittance Date, after all payments of interest, principal and
Interest Shortfall Carryforward Amounts as set forth above, the aggregate Class
A, Class M-1, Class M-2 and Class B-1 Principal Shortfall Carryforward Amounts
will be paid sequentially to the Holders of each such Class of Certificates in
such order to the extent to the extent of the lesser of (i) the remaining
Available Remittance Amount in the Certificate Account on such date and (ii) the
Current Maximum Subordination Amount. In the event that, on a particular
Remittance Date, the remaining Available Remittance Amount in the Certificate
Account is less than the aggregate Principal Shortfall Carryforward Amounts, and
any Principal Shortfall Carryforward Amounts not paid shall be carried forward
to the next Remittance Date, subject in all cases to the Available Maximum
Subordination Amount described above under "--Interest Shortfall Carryforward
Amounts."
SUBORDINATION OF CLASS M CERTIFICATES AND CLASS B CERTIFICATES
The rights of the Holders of the Class M Certificates and the Class B
Certificates to receive distributions with respect to the Loans will be
subordinated to such rights of the Class A Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class A Certificates of the full amount of their monthly payments
of principal and interest and to afford such holders protection against losses
on Liquidated Loans. The protection afforded to the Holders of the Class A
Certificates by means of the subordination feature will be accomplished by the
preferential right of the Holders of the Class A Certificates (i) to receive,
prior to any distribution being made on a Remittance Date in respect of
principal or interest on the Class M Certificates and the Class B Certificates,
the amount of interest due them on each Remittance Date out of the Available
Remittance Amount on deposit on such date in the Certificate Account, (ii) to
receive, prior to any distribution being made on a Remittance Date in respect of
principal on the Class M Certificates and the Class B Certificates, the amount
of principal due them on each Remittance Date out of the Available Remittance
Amount on deposit on such date in the Certificate Account.
In addition, the rights of the Holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Loans will be
subordinate to such rights of the Holders of the Class M-1 Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
Holders of the Class M-1 Certificates of the full amount of their monthly
payments of principal and interest and to afford such holders protection against
losses on Liquidated Loans. The protection afforded to the Holders of the Class
M-1 Certificates by means of the subordination feature will be accomplished by
the preferential right of the Holders of the Class M-1 Certificates (i) to
receive, prior to any distribution being made on a Remittance Date in respect of
principal or interest on the Class M-2 Certificates and the Class B
Certificates, the amount of interest due them on each Remittance Date out of the
Available Remittance Amount on deposit on such date in the Certificate Account,
(ii) to receive, prior to any distribution being made on a Remittance Date in
respect of principal on the Class M-2 Certificates and the Class B Certificates,
the amount of principal due them on each Remittance Date out of the Available
Remittance Amount on deposit on such date in the Certificate Account.
In addition, the rights of the Holders of the Class B-1 Certificates and
Class B-2 Certificates to receive distributions with respect to the Loans will
be subordinate to such rights of the Holders of the Class M-2 Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
Holders of the Class M-2 Certificates of the full amount of their monthly
payments of principal and interest and to afford such holders protection against
losses on Liquidated Loans. The protection afforded to the Holders of the Class
M-2 Certificates by means of the subordination feature will be accomplished by
the preferential right of the Holders of the Class M-2 Certificates (i) to
receive, prior to any distribution being made on a Remittance Date in respect of
principal or interest on the Class B Certificates, the amount of interest due
them on each Remittance Date out of the Available Remittance Amount on deposit
on such date in the Certificate Account, (ii) to receive, prior to any
distribution being made on a Remittance Date in respect of principal on the
Class B Certificates, the amount of principal due them on each Remittance Date
out of the Available Remittance Amount on deposit on such date in the
Certificate Account.
In addition, the rights of the Holders of the Class B-2 Certificates to
receive distributions with respect to the Loans will be subordinate to such
rights of the Holders of the Class B-1 Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the Holders of the
Class B-1 Certificates of the full amount of their monthly payments of principal
and interest and to afford such holders protection against losses on Liquidated
Loans. The protection afforded to the Holders of the Class B-1 Certificates by
means of the subordination feature will be accomplished by the preferential
right of the Holders of the Class B-1 Certificates (i) to receive, prior to any
distribution being made on a Remittance Date in respect of principal or interest
on the Class B-2 Certificates, the amount of interest due them on each
Remittance Date out of the Available Remittance Amount on deposit on such date
in the Certificate Account, (ii) to receive, prior to any distribution being
made on a Remittance Date in respect of principal on the Class B-2 Certificates,
the amount of principal due them on each Remittance Date out of the Available
Remittance Amount on deposit on such date in the Certificate Account.
REPORTS TO CERTIFICATEHOLDERS
On each Remittance Date, the Trustee will be required to forward to each
Certificateholder (which will be Cede, as registered Holder of each Class of
Certificates and the nominee of DTC, unless and until Definitive Certificates
are issued), a statement which will set forth, among other things:
(a) the amount of such distribution to holders of each Class of
Certificates allocable to interest (separately identifying any Interest
Shortfall Carryforward Amount);
(b) the amount of such distribution to holders of each Class of
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Shortfall Carryforward Amount);
(c) the amount, if any, by which the applicable Formula Distribution
Amount exceeds the applicable Class Distribution Amount for such Remittance
Date;
(d) the Principal Balance of each Class of Certificates after giving
effect to the distribution of principal on such Remittance Date;
(e) the Senior Percentage and Class B Percentage for the current
Remittance Date;
(f) the Class Factor (a percentage derived from a fraction the
numerator of which is the Current Principal Balance of a particular Class
and the denominator of which is the original Principal Balance of such
Class); and
(g) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
The Statement described above to be furnished each Class of Certificates
need only provide information relating to that Class of Certificates.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class of Certificates with a 1% Percentage Interest or per
$1,000 denomination of Certificates.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") will hold their Certificates through DTC in
the United States, or Cedel Bank or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate principal balance of the
Certificates and will initially be registered in the name of Cede & Co., the
nominees of DTC. Cedel Bank and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Cedel Bank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as depositary for Cedel Bank
and Morgan Guaranty Trust Company of New York, Brussels Office, will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing original Certificate Principal Balances of $1,000 and
integral multiples of $1,000 in excess thereof. Except as described below, no
person acquiring a Book- Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Class A Certificate"). Unless and until Definitive Class A
Certificates are issued, it is anticipated that the only "Certificateholder" of
the Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Agreement. Certificate
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedel Bank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and indirect participants by
instructing such Participants and indirect 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 Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in Cedel
Bank or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Bank Participants on such business day. Cash received in
Cedel Bank or Euroclear as a result of sales of securities by or through a Cedel
Bank Participant (as defined below) or Euroclear Participant (as defined below)
to a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Cedel Bank or Euroclear cash account only as
of the business day following settlement in DTC. For information with respect to
tax documentation procedures relating to the Certificates, see "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Bank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel Bank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Bank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel Bank is incorporated under the laws of Luxembourg as a professional
depository. Cedel Bank holds securities for its participating organizations
("Cedel Bank Participants") and facilitates the clearance and settlement of
securities transactions between Cedel Bank Participants through electronic
book-entry changes in accounts of Cedel Bank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedel Bank in any of 28 currencies, including United States dollars. Cedel Bank
provides to its Cedel Bank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel Bank interfaces with
domestic markets in several countries. As a professional depository, Cedel Bank
is subject to regulation by the Luxembourg Monetary Institute. Cedel Bank
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedel Bank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel Bank
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel Bank or Euroclear will be credited to the cash accounts of
Cedel Bank Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book- entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates, Cedel Bank
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Agreement on behalf of a
Cedel Bank Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Certificates which conflict with actions taken with respect to other
Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Servicing
Termination (as defined herein), beneficial owners having Percentage Interests
aggregating not less than 51% of the aggregate Class A Principal Balance of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates and
Certificateholders under the Agreement.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, Cedel Bank and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
None of the Seller, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DESCRIPTION OF THE LIMITED GUARANTY
LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Loans, the Company
will provide a limited guaranty (the "Limited Guaranty") against losses that
would otherwise be borne by the Class B-2 Certificates. Each payment required to
be made under the Limited Guaranty is referred to as a "Guaranty Payment." Prior
to the Class B Cross-over Date, and on any Remittance Date on or after the Class
B Cross-over Date on which the Class B Principal Distribution Test is not
satisfied (unless the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero), the Guaranty Payment will equal the amount,
if any, by which (a) the sum of (i) the Class B-2 Formula Distribution Amount
for such Remittance Date (which will be equal to accrued and unpaid interest on
the Class B-2 Certificates) and (ii) the Class B-2 Principal Liquidation Loss
Amount, if any, for such Remittance Date exceeds (b) the Class B-2 Distribution
Amount for such Remittance Date. The "Class B-2 Principal Liquidation Loss
Amount" for any Remittance Date equals the amount, if any, by which the sum of
the Class A Principal Balance, the Class M Principal Balance and the Class B
Principal Balance for such Remittance Date exceeds the aggregate outstanding
principal balances of the Loans for such Remittance Date. The "Class B-2
Principal Liquidation Loss Amount" is, in substance, the amount of delinquencies
and losses experienced on the Loans during the related Due Period that was not
absorbed by the Class X and Class R Certificates and the monthly Servicing Fee
otherwise payable to the Company (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer). On each Remittance Date on or after
the Class B Cross-over Date, on which the Class B Principal Distribution Test is
satisfied on such Remittance Date (or on which the Class A Principal Balance and
the Class M Principal Balance have been reduced to zero), the Guaranty Payment
will equal the amount, if any, by which (a) the sum of (i) the Class B-2 Formula
Distribution Amount for such Remittance Date (which will include both interest
and principal) and (ii) the Class B-2 Principal Liquidation Loss Amount, if any,
for such Remittance Date exceeds (b) the Class B-2 Distribution Amount for such
Remittance Date.
The Limited Guaranty will be an unsecured general obligation of the
Company. The Limited Guaranty will not directly benefit in any way, or result in
any payment to, Holders of the Class A-1, Class A-2, Class A-3, Class M-1, Class
M-2 or Class B-1 Certificates.
ALTERNATE CREDIT ENHANCEMENT
If, at the option of The Money Store Inc., Alternate Credit Enhancement is
provided and the Rating Agencies shall have notified The Money Store Inc. that
substitution of such Alternate Credit Enhancement will not result in the
downgrade or withdrawal by the Rating Agencies of the then current rating of the
Certificates, and upon the delivery of an opinion of counsel that such action
would not cause the Trust to fail to qualify as a "grantor trust," the Limited
Guaranty will be released and terminated. The Alternate Credit Enhancement may
consist of cash or securities deposited in a segregated escrow, trust or
collateral account or letter of credit, certificate insurance policy or surety
bond provided by a third party or any other credit enhancement or support
approved by the Rating Agencies.
THE AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in this
Prospectus Supplement, set forth below is a summary of certain other provisions
thereof. Certain capitalized terms used in this section and not otherwise
defined, have the meanings set forth in the Prospectus.
REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties as to each Loan described
under the caption "The Agreements--Representations and Warranties" in the
Prospectus, (i) the Representative will represent in the Agreement that each FHA
Loan is an FHA Title I loan, underwritten in accordance with applicable FHA
requirements and submitted to the FHA for insurance; (ii) each Originator will
represent that, assuming sufficient coverage remains available in the Reserve
Amount, each Claim filed by the Claims Administrator with respect to a 90 Day
Delinquent FHA Loan will be honored by the FHA in accordance with the rules and
regulations of the FHA; (iii) substantially all the proceeds of each Loan have
been or will be used to acquire or to improve or protect an interest in real
property that, at the origination date of such Loan, was the only security for
such Loan; and (iv) for each Loan, after giving effect to all improvements to be
made on the related Mortgaged Property with the proceeds of such Loan, and based
upon representations of the related Obligor, the value of the related Mortgaged
Property will at least be equal to the amount of such Loan and the outstanding
amount of all other loans secured by prior liens on such Mortgaged Property.
The Servicer will also covenant that it will: (a) comply with all FHA rules
and regulations and will maintain its status as an approved lender and will at
all times hold a valid contract of insurance (unless such contract is terminated
so as not to affect the obligation of FHA to provide insurance coverage with
respect to the FHA Loans); (b) promptly pay all insurance charges and take all
action necessary to maintain insurance on the FHA Loans; (c) immediately pay,
or, if the Servicer is no longer the Claims Administrator, cause the Claims
Administrator to pay, in full, any FHA Payment into the Principal and Interest
Account; and (d) with certain exceptions, not allow any modifications or
assumptions of the FHA Loans that would vary their terms.
OBLIGATION OF THE CLAIMS ADMINISTRATOR
If any FHA Loan becomes a 90 Day Delinquent FHA Loan, and if sufficient
coverage is available in the Reserve Amount to make an FHA Payment with respect
to such FHA Loan, the Claims Administrator may, in its sole discretion, during
any subsequent Due Period, determine to file a Claim with the FHA with respect
to such 90 Day Delinquent FHA Loan. If the Claims Administrator determines to
file such a Claim, the Claims Administrator will so notify the Co-Trustee and
the Custodian no later than the Determination Date following such determination
and shall request delivery of the related Trustee's Loan File. Upon receipt of
such certification and request, the Custodian shall, no later than the related
Remittance Date, release to the Claims Administrator the related Trustee's Loan
File and the Co-Trustee and the Custodian shall execute and deliver such
instruments necessary to enable the Claims Administrator to file a Claim with
the FHA on behalf of the Co-Trustee. Within 120 days of its receipt of the
related Trustee's Loan File, the Claims Administrator shall, in its sole
discretion, either file a Claim with the FHA for an FHA Payment with respect to
such 90 Day Delinquent FHA Loan or, if the Claims Administrator determines not
to file such a Claim, return to the Co-Trustee the related Trustee's Loan File.
With respect to any 90 Day Delinquent FHA Loan transferred to the Claims
Administrator as described above, the Claims Administrator shall deposit (or, if
the Claims Administrator is not also the Servicer, the Claims Administrator
shall instruct the Servicer to deposit) in the Principal and Interest Account
within 24 hours of receipt or determination thereof the following amounts (such
amounts to be net of certain amounts that would be reimbursable to the Servicer
under the Agreement with respect to amounts in the Principal and Interest
Account): (i) any FHA Payments; (ii) the amount, if any, by which the FHA
Payment was reduced in accordance with FHA Regulations due to the Claims
Administrator enforcing a lien on the FHA Property prior to the lien of the
related 90 Day Delinquent FHA Loan; and (iii) any principal and interest
payments received with respect to a 90 Day Delinquent FHA Loan after the Due
Period in which the FHA Loan is transferred to the Claims Administrator and
before either the related FHA Payment is paid or the related Trustee's Loan File
is returned to the Co-Trustee, as the case may be (the amounts referred to in
(ii) and (iii) above are referenced to herein as "Related Payments").
If an FHA Loan becomes a 90 Day Delinquent FHA Loan when there is
insufficient coverage in the Reserve Amount, or if the Claims Administrator
determines not to file a Claim with the FHA with respect to such 90 Day
Delinquent FHA Loan, the Co-Trustee will not transfer such FHA Loan to the
Claims Administrator, no Claim will be made to the FHA and the Servicer may take
other action, including the commencement of foreclosure proceedings, on the
related Mortgaged Property.
FHA PREMIUM ACCOUNT
The FHA Premium Account will be established with the Trustee and will be
available to reimburse the Claims Administrator for the payment to the FHA of
the FHA Insurance Premium on each FHA Loan. The FHA Insurance Premium is an
annual premium equal to 0.5% of the original principal balance of the FHA Loan.
If the related Mortgagor pays the FHA Insurance Premium in addition to the
Monthly Payment, any payment of the FHA Insurance Premium received during a Due
Period will be deposited in the FHA Premium Account on the related Remittance
Date. In certain states, the Servicer is prohibited from directly collecting the
FHA Insurance Premium from the related Mortgagor. With respect to FHA Loans
secured by Mortgaged Properties located in such states, the Servicer will cause
to be deposited in the FHA Premium Account a specified percentage of each
scheduled interest payment. Since a Mortgagor pays interest on the declining
principal balance of the related FHA Loan and the FHA Insurance Premium is based
upon the original principal balance of the FHA Loan, the amount of interest
allocated to the FHA Premium Account may be more or less than the amount of the
related FHA Insurance Premium. The Servicer has agreed to satisfy any resulting
shortfall from its own funds.
PRE-FUNDING ACCOUNT
On the Closing Date, the Pre-Funded Amount will be deposited into the
Pre-Funding Account in an amount not to exceed approximately $43,750,000.
Pre-Funded Amounts may be used only (i) to acquire Subsequent Loans for the
Trust and (ii) to make accelerated payments of principal on the Certificates of
the Trust. During the period (the "Funding Period") from the Closing Date until
the earliest of (i) the date on which the amount on deposit in the Pre-Funding
Account is less than $200,000, (ii) the date on which an Event of Default occurs
under the Agreement or (iii) at the close of business on June 26, 1997, amounts
will, from time to time, be withdrawn from the Pre- Funding Account to purchase
Subsequent Loans in accordance with the Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period will be distributed as a principal
prepayment on the next Remittance Date to the Certificates of the Trust.
However, any Pre-Funded Amount remaining at the close of business on June 26,
1997 will be distributed as a principal prepayment on the Special Remittance
Date to the applicable Certificates of the Trust.
All funds in the Pre-Funding Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds in the
Pre-Funding Account will be applied to payment of interest on the applicable
Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Representative also will make a cash deposit in an
account (the "Capitalized Interest Account") in the name of the Trustee on
behalf of the Trust. The amount deposited in the Capitalized Interest Account
will be used by the Trustee on the Remittance Dates occurring in April, May and
June 1997 to fund the excess, if any, of (i) the amount of interest accrued for
each such Remittance Date at the weighted average Pass- Through Rates of the
Certificates on the portion of the Certificates having principal balances
exceeding the principal balances of the Loans over (ii) the amount of any
earnings on funds in the Pre-Funding Account that are available to pay interest
on the Certificates on each such Remittance Date. Additionally, if a principal
prepayment is made on the Special Remittance Date to any Class of Certificates,
such Certificates also will receive on such date, from the Capitalized Interest
Account, accrued interest at the applicable Pass-Through Rates on the amount of
such principal prepayment. Any amounts remaining in the Capitalized Interest
Account on the Special Remittance Date and not used for such purposes are
required to be paid directly to the holders of the Class X and Class R
Certificates on such Special Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
PAYMENTS ON THE LOANS
The Agreement requires the Servicer to establish and maintain one or more
principal and interest accounts (each, a "Principal and Interest Account") at
one or more institutions designated as a "Designated Depository Institution" in
the Agreement.
All funds in the Principal and Interest Accounts are required to be held
(i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds held in the Principal and Interest Accounts are for the account of the
Servicer.
The Servicer is required to deposit in the related Principal and Interest
Account (within 24 hours of receipt) all payments received after the Cut-Off
Date on account of principal and interest on the related Loans (but net of the
Servicing Fee and the Contingency Fee with respect to each Loan, other servicing
compensation payable to the Servicer as permitted by the Agreement and any
amounts required to be deposited into the Servicing Accounts referred to below).
Not later than the day of each month which is the later of (i) the third
Business Day prior to the 15th day of such month and (ii) the seventh Business
Day of such month (each such day a "Determination Date"), the Servicer is
required to wire transfer to the Trustee the Available Remittance Amounts for
each Pool for deposit in the segregated trust accounts maintained with the
Trustee for such purpose (each a "Certificate Account").
The "Available Remittance Amount" for each Pool is defined in the Agreement
to include, with respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Servicer or any Subservicer
on the Loans of such Pool (including amounts paid by the Servicer and the
Representative and excluding (a) amounts paid as reimbursement to the
Servicer of advances, (b) amounts deposited into the Servicing Accounts and
(c) amounts recovered as voidable preferences), during the immediately
preceding calendar month (the "Due Period"), plus
(ii) the amount of any Monthly Advances and Compensating Interest
payments with respect to the Loans of such Pool remitted by the Servicer
for such Remittance Date, plus
(iii) amounts to be transferred to the applicable Certificate Account
from the Pre-Funding Account and the Capitalized Interest Account.
The Agreement also will require the Servicer to establish and maintain, in
addition to the Principal and Interest Accounts one or more accounts (each a
"Servicing Account") in a depository institution the deposits of which are
insured by the Federal Deposit Insurance Corporation to the maximum extent
permitted by law. The Servicer will deposit and retain therein all collections
from the Obligors for the payment of taxes, assessments, insurance premiums, or
comparable items as agent of the Obligors and in trust as provided in the
Agreement. Amounts in any Servicing Account may relate to mortgage loans in more
than one mortgage pool or to mortgage loans not yet included in a mortgage pool.
All funds in the Servicing Accounts are required to be held (i) uninvested, up
to the limits insured by the Federal Deposit Insurance Corporation or (ii)
invested in Permitted Instruments. Any investment earnings on funds held in the
Servicing Accounts are for the account of the Servicer. Withdrawals of amounts
from the Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse the Servicer
for any advances made with respect to such items, to refund to any Obligors any
sums as may be determined to be overages, to pay interest, if required, to
Obligors on balances in the Servicing Accounts, to pay earnings not required to
be paid to Obligors to the Servicer or to clear and terminate the Servicing
Accounts at or at any time after the termination of the Agreement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
Not later than the close of business on each Determination Date, the
Servicer is required to remit to the Trustee for deposit in the Certificate
Account an amount equal to the amount, if any, by which (a) the sum of (x) 30
days' interest at the weighted average Adjusted Loan Remittance Rates on the
aggregate outstanding Principal Balances of each Class of Certificates
immediately prior to the related Remittance Date and (y) the Monthly Excess
Spread, if any, for the related Remittance Date relating to the Loans exceeds
(b) the amount received by the Servicer in respect of interest on the Loans as
of the related Record Date (and, with respect to the Remittance Dates in April,
May and June 1997, the sum of (i) all funds to be transferred to the Certificate
Account from the Capitalized Interest Account for such Remittance Date and (ii)
certain investment earnings on amounts in the Pre-Funding Account for the
Remittance Date). Such excess is defined as the "Monthly Advance."
Not later than the close of business on each Determination Date, with
respect to each Loan for which a Principal Prepayment in full or Curtailment was
received during the related Due Period, the Servicer is required to remit to the
Trustee for deposit in the Certificate Account from amounts otherwise payable to
it as servicing compensation, an amount equal to the excess of (a) 30 days'
interest on the principal balance of each such Loan as of the beginning of the
related Due Period at the weighted average Adjusted Loan Remittance Rates of the
Trust applicable to the Remittance Date on which such amount will be
distributed, over (b) the amount of interest actually received on the related
Loan for such Due Period (such difference, "Compensating Interest").
FLOW OF FUNDS
On each Remittance Date, the Trustee will withdraw the Available Remittance
Amount from the Certificate Account and make the following payments, in the
following order of priority:
(i) to pay the monthly Servicing Fee to the Servicer;
(ii) to pay the monthly Trustee's fee to the Trustee;
(iii) to pay current interest to the Holders of the Class A
Certificates, without any priority among the Classes of Class A
Certificates, as described under "Description of the
Certificates--Distributions--Class A Interest;"
(iv) to pay current interest to the Holders of the Class M-1, Class
M-2, Class B-1 and Class B-2 Certificates, in that order of
priority, as described under "Description of the
Certificates--Distributions--Class M-1 Interest," "--Class M-2
Interest," "--Class B-1 Interest" and "Class B-2 Interest;"
(v) to pay principal to the Holders of the Class A, Class M-1, Class
M-2, Class B-1 and Class B-2 Certificates, generally in that
order of priority, as described under "Description of the
Certificates--Distributions--Class A Principal," "--Class M-1
Principal," "--Class M-2 Principal," "--Class B-1 Principal" and
"--Class B-2 Principal;"
(vi) to pay the Class A Interest Shortfall Carryforward Amounts,
together with interest thereon, to the Holders of the Class A
Certificates, without priority, as described under "Description
of Certificates--Distributions--Interest Shortfall Carryforward
Amounts;"
(vii) to pay the Class M-1, Class M-2, Class B-1 and Class B-2
Interest Shortfall Carryforward Amounts, together with interest
thereon, to the Holders of the Class M-1, Class M-2, Class B-1
and Class B-2 Certificates, respectively, as described under
"Description of the Certificates--Distributions--Interest
Shortfall Carryforward Amounts;"
(viii) to pay Principal Shortfall Carryforward Amounts to the Holders
of the Certificates, as described under "Description of the
Certificates--Distributions--Principal Shortfall Carryforward
Amounts;"
(ix) to reimburse the Servicer or the Trustee for any unreimbursed
Advances; and
(x) then to the Class X and Class R Certificateholders, all amounts
then remaining in the Certificate Account as specified in the
Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; REPLACEMENT OF
SERVICER
The Servicer is entitled to a servicing fee of 0.25% per annum of the
principal balance of each Loan (the "Servicing Fee") and a contingency fee of
0.25% per annum of the principal balance of each Loan (the "Contingency Fee").
The Contingency Fee is meant to provide additional servicing compensation to a
successor servicer if The Money Store Inc. is replaced as Servicer under the
Agreement. However, as long as The Money Store Inc. acts as Servicer, it is
entitled to receive the Contingency Fee, although such amount is not deemed
servicing compensation. The Servicing Fee and Contingency Fee are each
calculated and payable monthly from the interest portion of scheduled monthly
payments, liquidation proceeds and certain other collected proceeds. In
addition, the Servicer is entitled under the Agreement to retain additional
servicing compensation in the form of assumption and other administrative fees,
prepayment penalties and premiums, late payment charges, interest paid on funds
in the Principal and Interest Accounts, interest paid on earnings realized on
Permitted Instruments, and certain other excess amounts. Upon the occurrence of
certain Servicing Delinquency Triggers (as defined in the Agreement) the holders
of Certificates representing in excess of 50% of the aggregate Current Principal
Balances of all Classes may determine to terminate the Servicer.
TERMINATION; PURCHASE OF LOANS
Each Trust will terminate upon distribution to the Certificateholders of
amounts due them following the earlier to occur of (i) the final payment or
other liquidation of the last Loan remaining in the Trust or the disposition of
all REO Property, (ii) the optional purchase of the assets of the Trust by the
Servicer as described below or (iii) the occurrence of a "qualified liquidation"
of the Trust, as permitted by the REMIC provisions of the Code as described
below; provided, however, that in no event will the Trust terminate later than
twenty-one years after the death of the last survivor of the person named in the
Agreement.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Loans are less than 10% of the sum of (i) the Original Pool Principal
Balance and (ii) the original Pre-Funded Amount the Servicer may, at its option,
purchase, on the next succeeding Remittance Date, all of the Loans and any
related REO Properties at a price equal to the Termination Price relating to the
Trust.
Following a final determination by the Internal Revenue Service (the "IRS")
or by a court of competent jurisdiction, in either case from which no appeal is
taken within the permitted time for such appeal, or if any appeal is taken,
following a final determination of such appeal from which no further appeal can
be taken, to the effect that either REMIC does not and will no longer qualify as
a REMIC pursuant to Section 860D of the Code (the "Final Determination"), at any
time on or after the date which is 30 calendar days following such Final
Determination the Holders of greater than 50 percent in Percentage Interest of
the Class A Certificates (the "Applicable Majority Certificateholders") may
direct the Trustee on behalf of the Trust to adopt a "plan of complete
liquidation" (within the meaning of Section 860F(a)(4)(B)(i) of the Code) with
respect to the related REMIC. Upon receipt of such direction by the Applicable
Majority Certificateholders, the Trustee will notify the holders of the Class R
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "Termination Notice"). The Holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, within 60
days from the date of receipt of the Termination Notice (the "Purchase Option
Period"), at their option, purchase from the Trust all the Loans and all
property theretofore acquired by foreclosure, deed in lieu of foreclosure, or
otherwise in respect of any Loan then remaining in the REMIC at a purchase price
equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period, in
the event that the Applicable Majority Certificateholders have given the Trustee
the direction described in clause (i) above, the Trustee is required to sell the
Loans and such other property in the related REMIC and distribute the proceeds
of the liquidation of such REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of such REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Applicable Majority Certificateholders
shall permit or direct in writing, after the expiration of the Purchase Option
Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee of an opinion of nationally recognized
tax counsel selected by the Holders of such Class R Certificates, which opinion
shall be reasonably satisfactory in form and substance to the Applicable
Majority Certificateholders, that the effect of the Final Determination is to
increase substantially the probability that the gross income of the related
REMIC will be subject to federal taxation, purchase from the Trust all Loans and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure,
or otherwise in respect of any Loan then remaining in the related REMIC at a
purchase price equal to the Termination Price. The foregoing opinion shall be
deemed satisfactory unless the Applicable Majority Certificateholders give the
holders of a majority of percentage interests in the Class R Certificates notice
that such opinion is not satisfactory within thirty days after receipt of such
opinion.
If the Trust were to lose its qualification as a REMIC, it might be taxable
as a grantor trust, a partnership, or an association taxable as a corporation.
If the Trust is treated as a grantor trust or a partnership, the Trust would not
be subject to a separate entity level tax, and it is not expected that the tax
treatment of the investors would be materially different from the tax treatment
if the REMIC election of the Trust had not been revoked. However, if the Trust
were treated as an association taxable as a corporation it would be subject to
Federal income taxes at corporate rates on its net income. Moreover,
distributions on the Certificates would probably not be deductible in computing
the Trust's taxable income, and all or part of the distributions to the holders
of such Certificates would probably be treated as dividend income to the
holders. Such an entity level tax could result in reduced distributions to the
Certificateholders and such Certificateholders could also be liable for a share
of such a tax. Any such corporate level tax would be borne first by the holders
of the Class R Certificates from amounts otherwise distributable to such
holders. Any remaining corporate level tax would be borne by holders of all
Classes of Certificates pro rata in proportion to the outstanding principal
balances of such Classes.
THE TRUSTEE
The Bank of New York will be the Trustee under the Agreement. The Agreement
will provide that the Trustee may resign at any time, in which event the
Representative will be obligated to appoint a successor Trustee. The
Representative may also remove the Trustee if the Trustee ceases to be eligible
to continue as such under the Agreement or if the Trustee becomes insolvent. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
THE CO-TRUSTEE
First Bank (N.A.), a national banking association headquartered in
Milwaukee, Wisconsin, or an affiliate of First Bank (N.A.) or any other entity
acceptable to the Co-Trustee and the Servicer will be the Co-Trustee with
respect to the Loans. First Bank (N.A.) is a subsidiary of First Bank Systems,
Minneapolis, Minnesota.
THE CUSTODIAN
First Trust National Association, a national banking association
headquartered in St. Paul, Minnesota, will be the Custodian with respect to the
Loans. In such capacity, it will retain the files relating to the Loans. The
Custodian is a subsidiary of First Bank Systems, Minneapolis, Minnesota.
FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, two separate elections will be made to
treat certain assets of the Trust as REMICs. Each Class Certificate will
constitute "regular interests" in a REMIC and each class of Class R Certificates
will constitute the "residual interest" in the related REMIC. See "Federal
Income Tax Consequences" in the Prospectus.
Because the Certificates will be considered REMIC regular interests, they
generally will be taxable as debt obligations under the Code, and interest paid
or accrued on such Certificates, including original issue discount with respect
to any such Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. See
"Federal Income Tax Consequences--REMIC Regular Certificates--Current Income on
REMIC Regular Certificates.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount with respect to the Certificates is 100%
Prepayment Assumption, as 100% Prepayment Assumption is defined herein with
respect to the Pool. See "Maturity, Prepayment and Yield Considerations" herein.
However, no representation is made as to the rate at which prepayments actually
will occur.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds and separate 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 Class
A Certificate a benefit plan fiduciary should determine whether such an
investment is permitted under the governing benefit plan instruments, is
appropriate for the benefit plan in view of its overall investment policy and
the composition and diversification of its portfolio and should consider the
ERISA provisions regarding the delegation of fiduciary responsibility with
respect to plan assets.
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 (each a "Plan") 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 Representative, the Originators, 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 Class A 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. Furthermore, if an
investing Plan's assets were deemed to include an interest in the Loans and any
other assets of the Trust and not merely an interest in the related Class A
Certificates, transactions occurring in the operation, management and servicing
of the Trust and its assets, including in the servicing of the Loans might
constitute prohibited transactions unless an administrative exemption applies.
One exemption which may be applicable to these potential prohibited transactions
is noted below.
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
(the "Plan Asset Regulations"), 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. Thus, a Plan fiduciary considering an investment in Class A
Certificates should also consider whether such an investment might constitute or
give rise to a prohibited transaction under ERISA or the Code.
DOL has granted to Lehman Brothers Inc. an administrative exemption
(Prohibited Transaction Exemption 91-14, 56 Fed. Reg. 7,413 (February 22, 1991)
(the "Exemption")) from 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 Exemption which may be applicable to the Class A
Certificates if Lehman Brothers or any of its affiliates is either the sole
underwriter or the manager or co-manager of the underwriting syndicate, or a
selling or placement agent. The conditions which must be satisfied for the
Exemption to apply to the purchase, holding and transfer of the Class A
Certificates are the following:
(i) The acquisition of the Class A Certificates by a Plan is
on terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party.
(ii) The rights and interest evidenced by a Class of Class A
Certificates acquired by the Plan are not subordinated to the rights
and interest evidenced by any other Certificates of the Trust.
(iii) The Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of Moody's, Duff &
Phelps Credit Rating Co., S & P or Fitch Investors Service, L.P.
("Authorized Rating Agencies") and the investment pool consists only of
assets of the type enumerated in the Exemption, and which have been
included in other investment pools; certificates evidencing interest in
such other investment pools have been rated in one of the three highest
generic rating categories by an Authorized Rating Agency for at least
one year prior to a Plan's acquisition of certificates; and
certificates evidencing interest in such other investment pools have
been purchased by investors other than Plans for at least one year
prior to a plan's acquisition of the Class A Certificates.
(iv) The sum of all payments made to the Underwriter in
connection with the distribution of the Class A Certificates represents
not more than reasonable compensation for distributing the Class A
Certificates. The sum of all payments made to and retained by the
Representative and the Originators pursuant to the sale of the Loans to
the Trust represents not more than the fair market value of such Loans.
The sum of all payments made to and retained by the Servicer or any
other servicer represents not more than reasonable compensation for
such services under the Agreement and reimbursement of the servicer's
reasonable expenses in connection therewith.
(v) The Trustee and the Co-Trustee must not be an affiliate of
any member of the Restricted Group as defined below.
In addition, it is a condition that the Plan investing in the Class A
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D under the Securities Act. Any Plan purchasing Class A Certificates
will be deemed to have represented, by virtue of such purchase, that it is an
accredited investor.
The Exemption does not apply to Plans sponsored by the Originators, the
Representative, the Underwriter, the Trustee, the Co-Trustee the Custodian, the
Servicer, any other servicers or any obligor with respect to Loans included in
the Trust constituting more than 5% of the aggregate unamortized principal
balance of the assets in the Trust or any affiliate of such parties (the
"Restricted Group"). No exemption is provided from the restrictions of ERISA for
the acquisition or holding of a Class A Certificate on behalf of an "Excluded
Plan" by any person who is a fiduciary with respect to the assets of such
Excluded Plan. For purposes of the Class A Certificates, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group. In addition, the Exemption
provides relief from certain self-dealing/conflict of interest prohibited
transactions that may occur when a Plan fiduciary causes a Plan to acquire Class
A Certificates and the fiduciary (or its affiliate) is an obligor on any Loan
held in the Trust provided that, among other requirements, (i) such fiduciary
(or its affiliate) is an obligor with respect to 5% or less of the fair market
value of the Loans contained in the Trust, (ii) the Plan's investment in any
Class of Class A Certificates does not exceed 25% of all of the Certificates of
such Class outstanding at the time of the Plan's acquisition and after the
Plan's acquisition of such Class of Class A Certificates, no more than 25% of
the assets over which the fiduciary has investment authority are invested in
securities of a trust containing assets which are sold or serviced by the same
entity, and (iii) in the case of initial issuance (but not secondary market
transactions), at least 50% of each Class of Class A Certificates, and at least
50% of the aggregate interest in the Trust, are acquired by persons independent
of the Restricted Group.
Before purchasing a Class A Certificate in reliance on the Exemption or any
other exemption, a fiduciary of a Plan should confirm that all applicable
requirements would be satisfied. Any Plan fiduciary considering the purchase of
a Class 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 investment prudence and diversification, an investment in the Class A
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. Special caution ought to be exercised before a Plan purchases a Class
A Certificate in such circumstances. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related securities"
for purposes of SMMEA. No Class of Class M or Class B Certificates will
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 such Classes of Certificates. No representation is made herein as to
whether any Class of Certificates 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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated March 25, 1997 (the "Underwriting Agreement"), the Representative, on
behalf of the Originators, has agreed to sell, and the Underwriter has agreed to
purchase all of the Certificates.
The Representative has been advised by the Underwriter that the Underwriter
proposes initially to offer the Certificates to the public at the respective
public offering prices set forth on the cover page of this Prospectus Supplement
and to certain dealers at such price less a concession not in excess of the
respective amounts set forth in the table below (expressed as a percentage of
the respective Class Principal Balance). The Underwriters may allow and such
dealers may reallow a discount not in excess of the respective amounts set forth
in the table below to certain other dealers.
Selling Reallowance
CLASS CONCESSION DISCOUNT
A-1 0.1500% 0.0750%
A-2 0.2000% 0.1000%
A-3 0.2500% 0.1250%
M-1 0.2500% 0.1250%
M-2 0.2750% 0.1375%
B-1 0.3000% 0.1500%
B-2 0.3500% 0.1750%
The Representative has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Underwriter has agreed to reimburse the Representative for certain
expenses incurred by the Representative in connection with the offering of the
Certificates.
The Underwriter may provide investment banking services for the Representative
for which it will receive additional compensation.
EXPERTS
The consolidated financial statements of The Money Store Inc. as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994 incorporated by reference into this Prospectus Supplement have been audited
by KPMG Peat Marwick LLP, independent accountants, as set forth in their report
thereon incorporated by reference herein in reliance upon the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Representative by Eric R. Elwin, Esq.,
Corporate Counsel of the Representative. Certain legal matters relating to the
validity of the issuance of the Certificates will be passed upon for the
Underwriter by Stroock & Stroock & Lavan LLP, New York, New York. Stroock &
Stroock & Lavan LLP has performed legal services for the Representative and it
is expected that it will continue to perform such services in the future.
RATING OF THE OFFERED CERTIFICATES
It is a condition to the issuance of the Class A Certificates that each
Class be rated "AAA" by S&P and "Aaa" by Moody's. Such ratings are the highest
long-term ratings that such Rating Agencies assign to securities. It is a
condition to the issuance of the Class M-1 Certificates that they be rated "AA"
by S&P and "Aa2" by Moody's. It is a condition to the issuance of the Class M-2
Certificates that each such Class be rated "A" by S&P and "A2" by Moody's. It is
a condition to the issuance of the Class B-1 Certificates that each Class be
rated "BBB" by S&P and "Baa1" by Moody's. It is a condition to the issuance of
the Class B-2 Certificates that such Class be rated "BBB" by S&P and "Baa3" by
Moody's. The ratings given to the Certificates will be based, among other
things, upon the ratings assigned to the Company with respect to the Limited
Guaranties. Any reduction in such rating of the Company would most likely result
in a reduction in the ratings given to the Certificates. A security rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning Rating Agency. No person is
obligated to maintain the rating on any Class of Certificates.
FINANCIAL INFORMATION
The Trust has been formed to own the Loans and to issue the Certificates.
The Trust had 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 the Trust are included in
this Prospectus Supplement.
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
90 Day Delinquent FHA Loan..............................................S-26
Adjusted Loan Remittance Rate...........................................S-31
Agreement................................................................S-6
Alternate Credit Enhancement............................................S-22
Applicable Majority Certificateholders..................................S-70
Authorized Rating Agencies..............................................S-72
Auto Loans..............................................................S-40
Available Maximum Subordination Amount..................................S-59
Balloon Loans...........................................................S-44
Book-Entry Certificates.................................................S-61
Business Day............................................................S-53
Capitalized Interest Account............................................S-22
Cede....................................................................S-34
Cedel Bank Participants.................................................S-62
Certificate Owners......................................................S-61
Certificateholders.......................................................S-2
Certificates.............................................................S-1
Claims...................................................................S-5
Claims Administrator.....................................................S-2
Class A Certificates.....................................................S-1
Class A Current Principal Balance........................................S-7
Class A Formula Principal Distribution Amount...........................S-11
Class A Interest Distribution Amount.....................................S-7
Class A Interest Shortfall Carryforward Amount...........................S-7
Class A Principal Distribution Amount...................................S-12
Class A Principal Shortfall Carryforward Amount.........................S-12
Class A-1 Interest Shortfall Carryforward Amount.........................S-7
Class A-2 Interest Shortfall Carryforward Amount.........................S-7
Class A-3 Interest Shortfall Carryforward Amount.........................S-7
Class B Certificates.....................................................S-1
Class B Interest Distribution Amount....................................S-10
Class B Interest Shortfall Carryforward Amounts.........................S-10
Class B Percentage......................................................S-57
Class B Principal Distribution Test.....................................S-14
Class B-1 Formula Principal Distribution Amount"........................S-14
Class B-1 Interest Distribution Amount...................................S-9
Class B-1 Interest Shortfall Carryforward Amount.........................S-9
Class B-1 Principal Distribution Amount.................................S-15
Class B-1 Principal Shortfall Carryforward Amount.......................S-15
Class B-2 Formula Principal Distribution Amount.........................S-15
Class B-2 Interest Distribution Amount..................................S-10
Class B-2 Interest Shortfall Carryforward Amount".......................S-10
Class B-2 Principal Liquidation Loss Amount.............................S-15
Class M Interest Distribution Amount.....................................S-8
Class M Interest Shortfall Carryforward Amounts..........................S-9
Class M-1 Formula Principal Distribution Amount.........................S-12
Class M-1 Interest Shortfall Carryforward Amount.........................S-8
Class M-1 Principal Distribution Amount.................................S-12
Class M-1 Principal Shortfall Carryforward Amount.......................S-13
Class M-2 Formula Principal Distribution Amount.........................S-13
Class M-2 Interest Distribution Amount...................................S-8
Class M-2 Interest Shortfall Carryforward Amount.........................S-9
Class M-2 Principal Distribution Amount.................................S-13
Class R Certificates.....................................................S-1
Class X Certificates.....................................................S-1
Closing Date.............................................................S-1
Company..................................................................S-2
Compensating Interest...................................................S-31
Contingency Fee.........................................................S-31
Conventional Loans.......................................................S-2
Cooperative.............................................................S-63
CPR.....................................................................S-49
Curtailment.............................................................S-31
Custodian................................................................S-5
Cut-Off Date.............................................................S-5
Dealer Loans............................................................S-37
Definitive Certificates.................................................S-34
Detailed Description....................................................S-43
Determination Date......................................................S-30
Direct Loans............................................................S-37
DOL.....................................................................S-72
DTC.....................................................................S-34
Equity Advantage Loans..................................................S-42
ERISA...................................................................S-33
Euroclear Operator......................................................S-63
Euroclear Participants..................................................S-63
European Depositaries...................................................S-61
Exemption...............................................................S-33
FHA......................................................................S-2
FHA Insurance Premium...................................................S-27
FHA Loans................................................................S-2
FHA Payment.............................................................S-27
FHA Premium Account.....................................................S-27
Final Determination.....................................................S-70
Financial Intermediary..................................................S-61
Formula Principal Distribution Amount...................................S-55
Funding Period..........................................................S-22
Guaranty Payment........................................................S-64
HEP.....................................................................S-49
Holders..................................................................S-2
Home Equity Loans.......................................................S-40
Home Improvement Interest Rate..........................................S-30
Home Improvement Loans...................................................S-2
Home Improvement Mortgage Notes.........................................S-27
Home Improvement Mortgaged Properties...................................S-28
Home Improvement Mortgages..............................................S-27
HUD......................................................................S-2
Initial Loans...........................................................S-27
Insurance Proceeds......................................................S-31
Interest Distribution Amounts...........................................S-10
IRS.....................................................................S-70
Limited Guaranty.........................................................S-2
Liquidated Loan.........................................................S-11
Liquidation Proceeds....................................................S-30
Loans....................................................................S-2
Maximum Subordination Amount............................................S-59
Monthly Advance.........................................................S-30
Moody's.................................................................S-32
Mortgaged Properties....................................................S-28
Mortgages...............................................................S-43
Mortgagor...............................................................S-29
Multifamily Mortgaged Properties........................................S-29
NHA Act.................................................................S-36
Notes...................................................................S-43
Obligor.................................................................S-29
Optional Servicer Termination Date......................................S-32
Original Principal Balance..............................................S-32
Originators..............................................................S-2
Pass-Through Rate........................................................S-4
Payment Date.............................................................S-2
Percentage Interest......................................................S-6
Permitted Instruments...................................................S-67
Plan Asset Regulations..................................................S-72
Plans...................................................................S-33
Pool.....................................................................S-2
Pre-Funded Amount.......................................................S-22
Pre-Funding Account......................................................S-2
Prepayment Assumption...................................................S-49
Principal Distribution Amount...........................................S-11
Principal Prepayment....................................................S-31
Prospectus...............................................................S-3
PUDs....................................................................S-28
Purchase Option Period..................................................S-70
Rating Agencies.........................................................S-22
Related Payments........................................................S-66
Released Mortgaged Property Proceeds....................................S-31
REMIC....................................................................S-2
Remittance Date.........................................................S-23
REO Property............................................................S-32
Representative...........................................................S-2
Reserve Amount..........................................................S-24
Restricted Group........................................................S-73
S&P.....................................................................S-32
SBA.....................................................................S-40
SBA Loans...............................................................S-40
Senior Certificates......................................................S-1
Senior Percentage.......................................................S-11
Servicer.................................................................S-2
Servicing Fee...........................................................S-31
Shortfall Amounts.......................................................S-59
SMMEA...................................................................S-33
Special Payment Date....................................................S-22
Student Loans...........................................................S-40
Subordinated Certificates................................................S-1
Subsequent Loans.........................................................S-2
Termination Notice......................................................S-70
Termination Price ......................................................S-32
Terms and Conditions....................................................S-63
Title I..................................................................S-2
Title I Loan Program....................................................S-36
Title I Property Improvement Loans......................................S-36
Trust....................................................................S-1
Trust Class M Certificates...............................................S-1
Trustee..................................................................S-5
Trustee's Loan File.....................................................S-25
Underwriting Agreement..................................................S-74
Weighted average life...................................................S-47
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Class A
Certificates (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company, Cedel Bank or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset-Backed Certificates issues.
Secondary, cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel Bank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel Bank and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Asset-Backed Certificates issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel Bank or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel Bank and/or Euroclear Participants. Secondary market
trading between Cedel Bank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedel Bank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Bank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel Bank or Euroclear through a Cedel Bank
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel Bank or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Bank Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York.) If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel Bank, or Euroclear cash debt will be valued instead as
of the actual settlement date.
Cedel Bank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel Bank or Euroclear. Under
this approach, they may take on credit exposure to Cedel Bank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedel Bank or Euroclear has extended a line of credit
to them, Cedel Bank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Bank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedel Bank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Bank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel Bank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Bank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel Bank or Euroclear through a Cedel Bank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel Bank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedel Bank Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Cedel Bank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedel Bank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one- day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedel Bank
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel Bank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel Bank or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC' Participant is at least one
day prior to the value date for the sale to the Cedel Bank Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
Bank, or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate.
Exception for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. (Form 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a "Foreign Trust," as
defined in Section 7701(a)(31) of the Code. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advise concerning their holding and disposing of the
Global Securities.
<PAGE>
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates (the
"Certificates"), issuable in Series, which may be sold from time to time on
terms determined at the time of sale and described in the related Prospectus
Supplement, evidencing specified interests in one or more trust funds (each, a
"Trust"), the primary assets of which will consist of pools (each, a "Pool") of
certain mortgage loans and certain other mortgage-related or other similar
assets more particularly described herein (the "Mortgage Assets"). The Mortgage
Assets and other assets of any Trust will be described in the Prospectus
Supplement for the related Series of Certificates. Certain of the Mortgage
Assets may have been originated by wholly-owned subsidiaries (the "Originators")
of The Money Store Inc. ("The Money Store" or the "Representative"). Certain
other of the Mortgage Assets may have been acquired by The Money Store, an
Originator or an affiliate thereof from other lenders or government agencies, or
may consist of mortgage pass-through or mortgage-backed securities issued by
government agencies or private lenders. In addition, if so specified in the
related Prospectus Supplement, the Trust will include monies on deposit in one
or more trust accounts to be established with a Trustee (as defined herein),
which may include a Pre-Funding Account (as defined herein) which would be used
to purchase additional Mortgage Assets for the related Trust from time to time
during the Funding Period (as defined herein) specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
certain Certificates may evidence a fractional undivided ownership interest in a
Trust which will hold a beneficial ownership interest in another trust fund
which will contain the Mortgage Assets. Certificates may also be entitled to the
benefits of insurance policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees, guaranties of The
Money Store, supplemental interest payments or other forms of credit enhancement
or maturity protection, to the extent described in the related Prospectus
Supplement. The Prospectus Supplement for each Series of Certificates will name
the entities (which will include The Money Store or one of its affiliates and
may include other entities) which will act, directly or through one or more
sub-servicers, as master servicers (each, in such capacity, the "Master
Servicer") of such Mortgage Assets.
Each Series of Certificates will be issued in one or more classes
(each, a "Class"). Each Class of Certificates will evidence a fractional
undivided ownership interest of a specified percentage or portion of future
interest payments and a specified percentage or portion of future principal
payments on the Mortgage Assets in the related Trust. A Series of Certificates
may include one or more Classes that receive certain preferential treatment with
respect to one or more other Classes. One or more Classes of Certificates may be
entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other Classes of Certificates 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.
SEE RISK FACTORS ON PAGE 18 HEREIN FOR A DISCUSSION OF CERTAIN RISK
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES
OFFERED HEREBY.
The date of this Prospectus is _________ __, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
<PAGE>
Distributions to holders of Certificates ("Certificateholders" or
"Holders") will be made on certain dates specified in the related Prospectus
Supplement (each, a "Remittance Date"), which may be monthly, quarterly,
semi-annually or at such other intervals as are specified therein. The rate (the
"Pass-Through Rate") at which Certificateholders will receive distributions of
interest on any Class of Certificates or the method of calculating such
Pass-Through Rate, which may be fixed or variable, will be set forth in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made only from the assets of the related Trust.
The Certificates will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as otherwise specified in the related Prospectus Supplement) by any
other person. Unless otherwise specified in the related Prospectus Supplement,
the only obligations of the Representative or the Originators with respect to a
Series of Certificates will be pursuant to certain limited representations and
warranties. Except for certain representations and warranties relating to the
Mortgage Assets and certain other exceptions, the Master Servicer's obligations
with respect to the related Series of Certificates will be limited to its
contractual servicing obligations. If the amount available for distribution to
Certificateholders on any Remittance Date is less than the amount due to them,
the Master Servicer, to the extent provided in the related Prospectus
Supplement, may be obligated, under certain terms and conditions, to advance
cash to such Certificateholders, to the extent such deficiency is attributable
to delinquent payments of principal and interest during the immediately
preceding Due Period (as defined herein). See "Description of the
Certificates--Monthly Advances and Compensating Interest."
The yield to Certificateholders on each Class of Certificates of a
Series may be affected by the rate of payment of principal (including
prepayments) of the Mortgage Assets 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.
If specified in a Prospectus Supplement, an election may be made to
treat each Trust as a "real estate mortgage investment conduit" ("REMIC") for
federal income tax purposes.
See "Federal Income Tax Consequences."
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.
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
"Plan of Distribution" herein and in the related Prospectus Supplement. The
intention of any underwriter to make a secondary market in the Certificates will
be set forth in the related Prospectus Supplement. 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.
<PAGE>
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) the aggregate principal amount, Pass-Through Rate or
Rates or other applicable annual rate or rates of interest (or the manner of
determining such rate or rates) and authorized denominations of each Class of
such Certificates; (ii) certain information concerning the Mortgage Assets and
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, guaranties of The Money
Store, supplemental interest payments or other forms of credit enhancement or
maturity protection, if any, relating to the Pools or all or part of the related
Certificates; (iii) the specified interest of each Class of Certificates in, and
manner and priority of, the distributions on the Mortgage Assets; (iv)
information as to the nature and extent of subordination with respect to such
Series of Certificates, if any; (v) the Remittance Dates; (vi) information as to
the Master Servicer; (vii) the circumstances, if any, under which each Trust may
be subject to early termination; (viii) whether the Representative intends to
elect to cause the Trust to be treated as a REMIC; and (ix) additional
information with respect to the plan of sale of such Certificates.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities and
Exchange Commission (the "Commission") with respect to the Certificates. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor,
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. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the 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.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the Certificateholders as described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, a
Series of Certificates may be issuable in book-entry form. In such event, the
related Certificates will be registered in the name of Cede, the nominee of The
Depository Trust Company. All reports will be provided to Cede, which in turn
will provide such reports to its Participants and Indirect Participants (as
defined herein). Such Participants and Indirect Participants will then forward
such reports to the beneficial owners of Certificates. See "Description of the
Certificates--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. With respect to
any Class of Certificates that is supported by a Guaranty of The Money Store,
The Money Store's Annual Report on Form 10-K for the year ended December 31,
1995, and Quarterly Reports on Form 10-Q for the periods ended March 31, June 30
and September 30, 1996, which have been filed with the Commission, are hereby
incorporated by reference in this Prospectus and the related Prospectus
Supplement. With respect to any Class of Certificates that is supported by a
Guaranty of The Money Store, all documents filed by The Money Store pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus and prior to the termination
of the offering of the Certificates shall be deemed to be incorporated by
reference into this Prospectus and the related Prospectus Supplement and to be a
part hereof from the respective dates of filing such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus. The Representative will provide without charge to each person to
whom a copy of the Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to The Money Store Inc., 3301 C Street, Suite 100-M,
Sacramento, California 95816, Attention: Investor Relations, Telephone: (916)
446-5000.
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Capitalized terms used but not defined in this Prospectus shall
have the meanings assigned to such terms elsewhere in this
Prospectus.
Securities
Offered........................... The Money Store Asset Backed Certificates
(the "Certificates"), evidencing interests
in certain Pools of Mortgage Loans and
certain other Mortgage Assets (each, as
defined below), may be issued from time to
time in Series pursuant to separate
Pooling and Servicing Agreements (each, an
"Agreement") among The Money Store Inc.,
as Representative (the "Representative")
of certain Trusts, Originators, a Master
Servicer, and a Trustee, each as defined
herein and as specified in the related
Prospectus Supplement for such Series of
Certificates.
Issuers........................... Certain trust funds (each, a "Trust")
represented by The Money Store, the
primary assets of which will be a Pool of
Mortgage Loans and certain other Mortgage
Assets.
Representative
and Master
Servicer.......................... The Money Store Inc. ("The Money
Store"), a New Jersey corporation. The
Prospectus Supplement relating to any
Series of Certificates will name the
entities (which may include The Money
Store or one of its affiliates and may
additionally include other unrelated
entities) which will act, directly or
through one or more Sub-Servicers (as
defined herein), as master servicers
(each, in such capacity, the "Master
Servicer"). The principal offices of The
Money Store are located in Sacramento,
California and Union, New Jersey. See
"The Representative and the Originators."
The Mortgage
Assets............................ The Certificates will evidence
fractional undivided ownership interests
in certain Trusts further described
herein. The primary assets of each Trust
may consist of one or more pools (each, a
"Pool") of Mortgage Loans and certain
other mortgage-related assets ("Mortgage
Assets") specified in the related
Prospectus Supplements, which may include
(i) first, second and more junior lien
mortgage loans, deeds of trust or
participations therein secured by one- to
four-family residential properties,
including low-rise condominiums, single
family detached homes, single-family
attached homes, planned unit developments
and mixed use properties (collectively,
"Single Family Loans," which Single
Family Loans may be "Conventional Loans"
(I.E., loans that are not insured or
guaranteed by any governmental agency) or
loans that are insured by the Federal
Housing Authority ("FHA") or partially
guaranteed by the Veterans'
Administration ("VA") as specified in the
related Prospectus Supplement), (ii)
loans or participations therein secured by
security interests or similar liens on
shares in private, non-profit cooperative
housing corporations ("Cooperatives") and
on the related proprietary leases or
occupancy agreements granting exclusive
rights to occupy specific dwelling units
in such Cooperatives' buildings
("Cooperative Loans"), (iii) first, second
and more junior lien mortgage loans,
deeds of trust or participations therein
secured by multifamily residential or
mixed-use properties, such as rental
apartment buildings (including buildings
owned by Cooperatives) or projects
containing five or more residential units
("Multifamily Loans"), (iv) conditional
sales contracts and installment sales or
loan agreements or participations therein
secured by manufactured housing
("Contracts"), (v) mortgage-backed
securities issued or guaranteed by the
Government National Mortgage Association
("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC") (the
"Agency Securities"), (vi) privately issued
mortgage-backed securities ("Private
Mortgage-Backed Securities" or "PMBS"),
(vii) first, second and more junior home
improvement mortgage loans that are either
conventional loans ("Secured 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"), and
(viii) unsecured home improvement loans
consisting of conventional unsecured home
improvement loans and FHA insured home
improvement loans (the "Unsecured Home
Improvement Loans"). The Single Family
Loans, Cooperative Loans, Multifamily
Loans, Secured Conventional Home
Improvement Loans, FHA Loans and Unsecured
Home Improvement Loans are sometimes
referred to herein collectively as the
"Mortgage Loans."
A. Mortgage
Loans........................ The payment terms of the Mortgage Loans
to be included in any Pool will be
described in the related Prospectus
Supplement and may include any of the
following features, combinations thereof
or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed
rate (a "Fixed Rate") or may be
payable at a rate that is adjustable
from time to time in relation to an
index, that may be fixed for a period
of time or under certain circumstances
and is followed by an adjustable rate,
a rate that other-wise varies from
time to time, or a rate that is
convertible from an adjustable rate to
a fixed rate (each, an "Adjustable
Rate"). The specified rate of interest
on a Mortgage Loan is its "Mortgage
Interest Rate." Changes to an
Adjustable Rate may be subject to
periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be
deferred and added to the principal of
a Mortgage Loan for such periods and
under such circumstances as may be
specified in the related Prospectus
Supplement. Mortgage Loans may permit
the payment of interest at a rate
lower than the Mortgage Interest Rate
for a period of time or for the life
of the Mortgage Loan, and the amount
of any difference may be contributed
from funds supplied by the seller of
the properties securing the related
Mortgage Loan (the "Mortgaged
Properties") or another source or may
be treated as accrued interest and
added to the principal of the Mortgage
Loan.
(b) Principal may be payable on a level
basis to fully amortize the Mortgage
Loan over its term, may be calculated
on the basis of an assumed
amortization schedule that is
significantly longer than the original
term to maturity or on an interest
rate that is different from the
Mortgage Interest Rate, or may not be
amortized during all or a portion of
the original term. Payment of all or a
substantial portion of the principal
may be due on maturity (a "balloon"
payment). From time to time, principal
may include interest that has been
deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of
principal and interest may be fixed
for
the life of the Mortgage Loan, may
increase over a specified period of
time ("graduated payments"), or may
change from period to period.
Mortgage
Loans may include limits on periodic
increases or decreases in the amount
of
monthly payments and may include
maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be
subject to a prepayment fee, which may
be fixed for the life of the Mortgage
Loan or may adjust or 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 other
transfers of the related Mortgaged
Properties. Other Mortgage Loans may
be assumable by persons meeting the
then applicable underwriting standards
of the originator.
The Mortgaged Properties relating to Mortgage
Loans may be located in any one of the fifty
states, the District of Columbia, the
Commonwealth of Puerto Rico or any other
commonwealth or territory or possession of
the United States. The Mortgaged Properties
generally will be covered by standard hazard
insurance policies ("Standard Hazard
Insurance Policies") insuring against losses
due to fire and various other causes. The
Mortgage Loans will be covered by Primary
Mortgage Insurance Policies to the extent
provided in the related Prospectus
Supplement. 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
Representative, the Originators or affiliates
thereof and certain Mortgage Loans may have
been purchased by the Representative, an
Originator or an affiliate thereof in the
open market or in privately negotiated
transactions, including transactions with
entities affiliated with the Representative.
Certain of the Mortgage Loans may be
partially insured by the 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). 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 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 expected to be
included in the related Pool as of the
related closing date, among other things,
(i) the expected aggregate outstanding
principal balance and the expected average
outstanding principal balance of the
Mortgage Loans in such Pool as of the date
specified in the Prospectus Supplement,
(ii) the largest expected principal
balance and the smallest expected
principal balance of any of the Mortgage
Loans, (iii) the types of Mortgaged
Properties and/or other assets securing
the Mortgage Loans and the percentage, if
any, of Unsecured Home Improvement Loans
expected to be included in the related
Pool, (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 date specified in
the Prospectus Supplement and the expected
range of the terms to maturity, (vi) the
earliest origination date and latest
maturity date of any of the Mortgage Loans,
(vii) the expected aggregate principal
balance of Mortgage Loans having Combined
Loan-to-Value Ratios
at origination exceeding 80%, (viii) the
expected weighted average Mortgage Rate
or APR and ranges of Mortgage Rates or
APRs borne by the Mortgage Loans or
Contracts (as the case may be), (ix) in
the case of Mortgage Loans having
Adjustable Rates, the expected weighted
average of the Adjustable Rates as of the
date set forth in the Prospectus Supplement
and maximum permitted Adjustable Rates, if
any, (x) the expected aggregate outstanding
principal balance, if any, of "buydown"
mortgage loans (as hereinafter described)
and Mortgage Loans having graduated payment
provisions, as of the date set forth in the
Prospectus Supplement, (xi) the amount of
any Certificate Guaranty Insurance Policy,
Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond
(each as defined herein) to be maintained
with respect to such Pool, (xii) the amount
of any Primary Mortgage Insurance and
Standard Hazard Insurance (as hereinafter
described) required to be maintained with
respect to each Mortgage Loan, (xiii) the
amount, if any, and terms of any other
credit enhancement to be provided with
respect to all or any Mortgage Loans or the
Pool and (xiv) the expected geographic
location of the Mortgaged Properties, if
any.
B. Contracts..................... Contracts will consist of conditional
sales and installment sales or loan
agreements secured by new or used
Manufactured Homes (as defined herein).
To the extent provided in the related
Prospectus Supplement, each Contract will
be fully amortizing and will bear interest
at a fixed annual percentage rate
("APR").
C. Agency
Securities................... The Agency Securities will consist of
(i) fully modified pass-through
mortgage-backed certificates guaranteed as
to timely payment of principal and
interest by the Government National
Mortgage Association ("GNMA
Certificates"), (ii) guaranteed mortgage
pass-through certificates issued and
guaranteed as to timely payment of
principal and interest by the Federal
National Mortgage Association ("FNMA
Certificates"), (iii) Mortgage
Participation Certificates issued and
guaranteed as to timely payment of
interest and, unless otherwise specified
in the related Prospectus Supplement,
ultimate payment of principal by the
Federal Home Loan Mortgage Corporation
("FHLMC Certificates"), (iv) stripped
mortgage-backed securities representing
an undivided interest in all or a part of
either the principal distributions (but
not the interest distributions) or the
interest distributions (but not the
principal distributions) or in some
specified portion of the principal and
interest distributions (but not all of
such distributions) on certain GNMA, FNMA,
FHLMC or other government agency or
government-sponsored agency Certificates
and, unless otherwise specified in the
Prospectus Supplement, guaranteed to the
same extent as the underlying securities,
(v) another type of guaranteed pass-through
certificate issued or guaranteed by GNMA,
FNMA, FHLMC or another government agency or
government-sponsored agency and described
in the related Prospectus Supplement, or
(vi) a combination of such Agency
Securities. All GNMA Certificates will be
backed by the full faith and credit of the
United States. No FNMA or FHLMC
Certificates will be backed, directly or
indirectly, by the full faith and credit of
the United States. The Agency Securities
may consist of pass-through securities
issued under the GNMA I Program, the GNMA
II Program, FHLMC's Cash or Guarantor
Program or another program specified in the
Prospectus Supplement. The payment
characteristics of the Mortgage Loans
underlying the Agency Securities will be
described in the related Prospectus
Supplement. See "The Trusts--Agency
Securities."
D. Private Mortgage-
Backed
Securities................... Private Mortgage-Backed Securities may
include (i) mortgage participations or
pass-through certificates representing
beneficial interests in certain mortgage
loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such
mortgage loans. Although individual
mortgage loans underlying a Private
Mortgage-Backed Security may be insured or
guaranteed by the United States or an
agency or instrumentality thereof, they
need not be, and the Private
Mortgage-Backed Securities themselves
will not be,
so insured or guaranteed. See "The
Trusts--Private Mortgage-Backed
Securities."
Unless otherwise specified in the
Prospectus Supplement relating to a Series
of Certificates, payments on the Private
Mortgage-Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private
Mortgage-Backed Securities. See "The
Trusts--Private Mortgage-Backed
Securities."
The Prospectus Supplement for each Series
of Certificates will specify, with respect
to any Private Mortgage-Backed Securities
owned by the related Trust: (i) the
aggregate approximate principal amount and
type of Private Mortgage- Backed
Securities; (ii) certain characteristics of
the mortgage loans underlying the Private
Mortgage-Backed Securities, including (A)
the payment features of such mortgage
loans, (B) the approximate aggregate
principal amount, if known, of the
underlying mortgage loans which are insured
or guaranteed by a governmental entity, (C)
the servicing fee or range of servicing
fees with respect to such mortgage loans,
and (D) the minimum and maximum stated
maturities of the mortgage loans at
origination; (iii) the maximum original
term-to-stated maturity of the Private
Mortgage-Backed Securities; (iv) the
weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities; (v)
the pass-through or certificate rate or
ranges thereof for the Private
Mortgage-Backed Securities; (vi) the
weighted average pass-through or
certificate rate of the Private
Mortgage-Backed Securities; (vii) the
issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the
servicer of the Private Mortgage-Backed
Securities (the "PMBS Servicer") and the
trustee of the Private Mortgage-Backed
Securities (the "PMBS Trustee"); (viii)
certain characteristics of credit support,
if any, such as reserve funds, insurance
policies, letters of credit, financial
guaranty insurance policies or third party
guarantees, relating to the mortgage loans
underlying the Private Mortgage-Backed
Securities, or to such Private
Mortgage-Backed Securities themselves; (ix)
the terms on which underlying mortgage
loans for such Private Mortgage-Backed
Securities may, or are required to, be
repurchased prior to stated maturity; and
(x) the terms on which substitute mortgage
loans may be delivered to replace those
initially deposited with the PMBS Trustee.
See "The Trusts."
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 Assets
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 Holders. 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 Assets for the
related Trust subject to the satisfaction
of certain conditions specified under the
Agreements.
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 Assets that the
Representative anticipates will be acquired
and conveyed to the Trust during the
applicable Funding Period.
Prior to the conveyance of any additional
Mortgage Assets to the Trust, the
Representative will be required to give
notice of the additional Mortgage Assets to
be conveyed to the Trust to the Trustee(s)
and any third-party credit enhancement
provider. Upon the satisfaction of the
conditions set forth in the Agreement,
including the receipt by the Trustee of an
executed assignment, an Officer's
Certificate and a legal opinion, the
Trustee will release from the Pre- Funding
Account the necessary funds to purchase the
additional Mortgage Assets 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.
Description of the
Certificates...................... Each Certificate will represent a
fractional undivided ownership interest in
the Trust created pursuant to the related
Agreement. The primary assets of such
Trust will be a Pool of Mortgage Loans and
certain other Mortgage Assets. 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, Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy,
Bankruptcy Bond or other insurance
policies, cash accounts, letters of
credit, financial guaranty insurance
policies, third party guarantees,
supplemental interest payments or other
forms of credit enhancement or maturity
protection, as described herein and in the
related Prospectus Supplement.
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 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 its 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 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 amounts of such
distributions may vary among Classes, over
time, or otherwise as specified in the
related Prospectus Supplement.
The Certificates will be issuable in fully
registered form, in minimum denominations
of $1,000 and integral multiples of $1,000
in excess thereof (or such other amounts as
may be set forth in a Prospectus
Supplement), except that one Certificate of
each Class may be issued in a different
denomination. See "Description of
Certificates."
Credit
Enhancement ...................... The Mortgage Assets 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 may be
limited. Such credit enhancement may
include one or more of the following types:
A. Subordination
and Reserve
Accounts..................... The rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the Mortgage
Assets and other assets in 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 or
delinquencies. The protection afforded to
the holders of Senior Certificates through
subordination may be accomplished by the
preferential right of such holders 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 Remittance
Date 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, the same Class of Certificates
may constitute Senior Certificates with
respect to certain types of payments or
certain losses or delinquencies and
Subordinated Certificates with respect to
other types of payments or 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 support, such as
hazard losses not covered by Standard
Hazard Insurance Policies or losses due to
the bankruptcy of a Mortgagor not covered
by a Bankruptcy Bond. If further specified
in the related Prospectus Supplement, one
or more reserve 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 Subordinated Certificates
for a specified time or until a specified
level is reached. 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.
B. Certificate
Guaranty
Insurance
Policy....................... A certificate guaranty insurance policy or
policies ("Certificate Guaranty Insurance
Policy") may be obtained and maintained
for each Class or Series of Certificates.
Certificate Guaranty Insurance Policies
generally unconditionally and irrevocably
guarantee that the full amount of the
distributions of principal and interest,
as well as any other amounts specified in
the related Prospectus Supplement, will
be received by an agent of the Trustee,
for distribution by the Trustee to
Certificateholders. Certificate Guaranty
Insurance Policies 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 Master
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.
C. 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
Assets. The accelerated amortization will
be achieved by applying certain excess
interest collected on the Mortgage Assets
to the payment of 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 Assets 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 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. An 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.
D. Mortgage Pool
Insurance
Policy....................... A mortgage pool insurance policy or
policies ("Mortgage Pool Insurance
Policy") may be obtained and maintained
for each Series pertaining to Mortgage
Loans and Contracts, limited in scope,
covering defaults on the related Mortgage
Loans or Contracts in an initial amount
equal to a specified percentage of the
aggregate principal balance of all
Mortgage Loans or Contracts included in
the Pool as of the Cut-off Date or such
other date as is specified in the related
Prospectus Supplement.
E. Special Hazard
Insurance
Policy....................... In the case of Mortgage Loans or
Contracts, certain physical risks that are
not otherwise insured against by Standard
Hazard Insurance Policies may be covered
by a special hazard insurance policy or
policies (a "Special Hazard Insurance
Policy"). The level of coverage of each
Special Hazard Insurance Policy will be
specified in the related Prospectus
Supplement.
F. Bankruptcy
Bonds........................ A mortgagor bankruptcy bond or bonds
("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 Contract or a
reduction by such court of the principal
amount of a Mortgage Loan or Contract, and
will cover certain unpaid interest on the
amount of such a principal reduction. The
level of coverage of each Bankruptcy Bond
will be specified in the related Prospectus
Supplement.
G. Cross
Support...................... If so specified in the Prospectus
Supplement, the ownership interests of
separate Trusts or separate groups of
assets 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 asset groups or Trusts. If
specified in the related Prospectus
Supplement, the coverage provided by one
or more forms of credit support 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.
H. 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 Remittance Date and
the interest that would be available to
pay such interest assuming no defaults or
delinquencies on the Mortgage Assets.
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 Assets. 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 Assets.
I. 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.
J. The Guaranty................. If so specified in
the Prospectus Supplement, and in order to
provide additional credit enhancement, The
Money Store may provide a guaranty
of amounts due on certain Classes of
Certificates. The amount and formula for
calculating such guaranty shall be
as set forth in the Prospectus Supplement.
K. Other Credit
Enhancement................... Other credit enhancement arrangements, as
described in the related Prospectus
Supplement, including (but not limited to)
one or more reserve funds, letters of
credit, financial guaranty insurance
policies, a guaranty of The Money
Store or third party guarantees, may be
used to provide coverage for certain risks
of defaults or losses. These arrangements
may be in addition to or in substitution
for any forms of credit support described
in the Prospectus. Any such arrangement
must be acceptable to each nationally
recognized rating agency that provides a
rating for the related Series of
Certificates (the "Rating Agency").
Additionally, to the extent a significant
portion of the Mortgage Loans underlying a
given Series of Certificates consists of
FHA Loans, the related Prospectus
Supplement will describe the features of
any related credit support including, but
not limited to, that provided by the FHA,
if any.
Monthly Advances.................. If so specified in the related Prospectus
Supplement, the Master Servicer will be
required under each Agreement to remit to
the Trustee no later than the day of each
month which is at least three business days
prior to the Remittance Date and is in no
case earlier than the seventh business day
of such month (the "Determination Date")
the amount (a "Monthly Advance"), if any,
by which (a) the sum of (x) 30 days'
interest at the weighted average Adjusted
Mortgage Loan Remittance Rate (as defined
herein under "Description of the
Certificates--Monthly Advances and
Compensating Interest") on the then
outstanding principal balance of the
related Series of Certificates and (y) the
amount, if any, required to be deposited
into the related Reserve Account (as
specified in the related Prospectus
Supplement) for the related Remittance Date
exceeds (b) the amount received by the
Master Servicer in respect of interest on
the Mortgage Loans as of the related Record
Date. Such advances by the Master Servicer
are reimbursable in the first instance from
late collections of interest, including
amounts received in connection with the
liquidation of defaulted Mortgage Loans
("Liquidation Proceeds"), amounts paid by
any insurer pursuant to any insurance
policy covering a Mortgage Loan, Mortgaged
Property or REO Property ("Insurance
Proceeds"), and proceeds received by the
Master Servicer in connection with
condemnation, eminent domain or a release
of lien ("Released Mortgaged Property
Proceeds") collected with respect to the
related Mortgage Loans as to which the
advances were made, and any other amount
that would otherwise be distributed on the
Class R Certificates. See "Description of
the Certificates--Monthly Advances and
Compensating Interest."
Compensating
Interest.......................... If so specified in the related
Prospectus Supplement, with respect to
each Mortgage Loan as to which the Master
Servicer receives a principal payment in
full in advance of the final scheduled due
date (a "Principal Prepayment") or
receives a principal payment that exceeds
the scheduled payment by a specified
multiple, but which was not intended by
the Mortgagor to satisfy the Mortgage
Loan in full or to cure a delinquency (a
"Curtailment"), the Master Servicer will
be required to remit to the Trustee, from
amounts otherwise payable to the Master
Servicer as servicing compensation, an
amount ("Compensating Interest") equal to
any excess of (a) 30 days' interest on the
principal balance of each such Mortgage
Loan as of the beginning of the related
Due Period at the applicable weighted
average Adjusted Mortgage Loan Remittance
Rate over (b) the amount of interest
actually received on the related Mortgage
Loan during such Due Period.
Optional
Termination....................... The Master Servicer, certain insurers, the
holders of REMIC Residual Certificates
(as defined herein), 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
related Mortgage Assets and other assets
in the related Trust under the
circumstances and in the manner described
in "The Agreement--Termination; Purchase
of Mortgage Loans."
Mandatory
Termination....................... The Trustee, the Master 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."
Trustee .......................... The trustee or trustees under any Agreement
relating to a Series of Certificates (each,
a "Trustee") will be specified in the
related Prospectus Supplement.
Federal Income Tax
Consequences...................... The federal income tax consequences of
the purchase, ownership and disposition
of the Certificates of each series will
depend on whether an election is made to
treat the corresponding Trust (or certain
assets of the Trust) as a "real estate
mortgage investment conduit" ("REMIC")
under the Internal Revenue Code of 1986,
as amended (the "Code").
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 ("REMIC Regular Certificates") and
which class of Certificates will be
designated as the residual interest in the
REMIC ("REMIC Residual Certificates"). To
the extent provided herein and in the
related Prospectus Supplement, in the
opinion of Stroock & Stroock & Lavan,
special Federal tax counsel ("Federal Tax
Counsel"), Certificates representing an
interest in the REMIC generally will be
considered "real estate assets" for
purposes of Section 856(c)(5)(A) of the
Code and assets described in Section
7701(a)(19)(C) of the Code, but generally
will not be considered "residential loans"
for purposes of Section 593(g)(4)(B) of the
Code.
In the opinion of Federal Tax Counsel, for
federal income tax purposes, REMIC Regular
Certificates generally will be treated as
debt obligations of the Trust with payment
terms equivalent to the terms of such
Certificates. Holders of REMIC Regular
Certificates will be required to report
income with respect to such Certificates
under an accrual method, regardless of
their normal tax accounting method.
Original issue discount, if any, on REMIC
Regular Certificates will be includible in
the income of the Holders 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. The REMIC 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.
Each holder of a REMIC Residual Certificate
will be required to take into account
separately its pro rata portion of the
REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess
inclusions") generally may not be offset by
such a holder's net operating loss
carryovers or other deductions, and in the
case of a tax-exempt holder of a REMIC
Residual Certificate will be treated as
"unrelated business taxable income." In
certain situations, particularly in the
early years of a REMIC, holders of a REMIC
Residual Certificate may have taxable
income, and possibly tax liabilities with
respect to such income, in excess of cash
distributed to them. "DISQUALIFIED
ORGANIZATIONS," AS DEFINED IN "FEDERAL
INCOME TAX CONSEQUENCES-- REMIC RESIDUAL
CERTIFICATES--TAX ON DISPOSITION OF REMIC
RESIDUAL CERTIFICATES; RESTRICTION ON
TRANSFER; HOLDING BY PASS-THROUGH
ENTITIES," ARE PROHIBITED FROM ACQUIRING OR
HOLDING ANY BENEFICIAL INTEREST IN THE
REMIC RESIDUAL CERTIFICATES.
GRANTOR TRUST. If no election is to be made
to treat the Trust 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. In the opinion of Federal
Tax Counsel, 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 Assets 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 Assets and
will be entitled, subject to certain
limitations, to deduct their pro rata share
of expenses of the Trust.
To the extent provided herein, Non-REMIC
Certificates generally will represent
interests in "real estate assets" for
purposes of Section 856(c)(5)(A) 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 but should not be considered
"residential loans" for purposes of Section
593(g)(4)(B) of the Code.
Investors are advised to consult their tax
advisors and to review "Federal Income Tax
Consequences" herein and, if applicable, in
the related Prospectus Supplement.
ERISA
Considerations.................... Fiduciaries of employee benefit plans or
other retirement plans or arrangements,
including individual retirement accounts,
certain Keogh plans, and collective
investment funds, separate accounts and
insurance company general accounts in
which such plans, accounts or arrangements
are invested, that are subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the
Code should carefully review with their
legal advisors whether an investment in
Certificates will cause the assets of the
related Trust to be considered plan assets
under the Department of Labor ("DOL")
regulations set forth in 29 C.F.R. Section
2510.3-101 (the "Plan Asset
Regulations"), thereby subjecting the
Trustee and the Master Servicer to the
fiduciary investment standards of ERISA,
and whether the purchase, holding or
transfer of Certificates gives rise to a
transaction that is prohibited under ERISA
or subject to the excise tax provisions of
Section 4975 of the Code, unless a DOL
administrative exemption applies. See
"ERISA Considerations."
Legal
Investment........................ Each Prospectus Supplement will describe
the extent, if any, to which the Classes
of Certificates offered thereby will
constitute "mortgage-related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
and whether they will be legal investments
for certain types of institutional
investors under SMMEA. See "Legal
Investment" herein.
Registration of
Certificates...................... Certificates may be represented by global
certificates registered in the name of Cede
& Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee. In such case,
Certificateholders will not be entitled to
receive definitive certificates
representing such Holders' interests,
except in certain circumstances described
in the related Prospectus Supplement. See
"Description of the
Certificates--Book-Entry Registration"
herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
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
Holders of the Certificates with liquidity of investment or that it will
continue for the lives of the Certificates.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, Direct or Indirect Participants 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 limited due to lack of a physical
certificate representing the Certificates.
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 Class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration."
NATURE OF SECURITY
Certain of the Mortgage Loans will be loans secured by junior liens
subordinate to the rights of the mortgagee under each related senior mortgage.
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a junior
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee are satisfied in full, including any related foreclosure costs. In
addition, a mortgagee may not foreclose on the mortgaged property unless it
forecloses subject to any related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder. In
servicing mortgage loans in their portfolios, it has been the Originators'
practice to satisfy each such senior mortgage at or prior to the foreclosure
sale only to the extent that they determine any amounts so paid will be
recoverable from future payments and collections on the mortgage loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the Mortgage Loans--Foreclosure/Repossession."
An overall decline in the market value of residential real estate, the
general condition of a Mortgaged Property, or other factors, could adversely
affect the values of the Mortgaged Properties such that the outstanding balances
of the Mortgage Loans which are junior mortgage loans, together with any senior
liens on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Property before having any effect on the interest of the related
senior mortgagee. Certain of the Mortgage Loans may be secured by Mortgaged
Properties located in California and Texas. Certain areas of the country,
including California and Texas, have experienced declines in real estate values
over the last few years. Economic conditions in California are often volatile
and from time to time have been adversely affected by natural disasters,
contractions in the defense industry and declining real estate values. The
President of the United States has endorsed a list of military bases to be
closed within the next two to six years, which list includes significant bases
in California. These closures, which have been approved by Congress, along with
the recent general decline in defense spending, could have an adverse affect on
economic conditions in California. The Representative will not be able to
quantify the impact of any property value declines on the Mortgage Loans or
predict whether, to what extent or how long such declines may continue. In
periods of such declines, the actual rates of delinquencies, foreclosures and
losses on the Mortgage Loans could be higher than those historically experienced
in the mortgage lending industry in general. See "The Single Family Lending
Program--Servicing and Collections."
Certain of the Mortgage Loans may constitute "Balloon Loans." Balloon
Loans are originated with a stated maturity of less than the period of time of
the corresponding amortization schedule. 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 such Mortgagor's previous monthly payments.
The ability of such a Mortgagor to repay a Balloon Loan at maturity frequently
will depend on such borrower'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 level of available 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 and the tax
laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, 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
Representative, the Originators, the Master Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan.
General economic conditions have an impact on the ability of borrowers
to repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by borrowers. In the
event of 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.
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
receipt of related proceeds by 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 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 Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Master
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 and not yet repaid, including payments to prior
lienholders, legal fees and costs of legal action, real estate taxes, and
maintenance and preservation expenses. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans and
insufficient funds are available from applicable Credit Enhancement,
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 loan at the time of
default. Therefore, assuming that a 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 loan. Because the average outstanding
principal balances of the Mortgage Loans which are junior mortgage loans are
small relative to the size of the loans in a typical pool composed entirely of
first mortgages, realizations net of liquidation expenses on defaulted Mortgage
Loans which are junior mortgage loans may also be smaller as a percentage of the
principal amount of such junior mortgage loans than would be the case with a
typical pool of first mortgage loans.
Under environmental legislation and case law applicable in various
states, including California, a secured party that takes a deed in lieu of
foreclosure, acquires a mortgaged property at a foreclosure sale or which, prior
to foreclosure, has been involved in decisions or actions which may lead to
contamination of a 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 holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Considerations."
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement
Loan included in a Pool will not be secured by an interest in the related real
estate or otherwise, and the related Trust Fund, as the owner of such Unsecured
Home Improvement Loan, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an Unsecured Home
Improvement Loan, the related Trust Fund will have recourse only against the
borrower's assets generally, along with all other general unsecured creditors of
the borrower. In a bankruptcy or insolvency proceeding relating to a borrower on
an Unsecured Home Improvement Loan, the obligations of the borrower under such
Unsecured Home Improvement Loan may be discharged in their entirety,
notwithstanding the fact that the portion of such borrower's assets made
available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of the Originators
and the Master Servicer. In addition, most states have other laws, public policy
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. 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 Master
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 Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the 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 Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and (iv)
the NHA Act (as defined herein) with respect to FHA Loans.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act") which amended the Federal
Truth in Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered in an action under the Home Ownership Act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the mortgage loan. Any Trust for which the Mortgage Assets
include Mortgage Loans subject to the Home Ownership Act would be subject to all
of the claims and defenses which the borrower could assert against the original
lender. Any violation of the Home Ownership Act which would result in such
liability would be a breach of the applicable Originator's representations and
warranties, and the Representative would be obligated to cure, repurchase or, if
permitted by the related Agreement, substitute for the Mortgage Loan in
question.
PREPAYMENT CONSIDERATIONS
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 a Trust will experience.
A number of factors suggest that the prepayment behavior of a pool
including junior mortgage loans may be significantly different from that of a
pool composed entirely of first mortgage loans with equivalent interest rates
and maturities. One such factor is the smaller average principal balance of a
pool of junior mortgage loans which may result in a higher prepayment rate than
that of a pool of first mortgage loans with a larger average balance, regardless
of the interest rate environment. A small principal balance, however, also may
make refinancing a junior mortgage loan 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 size of the
monthly payment for a junior mortgage loan may be less than for a first mortgage
loan with a larger balance. Other factors that might be expected to affect the
prepayment rate of a pool of junior mortgage loans include the amounts of, and
interest rates on, the underlying senior mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and junior mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity mortgage loans for federal income tax purposes
may further increase the rate of prepayments of such junior mortgage loans. See
"Maturity, Prepayment and Yield Considerations."
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), 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 and, if so
specified in the related Prospectus Supplement, amounts on deposit in the Pre-
Funding Account at the end of the Funding Period being applied to the payment of
principal of the Certificates. In addition, repurchases or purchases from a
Trust of Mortgage Loans required to be made by the Representative under the
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 secured Mortgage Loans contain "due-on-sale" provisions,
and the Master 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 Master
Servicer is authorized to permit the purchaser of the related Mortgaged Property
to assume the Mortgage Loan. See "The Agreement" in the related Prospectus
Supplement.
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 borrowers.
Certain of the Mortgage Loans may be "simple interest" or
"date-of-payment loans." If a payment is received on such a Mortgage Loan later
than scheduled, a smaller portion of such payment will be applied to principal
and a greater portion will be applied to interest than would have been the case
had the payment been received on the scheduled due date, resulting in such
Mortgage Loan having a longer average life than would have been the case had the
payment been made as scheduled. Conversely, if a payment on such a Mortgage Loan
is received earlier than scheduled, more of such payment will be applied to
principal and less to interest than would have been the case had the payment
been received on its scheduled due date, resulting in such Mortgage Loan having
a shorter average life than would have been the case had the payment been made
as scheduled.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF
BANKRUPTCY OF THE REPRESENTATIVE OR AN ORIGINATOR
In the event of the bankruptcy of the Representative or an Originator
at a time when it or any affiliate thereof holds a Class R Certificate, a
trustee in bankruptcy of the Representative or its creditors could attempt to
recharacterize the sale of the Mortgage Loans to the related Trust as a
borrowing by the Representative, the Originator or such affiliate with the
result, if such recharacterization is upheld, that the Certificateholders would
be deemed to be creditors of the Representative, the Originator or such
affiliate, secured by a pledge of the Mortgage Loans. If such an attempt were
successful, a trustee in bankruptcy could elect to 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.
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 have an effect, for an indeterminate period
of time, on the ability of the Master 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 Master 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
The rating of the Certificates will depend primarily on the
creditworthiness of any third party provider of credit enhancement, if any, as
set forth in the related Prospectus Supplement. Any reduction in the rating
assigned to the claims-paying ability of such provider below the rating
initially given to a Series of Certificates would likely result
in a reduction in the rating of such Series of Certificates.
See "Rating."
OTHER
To the extent a significant portion of the Mortgage Loans underlying a
given series of Certificates consists of FHA Loans and/or Secured Conventional
Home Improvement Loans, the related Prospectus Supplement will describe any
additional Risk Factors related to such Mortgage Loans.
THE TRUSTS
A Trust for any Series of Certificates will include the Mortgage Assets
consisting of (A) a Pool* comprised of (i) Single Family Loans, (ii) Cooperative
Loans, (iii) Multifamily Loans, (iv) Contracts, (v) FHA Loans, (vi) Secured
Conventional Home Improvement Loans, (vii) Unsecured Home Improvement Loans, or
(B) Agency Securities or Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
The Certificates will be entitled to payment only from the assets of
the related Trust and, to the extent specified in a Prospectus Supplement,
payments in respect of the assets of other trusts established by the
Representative, the Originators or any of their 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 Assets.
Certain of the Mortgage Assets may have been originated by the
Originators. Other Mortgage Assets may have been acquired by the Representative,
an Originator or an affiliate thereof in the open market or in privately
negotiated transactions, including transactions with entities affiliated with
the Representative. See "Mortgage Loan Program--Underwriting Criteria."
The following is a brief description of the Mortgage Assets expected to
be included in the Trusts. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series (the "Mortgage Asset Schedule") will be
attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
- ---------------------
* Whenever the terms "Pool" and "Certificates" are used in this Prospectus,
such terms will be deemed to apply, unless the context indicates otherwise,
to one specific Pool and the Certificates representing certain undivided
fractional interests, as described below, in a single Trust consisting
primarily of the Mortgage Loans in such Pool. Similarly, the term "Pass-
Through Rate" will refer to the Pass-Through Rate borne by the Certificates
of one specific Series and the term "Trust" will refer to one specific
Trust.
<PAGE>
THE MORTGAGE LOANS--GENERAL
The real property and Manufactured Homes, as the case may be, which secure
repayment of the Mortgage Loans and Contracts (the "Mortgaged Properties") may
be located in any one of the fifty states, the District of Columbia, the
Commonwealth of Puerto Rico or any other commonwealth, territory or possession
of the United States. It is expected that the Mortgage Loans or Contracts will
be Conventional Loans (i.e., loans that are not insured or guaranteed by any
governmental agency). However, if specified in the related Prospectus
Supplement, certain of the Single Family Loans may be insured by the FHA or
partially guaranteed by the VA. Mortgage Loans with Combined Loan-to-Value
Ratios and/or certain principal balances may be covered wholly or partially by
Primary Mortgage Insurance Policies. The Mortgage Loans may be covered by
Standard Hazard Insurance Policies.
All of the Mortgage Loans in a Pool will provide for payments to be
made monthly ("monthly pay"), bi- weekly or on such other terms as may be
described in a Prospectus Supplement. The payment terms of the Mortgage Loans to
be included in a Trust will be described in the related Prospectus Supplement
and may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate). The specified rate of interest on
a Mortgage Loan is its Mortgage Interest Rate. Changes to an Adjustable
Rate may be subject to periodic limitations, maximum rates, minimum
rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a Mortgage Loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the Mortgage Interest Rate for a period
of time or for the life of the Mortgage Loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged Property securing the related Mortgage Loan or another source
or may be treated as accrued interest added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level basis to fully
amortize the Mortgage Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly longer
than the original term to maturity or on an interest rate that is
different from the Mortgage Interest Rate, or may not be amortized
during all or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity ("balloon"
payments). Principal may include interest that has been deferred and
added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time ("graduated payments") or may change from period to period.
Mortgage Loans may include limits on periodic increases or decreases in
the amount of monthly payments and may include maximum or minimum
amounts of monthly payments. Mortgage Loans having graduated payment
provisions may require the monthly payments of principal and interest
to increase for a specified period, provide for deferred payment of a
portion of the interest due monthly during such period, and recoup the
deferred interest through negative amortization whereby the difference
between the scheduled payment of interest and the amount of interest
actually accrued is added monthly to the outstanding principal balance.
Other Mortgage Loans sometimes referred to as "growing equity" mortgage
loans may provide for periodic scheduled payment increases for a
specified period with the full amount of such increases being applied
to principal.
(d) 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 Originator.
To the extent a significant portion of the Mortgage Loans underlying a
given Series of Certificates consist of FHA Loans and/or Secured 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 Prospectus Supplement for each Series of Certificates will
contain information with respect to all the Mortgage Loans expected to be
included in the related Pools as of the related closing date, including (i) the
expected aggregate outstanding principal balance and the expected average
outstanding principal balance of the Mortgage Loans as of the date set forth in
the Prospectus Supplement, (ii) the largest expected principal balance and the
smallest expected, principal balance of any of the Mortgage Loans, (iii) the
types of Mortgaged Properties and/or other assets securing the Mortgage Loans
(e.g., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property) and the percentage, if
any, of Unsecured Home Improvement Loans expected to be included in the related
Pool, (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 date
set forth in the Prospectus Supplement and the expected range of the terms to
maturity, (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the expected aggregate principal balance of Mortgage
Loans having Combined Loan-to-Value Ratios at origination exceeding 80%, (viii)
the expected Mortgage Interest Rate or APR and ranges of Mortgage Interest Rates
or APRs borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the expected weighted average of the Adjustable Rates, if any,
(x) the expected aggregate outstanding principal balance, if any, of Buy-Down
Loans and Mortgage Loans having graduated payment provisions as of the date set
forth in the Prospectus Supplement, (xi) the amount of any Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to such Pool, (xii) to the extent different from the
amounts described herein, the amount of any Standard Hazard Insurance Policy
required to be maintained with respect to each Mortgage Loan; (xiii) the amount,
if any, and terms of any other credit enhancement to be provided with respect to
all or a material portion of the Mortgage Loans or the Pool and (xiv) the
expected geographic location of the Mortgaged Properties. If specific
information respecting the Mortgage Loans is not known to the Representative at
the time the related Certificates are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement and specific information will be set forth in the Detailed
Description.
The Combined "Loan-to-Value Ratio" of a Single Family Loan at any
given time is the ratio, expressed as a percentage, determined by dividing (x)
the sum of the original principal balance of the Single Family Loan (less the
amount, if any, of the premium for credit life insurance) plus the then-current
principal balance of the related first lien, if any, by (y) the value of the
related Mortgaged Property, based upon the appraisal or valuation made at the
time of origination of the Single Family Loan. To the extent a significant
portion of the Mortgage Loans underlying a given Series of Certificates consists
of FHA loans and/or Secured 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 Representative. In the case of
Refinance Loans, the value of the related Mortgaged Property generally will be
based on an appraisal or valuation obtained at the time of refinancing. For
purposes of calculating the Combined Loan-to-Value Ratio of a Contract relating
to a new Manufactured Home, the value of such Manufactured Home generally will
be no greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site) including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. The value of a used Manufactured
Home generally will be the least of the sales price, appraised value, and
National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a Manufactured Home will be
based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
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 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 on the same
Mortgaged Properties), in a particular Pool become equal to or greater than the
value of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. An overall decline in the market value of real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the Mortgage Loans, together with any additional liens
on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Under such circumstances, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Certain of the residential mortgage loans to be included in a Trust are
expected to be residential mortgage loans secured by second, third or fourth
liens ("Home Equity Loans") subordinate to the rights of the mortgagee under
each related senior mortgage. The proceeds from any liquidation, insurance or
condemnation of Mortgaged Properties relating to Home Equity Loans in a Pool
will be available to satisfy the principal balance of such Home Equity Loans
only to the extent that the claims, if any, of the related senior mortgagee,
including any related foreclosure costs, are satisfied in full. In addition, the
Master Servicer may not foreclose on a Mortgaged Property relating to a Home
Equity Loan unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. Generally, in servicing Home Equity Loans in their loan
portfolios, it has been the Originators' practice to satisfy each senior
mortgage at or prior to a foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the Home Equity Loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the Mortgage Loans--
Foreclosure/Repossession."
In addition, general economic conditions and other factors (which may
or may not effect real property values) have an impact on the ability of
mortgagors to repay mortgage loans. Loss of earnings, illness and other similar
factors may lead to an increase in delinquencies and bankruptcy filings by
mortgagors. In the event of bankruptcy of a mortgagor, it is possible that a
Trust could experience a loss with respect to the related 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 such Trust
with respect thereto. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to the Trust, any remaining balance
on such Mortgage Loan may not be recoverable.
Other factors affecting mortgagors' ability to repay Mortgage Loans
include excessive building resulting in an oversupply of housing stock or a
decrease in employment reducing the demand for units in an area; federal, state
or local regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the Certificateholders of the related Series.
The Representative will cause the Mortgage Loans comprising each Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Agreement." With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Agreement as if the Master Servicer alone were
servicing such Mortgage Loans.
The only obligations of the Representative or the Originators with
respect to a Series of Certificates will be to provide (or, where the
Representative or an 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 Representative's or Originator's rights with respect to such
representations and warranties. See "The Agreements--Sale of Mortgage Loans."
The obligations of the Master Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Agreement and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates--Advances." The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
If provided in the related Prospectus Supplement, the original
principal amount of a Series of Certificates may exceed the principal balance of
the Mortgage Assets initially being delivered to the Trustee. Cash in an amount
equal to such difference (the "Pre-Funded Amount") will be deposited into a
separate trust account (the "Pre-Funding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement (the "Funding
Period"), amounts on deposit in the Pre-Funding Account may be used to purchase
additional Mortgage Assets for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements. 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 AND COOPERATIVE LOANS
Single Family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on one- to four-family residential properties. If so specified
in a Prospectus Supplement, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low-rise condominium buildings together with such condominium units'
appurtenant interests in the common elements of the condominium buildings.
Cooperative Loans generally will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' 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 low-rise
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.
MULTIFAMILY LOANS
"Multifamily Loans" will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior 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. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. In such cases, the
Cooperative owns all the apartment units in the building and all common areas.
The Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Substantially all of the Multifamily Loans will be secured by mixed-use
properties, with no less than approximately 90% of such properties, measured by
square footage, number of units and projected rent, being allocated to
residential units.
CONTRACTS
Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans Administration
("VA"), as specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, each Contract will be fully
amortizing and will bear interest at its APR.
The "Manufactured Homes" securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which, in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust, among other things, the date of origination of
the Contracts; the APRs on the Contracts; the Contract loan-to-value ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust; and the original maturities of the
Contracts and the last maturity date of any Contract.
FHA LOANS
The FHA Loans will consist of home improvement loans originated under
Title I (the "Title I Loan Program") of the National Housing Act of 1934 (the
"NHA Act"). Under the NHA Act, the Federal Housing Administration (the "FHA"),
an agency of the United States Department of Housing and Urban Development
("HUD"), is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. 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). Property improvement loans (the
"Title I Property Improvement Loans") may be made by approved lenders to finance
alterations, repair or improvement of existing single family, multifamily,
manufactured housing and nonresidential structures.
Title I Property Improvement Loans, in addition to improvements to
protect the livability or utility of single family, multifamily or manufactured
housing or nonresidential property, also include loans for the renovation or
preservation of historic residential structures and loans to finance the
installation of fire safety equipment in existing health care facilities. 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.
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, 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 for
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.
SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
The Secured 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." To the extent set
forth in the related Prospectus Supplement, the Secured Conventional Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans will consist of conventional
unsecured home improvement loans and FHA insured home improvement loans. To the
extent set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned
corporate instrumentality of the United States within the United Stated
Department of Housing and Urban Development HUD. Section 306(g) of Title II of
the National Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to, among other things, guarantee the timely payment of the principal of
and interest on certificates which represent an interest in a pool of mortgage
loans insured by FHA under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which
may be a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to four-
family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will provide for
the payment by or on behalf of the GNMA Issuer to the registered holder of such
GNMA Certificate of scheduled monthly payments of principal and interest equal
to the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loans or VA Loans
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one- half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
loans are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("FNMA Project
Issuers") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the Housing Act ("GNMA
Project Certificates"). The Prospectus Supplement for a Series of Certificates
that includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
Federal National Mortgage Association. FNMA is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each such pool
will consist of mortgage loans of one of the following types: (i) fixed-rate
level installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA; (iii)
adjustable rate conventional mortgage loans; or (iv) adjustable rate mortgage
loans that are insured by the FHA or partially guaranteed by the VA. Each
mortgage loan must meet the applicable standards set forth under the FNMA
purchase program. Each such mortgage loan will be secured by a first lien on a
one-family or two- to four-family residential property. Each such FNMA
Certificate will be issued pursuant to a trust indenture. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying a
FNMA Certificate are expected to be between either 8 to 15 years or 20 to 40
years. The original maturities of substantially all of the fixed rate level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate if a FNMA MBS, or the series
pass-through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute on a timely basis amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such FNMA Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of each
class in principal and interest distributions are not identical, but the classes
in the aggregate represent 100% of the principal distributions and interest
distributions (adjusted to the series pass-through rate) on the respective pool.
Because of such difference between the fractional interests in principal and
interest of each class, the effective rate of interest on the principal of each
class of FNMA SMBS may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing
interests in pools of mortgages formed on or after May 1, 1985 will be available
in book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government- sponsored enterprise created pursuant to the Federal Home
Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the
Federal Home Loan Banks. FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate Group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate Group. Under the Guarantor Program, any
such FHLMC Certificate Group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate receipt by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not, except if and to the extent specified in the
Prospectus Supplement for a Series of Certificates, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June
1, 1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). The Prospectus Supplement for a Series of
Securities issued by a Trust that included FHLMC Project Certificates will set
forth additional information regarding multi-family residential mortgage loans
that qualify for purchase by FHLMC.
Stripped Mortgage-Backed Securities. Agency Securities may consist of
one or more stripped mortgage- backed securities, each as described herein and
in the related Prospectus Supplement. Each such Agency Security will represent
an undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain FHLMC,
FNMA, GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA, GNMA or another government agency or government- sponsored agency,
each as trustee, or by another trustee named in the related Prospectus
Supplement. FHLMC, FNMA, GNMA or another government agency or
government-sponsored agency will guarantee each stripped Agency Security to the
same extent as such entity guarantees the underlying securities backing such
stripped Agency Security, unless otherwise specified in the related Prospectus
Supplement.
Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of mortgage
loans, or (b) collateralized mortgage obligations ("CMO's") secured by mortgage
loans. Private Mortgage-Backed Securities will have been issued pursuant to a
PMBS agreement (the "PMBS Agreement"). The seller/servicer of the underlying
mortgage loans will have entered into the PMBS Agreement with the PMBS Trustee
under the PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will
possess the mortgage loans underlying such Private Mortgage-Backed Security.
Mortgage loans underlying a Private Mortgage-Backed Security will be serviced by
the PMBS Servicer directly or by one or more sub-servicers who may be subject to
the supervision of the PMBS Servicer. The PMBS Servicer will be approved as a
servicer by FNMA or FHLMC and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by the Department of Housing and Urban Development ("HUD")
as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Representative. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The mortgage loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such mortgage loans may be Single Family Loans, Multifamily Loans, Cooperative
Loans or Contracts secured by Manufactured Homes. As specified in the related
Prospectus Supplement, (i) no mortgage loan underlying the Private
Mortgage-Backed Securities will have had a Combined Loan-to-Value Ratio at
origination in excess of the percentage set forth in the related Prospectus
Supplement, (ii) each underlying mortgage loan will have had an original term to
stated maturity of not less than 5 years and not more than 40 years, (iii) each
underlying mortgage loan (other than Cooperative Loans) will be required to be
covered by a standard hazard insurance policy (which may be a blanket policy),
and (iv) each mortgage loan (other than Cooperative Loans or Contracts secured
by a Manufactured Home) will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying the
Private Mortgage-Backed Securities or with respect to the Private Mortgage-
Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for
which the related Trust includes Private Mortgage-Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the mortgage loans underlying the Private Mortgage-Backed
Securities including (A) the payment features of such mortgage loans, (B) the
approximate aggregate principal balance, if known, of underlying mortgage loans
insured or guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the underlying mortgage loans, and (D) the
minimum and maximum stated maturities of the underlying mortgage loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term- to-stated maturity
of the Private Mortgage-Backed Securities, (v) the pass-through or certificate
rate of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage- Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the mortgage loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
mortgage loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which other mortgage
loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Certificates of each Series for general corporate
purposes, including repayment of debt and the origination and acquisition of
residential mortgage loans and other loans. The Representative expects
Certificates to be sold in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The Mortgage Loans will have been originated or acquired by the
Originators. The Money Store will act as the Master Servicer of the Mortgage
Loans and other Mortgage Assets. Except for certain representations and
warranties relating to the Mortgage Loans and other Mortgage Assets and certain
other matters, the obligations of The Money Store with respect to the Mortgage
Loans and other Mortgage Assets will be limited to its contractual servicing
obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, loans partially
guaranteed by the United States Small Business Administration, student loans,
and automobile loans.
Since 1967, The Money Store and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States.
THE SINGLE FAMILY LOAN LENDING PROGRAM
OVERVIEW
The Money Store's and the Originators' mortgage lending activities
consist primarily of originating, purchasing, selling and servicing mortgage
loans that are primarily secured by one- to four-family residential properties,
including low-rise condominiums, single-family detached homes, single-family
attached homes, planned unit developments and mixed use properties
(collectively, "Single Family Loans"). It has been the Originators' policy
generally not to make mortgage loans secured by high-rise condominiums,
cooperative residences or other categories of properties that management
believes have demonstrated relatively high levels of risk. The majority of
Single Family Loans are to borrowers owning a single-family detached home.
Single Family Loans are made to borrowers for, among other purposes, education,
home improvements and debt consolidation. The Money Store and its subsidiaries
also originate, with the intention of selling and servicing, Multifamily Loans,
FHA Loans, Secured Conventional Home Improvement Loans, Unsecured Home
Improvement Loans and loans partially guaranteed by the United States Small
Business Administration. In addition, The Money Store and its subsidiaries from
time to time purchase packages of loans from other lenders or government
agencies.
Historically, the majority of all loans originated and purchased by the
Originators were Single Family Loans with original terms of 15 years. Starting
in 1992, the Originators began originating and purchasing Single Family Loans
with original terms of up to 30 years. The Money Store believes that the longer
term, and correspondingly lower monthly payments, of these Single Family Loans
is attractive to customers who might otherwise refinance an existing loan or
obtain a new loan from a bank or other traditional long term lender. The Money
Store believes that its rapid turnaround time from application to funding also
makes it an attractive alternative to more traditional lenders. The following is
a description of the origination, underwriting, servicing and other procedures
used by The Money Store and the Originators in connection with their Single
Family Loan program. If a significant portion of the Mortgage Loans underlying a
given Series of Certificates consists of FHA Loans, Secured Conventional Home
Improvement Loans and/or Unsecured Home Improvement Loans, the related
Prospectus Supplement will contain a similar description of the program relating
to such Mortgage Loans.
SINGLE FAMILY LOAN ORIGINATION
The Originators' Single Family Loan origination offices are generally
located in small and medium-sized suburban communities. All Single Family Loan
origination offices have a manager who reports to senior management. Each
regional office supervises the operations of a group of states. The supervision
of all of the Originator's underwriting and administrative functions is
conducted from the Sacramento, California headquarters.
The entire application and approval process for Single Family Loans is
generally conducted by telephone. The Originators attempt to grant approvals of
loans quickly to borrowers meeting their underwriting criteria. A loan officer
is responsible for completing, evaluating and processing the loan application of
a prospective borrower based on information obtained from the borrower and
verified with third parties. Depending on the size of the loan applied for, loan
applications must be approved by an underwriter located in the Sacramento,
California headquarters. Loan officers are trained to structure loans that meet
the applicant's needs, while satisfying the Originators' lending criteria. If an
applicant does not meet the lending criteria, the loan officer may offer to make
a smaller loan, if a smaller loan would meet the lending criteria, or suggest a
debt consolidation package that better suits the applicant's needs.
The Originators also acquire Single Family Loans through an indirect
lending program, from independent brokers. Such Single Family Loans are
underwritten by the Originators using the same criteria applied to loans
originated by such Originator. Brokers participating in this program must
satisfy certain requirements established by the Originators pertaining to
experience, size of business and various licenses and approvals. The Originators
also acquire, from time to time, portfolios of Single Family Loans from various
third parties. The Originators will not sell such acquired loans to a Trust
unless the Originators determine that such loans, when originated, were
underwritten using the same criteria applied to loans originated by the
Originators.
Starting in October 1995, the Originators began originating Single
Family Loans under a program that will result in lower interest rates for
borrowers that make timely payments during the early years of the related loan.
Under this program, if a borrower remits all scheduled payments during the first
year of the loan on a timely basis, the interest rate on the loan will be
reduced 0.50% per annum. If the borrower remits all scheduled payments during
the second year of the loan on a timely basis, the interest rate will be reduced
an additional 0.50% per annum and, if all payments are made during the third
year of the loan on a timely basis, the interest rate will be reduced a final
0.50% per annum. Once the interest rate on a loan is reduced, it will not be
increased, regardless of the borrowers future payment record.
UNDERWRITING CRITERIA
The following is a brief description of certain of the underwriting
standards used by the Originators to underwrite Single Family Loans. The
underwriting process is intended to assess both the prospective borrower's
ability to repay and the adequacy of the real property security as collateral
for the loan granted. To the extent that the relevant underwriting criteria
differ from those described herein, the related Prospectus Supplement for such
Series will specifically describe such criteria.
In certain cases deemed appropriate by an Originator's underwriters,
loans may be made outside of the Originator's guidelines with the prior approval
of pre-designated senior officials. No information is available with respect to
the portion of the Mortgage Loans which was originated outside of these
guidelines.
The Originators' objective in originating Single Family Loans is to
provide loans to borrowers with satisfactory income and credit histories deemed
sufficient to demonstrate the ability to repay their loan. The primary and
initial origination policy is to analyze the applicant's creditworthiness (i.e.,
a determination of the applicant's ability to repay the loan). Creditworthiness
is assessed by examination of a number of factors, including calculating a
debt-to-income ratio obtained by dividing a borrower's fixed monthly debt by the
borrower's gross monthly income. Fixed monthly debt generally includes (i) the
monthly payment under the related prior mortgages (which generally includes an
escrow for real estate taxes) based, in the case of an adjustable-rate first
mortgage, on the assumption that the then-current rate is the rate at which
interest will accrue on such loan, (ii) the monthly payment on the loan applied
for and (iii) other installment debt, including, for revolving debt, the
required monthly payment thereon or if no such payment is specified, 5% of the
balance as of the date of calculation. Fixed monthly debt does not include any
debt (other than revolving credit debt) described above that matures within less
than 10 months of the date of calculation. Except as otherwise set forth in the
related Prospectus Supplement, the debt-to-income ratio of any borrower will not
have exceeded 50% as of origination of the related loan. Creditworthiness is
also assessed by examining the applicant's credit history through standard
credit reporting bureaus, and by checking the applicant's payment history with
respect to the first mortgage, if any, on the property.
The second origination policy for Single Family Loans is a
determination of the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio
guidelines are established depending on the type of loan. For each Single Family
Loan, the Originator confirms the value of the property to be mortgaged by
appraisals (which in certain cases may be drive-by appraisals) performed by
independent appraisers. Drive-by appraisals involve a visual observation of the
exterior of the characteristics and condition of the property and the
neighborhood. Because the interior dimensions, improvements and conditions are
not inspected, a drive-by appraisal produces only a general approximation of
value for the particular property. If the Originator has previously originated a
loan to the same borrower secured by the same property within one year, the
Originator may rely on the prior appraisal in conjunction with a new drive-by
appraisal. If an appraisal is not required to be obtained for a Single Family
Loan, the value of the related mortgaged property, as represented by the
borrower, may be evaluated through other methods such as a drive-by appraisal, a
review of comparable sales or tax assessments or reliance upon a recent sales
price for such mortgaged property. Such methods do not constitute an appraisal
of the related mortgaged property. All Combined Loan-to-Value Ratios are
determined prior to approval of the loans.
The Originators have several procedures which they use to verify
information obtained from an applicant. The applicant's outstanding balance and
payment history on any senior mortgage may be verified by calling the senior
mortgage lender. If the senior mortgage lender cannot be reached by telephone to
verify this information, the Originator may rely upon information provided by
the applicant, such as a recent statement from the senior lender and
verification of payment, such as canceled checks, or upon information provided
by national credit bureaus.
In order to verify an applicant's employment status, the Originators
may obtain from the applicant recent tax returns or other tax forms (e.g., W-2
forms) or current pay stubs or may telephone the applicant's employer or obtain
written verification from the employer. As in the case of the senior mortgage
lender verification procedures, if the employer will not verify employment
history over the telephone, the Originator may rely solely on the other
information provided by the applicant.
The Originators will not close a Single Family Loan prior to receiving
evidence that the property securing the loan is insured. In addition, at the
closing, the borrower is required to sign a letter addressed to his insurance
carrier naming the Originator as a loss payee under the insurance policy, which
the Originator will thereafter mail to the insurer. Accordingly, the Originator
normally will not be named as a loss payee with respect to the property securing
the Single Family Loan at the time the loan is closed.
A title search is ordered to verify the vesting of title to the
Mortgaged Property, along with the existence of any mortgages, tax or other
liens that have been levied on the property, to assure that the lien priority
will be as represented by the borrower.
Most Single Family Loans originated or purchased by the Originators
generally are scheduled to amortize over their terms and provide for equal
monthly payments over their terms. The Originators also offer a "balloon"
mortgage on a limited basis. The Originators collect nonrefundable points, late
charges and various fees in certain states in connection with their mortgage
loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees.
Although the Originators have no maximum dollar amount for Single
Family Loans, the actual maximum amount that they will lend is determined by an
evaluation of the applicant's ability to repay the loan, the value of the
borrower's equity in the real estate and the ratio of such equity to the real
estate's appraised value.
QUALITY CONTROL
Quality control is exercised in two areas: lending and documentation
standards. In the case of Single Family Loans, a centralized quality control
staff checks to confirm that lending and documentation standards are met. Every
month, at least one office is audited and every loan type originated during the
prior month by such office is reviewed for compliance with lending and
documentation standards. Five percent of all Single Family Loans originated by
the Originators are audited at random on a monthly basis for compliance with
lending and documentation standards. Additional offices receive audits on a
random, monthly basis. In order to confirm the validity of appraisals obtained
at the time loans are made, reappraisals are obtained for the property securing
the loans in approximately two percent to five percent of the transactions.
REFINANCING POLICY
Where the Originators believe that borrowers having existing loans with
them are likely to refinance such loans due to interest rate changes or other
reasons, the Originators actively attempt to retain such borrowers through
solicitations of such borrowers to refinance with the Originators. Such
refinancings generate fee and servicing income for the Originators. Since the
solicited borrowers may refinance their existing loans in any case, the
Representative believes that this practice will be unlikely to affect the
prepayment experience of the Single Family Loans in a material respect. The
Originators also have solicited their borrowers who are in good standing to
apply for additional loans, consistent with their origination standards, where
deemed appropriate.
SERVICING AND COLLECTIONS
The Money Store, as Master Servicer, will be required under the related
Agreement to master service the Mortgage Loans and other Mortgage Assets
underlying a particular Series of Certificates with the same degree of skill and
care that it exercises with respect to all comparable loans and assets that it
master services for its own account. Servicing includes, but is not limited to,
post-origination loan processing, customer service, remittance handling,
collections and liquidations.
Borrowers are sent payment coupon books that specify the fixed payment
due and the late payment amount, if any. Due dates for payments occur throughout
the calendar month. If payment is not received within fifteen working days of
the due date, an initial collection effort is made by telephone in an attempt to
bring the delinquent account current. The various stages of delinquency are
monitored and evaluated on a monthly basis.
Means of contacting delinquent accounts include, but are not limited
to, telephone calls and collection letters. When an account is 30 days past due,
the collection supervisor analyzes the account to determine the appropriate
course of action. If a borrower is experiencing difficulty in making payments on
time, the Servicer may modify the payment schedule (as permitted by the
Agreement) but will not remove the loan from a delinquency status.
The course of action taken by the Servicer is dependent upon a number
of factors including the borrower's payment history, the amount of equity in the
related Mortgaged Property and the reason for the current inability to make
timely payments.
When a loan is 90 days past due, the related Mortgaged Property is
required to be reappraised and the results evaluated by the Company to determine
a course of action. Foreclosure regulations and practices and the rights of the
owner in default vary from state to state, but generally procedures may be
initiated if: (i) the loan is 90 days or more delinquent; (ii) a notice of
default on a senior lien is received or (iii) the servicer discovers
circumstances indicating potential loss exposure. During the foreclosure
process, any expenses incurred by the Servicer may be added to the amount owed
by the borrower, 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 proceeds to liquidate the asset.
The Servicer may not foreclose on the property securing a junior
mortgage loan unless it forecloses subject to the related senior mortgages. In
such cases, the Servicer generally will pay the amount due on the senior
mortgages to the senior mortgagees, if the Servicer considers it to be in the
best interest of the related Certificateholders to do so. In the event that
foreclosure proceedings have been instituted on a senior mortgage prior to the
initiation of the Servicer's foreclosure action, the Servicer will either
satisfy such mortgage at the time of the foreclosure sale or take other
appropriate action. The Servicer retains "in-house" counsel in part to help
assist with problem accounts. Such counsel may be utilized by all levels of
management to help avoid legal problems, including those associated with
consumer lending.
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, as well as other
items.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the borrower in default vary greatly from
state to state. Only if a delinquency cannot otherwise be cured will the
servicer decide that liquidation is the appropriate course of action. If, after
determining that purchasing a property securing a mortgage loan will minimize
the loss associated with such defaulted loan, the servicer may bid at the
foreclosure sale for such property or accept a deed in lieu of foreclosure.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the date set forth in the related Prospectus Supplement (each such
date, a "Cut-off Date"), among The Money Store, the applicable Originators and
the Trustee for the benefit of the Certificateholders of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust. A form
of an Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following summaries describe certain
material provisions which may appear in each Agreement. The Prospectus
Supplement for a Series of Certificates will describe any provision of the
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 Agreement for each Series of Certificates and
the applicable Prospectus Supplement. The Representative will provide a copy of
the Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of a Certificate of such Series addressed to The
Money Store, 2840 Morris Avenue, Union, New Jersey 07083, Attention:
Corporate Counsel.
GENERAL
The Certificates of each Series will represent fractional undivided
ownership interests in a Trust created pursuant to the related Agreement and/or
such other assets as may be described in the related Prospectus Supplement. The
Certificates will be issued in fully registered form, in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof (or such other
amounts do may be set forth in a Prospectus Supplement), except that one
Certificate of each Class may be issued in a different denomination.
Definitive Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, at the office of a Certificate Registrar appointed by the Trustee.
No service charge will be made 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 Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
The Certificates will not represent obligations of the Representative,
the Originators or any affiliate thereof. The assets of each Trust will consist
of one or more of the following, as set forth in the related Prospectus
Supplement, (a) the Mortgage Loans that from time to time are subject to the
related Agreement and which are held in the related Pool; (b) the assets for the
Trust that from time to time are required by the Agreement to be deposited in
certain reserve accounts, including the Certificate Account, the Principal and
Interest Account, the Expense Account, the Letter of Credit Fee Account and the
Insurance Account (each, as defined herein), or to be invested in Permitted
Investments (as defined herein); (c) property and any proceeds thereof acquired
by foreclosure of the Mortgage Loans in such Pool, deed in lieu of foreclosure
or a comparable conversion; (d) any Primary Mortgage Insurance Policies; (e) any
Mortgage Pool Insurance Policies; (f) any Special Hazard Insurance Policies; (g)
any Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit,
guaranties of The Money Store or other credit enhancement or maturity
protection covering any Certificates, any Mortgage Loan in the related Pool or
any related Mortgaged Property which is required to be maintained pursuant to
the related Agreement.
Each Series of Certificates will be issued in one or more Classes. Each
Class of Certificates of a Series will evidence beneficial ownership of the
interest in assets of the related Trust specified in the related Prospectus
Supplement. A Class of Certificates may be divided into two or more Sub-Classes,
as 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 of Certificates of such Series. Certain Series or
Classes of Certificates may he covered by a Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond or other insurance policies,
cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, supplemental interest payments or other forms of credit
enhancement or maturity protection, 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 prior to one or more other Classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust or 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.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Remittance Date, 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 Unless Definitive Certificates have been
issued, the registered holder of all Certificates will be Cede. Distributions
will be made by check mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (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.
DISTRIBUTIONS ON CERTIFICATES
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 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 its 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 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.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds available
in the related Certificate Account and other accounts to the extent described in
the related Prospectus Supplement. To the extent described in the related
Prospectus Supplement, on each Remittance Date, the Master Servicer will
withdraw from the applicable Certificate Account and such other accounts as may
be described in the related Prospectus Supplement and distribute to the
Certificateholders of each Class (other than a Series having a Class of
Subordinated Certificates, as described below), either the specified interest of
such Class in the Pool times the aggregate of all amounts on deposit in the
Certificate Account as of the Determination Date, or, in the case of Classes
which have been assigned an aggregate principal balance and Pass-Through Rate,
payments of interest and payments in reduction of such aggregate principal
balance from all amounts on deposit in the Certificate Account on the
Determination Date, in the priority and calculated in the manner set forth in
the related Prospectus Supplement, except, in each case, for (i) all payments on
the Mortgage Loans that were due on or before the Cut-off Date; (ii) all
Principal Prepayments, Liquidation Proceeds and Insurance Proceeds received
after the period specified in the related Prospectus Supplement (the "Principal
Prepayment Period"); (iii) all scheduled payments of principal and interest due
on a date or dates subsequent to the Determination Date; (iv) amounts
representing reimbursement for Advances, as specified in the related Prospectus
Supplement; (v) amounts representing reimbursement for any unpaid Servicing Fee
or Contingency Fee and expenses from Liquidation Proceeds, condemnation proceeds
and proceeds of insurance policies with respect to the related Mortgage Loans;
(vi) all income from any Permitted Investments held in the Certificate Account
for the benefit of the Master Servicer; and (vii) any Advances deposited in the
Certificate Account prior to the applicable Remittance Date.
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 Remittance Date may vary among Classes, over time
or otherwise as specified in the Prospectus Supplement. Differing allocations of
principal and interest to different Classes of Certificateholders will have the
effect of accelerating the amortization of Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the related Trust.
Distributions to any Class of Certificates will be made pro rata to all
Certificateholders of that Class, or as otherwise described in a Prospectus
Supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Certificateholders (rather than to guarantee or insure against losses) if
provided in the related Prospectus Supplement, the Master Servicer will be
required to advance to the Trustee, on or before each Remittance Date (from its
own funds), the amount, if any, by which (a) the sum of (x) 30 days' interest at
the applicable weighted average Adjusted Mortgage Loan Remittance Rate (as
defined below) on the then outstanding principal balance of the related Series
of Certificates and (y) the amount, if any, required to be deposited into the
related Reserve Account (as specified in the Prospectus Supplement) for the
related Remittance Date exceeds (b) the amount received by the Master Servicer
and any Sub-Servicers in respect of interest on the Mortgage Loans as of the
related Record Date (such excess, the "Monthly Advance"). For each Class of
Certificates, the "Adjusted Mortgage Loan Remittance Rate" will equal the sum of
the related Pass- Through Rate and the rate used in determining certain expenses
payable by the related Trust, as more specifically set forth in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, not later than
the close of business on each Determination Date, with respect to each Mortgage
Loan for which a Principal Prepayment in full or Curtailment was received during
the related Due Period, the Master Servicer will be required to remit to the
Trustee for deposit in the Certificate Account from amounts otherwise payable to
it as servicing compensation, an amount equal to the excess of (a) 30 days'
interest on the principal balance of each such Mortgage Loan as of the beginning
of the related Due Period at the applicable weighted average Adjusted Mortgage
Loan Remittance Rate, over (b) the amount of interest actually received on the
related Mortgage Loan for such Due Period (such difference, "Compensating
Interest").
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
initially will be registered in the name of Cede, the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code ("UCC") and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. 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 and reports relating to the Certificates from the Trustee
through DTC and its Participants. Under a book-entry format, Certificateholders
will receive payments and reports relating to the Certificates after the related
Remittance Date because, while payments and such reports are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such
payments and reports to its Participants which thereafter will be required to
forward them to Indirect Participants or Certificateholders. Unless and until
Definitive Certificates are issued, 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 Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the 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 reports and 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 reports and
payments on behalf of their respective Certificateholders. Accordingly, although
Certificateholders will not possess certificates, the rules provide a mechanism
by which Certificateholders will receive distributions and reports and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, 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 an Agreement only at the direction of one or
more Participants to whose account with DTC 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, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the events specified in the related Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related 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 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 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 Remittance Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes
of a Series of Certificates or with respect to the Mortgage Assets 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 Guarantee Insurance Policy, Spread Amount, Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts,
Supplemental Interest Payments, a letter of credit, a limited financial guaranty
insurance policy, a guaranty of The Money Store, other third party
guarantees or maturity protection, another method of credit enhancement
described in the related Prospectus Supplement, or the use of a cross-support
feature, or (iii) any combination of the foregoing. Credit enhancement will not
provide protection against all risks of loss and will not guarantee repayment of
the entire principal balance of the Certificates and interest thereon. If losses
occur which exceed the amount covered by credit enhancement or which are not
covered by the credit enhancement, holders of one or more Classes of
Certificates will bear their allocable share of deficiencies. If a form of
credit enhancement applies to several Classes of Certificates, and if principal
payments equal to the aggregate principal balances of certain Classes will be
distributed prior to such distributions to other Classes, the Classes which
receive such distributions at a later time are more likely to bear any losses
which exceed the amount covered by credit enhancement. Coverage under any credit
enhancement may be canceled or reduced by the Master Servicer or the
Representative if such cancellation or reduction would not adversely affect the
rating or ratings of the related Certificates. The Trustee of the related Trust
will have the right to sue providers of credit enhancement if a default is made
on a required payment.
SUBORDINATION
To enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which they would be entitled to
receive in the absence of any losses or delinquencies, if so specified in the
related Prospectus Supplement, distributions of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series will
instead be payable to holders of one or more Classes of Senior Certificates,
under the circumstances and to the extent specified in the Prospectus
Supplement. If specified in the related Prospectus Supplement, the holders of
Senior Certificates will receive the amounts of principal and/or interest due to
them on each Remittance 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 the
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 payable and 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 the
Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into one or more Reserve Accounts established and maintained with the
Trustee. If so specified in the Prospectus Supplement, such deposits may be made
on each Remittance Date, on each Remittance Date for specified periods or until
the balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the Class of
Certificates specified in the Prospectus Supplement at the times and under the
circumstances specified in the Prospectus Supplement. See "--Reserve Accounts"
below.
If so specified in the related Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the related 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
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. 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.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy may be obtained and maintained for any Class or Series
of Certificates. The issuer of any Certificate Guaranty Insurance Policy (a
"Certificate Guaranty 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 Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy will unconditionally and irrevocably guarantee to
Certificateholders that an amount equal to each full and complete Insured
Payment will be received by an agent of the Trustee (an "Insurance Paying
Agent") on behalf of Certificateholders, for distribution by the Trustee to each
Certificateholder. The "Insured Payment" will equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement.
The specific terms of any Certificate Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Certificate Guaranty
Insurance Policies may have limitations including (but not limited to)
limitations on the insurer's obligation to guarantee the Master 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 Agreement, the Certificate Guaranty
Insurer may be subrogated to the rights of each Certificateholder to receive
payments under the Certificates to the extent of any payments by such
Certificate Guaranty Insurer under the related Certificate Guaranty
Insurance Policy.
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 Assets. The accelerated
amortization will be achieved by applying certain excess interest collected on
the Mortgage Assets to the payment of 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 Assets 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 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. An 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.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of
Mortgage Loans, a Mortgage Pool Insurance Policy issued by the insurer (the
"Pool Insurer") named in such Prospectus Supplement will be obtained and
maintained for each Series pertaining to Mortgage Loans. Each Mortgage Pool
Insurance Policy will, subject to the limitations described below or in the
related Prospectus Supplement, cover loss by reason of default in payment on the
related Mortgage Loans in the Pool in an amount initially equal to a specified
percentage of the aggregate principal balance of all Mortgage Loans included in
the Pool as of the Cut-off Date or such other date as is specified in such
Prospectus Supplement. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. The Mortgage Pool Insurance
Policies generally 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 the 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 Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted Mortgage Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim 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 insurer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid will include certain expenses incurred by the Master
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 any
Mortgage Pool Insurance Policy reach the original policy limit, coverage under
that Mortgage Pool Insurance Policy will be exhausted and any further losses
will be borne by the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the 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 holders of the related Certificates 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 located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreement-- Hazard Insurance." No Special
Hazard Insurance Policy will 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.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
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 Agreement will provide that, if the related Mortgage Pool
Insurance Policy shall have been terminated or been exhausted through payment of
claims, the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each 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 required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master 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. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, letters of credit, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the Prospectus
Supplement may be deposited by the Master Servicer or Representative on the date
specified in the 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 distributions
otherwise payable to holders of Subordinated Certificates on any Remittance Date
may instead be deposited into such Reserve Accounts. Such deposits may be made
on the date specified in the Prospectus Supplement, which may include each
Remittance Date, each Remittance 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 the Reserve Accounts will be used to
enhance the likelihood of timely payment of principal of, and interest on, or,
if so specified in the 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 the 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 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 ("Permitted Investments"). Any asset or instrument
deposited in the Reserve Account generally 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. Additional
information with respect to such instruments deposited in the Reserve Accounts
will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments
deposited in a Reserve Account will be available for withdrawal from such
Reserve Account for distribution to Certificateholders for the purposes, in the
manner and at the times specified in the Prospectus Supplement.
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 Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Mortgage Assets.
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 Assets. 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 Assets.
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.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include
in lieu of some or all of the foregoing or in addition thereto letters of
credit, financial guaranty insurance policies, a guaranty of The Money
Store, other third party guarantees, guaranties or insurance from
agencies or instrumentalities of the United States, 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 as may be described in the Prospectus
Supplement. 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. If any Class of Certificates has a floating
interest rate, or if any of the Mortgage Assets has a floating interest rate,
the Trust may include an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks.
- --------
* Whenever the terms "Pool" and "Certificates" are used in
this Prospectus, such terms will be deemed to apply,
unless the context indicates otherwise, to one specific
Pool and the Certificates representing certain undivided
fractional interests, as described below, in a single
Trust consisting primarily of the Mortgage Loans in such
Pool. Similarly, the term "Pass-Through Rate" will refer
to the Pass-Through Rate borne by the Certificates of one
specific Series and the term "Trust" will refer to one
specific Trust.
<PAGE>
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a 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 which includes a cross-support feature will describe the
manner and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts 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.
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 Assets
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 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 Pool. Single Family Loans,
Cooperative Loans and Contracts generally 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. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment fee or penalty upon prepayment in full or in
part.
In general, prepayment of Mortgage Loans is likely to increase when the
level of prevailing interest rates declines significantly, although the
prepayment rate is influenced by a number of other factors, some of which are
described below. Similarly, when the level of prevailing interest rates rises,
prepayment rates may decrease. No prediction can be made as to the prepayment
rate that the Mortgage Loans will actually experience.
Generally, junior mortgage loans have smaller average principal
balances than senior or first mortgage loans and are not viewed by borrowers as
permanent financing. Accordingly, Mortgage Loans which are junior 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 Mortgage Loans for Federal income tax purposes may
result in a higher rate of prepayment of the Mortgage Loans. The obligation of
the Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. The prepayment experience of the
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 Representative is unaware of
any reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of The Money Store's and its affiliates'
portfolios of Mortgage Loans.
The secured conventional Mortgage Loans and Contracts generally will
contain due-on-sale provisions permitting the mortgagee or holder of the
Contract to accelerate the maturity of the Mortgage Loan or Contract upon sale
or certain transfers by the borrower of the underlying Mortgaged Property. The
Master 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 Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreement--Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
Greater than anticipated prepayments of principal will increase the
yield on Certificates purchased at a price less than par. Similarly, greater
than anticipated prepayments of principal will decrease the yield on
Certificates purchased at a price greater than par. The effect on an investor's
yield of principal prepayments on the Mortgage Loans occurring at a rate that is
faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the applicable Class of Certificates may
not be offset by a subsequent like reduction (or increase) in the rate of
principal payments.
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 or Curtailment 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 Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), as described under "Certain Legal
Aspects of the Mortgage Loans-- Soldiers' and Sailors' Civil Relief Act" herein.
If so specified in the related Prospectus Supplement, in the event that less
than 30 days' interest is collected on a Mortgage Loan during a Due Period,
whether due to prepayment in full or a Curtailment, the Master Servicer will be
obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of Compensating
Interest that the Master Servicer is obligated to pay, and are not otherwise
covered by Insured Payments, the yield on the Certificates could be adversely
affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Certificates. See "The Agreement--Termination; Purchase of
Mortgage Loans."
If so specified in the related Prospectus Supplement, the effective
yield to certain Certificateholders may be slightly lower than the yield
otherwise produced by the applicable Remittance Rate and purchase price, because
while interest generally will accrue on such 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.
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 will
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. 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 AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
SALE OF MORTGAGE LOANS
Pursuant to each Agreement, at the time of issuance of Certificates of
a Series the Originators and/or The Money Store will sell to the related Trust,
without recourse, all interest of the Originators and/or The Money Store in each
of the Mortgage Assets comprising the assets of such Trust and all interest in
all actual payments collected after the Cut-off Date with respect to such
Mortgage Assets.
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
Assets 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 Originators and/or The Money Store will sell to
the related Trust, without recourse, the entire interest of the Originators
and/or The Money Store in the additional Mortgage Assets identified in a
schedule attached to a supplemental conveyance relating to such additional
Mortgage Assets executed on such date by the Originators and/or The Money Store.
In connection with each purchase of additional Mortgage Assets, the related
Trust will be required to pay to the Originators and/or The Money Store a cash
purchase price equal to the outstanding principal balance of each additional
Mortgage Asset as of its related Cut-off Date. The purchase price will be
withdrawn from the Pre-Funding Account and paid to the Originators and/or The
Money Store so long as the representations and warranties set forth in
"--Representations and Warranties" below apply to each additional Mortgage Asset
to be conveyed, and the conditions set forth in the paragraph below and in the
related Agreement are satisfied. The Originators and/or The Money Store will
convey the additional Mortgage Assets to the related Trust on the applicable
purchase date pursuant to the Agreement.
Any conveyance of additional Mortgage Assets will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Mortgage Asset 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 related Prospectus
Supplement, the third-party credit enhancement provider, if any, shall have
approved the transfer of such additional Mortgage Assets to the related Trust;
(iii) neither the Originator nor The Money Store will have selected such
additional Mortgage Assets in a manner that either believes is adverse to the
interests of Certificateholders; and (iv) the Originator and The Money Store
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 Assets.
In connection with such sales of the Mortgage Loans, the Representative
will be required to deliver to the Trustee certain specified items (collectively
with respect to each Mortgage Loan, the "Trustee's Mortgage File") with respect
to each Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, each Trustee's Mortgage File will be required to include the
following, together with certain other specified items: (a) The original
Mortgage Note; (b) either: (i) the original Mortgage, with evidence of recording
thereon or (ii) a certified copy of the Mortgage where the original has been
transmitted for recording or has been lost; and (c) an assignment of the
Mortgage Loan from the applicable Originator to either the related Trustee or
Initial Co-Trustee under the Agreement with evidence of recording thereon.
The Trustee will be required to review each such Trustee's Mortgage
File to ascertain that all required documents have been executed and received.
If the Certificate Guaranty Insurer, if any, or the Trustee finds any document
constituting a part of a Trustee's Mortgage File which is not properly executed,
has not been received, is unrelated to the Mortgage Loans of the related Trust
or does not conform in a material respect to the description thereof provided on
behalf of the Representative, the Certificate Guaranty Insurer, if any, or the
Trustee is required promptly to notify the Master Servicer, The Money Store, and
the Trustee or the Certificate Guaranty Insurer, if any, respectively. The Money
Store is required to use reasonable efforts to remedy a material defect in a
document constituting part of a Trustee's Mortgage File of which it is so
notified. If, however, within 60 days after the Trustee's notice to it
respecting such defect The Money Store has not remedied the defect and the
defect materially and adversely affects the interest of the Trust in the related
Mortgage Loan or the interests of the Certificate Guaranty Insurer, if any, The
Money Store is required to (i) substitute in lieu of such Mortgage Loan a
substitute Mortgage Loan which qualifies for substitution under the Agreement (a
"Qualified Substitute Mortgage Loan") and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution, deposit in
the related Principal and Interest Account (as defined herein under "--Payments
on the Mortgage Loans") the amount of such shortfall in principal balance
arising from such substitution (the "Substitution Adjustment") or (ii) purchase
such Mortgage Loan at a price equal to the principal balance of such Mortgage
Loan as of the date of purchase, plus 30 days' interest on such principal
balance, computed at the Adjusted Mortgage Loan Remittance Rate (as defined in
the related Prospectus Supplement) as of the next succeeding Determination Date,
plus any accrued unpaid Servicing Fees and Contingency Fees (each as defined
herein under "--Servicing and Other Compensation and Payment of Expenses") and
certain other amounts advanced by and reimbursable to the Master Servicer, plus
the interest portion of any unreimbursed Insured Payments made by the
Certificate Guaranty Insurer, if any, related to such Mortgage Loan, which
purchase price will be deposited in the Principal and Interest Account and
delivered to the Trustee on the next succeeding Determination Date, except for
the amount described above relating to unreimbursed Insured Payments, if any,
which shall be paid directly to the Certificate Guaranty Insurer; provided,
however, that, if a REMIC election has been made for the related Trust, The
Money Store may not take any such action unless it has theretofore caused to be
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters (an "Opinion of Counsel") which states that such a purchase or
substitution would not constitute a "prohibited transaction," as defined in
Section 860F of the Code (a "Prohibited Transaction").
REPRESENTATIONS AND WARRANTIES
The Representative will represent, among other things, that as of the
related Cut-off Date as to each Mortgage Loan sold to the related Trust, the
information provided with respect to such Mortgage Loan was true and correct;
all of the original or certified documentation constituting the Trustee's
Mortgage Files (including all material documents related thereto) has been or
will be delivered to the Trustee or a custodian on its behalf (the "Custodian");
each Mortgage was a valid and subsisting lien of record on the Mortgaged
Property; immediately prior to such transfer and assignment, the Originators
were the sole owners of each Mortgage Loan conveyed by them; and as of the
related Cut-off Date, no Mortgage Loan will be 59 days or more delinquent in
payment, no Mortgage Loan originated within 12 months of the related Cut-off
Date will be delinquent 59 days or more as measured at the end of any month
during the 12 months immediately preceding such Cut-off Date, and with respect
to Mortgage Loans originated more than 12 months before such Cut-off Date, no
more than the percentage of Mortgage Loans specified in the related Prospectus
Supplement (measured by outstanding principal balance as of such Cut-off Date)
will have been on up to two occasions 60 days delinquent as measured at the end
of any month since the inception of each such Mortgage Loan.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Servicer, any Subservicer, the Custodian, the Certificate Guaranty Insurer, if
any, or the Trustee that any of the representations and warranties contained in
the Agreement have been breached in any material respect as of the related
Cut-off Date, with the result that the interests of the related Trust in the
related Mortgage Loan or the interests of the Certificate Guaranty Insurer, if
any, were materially and adversely affected, notwithstanding that such
representation and warranty was made to The Money Store's best knowledge, the
party discovering such breach is required to give prompt written notice to the
other parties. Within 60 days of the earlier to occur of The Money Store's
discovery or its receipt of notice of any such breach, The Money Store will be
required to cure promptly such breach in all material respects, or (i) remove
such Mortgage Loan and substitute one or more Qualified Substitute Mortgage
Loans or (ii) purchase such Mortgage Loan, in each case on the same terms and on
the same conditions as described above under "Sale of Mortgage Loans." The
obligation of The Money Store to so substitute or purchase any Mortgage Loan
will constitute the sole remedy respecting a material breach of any such
representation or warranty available to the Certificateholders or the Trustee.
PAYMENTS ON THE MORTGAGE LOANS
The Agreement will require the Master Servicer to establish and
maintain one or more principal and interest accounts (each a "Principal and
Interest Account") at one or more institutions designated as a "Designated
Depository Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer will be required to deposit or cause to be
deposited in the related Principal and Interest Account (within 24 hours of
receipt) all payments received after the related Cut-off Date on account of
principal and interest on the related Mortgage Loans (but net of the Servicing
Fee and the Contingency Fee with respect to each Mortgage Loan and other
servicing compensation payable to the Master Servicer as permitted by the
Agreement).
Not later than the day of each month which is the later of (i) the
third Business Day prior to the 15th day of such month and (ii) the seventh
Business Day of such month (each such day a "Determination Date"), the Master
Servicer will be required to wire transfer to the Trustee the Available
Remittance Amount for deposit in the segregated trust accounts to be maintained
with the Trustee for such purpose (each a "Certificate Account").
Unless otherwise specified in the related Prospectus Supplement, the
"Available Remittance Amount" will be defined in the Agreement to include, with
respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Master Servicer or
any Sub-Servicer on the Mortgage Loans (including amounts paid by the
Master Servicer and the Representative and excluding amounts required
to be deposited into any related Reserve Account, amounts paid as
reimbursement to the Master Servicer of advances and amounts recovered
as voidable preferences) during the immediately preceding calendar
month (the "Due Period"), plus
(ii) the amount of any Monthly Advance and Compensating
Interest payments with respect to the Mortgage Loans remitted by the
Master Servicer for such Remittance Date.
The term Available Remittance Amounts will not include Insured
Payments, if any.
GENERAL SERVICING STANDARDS
The Master Servicer will agree to master service the Mortgage Loans in
accordance with the related Agreement and, where applicable, prudent mortgage
servicing standards. "Prudent mortgage servicing standards" generally will
require the Master Servicer to exercise collection and foreclosure procedures
with respect to the Mortgage Loans with the same degree of care and skill that
it would use in master servicing mortgage loans for its own account. Pursuant to
each Agreement, the Master Servicer will be required to make reasonable efforts
to collect all payments called for under the terms of the related Mortgage Loan.
Nonetheless, the Master Servicer, in determining the type of action that is
reasonable to pursue may consider, among other things, the unpaid principal
balance of a Mortgage Loan against the estimated cost of collection or
foreclosure action, the unpaid balance of the related prior mortgage, if any,
the condition and estimated market value ("as is" and "if repaired"), the
estimated marketability of the related Mortgaged Property and the borrower's
ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "Servicing
Fee") and a contingency fee (the "Contingency Fee") equal to the percentage per
annum specified in the related Prospectus Supplement of the principal balance of
each Mortgage Loan. The Contingency Fee is meant to provide additional servicing
compensation to a successor servicer if The Money Store is replaced as Master
Servicer under the related Agreement. However, as long as The Money Store acts
as Master Servicer, it will be entitled to receive the Contingency Fee, although
such amount is not deemed servicing compensation. Unless otherwise specified in
the related Prospectus Supplement, the Servicing Fee and Contingency Fee will
each be calculated and payable monthly from the interest portion of scheduled
monthly payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, prepayment penalties and premiums, late payment charges,
interest paid on funds in the Principal and Interest Account, interest paid on
earnings realized on Permitted Instruments, and certain other excess amounts.
The Master Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of the Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage Loan. Such expenditures may include costs of collection
efforts, reappraisals when a loan is 90 days past due, forced placement of
hazard insurance if a borrower allows his hazard policy to lapse, legal fees in
connection with foreclosure actions, advancing payments on the related senior
mortgage, if any, advances of delinquent property taxes, upkeep and maintenance
of the property if it is acquired through foreclosure and similar types of
expenses. Each such expenditure constitutes a "Servicing Advance." The Master
Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Master Servicer will be entitled
to recover Servicing Advances to the extent permitted by the Mortgage Loans or,
if not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan.
Servicing Advances will be reimbursable to the Servicer from the sources
described above out of the funds on deposit in the Principal and Interest
Account.
HAZARD INSURANCE
The Master Servicer will be required to cause to be maintained fire and
hazard insurance with extended coverage customary in the area where the
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 mortgage, if any, (ii) the full insurable value of the premises
securing the Mortgage Loan, and (iii) the minimum amount required to compensate
for damage or loss on a replacement cost basis. If the Mortgaged Property is in
an area identified in the Federal Register by the Flood Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), the Master 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 full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended.
The Master Servicer will also be required to maintain, to the extent such
insurance is available, on REO Property, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, flood insurance in an amount equal to that required above. Any amounts
collected by the Master Servicer or any Sub-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 first
or second mortgage servicing procedures) are required to be deposited in the
Principal and Interest Account.
In the event that the Master 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
balance on the Mortgage Loans without individual fire and hazard insurance, and
otherwise complies with the requirements of the preceding paragraph, the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
ENFORCEMENT OF DUE ON SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer, on behalf of the Trustee, 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 Master
Servicer will not be required to exercise any such right if the "due-on-sale"
clause, in the reasonable belief of the Master 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 Master 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, unless prohibited by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Certificate Guaranty Insurer, if
any, 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.
REALIZATION UPON DEFAULTED MORTGAGE
The Master Servicer generally will foreclose upon or otherwise
comparably convert the ownership in the name of the Trustee of Mortgaged
Properties relating to defaulted Mortgage Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments. However, the
Master Servicer will be required to take into account the existence of any
hazardous substances, hazardous wastes or solid wastes on a Mortgaged Property
in determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable
efforts to collect all payments called for under the terms and provisions of the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any late payment charge, prepayment charge, assumption fee or
any penalty interest in connection with the prepayment of a Mortgage Loan or any
other fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Mortgage
Loan or consent to the postponement of strict compliance with any such term or
in any matter grant indulgence to any Mortgagor, subject to the limitations set
forth in the Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will nonetheless make payment of any required Monthly Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to
enter into sub-servicing arrangements with sub-servicers meeting the
requirements of the related Agreement (each, a "Sub-Servicer"). Such
sub-servicing arrangements will not relieve the Master Servicer of any liability
it might otherwise have, had the sub-servicing arrangement not been entered
into.
REMOVAL AND RESIGNATION OF MASTER SERVICER
With respect to each Series of Certificates, the Certificate Guaranty
Insurer, if any, or the Holders of not less than 50 percent of each Class of
Certificates of the related Series, other than the Class R Certificates (the
"Majority Certificateholders"), by notice in writing to the Master Servicer and
with the prior written consent of the Certificate Guaranty Insurer, if any,
which consent may not be unreasonably withheld, may, pursuant to the related
Agreement, remove the Master Servicer upon the occurrence of any of the
following events:
(i) (A) an Event of Nonpayment (as defined below); (B) the
failure by the Master Servicer to make any required Servicing Advance
to the extent such failure materially or adversely affects the
interests of the Certificate Guaranty Insurer, if any, or the
Certificateholders; (C) the failure by the Master Servicer to make any
required Monthly Advance; (D) the failure by the Master Servicer to
remit any Compensating Interest; or (E) any failure by the Master
Servicer to remit to the Trustee any payment required to be made under
the terms of the related Agreement, which in each case continues
unremedied (in the case of the events described in clauses (i)(A),
(i)(B), (i)(D) and (i)(E) for 30 days) after the date upon which
written notice of such failure, requiring the same to be remedied,
shall have been given to the Master Servicer by the Trustee or to the
Master Servicer and the Trustee by any Certificateholder or the
Certificate Guaranty Insurer, if any; or
(ii) failure by the Master Servicer or The Money Store (so
long as The Money Store is the Master Servicer) duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the Master Servicer or the Representative, as set forth
in the related Agreement, which failure continues unremedied for a
period of 60 days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Master Servicer or The Money Store, as the case may be, by the
Trustee or to the Master Servicer or The Money Store, as the case may
be, and the Trustee by any Certificateholder or the Certificate
Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Master Servicer and such decree or order shall have
remained in force, undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Master Servicer or of or relating to all or
substantially all of the Master Servicer's property; or
(v) the Master Servicer shall admit in writing its inability
to pay its debts as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations.
An "Event of Nonpayment" will generally be defined in the Agreements as
a shortfall on any Remittance Date in moneys (excluding any amounts representing
Insured Payments) available to fund the full amount of the Distribution Amounts
due on such Remittance Date.
The Master Servicer may not assign its obligations under the Agreement
nor resign from the obligations and duties thereby imposed on it except by
mutual consent of the Master Servicer, the Certificate Guaranty Insurer, if any,
the Trustee and the Majority Certificateholders, or upon the determination that
the Master Servicer's duties thereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Master Servicer. No
such resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be
the successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the Majority
Certificateholders or the Certificate Guaranty Insurer, if any, so request, the
Trustee may appoint, or petition a court of competent jurisdiction to appoint,
any established mortgage loan servicing institution acceptable to the
Certificate Guaranty Insurer, if any, having a net worth of not less than
$15,000,000 and which is approved as a servicer by FNMA and FHLMC as the
Successor Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee,
the Contingency Fee and such other compensation as is described under
"--Servicing and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust established under each Agreement will terminate upon notice
to the Trustee following the earlier to occur of (i) the final payment or other
liquidation of such last Mortgage Loan remaining in the related Trust or the
disposition of all REO Property, (ii) the optional purchase of the assets of the
Trust by the Servicer or the Certificate Guaranty Insurer, if any, as described
below, (iii) mutual consent of the Master Servicer, the Certificate Guaranty
Insurer, if any, and all Certificateholders in writing, or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the Trust, as permitted by the REMIC provisions of the Code as
described below; provided, however, that in no event will any Trust terminate
later than twenty-one years after the death of the last survivor of the person
named in the related Agreement.
Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Mortgage Loans are less than 10% of the Original Pool Principal Balance (or
such other percentage as may be specified in the related Prospectus Supplement),
the Master Servicer may, at its option, and in the absence of the exercise
thereof by the Master Servicer, the Certificate Guaranty Insurer, if any, may,
at its option, purchase, on the next succeeding Remittance Date, all of the
Mortgage Loans and any related REO Properties at a price equal to the
Termination Price.
On any Remittance Date on or after the Cross-Over Date on which
Mortgage Loans with an aggregate principal balance as of the Cut-off Date that
equals or exceeds 25% of the Original Pool Principal Balance (or such other
percentage as may be specified in the related Prospectus Supplement) have become
liquidated Mortgage Loans, the Certificate Guaranty Insurer, if any, may
determine to purchase and may cause the purchase from the Trust of all Mortgage
Loans and REO Properties in the Pool at a price equal to the sum of the
Termination Price and the outstanding and unpaid fees and expenses of the
Trustee and the Master Servicer.
If a REMIC election is made for a Series of Certificates, following a
final determination by the Internal Revenue Service (the "IRS") or by a court of
competent jurisdiction, in either case from which no appeal is taken within the
permitted time for such appeal, or if any appeal is taken, following a final
determination of such appeal from which no further appeal can be taken, to the
effect that the REMIC does not and will no longer qualify as a REMIC pursuant to
Section 860D of the Code (the "Final Determination"), at any time on or after
the date which is 30 calendar days following such Final Determination (i) the
Majority Certificateholders may direct the Trustee on behalf of such Trust to
adopt a "plan of complete liquidation" (within the meaning of Section
860F(a)(4)(B)(i) of the Code) with respect to such REMIC and (ii) the
Certificate Guaranty Insurer, if any, may notify the Trustee of the Certificate
Guaranty Insurer's determination to purchase from the Trust all Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan, then
remaining in such REMIC at a price (the "Termination Price") equal to the sum
of (x) 100% of the aggregate principal balances of such Mortgage Loans as of the
day of purchase minus amounts remitted from the Principal and Interest Account
to the Certificate Account representing collections of principal on such
Mortgage Loans during the current Due Period, (y) 30 days' interest on such
amount computed at the applicable weighted average of the Adjusted Mortgage Loan
Remittance Rates, and (z) the interest portion of any unreimbursed insured
payment made by the Certificate Guaranty Insurer, if any. Upon receipt of such
direction by the Majority Certificateholders or of such notice from the
Certificate Guaranty Insurer, the Trustee will notify the holders of the Class R
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "Termination Notice"). The Holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, within 60
days from the date of receipt of the Termination Notice (the "Purchase Option
Period"), at their option, purchase from the related Trust all Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the
REMIC at a purchase price equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Certificateholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
Mortgage Loans and such other property in the REMIC and distribute the proceeds
of the liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Certificateholders shall permit
or direct in writing, after the expiration of the Purchase Option Period and
(ii) in the event that the Certificate Guaranty Insurer has given the Trustee
notice of the Certificate Guaranty Insurer's determination to purchase the
assets described in clause (ii) preceding, the Certificate Guaranty Insurer
shall so purchase such assets within 60 days after the expiration of the
Purchase Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and the Certificate Guaranty Insurer, if
any, of an opinion of nationally recognized tax counsel selected by the Holders
of such Class R Certificates, which opinion shall be reasonably satisfactory in
form and substance to the Majority Certificateholders and the Certificate
Guaranty Insurer, if any, that the effect of the Final Determination is to
increase substantially the probability that the gross income of the REMIC will
be subject to federal taxation, purchase from the Trust all Mortgage Loans and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure,
or otherwise in respect of any Mortgage Loan then remaining in the applicable
REMIC at a purchase price equal to the Termination Price. The foregoing opinion
shall be deemed satisfactory unless the Majority Certificateholders give the
holders of a majority of percentage interests in the Class R Certificates notice
that such opinion is not satisfactory within thirty days after receipt of such
opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Certificate-holders may
exercise any trust or power conferred on the Trustee with respect to the
Certificates or the Trusts, upon satisfaction of certain conditions set forth in
the Agreements; provided, however, that with respect to any action or event
affecting only one or more Classes of Certificates, only Holders of such Class
or Classes may exercise such trust or power.
AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer
and the Trustee by written agreement, upon the prior written consent of the
Certificate Guaranty Insurer, if any, without the notice to, or consent of, the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions of such Agreement, or any
agreement for the retention of each Trustee's Mortgage File; provided, however,
that such action shall not, as evidenced by an Opinion of Counsel delivered to
the Trustee, adversely affect the interest of any Certificateholder or any other
party and further provided that no such amendment shall reduce in any manner the
amount of, or delay the timing of, any amounts which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party thereto
without the consent of such party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer and the Trustee with the consent of the Certificate Guaranty
Insurer, if any, and the Holders of the majority of the percentage interest in
each Class of Certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner any provisions thereof; provided,
however, that if a REMIC election is made for the applicable Trust, no such
amendment shall be made unless the Trustee receives an Opinion of Counsel, at
the expense of the party requesting the change, that such change will not
adversely affect the status of the Trust as a REMIC or cause a tax to be imposed
on the REMIC, and provided further, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, any amounts which are required to
be distributed on any Certificates without the consent of the Holders of 100% of
each Class of Certificates affected thereby.
Each Agreement may be amended from time to time by the Master Servicer,
The Money Store and the Trustee by written agreement, upon the prior written
consent of the Certificate Guaranty Insurer, if any, without the notice to or
consent of the Certificateholders, in connection with the substitution of cash,
a letter of credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Mortgage Loans. Laws and
practices relating to the legal effects and enforcement of mortgages and deeds
of trust vary somewhat from state to state. In general, however, the most
significant applicable legal principles are similar in all states. The following
discussion addresses the more significant legal principles applicable to
mortgages and deeds of trust in all states. It should be noted that some of the
Mortgage Loans may relate to Mortgaged Properties located in California, which
has enacted various laws, not common to most other states, which impose special
limitations on the remedies available to the holders of mortgages and deeds of
trust. These laws, called "anti-deficiency laws," are discussed below.
NATURE OF THE MORTGAGE ASSETS
Single Family Loans, FHA Loans, Secured Conventional Home Improvement
Loans and Multifamily Loans. The Single Family Loans, FHA Loans, Secured
Conventional Home Improvement Loans and Multifamily Loans generally 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 property
subject to the loan 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. Priority between mortgages depends on their
terms and generally on the order of recording with a 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 formally has three
parties, the borrower-property owner called the trustor (similar to a
mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. 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,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a security deed or deed to secure debt are governed
by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be 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 and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupants under proprietary leases or occupancy
agreements to which the Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust including
Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. The
Contracts generally are "chattel paper" as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant to
the UCC, the rules governing the sale of chattel paper are similar to those
governing the perfection of a security interest in chattel paper. Unless
otherwise specified in the Prospectus Supplement, under the Agreement, the
Representative will transfer or cause the transfer of physical possession of the
Contracts to the Trustee or its custodian. In addition, the Representative will
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Representative.
The Representative will assign or cause to be assigned a security
interest in the Manufactured Homes to the Trustee, on behalf of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Representative, the Master Servicer nor the Trustee will
amend the certificates of title to identify the Trustee, on behalf of the
Certificateholders, as the new secured party and, accordingly, the
Representative or the Seller will continue to be named as the secured party on
the certificates of title relating to the Manufactured Homes. In most states,
such assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Representative's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, such assignment of the security interest might not
be held effective against creditors of the Representative or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Representative and the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Representative will represent that it has no knowledge of any such liens with
respect to any Manufactured Home securing a Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Certificateholders in the event such a lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement
Loans and Multifamily Loans. Foreclosure of a deed of trust is generally
accomplished by a non-judicial sale under a specific provision in the deed of
trust 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. In
some 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 to certain
other persons. Before such non-judicial sales take 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.
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 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 general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, 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 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 obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the Cooperative when the building was so converted.
Cooperative Loans. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement
Loans and Multifamily Loans. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights 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.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the Mortgage Assets (by
principal balance) will be secured by properties located in California.
Foreclosure of a deed of trust in California may be effected by a judicial or
nonjudicial foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. However, in the case of certain
purchase money mortgage loans, a lender may be prohibited by statute from
obtaining a deficiency judgment. California law also requires the deed of trust
beneficiary to exhaust all real property security in a single action (i.e. in a
judicial foreclosure) before a deficiency judgment may be sought against the
borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory
prohibitions which limit the remedies of a beneficiary under a deed of trust or
a mortgagee under a mortgage. In some states, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment would
be a personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of the
real property sold at the foreclosure sale. As a result of these prohibitions,
it is anticipated that in many instances the Master Servicer will not seek
deficiency judgments against defaulting mortgagors. Under the laws applicable in
most states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws (including California law) affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon collateral and/or enforce a deficiency judgment. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the court determines
that the value of the Mortgaged Property is less than the principal balance of
the mortgage loan, for the reduction of the secured indebtedness to the value of
the Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in 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
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. 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 or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the seller of such Contract had or should have had knowledge of
such claim or defense, the Master Servicer will have the right to require the
seller to repurchase the Contract because of a breach of such seller's
representation and warranty that no claims or defenses exist which would affect
the obligor's obligation to make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgager
or secured party. 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 (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property 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 default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of mortgage loans with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APR's,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts. Legal restrictions, if any, on prepayment of Multifamily
Loans will be described in the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. 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 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. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (including a
borrower 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 Master
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 holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower'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.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a consequence,
lawsuits may arise from time to time asserting claims against manufacturers or
builders of the housing, suppliers of component parts, and related persons in
the distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured
by a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Seller, and the Certificateholders would
suffer a loss only to the extent that (i) the Seller breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Seller, the Representative or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Certificateholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages. Typical products liability
insurance policies held by manufacturers and component suppliers of manufactured
homes may not cover liabilities arising from formaldehyde and certain other
chemicals in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage
Loans may include installment sales contracts entered into with the builders of
the homes located on the Mortgaged Properties. The Mortgagors in some instances
may have claims and defenses against the builders which could be asserted
against a Trust.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. 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 if a Mortgaged Property securing a
Mortgage Loan became the property of such Trust in certain circumstances and if
such Cleanup Costs were incurred. Moreover, certain states by statute impose a
lien for any Cleanup Costs incurred by such state on the property that is the
subject of such Cleanup Costs (a "Superlien"). All subsequent liens on such
property are subordinated to such Superlien and, in some states, even prior
recorded liens are subordinated to such Superliens. In the latter states, the
security interest of the Trustee in a property that is subject to such a
Superlien could be adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special Federal tax
counsel, ("Federal Tax Counsel"), the following are the material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
offered hereby. The discussion, and the opinions referred to below, are based on
laws, regulations, rulings and decisions now in effect (or, in the case of
certain regulations, proposed), all of which are subject to change or possibly
differing interpretations. Because tax consequences may vary based on the status
or tax attributes of the owner of a Certificate, prospective investors should
consult their own tax advisors in determining the federal, state, local and
other tax consequences to them of the purchase, ownership and disposition of
Certificates. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), the terms
"Certificateholder" and "holder" mean the beneficial owner of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election will be made
with respect to the related Trust. In addition, if the related Prospectus
Supplement so provides, the transaction documents for a Trust may provide that
an election will be made on or after September 1, 1997 to qualify such Trust as
a Financial Asset Securitization Investment Trust pursuant to new provisions of
the Code which will be effective as of such date. To the extent provided in the
Prospectus Supplement for a series, Certificateholders may also have the benefit
of a Reserve Account and of certain agreements (each, a "Yield Supplement
Agreement") under which payment will be made from the Reserve Account in the
event that interest accrued on the Mortgage Loans at their Mortgage Interest
Rates is insufficient to pay interest on the Certificates of such Series (a
"Basis Risk Shortfall"). If a REMIC election is to be made, the Prospectus
Supplement will designate the Certificates of such series as "regular interests"
("REMIC Regular Certificates") in the REMIC (within the meaning of Section
860G(a)(1) of the Code) or as the "residual interest" ("REMIC Residual
Certificates") in the REMIC (within the meaning of Section 860G(a)(2) of the
Code). The terms "REMIC Certificates" and "Non-REMIC Certificates" denote,
respectively, Certificates of a series with respect to which a REMIC election
will, or will not, be made. The discussion below is divided into two parts, the
first part applying only to REMIC Certificates and the second part applying only
to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will
agree in the Agreement to elect to treat the related Trust or certain assets of
such Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations, the related Trust or
certain assets of such Trust will be a REMIC and the REMIC Certificates will be
considered to evidence ownership of "regular interests" or "residual interests"
within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Account
in the event of a Basis Risk Shortfall will be required to allocate their
purchase price between their beneficial ownership interests in the related REMIC
regular interests and Yield Supplement Agreements, and will be required to
report their income realized with respect to each, calculated 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 related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. REMIC Regular Certificateholders
are advised to consult their own tax advisors concerning the determination of
such fair market values. Under the Agreement, holders of applicable classes of
REMIC Regular Certificates will 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.
Status of REMIC Certificates. The REMIC Certificates will be "real
estate assets" for purposes of Section 856(c)(5)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code (assets qualifying under one or
both of those sections, applying each section separately, "qualifying assets")
to the extent that the REMIC's assets are qualifying assets, but not to the
extent that the REMIC's assets consist of Yield Supplement Agreements. However,
if at least 95 percent of the REMIC's assets are qualifying assets, then 100
percent of the REMIC Certificates will be qualifying assets. Similarly, income
on the REMIC Certificates will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Mortgage Assets, the REMIC's assets will include payments on Mortgage Assets
held pending distribution to holders of REMIC Certificates, amounts in reserve
accounts (if any), other credit enhancements (if any) and possibly buydown funds
("Buydown Funds"). The Mortgage Assets generally will be qualifying assets under
the foregoing sections of the Code except to the extent provided in the
Prospectus Supplement. However, Mortgage Assets that are not secured by
residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(C)(v) of the
Code. In addition, to the extent that the principal amount of a Mortgage Asset
exceeds the value of the property securing the Mortgage Asset, it is unclear and
Federal Tax Counsel is unable to opine whether the loans will be qualifying
assets. The regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Mortgage Assets and held pending
distribution to holders of Certificates ("cash flow investments") will be
treated as qualifying assets. It is unclear whether amounts in a Reserve Account
or Buydown Funds would also constitute qualifying assets under any of those
provisions. The Prospectus Supplement for each series will indicate (if
applicable) that it has Buydown Funds. The REMIC Certificates will not be
"residential loans" for the purposes of the residential loan requirement of
Section 593(g)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Federal Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of the
Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as
otherwise indicated herein, the REMIC Regular Certificates will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Certificates and not as ownership interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Certificates who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Payments of interest on REMIC Regular Certificates may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular Certificate
is outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount---Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Certificates issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders
of REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue
discount ratably as payments of stated principal are made on
the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
Qualified Stated Interest. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includible in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Assets underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered. Accordingly, Federal Tax Counsel is unable to opine whether interest
payments on REMIC Regular Certificates that otherwise would not be treated as
having original issue discount would be considered to have original issue
discount because there are not reasonable remedies to compel timely payment of
interest or terms or conditions that would make the likelihood of late payment
or nonpayment remote.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
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 objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Certificate that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a Variable
Rate REMIC Regular Certificate will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate REMIC Regular Certificate's term will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). 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 qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a
"variable rate debt instrument" under the OID Regulations and provide for
interest at either a single qualified floating rate, a single objective rate, a
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate REMIC Regular Certificate"),
original issue discount is computed as described in "REMIC Regular Certificates-
Current Income on REMIC Regular Certificates--Original Issue Discount" based on
the following: (i) stated interest on the Single Variable Rate REMIC Regular
Certificate which is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually will constitute qualified
stated interest; (ii) by assuming that the variable rate on the Single Variable
Rate REMIC Certificate is a fixed rate equal to: (a) in the case of a Single
Variable Rate REMIC Regular Certificate with a qualified floating rate or a
qualified inverse floating rate, the value of, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate REMIC Regular Certificate with an objective rate
(other than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Rate REMIC Regular
Certificate; and (iii) the qualified stated interest allocable to an accrual
period is increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to be paid under
the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. Federal Tax Counsel is unable to opine how a Variable Rate REMIC
Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation, since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
Interest-Only REMIC Regular Certificates. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at
a market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that all holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC 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 the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC 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 a sale of a REMIC Regular Certificate by a bank or other financial
institution to which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate shortly following the REMIC's
receipt of the final payment in respect of the Mortgage Assets. The last
distribution on a REMIC Regular Certificate should be treated as a payment in
full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the
REMIC. Market discount on any of the Mortgage Assets held by the REMIC must be
included in the income of the REMIC as it accrues, rather than being included in
income only upon sale of the Mortgage Assets or as principal on the Mortgage
Assets is paid. The REMIC is not entitled to any personal exemptions or to
deductions for taxes paid to foreign countries and U.S. possessions, charitable
contributions or net operating losses, or to certain other deductions to which
individuals are generally entitled. Income or loss in connection with a
"prohibited transaction" is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (i.e., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to Mortgage Assets, on the one hand, and
the timing of deductions for interest (including original issue discount) on the
REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Assets may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Assets (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust will calculate the
taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to certain special rules. The excess inclusions with respect to
a REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Code Section 511, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Code Section 511. In addition, the Code provides that
under Treasury regulations, if a real estate investment trust ("REIT") owns a
REMIC Residual Certificate, to the extent excess inclusions of the REIT exceed
its real estate investment trust taxable income (excluding net capital gains),
the excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income
it derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a Mortgage Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Mortgage Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would cause it to be subject to such tax. This provision will not affect the
REMIC's ability to accept substitute Mortgage Loans or to sell defective
Mortgage Loans in accordance with the Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed
on the Trust initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificateholders, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark-to-Market REMIC Residual Certificates.
Treasury regulations provide that all REMIC Residual Certificates acquired on or
after January 4, 1995, and similar interests or arrangements acquired on or
after January 4, 1995 that are determined by the Commissioner to have
substantially the same economic effect as a REMIC Residual Certificate, are not
securities and cannot be marked to market pursuant to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations
(which have not yet been issued), if a holder sells a REMIC Residual Certificate
and acquires the same or other REMIC Residual Certificates, residual interests
in another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to
a "disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear and Federal Tax Counsel is unable to opine with
respect to this issue. The preamble to the REMIC Regulations indicates that the
Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. 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 (i.e., a computation of the present value of the
excess inclusions) 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 REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC 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 (or the tax, discussed below, on pass-through
entities, interests in which are held by disqualified organizations), the REMIC
Regulations further require that such information also be provided to the
Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Expenses" below. No prediction can be made regarding
whether such legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "Foreign Investors"
below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trusts with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC 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 REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts), the deductibility of such expenses
will be subject to the limitations described above. The reduction or
disallowance of these deductions may have a significant impact on the yield of
REMIC Regular Certificates to such a holder. In general terms, a single- class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single- class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (a) a citizen or resident of the United States, (b) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (c) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (d) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (d), above, unless the trust elects to have its United
States status determined under the criteria set forth in (d) above for tax years
ending after August 20, 1996. Proposed Treasury regulations, which would be
effective with respect to payments made after December 31, 1997 if adopted in
their current form, would provide alternative certification requirements and
means by which a holder of REMIC Certificates could claim the exemption from
federal income and withholding tax.
REMIC Residual Certificates. The Conference Report to the Tax Reform
Act of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC Residual
Certificate will not be entitled to the portfolio interest exception from the
30% withholding tax (or to any treaty exemption or rate reduction) for that
portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Assets from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
Gain on Transfers of Certificates. A Certificateholder that is a
nonresident alien or foreign corporation will not be subject to United States
federal income tax on gain realized on the sale, exchange, or redemption of a
REMIC Certificate, provided that (i) such gain is not effectively connected with
a trade or business carried on by the Certificateholder in the United States,
(ii) in the case of a Certificateholder that is an individual, such
Certificateholder is not present in the United States for 183 days or more
during the taxable year in which such sale, exchange or redemption occurs and
(iii) in the case of gain representing accrued interest, the Certificateholder
complies to the extent necessary with certain identification requirements,
including timely delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such holder.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Representative or its designee will act as the tax matters
person for each REMIC. Each holder of a REMIC Residual Certificate, by the
acceptance of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
Tax Status of the Trust. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel, will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Mortgage Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Mortgage Assets that is allocable to such
Non-REMIC Certificate and may deduct the portion of the expenses incurred by the
Trust that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Assets and received
directly its share of the payments on the Mortgage Assets and incurred directly
its share of expenses incurred by the Trust when those amounts are received or
incurred by the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Moreover, a holder of a Non-REMIC
Certificate that is not a corporation cannot deduct such expenses for purposes
of the alternative minimum tax (if applicable). Such deductions will include
servicing, guarantee and administrative fees paid to the servicer of the
Mortgage Loans. As a result, individuals, estates, or trusts holding Non-REMIC
Certificates may have taxable income in excess of the cash received.
Status of the Non-REMIC Certificates. The Non-REMIC Certificates
generally will be "real estate assets" for purposes of Section 856(c)(5)(A) of
the Code and "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and interest income on the
Non-REMIC Certificates generally will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-REMIC Certificates may not be qualifying assets under any
of the foregoing sections of the Code to the extent that the Trust's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to Certificateholders. Further, the Non-Remic
Certificates may not be "real estate assets" to the extent loans held by the
trust are not secured by real property, and may not be "loans . . . secured by
an interest in real property" to the extent loans held by the trust are not
secured by residential real property or real property used primarily for church
purposes. In addition, to the extent that the principal amount of a loan exceeds
the value of the property securing the loan, it is unclear and Federal Tax
Counsel is unable to opine whether the loan will be a qualifying asset. The
Non-REMIC Certificates should not be "residential loans made by the taxpayer"
for purposes of the residential loan requirement of Section 593(g)(4)(B) of the
Code.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The
federal income tax treatment of the Non-REMIC Certificates will depend on
whether they are subject to the rules of section 1286 of the Code (the "stripped
bond rules"). The Non-REMIC Certificates will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the Internal Revenue Service may
contend that the stripped bond rules apply on the ground that the Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Servicer
or its affiliates, as specified in the applicable Prospectus Supplement,
represent greater than an arm's length consideration for servicing the Mortgage
Loans and should be characterized for federal income tax purposes as an
ownership interest in the Mortgage Loans. The Internal Revenue
Service has taken the position in Revenue Ruling 91-46 that retained interest
in excess of reasonable compensation for servicing is treated as a "stripped
coupon" under the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest
is treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate (other than an interest treated as a "stripped coupon") as market
discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount de minimis rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Asset underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Mortgage Assets,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. It is unclear whether such regulations
would apply this rule to the Non-REMIC Certificates, whether Section 1272(a)(6)
might apply to the Non-REMIC Certificates in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles and Federal Tax Counsel
is unable to opine with respect to these issues. If required to report interest
income on the Non-REMIC Certificates to the Internal Revenue Service under the
stripped bond rules, it is anticipated that the Trustee will calculate the yield
of the Non-REMIC Certificates based on a representative initial offering price
of the Non-REMIC Certificates and a reasonable assumed rate of prepayment of the
Mortgage Assets (although such yield may differ from the yield to any particular
holder that would be used in calculating the interest income of such holder).
The Prospectus Supplement for each series of Non-REMIC Certificates will
describe the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Assets will prepay at that rate or at
any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption would not have any significant
effect on the yield used in calculating accruals of interest income. In the
case, however, of a Non-REMIC Certificate acquired at a discount or premium
(that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "Sales of Non-REMIC Certificates" below) that is allocable to the Mortgage
Loan. The method of allocating such basis among the Mortgage Loans may differ
depending on whether a reasonable prepayment assumption is used in calculating
the yield of the Non-REMIC Certificates for purposes of accruing original issue
discount. It is not clear whether any other adjustments would be required to
reflect differences between the prepayment rate that was assumed in calculating
yield and the actual rate of prepayments.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Assets held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-REMIC
Certificate that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest payments
on the Mortgage Assets in accordance with its tax accounting method. In
addition, if the holder purchased the Non-REMIC Certificate at a discount or
premium, the holder will be required to account for such discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is original issue discount as defined in the Code and, in the case
of discount other than original issue discount, whether such other discount
exceeds a de minimis amount. In the case of original issue discount, the holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of original issue discount to be accrued
in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Assets. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates."
If discount other than original issue discount exceeds a de minimis
amount (described below), the holder will also generally be required to include
in income in each month the amount of such discount accrued through such month
and not previously included in income, but limited, with respect to the portion
of such discount allocable to any Mortgage Asset, to the amount of principal on
such Mortgage Asset received by the Trust in that month. Because the Mortgage
Assets will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues (and therefore at a rate not
significantly slower than the rate at which such discount would be included in
income if it were original issue discount). The holder may elect to accrue such
discount under a constant yield method based on the yield of the Non-REMIC
Certificate to such holder. In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method. Under
the de minimis rule, market discount with respect to a Non-REMIC Certificate
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate
and (ii) the weighted average life (in complete years) of the Mortgage Assets
remaining at the time of purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize the portion of such premium
that is allocable to a Mortgage Loan under a constant yield method based on the
yield of the Mortgage Loan to such holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage Loan and allowed as an ordinary deduction as principal
payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or
premium would be made based on the scheduled payments on the Mortgage Loans or
taking account of a reasonable prepayment assumption, and Federal Tax Counsel is
unable to opine on this issue.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan. The
method of allocating such basis among the Mortgage Loans may differ depending on
whether a reasonable prepayment assumption is used in calculating the yield of
the Non-REMIC Certificates for purposes of accruing original issue discount.
Other adjustments might be required to reflect differences between the
prepayment rate that was assumed in accounting for discount or premium and the
actual rate of prepayments.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a de
minimis amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-REMIC Certificate to the extent attributable to
Mortgage Loans that were originated after July 18, 1984, provided that the
holder complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Proposed Treasury Regulations, which would be effective with respect to payments
made after December 31, 1997 if adopted in their current form, would provide
alternative certification requirements and means by which a holder of Non-REMIC
Certificates could claim an exemption from federal income and withholding tax.
Interest or original issue discount on a Non-REMIC Certificate attributable to
Mortgage Loans that were originated prior to July 19, 1984 will be subject to a
30% withholding tax (unless such tax is reduced or eliminated by an applicable
tax treaty). For these purposes, the term "United States person" means a citizen
or a resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, and a trust for
which one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term "United States person" shall include a trust whose
income is includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts just described, unless the trust elects
to have its United States status determined under the criteria described in the
previous sentence for tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" 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 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
Internal Revenue 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 Non-REMIC Certificates were treated as obligations of
a taxable mortgage pool, 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 taxable
mortgage pool rules.
ERISA CONSIDERATIONS
ERISA 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 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 (each a "Plan") 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 Representative, the Originators, 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
(the "Plan Asset Regulations"), 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.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("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 transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass- through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. 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.
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 Class A Certificates 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 1% of 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.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Representative, the Certificate Guaranty Insurer,
the Servicer, or the Trustee is a party in interest if the Plan does not pay
more than 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 and 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 agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Representative, the
Servicer, the Certificate Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to 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 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 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 Certificates on behalf of a Plan.
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
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL
may be available to a 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 the Exemption 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.
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 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
Each Prospectus Supplement will describe the extent, if any, to which
the Classes of Certificates offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. 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.
PLAN OF DISTRIBUTION
The Certificates offered hereby will be offered in Series, either
directly by the Representative 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 and their use by the Representative and the Originators, 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. 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. 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 place and time of delivery for the Certificates of a Series in
respect of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Certificates of each Series will be passed upon for the Representative by Eric
R. Elwin, Esq., Corporate Counsel of the Representative and certain legal
matters relating to the validity of the issuance of the Certificates of each
Series will be passed upon for the Underwriters of the Certificates of each
Series by Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock &
Lavan LLP has performed legal services for the Representative and it is expected
that it will continue to perform such services in the future.
EXPERTS
The consolidated financial statements of The Money Store Inc. as of
December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 incorporated by reference herein have been audited
by KPMG Peat Marwick LLP, independent accountants, as stated in their opinion
given upon their authority as experts in accounting and auditing.
FINANCIAL INFORMATION
A new Trust will be formed to own the Mortgage Assets 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 are included in this Prospectus.
RATING
It is a condition to the issuance of the Certificates of
each Series offered hereby and by the Prospectus Supplement 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.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
Adjustable Rate................................................ 6
Adjusted Mortgage Loan Remittance Rate......................... 42
Agency Securities.............................................. 6
Agreement...................................................... 5
APR............................................................ 8
ARM............................................................ 85
Available Remittance Amount.................................... 53
Balloon Loans.................................................. 19
Bankruptcy Bond................................................ 13
Basis Risk Shortfall........................................... 68
Buydown Funds.................................................. 69
Cede........................................................... 17
Certificate Account............................................ 53
Certificate Guaranty Insurance Policy.......................... 12
Certificate Guaranty Insurer................................... 45
Certificate Register........................................... 41
Certificateholders............................................. 2
Certificates................................................... 1
Class.......................................................... 2
Cleanup Costs.................................................. 67
CMO............................................................ 9
Code........................................................... 15
Commission..................................................... 3
Compensating Interest.......................................... 15
Contingency Fees............................................... 53
Contracts...................................................... 6
Conventional Loans............................................. 5
Cooperative Loans.............................................. 5
Cooperatives................................................... 5
Curtailment.................................................... 15
Custodian...................................................... 52
Cut-off Date................................................... 40
Definitive Certificates........................................ 45
Designated Depository Institution.............................. 53
Detailed Description........................................... 23
Determination Date............................................. 14
DTC............................................................ 17
Due Period..................................................... 53
ERISA.......................................................... 17
Event of Nonpayment............................................ 56
Federal Tax Counsel............................................ 16
FHA............................................................ 5
FHA Loans...................................................... 6
FHLMC.......................................................... 6
Final Determination............................................ 57
Fixed Rate..................................................... 6
FNMA........................................................... 6
FTC Rule....................................................... 65
Funding Period................................................. 10
Garn-St. Germain Act.......................................... 66
GNMA........................................................... 6
Home Equity Loans.............................................. 25
HUD............................................................ 7
Index.......................................................... 90
Indirect Participant........................................... 42
Insurance Proceeds............................................. 14
Insurance Paying Agent......................................... 45
Insured Payment................................................ 45
IRS............................................................ 58
Liquidation Proceeds........................................... 14
Loan-to-Value Ratio............................................ 25
Lockout Periods................................................ 6
Lower Tier REMIC............................................... 77
Majority Certificateholders.................................... 55
Manufactured Homes............................................. 27
Manufacturer's Invoice Price................................... 25
Master Servicer................................................ 1
Monthly Advance................................................ 14
Mortgage Asset Schedule........................................ 23
Mortgage Assets................................................ 1
Mortgage Interest Rate......................................... 6
Mortgage Loans................................................. 6
Mortgage Pool Insurance Policy................................. 13
Mortgaged Properties........................................... 6
Multifamily Loans.............................................. 5
NHA Act........................................................ 28
1933 Act....................................................... 3
Non-REMIC Certificates.......................................... 16
Opinion of Counsel.............................................. 52
Originators..................................................... 1
Participants.................................................... 42
Pass-Through Rate............................................... 2
Permitted Instruments........................................... 53
Permitted Investments........................................... 47
Plan............................................................ 86
PMBS............................................................ 6
PMBS Agreement.................................................. 34
PMBS Issuer..................................................... 9
PMBS Servicer................................................... 9
PMBS Trustee.................................................... 9
Pool............................................................ 1
Pool Insurer.................................................... 46
Pre-Funding Account............................................. 10
Prepayment Assumption........................................... 70
Principal and Interest Account.................................. 53
Principal Prepayment Period..................................... 41
Principal Prepayment............................................ 15
Private Mortgage-Backed Securities.............................. 6
Qualified Substitute Mortgage Loan.............................. 52
Rating Agency................................................... 14
REIT ........................................................... 78
Relief Act...................................................... 22
REMIC........................................................... 2
REMIC Certificates............................................. 68
REMIC Regular Certificates...................................... 15
REMIC Residual Certificates...................................... 15
REMIC Regulations................................................ 69
Remittance Date.................................................. 2
Representative................................................... 1
Reserve Account.................................................. 12
Secured Conventional Home Improvement Loans...................... 6
Senior Certificates.............................................. 10
Servicing Advance................................................ 54
Servicing Fees................................................... 53
Single Family Loans.............................................. 5
SMMEA............................................................ 17
Special Hazard Insurance Policy................................... 13
Special Hazard Insurer............................................. 46
Spread Amount...................................................... 12
Standard Hazard Insurance Policies.................................. 7
Subordinated Certificates........................................... 10
Sub-Servicer........................................................ 55
Substitution Adjustment............................................. 52
Successor Servicer.................................................. 56
Superlien........................................................... 68
Supplemental Interest Payments...................................... 13
Termination Notice.................................................. 57
Termination Price................................................... 57
Tiered REMICs....................................................... 69
Title I Loan Program................................................ 6
Title I Property Improvement Loans.................................. 28
Title V............................................................. 66
Trust .............................................................. 1
Trustee............................................................. 15
Trustee's Mortgage File.............................................. 51
UCC.................................................................. 42
Underwriters......................................................... 88
United States person................................................. 81
Unsecured Home Improvement Loans..................................... 6
VA................................................................... 5
Variable Rate Non-REMIC Certificates................................. 84
Variable Rate REMIC Regular Certificate.............................. 72
Yield Supplement Agreement............................................ 68
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE REPRESENTATIVE OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY NOR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms................................................. S- 4
Risk Factors..................................................... S-40
Lending Programs................................................. S-42
The Representative and the Originators........................... S-46
The Loans Pools.................................................. S-49
Maturity, Prepayment and Yield Considerations.................... S-54
Description of the Certificates.................................. S-64
The MBIA Policies and MBIA....................................... S-73
The Agreement ................................................... S-76
Federal Income Tax Considerations................................ S-85
ERISA Considerations............................................. S-85
Legal Investment Considerations.................................. S-87
Underwriting..................................................... S-88
Experts.......................................................... S-88
Legal Matters.................................................... S-89
Rating of the Class A Certificates............................... S-89
Financial Information ........................................... S-89
Index of Principal Terms......................................... S-90
(Back cover continued
on next page)
<PAGE>
PROSPECTUS
Prospectus Supplement .......................................... 3
Available Information .......................................... 3
Reports to Certificateholders................................... 3
Incorporation of Certain Documents by Reference................. 4
Summary of Terms ............................................... 5
Risk Factors.................................................... 18
The Trusts...................................................... 22
Use of Proceeds ................................................ 35
The Representative and the Originators.......................... 35
The Single Family Loan Lending Program.......................... 36
Description of the Certificates ................................ 40
Credit Enhancement ............................................. 44
Maturity, Prepayment and Yield Considerations .................. 49
The Agreements ................................................. 50
Certain Legal Aspects of the
Mortgage Loans ............................................... 59
Federal Income Tax Consequences ................................ 68
ERISA Considerations ........................................... 86
Legal Investment Considerations ................................ 88
Plan of Distribution ........................................... 88
Legal Matters .................................................. 89
Experts......................................................... 89
Financial Information........................................... 89
Rating.......................................................... 89
Index of Principal Terms........................................ 90
(Back cover continued
on next page)
<PAGE>
$--------------
(APPROXIMATE)
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
PROSPECTUS SUPPLEMENT
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 6, 1997.
PROSPECTUS SUPPLEMENT
(To Prospectus dated
____________, 199_)
THE MONEY STORE SBA LOAN TRUST 199_-_
$______________ Class A Certificates
$______________ Class B Certificates
(Approximate)
THE MONEY STORE SBA LOAN-BACKED ADJUSTABLE RATE
CERTIFICATES, SERIES 199_-_,
(EXCEPT FOR THE EXCESS SPREAD (AS DEFINED HEREIN), WHICH CONSTITUTES PART OF THE
TRUST FUND, THE UNITED STATES SMALL BUSINESS ADMINISTRATION (THE "SBA") NEITHER
GUARANTEES THE CERTIFICATES OFFERED HEREBY, THE BENEFICIAL OWNERSHIP INTEREST IN
THE TRUST FUND REPRESENTED THEREBY OR THE UNGUARANTEED INTEREST IN THE SBA LOANS
THAT CONSTITUTE THE ASSETS OF SUCH TRUST FUND NOR DOES THE SBA HAVE ANY DIRECT
OR INDIRECT OBLIGATION TO THE TRUST FUND OR THE CERTIFICATEHOLDERS).
THE MONEY STORE INVESTMENT CORPORATION
THE MONEY STORE COMMERCIAL MORTGAGE INC.
AND
THE MONEY STORE OF NEW YORK, INC.,
Sellers
The Money Store SBA Loan-Backed Adjustable Rate Certificates, Series
199_-_ (the "Certificates"), evidence the entire beneficial ownership interest
in a trust fund (the "Trust Fund") created by The Money Store Investment
Corporation ("TMSIC"), The Money Store Commercial Mortgage Inc. ("TMSCMI") and
The Money Store of New York, Inc. ("MSNY" and, together with TMSIC and TMSCMI,
the "Sellers"). The Trust Fund consists primarily of the right to receive
payments and other recoveries attributable to certain unguaranteed interests
(the "Unguaranteed Interests") in a pool of loans partially guaranteed by the
U.S. Small Business Administration and, as described herein, may also include
certain loans originated in connection with such loans (collectively, the "SBA
Loans"). See "The SBA Loan Program -- Loan Parameters" herein. The Certificates
will be issued pursuant to a Pooling and Servicing Agreement, among the Sellers,
TMSIC, as servicer (in such capacity, the "Servicer"), The Money Store Inc., as
Representative (the "Representative") and [Name of Trustee], as trustee.
SEE "RISK FACTORS" ON PAGE S-25 HEREIN AND ON PAGE 17 IN
THE PROSPECTUS FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CERTIFICATES OFFERED HEREBY.
--------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF TMSIC, TMSCMI, MSNY OR ANY
OF THEIR RESPECTIVE AFFILIATES OR SUBSIDIARIES [, EXCEPT FOR THE
GUARANTY OF THE REPRESENTATIVE AS PROVIDED HEREIN]. EXCEPT FOR THE EXCESS
SPREAD, NEITHER THE CERTIFICATES NOR THE UNDERLYING UNGUARANTEED INTERESTS OF
THE SBA LOANS ARE INSURED OR GUARANTEED BY THE UNITED STATES SMALL BUSINESS
ADMINISTRATION OR ANY OTHER GOVERNMENTAL AGENCY, AND NO GOVERNMENTAL AGENCY HAS
PASSED UPON THE ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The Underwriter has agreed to purchase the Class A and Class B
Certificates from the Sellers at _____% of the principal amounts thereof,
subject to the terms and conditions set forth in the Underwriting Agreement
referred to herein under "Underwriting". Aggregate proceeds to the Sellers from
the sale of the Certificates offered hereby (before deducting expenses payable
by the Sellers estimated at $_______) will be approximately $___________.
The Underwriter proposes to offer the Certificates from time to time
for sale in negotiated transactions or otherwise, at prices determined at the
time of sale. For further information with respect to the plan of distribution
and any discounts, commissions or profits that may be deemed underwriting
discounts or commissions, see "Underwriting".
The Certificates are offered by the Underwriter subject to prior sale,
when, as and if issued to and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the Class A Certificates
will be made in book-entry form only through the Same Day Funds Settlement
System of The Depository Trust Company, and that delivery of the Class B
Certificates will be made, at the option of the Sellers, either (i) in
book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company or (ii) in physical form, at the office of [Name and
address of underwriter], in each case on or about __________, 199_.
[NAME OF UNDERWRITER]
__________, 199_
<PAGE>
(cover continued from previous page)
Additional SBA Loans (the "Subsequent SBA Loans") may be purchased by
the Trust from the Sellers from time to time on or before the close of business
on ____________, 199_ from funds, if any, on deposit in the Pre-Funding Account.
As described herein, any Subsequent SBA Loans acquired by the Trust will be
either (i) SBA ss. 7(a) Loans or (ii) Section 7(a) Companion Loans and SBA 504
Loans, each as defined herein. See "The SBA Loan Pool--General." On the Closing
Date (as defined herein), an aggregate cash amount not to exceed approximately
$_________ may be deposited into the Pre-Funding Account.
Each SBA Loan was, and each Subsequent SBA Loan will have been,
originated or acquired by the Sellers in accordance with the Sellers'
underwriting criteria described under "The Sellers--Underwriting Criteria"
herein. The SBA Loans will be master serviced by the Servicer, although MSNY
will service the SBA Loans sold by it to the Trust Fund and TMSIC will service
the SBA Loans sold by it and TMSCMI to the Trust Fund.
The Certificates will consist of two classes of certificates (the
"Class A Certificates" and the "Class B Certificates"). The Class B Certificates
are subordinate to the Class A Certificates in the right to receive payment of
interest and, after interest has been paid with respect to both Classes of
Certificates, the Class B Certificates are subordinate to the Class A
Certificates in the right to receive payments of principal. See "Description of
the Agreement and the Certificates--Flow of Funds" herein.
Distributions of principal and interest on the Certificates will be
made on the 15th day of each month or, if the 15th day is not a business day,
the first business day thereafter, commencing __________, 199_. To the extent of
Available Funds (as defined herein), and prior to payments of principal on the
Certificates, holders of Class A and Class B Certificates, in that order, will
be entitled to receive interest accrued at an adjustable rate, as described
herein. To the extent of the Available Funds remaining after payment of interest
on the Certificates, holders of Class A and Class B Certificates, in that order,
will be entitled to receive distributions of principal, as described herein. See
"Description of the Agreement and the Certificates -- Flow of Funds" herein.
Additionally, any Pre- Funded Amount (as defined herein) remaining in the
Pre-Funding Account at the close of business on ____________, 199_ will be
distributed as a principal payment on ____________, 199_ (together with __ days'
accrued interest at the applicable Remittance Rate on the amount of such
prepayment) to the Class A and Class B Certificates. The interest due the
Certificates on the _______ 199_ Remittance Date will be adjusted to take
account of such distribution.
There is currently no secondary market for the Certificates. [Name of
Underwriter] (the "Underwriter") intends to make a secondary market for the
Certificates, but has no obligation to do so. There can be no assurance that a
secondary market for the Certificates will develop or, if one does develop, that
it will continue.
No election will be made to treat the Trust Fund as a real estate
mortgage investment conduit. See "Material Federal Income Tax Consequences"
herein.
The Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by the Sellers and the
Representative pursuant to the Prospectus dated ____________, 199_ (the
"Prospectus"), of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
-----------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
-----------------------
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.
-----------------------
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
CERTIFICATES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securiites has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms used but not defined elsewhere in
this Prospectus Supplement have the meanings assigned to such terms under
"Certain Definitions". Unless otherwise noted, all statistical percentages and
all dollar amounts in this Prospectus Supplement are measured by the aggregate
principal balances of the SBA Loans, the Unguaranteed Interests or the
Guaranteed Interests (each as defined below under "--Trust Fund Assets"), as the
case may be, at the close of business on the Cut-Off Date (as defined below
under "--Trust Fund Assets").
Securities Offered..................... The Money Store SBA Loan-Backed
Adjustable Rate
Certificates, Series 199_-_, Class A
and Class B (the "Class A
Certificates" and the "Class B
Certificates", respectively, and
collectively, the "Certificates").
The Class A Certificates will be
issued in an aggregate initial
principal amount (the "Initial Class
A Certificate Principal Amount") of
approximately $______________. The
Class B Certificates will be issued
in an aggregate initial principal
amount (the "Initial Class B
Certificate Principal Amount") of
approximately $____________.
The Class B Certificates are
subordinate to the Class A
Certificates in the right to receive
payments of interest and, after
interest has been paid to both
Classes of Certificates, the Class B
Certificates are subordinate to the
Class A Certificates in the right to
receive payments of principal, in
each case to the extent described
herein. See "Description of the
Agreement and the Certificates-- Flow
of Funds" herein.
The Certificates represent the entire
beneficial ownership interest in a
trust fund (the "Trust Fund") formed
pursuant to a Pooling and Servicing
Agreement (the "Agreement") by and
among The Money Store Investment
Corporation ("TMSIC"), The Money
Store Commercial Mortgage Inc.
("TMSCMI"), The Money Store of New
York, Inc. ("MSNY" and together with
TMSIC and TMSCMI, the "Sellers"),
TMSIC, as servicer (in such capacity,
the "Servicer"), The Money Store
Inc., as representative (the
"Representative"), and [Name of
Trustee], as trustee (the "Trustee").
Denominations....................... The Class A Certificates will be
issued in book-entry form and the
Class B Certificates will be issued
either in book-entry or physical
form, as determined by the Sellers
prior to issuance of the
Certificates. Each Class of
Certificates will be issued in
minimum denominations of $1,000
original principal amount and
integral multiples of $1,000 in
excess thereof, except that one
Certificate of each Class may be
issued in a different denomination
and, if so issued, will be held in
physical form. See "Description of
the Agreement and the Certificates--
Registration of Certificates" herein.
Trust Fund Assets.................... The Trust Fund will consist primarily
of the right to receive all payments
and other recoveries attributable to
the Unguaranteed Interests (as
defined below) in a pool of loans
(the "SBA Loan Pool") made to small
business concerns pursuant to Section
7(a) of the Small Business Act, as
amended, and Title 13 of the Code of
Federal Regulations, as amended (the
"SBAss. 7(a) Loans"). The SBA Loan
Pool also may consist of loans made
to small businesses in connection
with the origination of an SBA ss.
7(a) Loan, which related SBA ss. 7(a)
Loan may or may not be part of the
Trust Fund (the "Section 7(a)
Companion Loans") and pursuant to the
SBA 504 Loan Program described herein
(the "SBA 504 Loans"). The SBA ss.
7(a) Loans, the Section 7(a)
Companion Loans and the SBA 504 Loans
are referred to herein collectively
as the "SBA Loans". The SBA ss. 7(a)
Loans are partially guaranteed by the
U.S. Small Business Administration
(the "SBA") pursuant to a Small
Business Administration Loan Guaranty
Agreement (Deferred Participation)
(SBA Form 750), dated August 13,
1980, by and between TMSIC and the
SBA, and pertinent SBA regulations
found at 13 C.F.R. Parts 120 and 121.
None of the Section 7(a) Companion
Loans or the SBA 504 Loans are
guaranteed by the SBA.
The Sellers reserve the right to
include in the Trust Fund an
aggregate principal amount of up to
approximately $_________ of Section
7(a) Companion Loans and SBA 504
Loans. Section 7(a) Companion Loans
and SBA 504 Loans, if any, will have
the characteristics described herein
under "The SBA Loan Pool--Section
7(a) Companion Loans and SBA 504
Loans." If Section 7(a) Companion
Loans and SBA 504 Loans are not
included in the Trust Fund on the
Closing Date, an amount equal to
approximately $__________ will be
deposited into the Pre-Funding
Account. Amounts in the Pre-Funding
Account will be used to purchase
either Section 7(a) Companion Loans
and SBA 504 Loans or SBA ss. 7(a)
Loans similar to the SBA ss. 7(a)
Loans delivered on the Closing Date.
As to any SBA ss. 7(a) Loan, the
right to receive the guaranteed
portion of the principal balance
thereof together with interest
thereon at a per annum rate in effect
from time to time (which rate is less
than the rate paid by the obligor on
the related SBA ss. 7(a) Loan (the
"Obligor")) and the fee (the "Agent
of the SBA's Fee") payable to the
SBA's fiscal and transfer agent (the
"Agent of the SBA") is referred to
herein as the "Guaranteed Interest".
With respect to SBA ss. 7(a) Loans
for which the Guaranteed Interest was
sold in the secondary market on or
after September 1, 1993 and SBA ss.
7(a) Loans approved by the SBA on or
after October 12, 1995 (the
"Additional Fee SBA Loans"), a fee
equal to 40 basis points and 50 basis
points, respectively, per annum on
the outstanding balance of the
Guaranteed Interest of such
Additional Fee SBA Loans (the
"Additional Fee") is required to be
paid by the related Seller to the
SBA. Although such Additional Fee is
the responsibility of the related
Seller, the Additional Fee will be
funded from the interest received by
the related Obligor on the SBA ss.
7(a) Loans. Accordingly, any such
Additional Fee will reduce the Excess
Spread (as defined herein) on the
related SBA Loan. The Guaranteed
Interest varies from SBA ss. 7(a)
Loan to SBA ss. 7(a) Loan, is not
included in the Trust Fund and
Certificateholders have no right or
interest therein. As described
herein, the portion of the principal
guaranteed by the SBA for each SBA
ss. 7(a) Loan varies depending upon
the program under which such SBA ss.
7(a) Loan was originated. However,
the SBA imposes a maximum per
borrower guaranty of $750,000. See
"The SBA Loan Program -- Section 7(a)
Loan Parameters."
Pursuant to policies of the SBA, the
Servicer is required to retain for
each SBA ss. 7(a) Loan an amount
equal to 0.60% per annum on the
outstanding balance of the related
Guaranteed Interest (such amount is
referred to herein as the "Premium
Protection Fee" for the related SBA
ss. 7(a) Loan). The Premium
Protection Fee is not included in the
Trust Fund and Certificateholders
have no right or interest therein.
The "Unguaranteed Interest" will
equal (i) as to any SBA ss. 7(a)
Loan, all payments and other
recoveries on such SBA ss. 7(a) Loan
not constituting the Guaranteed
Interest therein and (ii) as to any
Section 7(a) Companion Loan or SBA
504 Loan, all payments and other
recoveries on such Section 7(a)
Companion Loan or SBA 504 Loan. As
stated above, the interest accrued on
the guaranteed portion of the
principal balance of each SBA ss.
7(a) Loan exceeds the sum of the
interest payable to the holder of the
Guaranteed Interest, the Agent of the
SBA's Fee and, with respect to the
Additional Fee SBA Loans, the
Additional Fee. Such excess (the
"Excess Spread"), which is guaranteed
by the SBA for up to 120 days of
accrued interest, is included in the
Unguaranteed Interest and will be
available to pay interest and
principal on the Certificates, the
Servicing Fee to the Servicer and
fund the Spread Account (as defined
under "--Spread Account" herein) as
described under "--Spread Account"
herein.
The "Unguaranteed Percentage" will
equal, (i) as to any SBA ss. 7(a)
Loan, the fraction, expressed as a
percentage, the numerator of which is
the principal portion of the
Unguaranteed Interest as of
____________, 199_ (the "Cut-Off
Date") and the denominator of which
is the outstanding principal balance
of such SBA ss. 7(a) Loan as of the
Cut-Off Date and (ii) as to any
Section 7(a) Companion Loan or SBA
504 Loan, 100%. The Unguaranteed
Percentage for any given loan will
not change over time.
As of the close of business on the
Cut-Off Date, the aggregate principal
amount of the Unguaranteed Interests
of the SBA ss. 7(a) Loans expected to
be delivered to the Trustee on the
Closing Date equaled approximately
$_______________ the "Original Pool
Principal Balance").
Sellers.......................... TMSIC and TMSCMI are New Jersey
corporations, and MSNY is a New York
corporation. TMSIC and TMSCMI are
wholly-owned subsidiaries of The
Money Store Inc., a New Jersey
corporation, and MSNY is a
wholly-owned subsidiary of TMSIC. All
of the SBA ss. 7(a) Loans were, and
all of the Subsequent SBA Loans
consisting of SBAss. 7(a) Loans will
have been, originated or acquired by
TMSIC or MSNY. All of the Section
7(a) Companion Loans and SBA 504
Loans will have been originated by
TMSCMI. Each Seller will deposit into
the Trust Fund the right to receive
the Unguaranteed Interests in the SBA
Loans originated or acquired by it
and will make representations and
warranties with respect to such SBA
Loans.
Servicers.......................... MSNY will service the SBA Loans sold
by it to the Trust Fund and TMSIC
will service the SBA Loans sold by it
and TMSCMI to the Trust Fund, in each
case in accordance with the terms of
the Agreement and, with respect to
the SBAss. 7(a) Loans, the SBA Rules
and Regulations and the Multi-Party
Agreement (as defined below under
"--Multi-Party Agreement"). TMSIC
will be liable to the Trustee for the
servicing of all the SBA Loans.
Trustee............................ [Marine Midland Bank, a trust company
headquartered in Buffalo, New York],
will be the Trustee. In the
Agreement, the Trustee will agree to
act as successor Servicer if TMSIC
can no longer serve in such capacity.
Document Custodians................ The promissory notes evidencing the
SBA ss. 7(a) Loans (the "Notes") will
be held by the Agent of the SBA
pursuant to the Multi-Party
Agreement. The Agent of the SBA will
be liable solely to the SBA for the
Agent of the SBA's gross negligence
or malfeasance. The SBA will be
liable to the Trustee, the Sellers
and the Servicer for the SBA's and
the Agent of the SBA's gross
negligence or malfeasance.
All other documents to be delivered
by the Sellers with respect to the
SBA Loans will be delivered to and
held by the Trustee pursuant to the
Agreement. See "Description of the
Agreement and the Certificates"
herein.
Interest Accrual Period............ With respect to each Remittance Date
(as defined below under "--Remittance
Date"), the "Interest Accrual Period"
will be the period commencing on the
15th day of the month preceding such
Remittance Date and ending on the
14th day of the month of such
Remittance Date. However, for the
Remittance Date occurring in
____________, 199_, the Interest
Accrual Period will be the period
commencing on the Closing Date and
ending on ____________, 199_.
Pre-Funding Account................ If Section 7(a) Companion Loans and
SBA 504 Loans are not included in the
Trust Fund on the Closing Date, cash
in an amount not to exceed
approximately $_________ (the
"Pre-Funded Amount") will be
deposited on the Closing Date into an
account (the "Pre-Funding Account").
Amounts in the Pre-Funding Account
may be used only (i) to acquire
Subsequent SBA Loans and (ii) to make
accelerated payments of principal on
the Certificates. During the period
(the "Funding Period") from the
Closing Date until the earliest of
(i) the date on which the amount on
deposit in the Pre-Funding Account,
is less than [$100,000], (ii)
the date
on which an Event of Default occurs
under the Agreement or (iii) the
close of business on ____________,
199_, amounts will, from time to
time, be withdrawn from the
Pre-Funding Account to purchase
Subsequent SBA Loans in accordance
with the Agreement. Any Pre-Funded
Amount remaining at the end of the
Funding Period will be distributed as
a principal prepayment on the next
Remittance Date to the Certificates.
However, any Pre- Funded Amount
remaining at the close of business on
____________, 199_ will be
distributed as a principal prepayment
on __________, 199_ (the "Special
Remittance Date") to the
Certificates.
Capitalized Interest Account........... If the Pre-Funding Account is
established, on the Closing Date, the
Representative also will make a cash
deposit in an account (the
"Capitalized Interest Account") to be
pledged to the Trustee. The amount,
if any, deposited in the Capitalized
Interest Account will be used by the
Trustee on the Remittance Dates
occurring in __________, __________
and __________ 199_ to fund the
excess, if any, of (i) the amount of
interest accrued for each such
Remittance Date at the weighted
average Class A and Class B
Remittance Rates on the portion of
the Certificates having principal
balances exceeding the principal
balances of the Unguaranteed
Interests over (ii) the amount of any
earnings on funds in the Pre-Funding
Account that are available to pay
interest on the Certificates on each
such Remittance Date. Additionally,
if a principal prepayment is made on
the Special Remittance Date to any
Class of Certificates, such Class of
Certificates also will receive on
such date, from the Capitalized
Interest Account, an amount equal to
__ days' interest at the applicable
Remittance Rate on the amount of such
principal prepayment. Any amounts
remaining in the Capitalized Interest
Account on the Special Remittance
Date and not used for such purposes
are required to be paid directly to
the Representative on such Special
Remittance Date.
Available Funds.................... With respect to each Remittance Date,
the "Available Funds" will equal the
sum of (i) all amounts (including any
Excess Spread) received from any
source by the Servicer or any
Subservicer during the preceding
calendar month with respect to
principal and interest on the SBA
Loans (net of the amount payable to
the holder of the Guaranteed
Interest, the Agent of the SBA's Fee,
the Additional Fee and the Servicing
Fee (as defined under "--Servicing
Fee" herein)), (ii) advances by the
Servicer, (iii) amounts to be
transferred from the Pre- Funding
Account and the Capitalized Interest
Account with respect to the
Remittance Dates in __________,
__________ and __________ 199_ and
(iv) amounts in the Spread Account.
Interest............................ To the extent of the Available Funds,
and prior to payments of principal,
on each Remittance Date the Class A
and Class B Certificateholders, in
that order, will be entitled to
receive interest accrued for the
related Interest Accrual Period at
the adjustable rate described below
on the Class A or Class B Certificate
Balance, as the case may be (each as
defined below), outstanding
immediately prior to such Remittance
Date. If, on any Remittance Date, the
Class A or Class B Certificates do
not receive the full amount of
interest to which they are entitled,
such shortfall, plus interest thereon
compounded monthly at the then
applicable Class A or Class B
Remittance Rate (each as defined
below), will be added to the amount
of interest they are entitled to
receive on succeeding Remittance
Dates. The aggregate amounts of
interest payable to the Class A and
Class B Certificates on each
Remittance Date are referred to
herein as the "Class A Interest
Distribution Amount" and the "Class B
Interest Distribution Amount",
respectively. Notwithstanding the
foregoing, if a principal payment is
made to a Class of Certificates on
the Special Remittance Date, each
such Class also will receive on such
date __ days' interest at the
applicable Remittance Rate on the
amount of such prepayment. Further,
the Class A and Class B Interest
Distribution Amounts for the
__________ 199_ Remittance Date will
be based on 30 days' interest on the
related Certificate Balance on
__________, 199_, after giving effect
to such prepayment.
Interest will accrue on the
Certificates on the basis of a
360-day year consisting of twelve
30-day months at a per annum rate
(the "Class A Remittance Rate" and
"Class B Remittance Rate",
respectively) equal to:
Class A: During the initial Interest
Accrual Period, _____% per annum.
During each subsequent Interest
Accrual Period, the Prime Rate (as
defined below) in effect on the
preceding Adjustment Date (as defined
below) minus _____% per annum,
subject to the adjustments described
under "Description of the Agreement
and the Certificates--Class A and
Class B Interest Distribution
Amounts" herein.
Class B: During the initial Interest
Accrual Period, _____% per annum.
During each subsequent Interest
Accrual Period, the Prime Rate in
effect on the preceding Adjustment
Date minus _____% per annum, subject
to the adjustments described under
"Description of the Agreement and the
Certificates--Class A and Class B
Interest Distribution Amounts"
herein.
The Class A and Class B Remittance
Rates will be adjusted on the first
Business Day (as defined under
"Certain Definitions" herein) of each
January, April, July and October,
commencing __________, 199_ (each, an
"Adjustment Date"). The Prime Rate
will equal the lowest prime lending
rate published in the Money Rate
Section of THE WALL STREET JOURNAL
for the applicable Adjustment Date.
As stated above, the amount of
interest paid on the Class A and
Class B Certificates on each
Remittance Date is based upon the
amount of interest due on the SBA
Loans in the month preceding such
Remittance Date. For each such
monthly payment, the related SBA Loan
Interest Rate is based on the Prime
Rate in effect for such SBA Loan in
the month preceding the month such
monthly payment is due. For example,
the monthly payment due on an SBA
Loan in October 199_ will be based
upon the Prime Rate in effect for
such SBA Loan in September 199_
(which, for SBA Loans adjusting
quarterly, generally will be the
Prime Rate in effect on July 1,
199_). This monthly payment will be
distributed to Certificateholders on
the Remittance Date in November 199_.
For this Remittance Date, interest on
the Class A and Class B Certificates
will accrue based upon the Prime Rate
in effect on the first Business Day
of October 199_.
Interest accruing on the Certificates
for the Remittance Dates occurring in
each February, May, August and
November will be based upon the Prime
Rate in effect on the first Business
Day in the preceding January, April,
July and October, respectively.
However, the interest payments on the
SBA Loans required to be distributed
to Certificateholders on each such
Remittance Date generally will be
based upon the Prime Rate in effect
on the first Business Day in the
preceding October, January, April and
July, respectively. As a result of
this mismatch, the actual amount of
interest distributed to the
Certificateholders in February, May,
August and November may be subject to
the adjustments described under
"Description of the Agreement and the
Certificates -- Class A and Class B
Interest Distribution Amounts"
herein.
As of any date, the "Class A
Certificate Balance" will equal the
Class A Certificate Balance on the
Closing Date reduced by all amounts
previously distributed to Class A
Certificateholders and allocable to
principal. The "Class B Certificate
Balance" will be calculated in a
similar manner.
Principal........................ To the extent of the Available Funds
remaining after payment of interest
as described above, on each
Remittance Date, holders of the Class
A Certificates will receive an amount
equal to the lesser of (A) such
remaining Available Funds and (B) the
sum of (i) the Class A Principal
Distribution Amount (as defined
below) and (ii) the Class A
Carry-Forward Amount (as defined
below).
To the extent of the Available Funds
remaining after payment of interest
as described above and payment of
principal on the Class A
Certificates, holders of the Class B
Certificates will receive an amount
equal to the lesser of (A) such
remaining Available Funds and (B) the
sum of (i) the Class B Principal
Distribution Amount (as defined
below) and (ii) the Class B
Carry-Forward Amount (as defined
below).
With respect to each Remittance Date,
the "Class A Principal Distribution
Amount" and the "Class B Principal
Distribution Amount" will equal the
Class A Percentage or the Class B
Percentage (each as defined below),
as the case may be, multiplied by the
total of (i) the Unguaranteed
Percentage of all payments and other
recoveries of principal of an SBA
Loan (net of amounts reimbursable to
the Servicer pursuant to the
Agreement) received by the Servicer
or any Subservicer in the immediately
preceding calendar month (with
respect to any Remittance Date, the
"Due Period"), excluding amounts
received relating to SBA Loans which
have been delinquent 24 months or
have been determined to be
uncollectible, in whole or in part,
by the Servicer to the extent that
the Class A Certificateholders or the
Class B Certificateholders, as the
case may be, have previously received
the Class A Percentage or the Class B
Percentage, as the case may be, of
the principal portion of the
Unguaranteed Interest of such SBA
Loans; (ii) the principal portion of
any Unguaranteed Interest actually
purchased by a Seller for breach of a
representation and warranty or other
defect and actually received by the
Trustee as of the related
Determination Date; (iii) any
adjustments with respect to
substitutions of SBA Loans for which
a Seller has breached a
representation or warranty deposited
in the Principal and Interest Account
and transferred to the Certificate
Account as of the related
Determination Date; (iv) the
Unguaranteed Percentage of all losses
on SBA Loans which were finally
liquidated during the applicable Due
Period; (v) the Unguaranteed
Percentage of the then outstanding
principal balance of any SBA Loan
which, as of the first day of the
related Due Period, has been
delinquent for 24 months or has been
determined to be uncollectible, in
whole or in part, by the Servicer;
and (vi) amounts, if any, released
from the Pre-Funding Account on the
July, __________, __________ and
____________, 199__ Remittance Dates.
With respect to each Remittance Date,
the "Class A Carry-Forward Amount"
and the "Class B Carry-Forward
Amount" will equal the aggregate
amount, if any, by which (i) the
Class A Principal Distribution Amount
or the Class B Principal Distribution
Amount, as the case may be, with
respect to any preceding Remittance
Date exceeded (ii) the amount of the
actual principal distribution to the
Class A Certificates or the Class B
Certificates, as the case may be, on
such Remittance Date.
With respect to each Remittance Date,
the "Class A Percentage" will equal
_____%, representing the beneficial
ownership interest of the Class A
Certificates in the Trust Fund.
With respect to each Remittance Date,
the "Class B Percentage" will equal
_____%, representing the beneficial
ownership interest of the Class B
Certificates in the Trust Fund.
On each Remittance Date, Available
Funds remaining after payment of
interest and principal to the Class A
and Class B Certificates and payment
of the Trustee's fees and expenses
will be deposited in the Spread
Account and, to the extent amounts in
the Spread Account would exceed the
then applicable Specified Spread
Account Requirement, such excess will
be distributed to the Spread Account
Depositor (as defined under "--
Spread Account"). See--Spread
Account" herein.
The aggregate amount of principal
payable with respect to each Class of
Certificates on each Remittance Date
as described above, together with
interest as calculated above under
"--Interest", constitutes the "Class
A Remittance Amount" and the "Class B
Remittance Amount", as the case may
be, for such Remittance Date.
Subordination of Class B
Certificates..................... The rights of the holders of the
Class B Certificates to receive
distributions with respect to
interest and principal will be
subordinated to such rights of the
holders of the Class A Certificates
to the extent described above under
"--Securities Offered". This
subordination is intended to enhance
the likelihood of regular receipt by
holders of Class A Certificates of
the full amount of their scheduled
monthly payments of interest and,
after distribution of the Class B
Interest Distribution Amount,
principal, and to afford the holders
of the Class A Certificates a measure
of protection against losses
resulting from liquidated SBA Loans
equal to (i) the amount of funds
remaining in the Spread Account after
payment of interest on the Class A
and Class B Certificates and (ii) the
then outstanding Class B Certificate
Balance.
Remittance Date................... Distributions to Certificateholders
will be made on the 15th day of each
month, or if such day is not a
business day, on the succeeding
business day, commencing _______,
199_ (each, a "Remittance Date"). Any
Pre- Funded Amount remaining at the
close of business on _________, 199_
(together with __ days' interest
thereon at the applicable Remittance
Rates) will be distributed by or on
behalf of the Trustee on the Special
Remittance Date to the Class A and
Class B Certificates. Such
distribution will be made to each
person in whose name a Certificate of
the applicable Class is registered on
_________, 199_.
The last scheduled Remittance Date
for the Certificates is ________,
20__. It is expected that the actual
last Remittance Date for each Class
of Certificates will occur
significantly earlier than such
scheduled Remittance Date. See
"Yield, Maturity, and Prepayment
Considerations" herein.
Record Date...................... Distributions on the Certificates
will be made by or on behalf of the
Trustee on each Remittance Date to
each person in whose name a
Certificate is registered on the last
day of the preceding calendar month
(the "Record Date").
Closing Date...................... _________, 199_
Spread Account.................... TMS SBA Holdings, Inc., a special
purpose, bankruptcy remote Delaware
corporation (the "Spread Account
Depositor") will establish a reserve
account (the "Spread Account") with
the Trustee. The Spread Account will
not be a part of the Trust Fund but
will be pledged to the Trustee as
security for the obligations of the
Spread Account Depositor under the
Agreement pursuant to an agreement
(the "Spread Account Agreement")
between the Spread Account Depositor
and the Trustee.
On the Closing Date, the Spread
Account Depositor will make an
initial cash deposit into the Spread
Account in an amount equal to ___% of
the Original Pool Principal Balance
(the "Initial Deposit"). Thereafter,
on each Remittance Date the Trustee
will deposit into the Spread Account
the cash, if any, remaining after
payment of interest and principal to
the holders of the Certificates as
described above under "--Interest"
and "--Principal", and payment of
amounts required to be deposited into
the Expense Account and certain
amounts reimbursable to the Servicer,
until the aggregate amount then on
deposit in the Spread Account (the
"Spread Balance") equals the sum of
(i) the then outstanding principal
balance of the Unguaranteed Interests
of all SBA Loans 180 days or more
delinquent and (ii) the greater of
(a) __% of the then outstanding
aggregate principal balance of the
Unguaranteed Interests of all the SBA
Loans, or (b) the amount of the
Initial Deposit; provided, however,
that for purposes of clauses (i) and
(ii)(a), there shall be excluded the
principal portion of the Unguaranteed
Interest of SBA Loans which have been
delinquent 24 months or have been
determined to be uncollectible, in
whole or in part, by the Servicer, to
the extent that the
Certificateholders have previously
received the principal portion of the
Unguaranteed Interest of such SBA
Loans (the sum of such amounts is
referred to herein as the "Specified
Spread Account Requirement").
Amounts, if any, on deposit in the
Spread Account will be available to
be applied to payments of interest
and principal on the Certificates on
any Remittance Date.
The Spread Account Depositor will not
be required to refund any amounts
previously properly distributed to
it, regardless of whether there are
sufficient funds on a subsequent
Remittance Date to make a full
distribution to holders of the
Certificates on such Remittance Date.
The funding and maintenance of the
Spread Account is intended to enhance
the likelihood of timely payment of
principal and interest to the holders
of the Certificates; however, if the
SBA Loan Pool experiences levels of
delinquencies and losses above the
scenarios used to obtain the ratings
on the Class B Certificates, the
Spread Account could be depleted, and
shortfalls could result. See "Risk
Factors -- Spread Account",
"Description of the Agreement and the
Certificates--Spread Account" and
"Ratings" herein.
[The Guaranty...................... As additional credit support
for the the Class B
Certificates, the Class B
Certificateholders are entitled to
receive on each Remittance Date the
amount equal to the Guaranty Payment,
if any, under the guaranty provided by
The Money Store Inc. (the "Guaranty").
The "Guaranty Payment" for any
Remittance Date will equal the
difference, if any, between the sum of
the Class B Interest Distribution
Amount and the Class B Principal
Distribution Amount for such
Remittance and the portion of the
Available Funds allocated to the Class
B Certificates on such Remittance
Date, but no more than $_________ in
the aggregate.]
The SBA Loan Pool..................... The following is a description of the
SBA ss. 7(a) Loans and the related
Unguaranteed Interests expected to be
delivered to the Trustee on the
Closing Date. As described herein,
the Sellers reserve the right to
include in the Trust Fund an
aggregate principal amount of up to
approximately $_________ of Section
7(a) Companion Loans and SBA 504
Loans having the characteristics set
forth in "The SBA Loan Pool--Section
7(a) Companion Loans and SBA 504
Loans." If the Sellers do not sell to
the Trust Fund such Section 7(a)
Companion Loans and SBA 504 Loans, it
is expected that the Sellers will
sell to the Trust Fund SBA ss. 7(a)
Loans having overall characteristics
substantially similar to the SBA ss.
7(a) Loans being delivered on the
Closing Date.
All the SBA ss. 7(a) Loans were
originated or acquired by the Sellers
in accordance with the underwriting
criteria described under "The Sellers
-- Underwriting Criteria" herein.
None of the SBA ss. 7(a) Loans are
balloon loans and each is fully
amortizing in accordance with its
terms. On the Closing Date, it is
expected that the Trust Fund will
contain the Unguaranteed Interest in
_______ SBA ss. 7(a) Loans, which SBA
ss. 7(a) Loans are secured primarily
by first liens on commercial real
property generally used by the
borrower or its affiliates in the
conduct of their business. Additional
collateral for certain of the SBA ss.
7(a) Loans generally consists of
second liens on personal real estate
and personal guarantees and may
include liens on machinery and
equipment and other business assets.
The SBA ss. 7(a) Loans were
originated to businesses located in
__ states and the District of
Columbia; primarily in California. As
of the Cut-Off Date, no more than
approximately ____% of the SBA ss.
7(a) Loans (by principal balance of
Unguaranteed Interests), representing
___ SBA ss. 7(a) Loans, were made to
borrowers whose businesses are
included in the same four digit
standard industrial code
classification. See "The SBA Loan
Program" herein.
As of the Cut-Off Date, the aggregate
and average unpaid principal portion
of the Unguaranteed Interests of the
SBA ss. 7(a) Loans were approximately
$____________ and $____________,
respectively, the aggregate and
average unpaid principal portion of
the Guaranteed Interests of the SBA
ss. 7(a) Loans were approximately
$____________ and $_____________,
respectively, the maximum and minimum
original principal portion of the
Unguaranteed Interests of the SBA ss.
7(a) Loans were approximately
$_________ and $_______,
respectively, and the maximum and
minimum original principal portion of
the Guaranteed Interests of the SBA
ss. 7(a) Loans were approximately
$________ and $________,
respectively. The aggregate original
principal portion of the Unguaranteed
Interests of the SBA ss. 7(a) Loans
was approximately $___________ and
the aggregate original principal
portion of the Guaranteed Interests
of the SBA ss. 7(a) Loans was
approximately $------------.
As of the Cut-Off Date, the SBA ss.
7(a) Loans bore interest at rates
(each, a "Note Rate") which ranged
from _____% to _____% per annum and
the weighted average Note Rate was
approximately ______% per annum. As
of the Cut-Off Date, the SBA ss. 7(a)
Loans had a weighted average age of
approximately __ months, a weighted
average original term of
approximately ___ months, a weighted
average gross margin of approximately
____%, a weighted average lifetime
floor of approximately ____%, a
weighted average original
Loan-to-Value Ratio based on net
discounted collateral value (as
described under "The
Sellers--Underwriting Criteria"
herein) of approximately _____%, a
weighted average original
Loan-to-Value Ratio without giving
effect to the discounts to collateral
values (as described in the
Prospectus under "The SBA Loan
Lending Program-- Underwriting
Criteria" for SBA ss. 7(a) Loans) of
approximately _____% and a weighted
average debt- service coverage ratio
of approximately _____. The weighted
average Guaranteed Percentage of the
SBA ss. 7(a) Loans was approximately
____%. The weighted average Excess
Spread, expressed as a percentage of
the principal balances of the
Unguaranteed Interests, was
approximately _____% as of the
Cut-Off Date. Such Excess Spread is
in addition to the Extra Interest (as
defined under "Description of the
Agreement and the Certificates--Class
A and Class B Interest Distribution
Amounts" herein) available from the
unguaranteed portion of the SBA ss.
7(a) Loans. Approximately _____% of
the SBA ss. 7(a) Loans (by principal
balance of Unguaranteed Interests) do
not have a lifetime interest rate
cap. As of the Cut-Off Date, the
weighted average lifetime cap of SBA
ss. 7(a) Loans with lifetime interest
rate caps was approximately ____%. As
described herein, the existence of a
lifetime interest rate cap or floor
will not limit the Excess Spread
included in the related Unguaranteed
Interest. See "The SBA Loan Pool"
herein.
Transfer of Assets............... Each Note will be endorsed by the
applicable Seller by means of an
allonge (I.E., a separate ---- piece
of paper attached to the Note) and
delivered to the Agent of the SBA (or
with respect to the Notes relating to
the Section 7(a) Companion Loans and
the SBA 504 Loans, delivered to the
Trustee). On or before the Closing
Date (or, with respect to a
Subsequent SBA Loan, on or before the
related transfer date), the Agent of
the SBA (or with respect to the
Section 7(a) Companion Loans and the
SBA 504 Loans, if any, the Trustee)
will acknowledge receipt of each such
Note for each SBA Loan in the SBA
Loan Pool and that each such Note has
been endorsed as follows (bracketed
language is applicable only for SBA
ss. 7(a) Loans): "Pay to the order of
[Name of Trustee], and its successors
and assigns, as trustee under that
certain Pooling and Servicing
Agreement dated as of _________,
199_, for the benefit of [the United
States Small Business Administration
and] holders of The Money Store
SBA Loan-Backed
Certificates, Series 199_-_, Class A
and Class B[, as their respective
interests may appear], without
recourse".
With respect to each SBA Loan in the
SBA Loan Pool, the applicable Seller
will be required to deliver the
following additional documentation to
the Trustee at or prior to the
Closing Date (or, with respect to a
Subsequent SBA Loan, in the case of
(a) below, at or prior to the related
transfer date):
(a) For each SBA Loan secured by
commercial real property or
residential real property:
(1) Original recorded Mortgage, or if
the original is unavailable, a copy
thereof certified to be true and
complete by the applicable Seller.
(2) Certified copy of the Assignment
of the Mortgage endorsed as follows
(bracketed language is applicable
only for SBA ss. 7(a) Loans): "[Name
of Trustee], ("Assignee") its
successors and assigns, as trustee
under the Pooling and Servicing
Agreement dated as of ________, 199_
[, subject to the Multi-Party
Agreement dated as of ________,
199_]." The original assignments will
be transmitted by the applicable
Seller for recording promptly
following the Closing Date.
(3) Original recorded intervening
assignments, if any, or if the
original is unavailable, copies
thereof certified by the applicable
Seller to be true and complete.
(4) Originals or certified copies of
all title insurance policies or other
evidence of lien position, including
but not limited to PIRT policies,
limited liability reports and lot
book reports, to the extent the
Sellers obtain such policies or other
evidence of lien position in
accordance with the criteria
described herein.
(b) For all SBA Loans:
(1) Blanket assignment of all
collateral securing the SBA Loan,
including without limitation, all
rights under applicable guarantees
and insurance policies.
(2) Irrevocable power of attorney of
the applicable Seller to the Trustee
to execute, deliver, file or record
and otherwise deal with the
collateral for the SBA Loans in
accordance with the Agreement. The
power of attorney will be delegable
by the Trustee to the Servicer and
any successor servicer and will
permit the Trustee or its delegate to
prepare, execute and file or record
UCC financing statements and notices
to insurers.
(3) Blanket Uniform Commercial Code
("UCC") UCC-1 financing statements
identifying by type all collateral
for the SBA Loans in the SBA Loan
Pool and naming the Trustee, and with
respect to the SBA ss. 7(a) Loans,
the SBA, as Secured Parties and the
applicable Seller as the Debtor. See
"The Agreements-- Sale of SBA Loans"
in the Prospectus.
The Trustee will be required to
provide an interim certification as
to the receipt of such documents
within 90 days after the Closing Date
and to provide a final certification
within one year after the Closing
Date.
Multi-Party Agreement............... TMSIC and MSNY, as Sellers, the
Servicer, the Trustee and the SBA
will enter into a Multi-Party
Agreement, dated as of _________,
199_ (the "Multi- Party Agreement"),
which will set forth the relationship
of the parties with respect to the
SBAss. 7(a) Loans and the proceeds
thereof and the consent of the SBA to
the transactions contemplated by the
Agreement.
Servicing of the
SBA Loans....................... MSNY will service the SBA
Loans sold by it to the Trust Fund
and TMSIC will service the SBA Loans
sold by it and TMSCMI to the Trust
Fund, in each case, in accordance
with the Agreement and, with respect
to the SBAss. 7(a) Loans, the SBA
Rules and Regulations and the
Multi-Party Agreement, and will cause
the SBA Loans to be serviced with the
same care as it customarily employs
and exercises in servicing and
administering small business loans
for its own account, giving due
consideration for the reliance of the
Trustee on the Servicer. Such
servicing includes, without
limitation, the right to release
and/or substitute collateral for an
SBA Loan.
Monthly Advances................. The Servicer is required to remit to
the Trustee no later than the day of
each month which is three business
days prior to the Remittance Date
(the "Determination Date") for
deposit in the Certificate Account
the amount (the "Monthly Advance"),
if any, by which (i) 30 days'
interest at a rate equal to the then
applicable weighted average Class A
and Class B Remittance Rates plus the
rate used in determining certain
expenses of the Trust Fund (the
"Adjusted SBA Loan Remittance Rate")
on the aggregate Class A and Class B
Principal Balances immediately prior
to the related Remittance Date (as
the amount calculated pursuant to
this clause (i) may be adjusted in
accordance with the limits described
under "Description of the Agreement
and the Certificates--Class A and
Class B Interest Distribution
Amounts" herein) exceeds (ii) the
amount received by the Servicer as of
the related Record Date in respect of
interest on the SBA Loans minus the
interest payable to the holders of
the Guaranteed Interest, the
Additional Fee and the fee payable to
the Agent of the SBA (plus, for the
Remittance Dates in ___________,
___________ and _____________, 199_,
the sum of (a) all funds to be
transferred to the Certificate
Account from the Capitalized Interest
Account for such Remittance Date and
(b) certain investment earnings on
amounts in the Pre-Funding Account
for the applicable Remittance Date).
Monthly Advances are reimbursable in
the first instance from late
collections of interest, Liquidation
Proceeds, Insurance Proceeds and
proceeds received by the Servicer in
connection with condemnation, eminent
domain or a release of lien
("Released Mortgaged Property
Proceeds") collected with respect to
the related SBA Loan as to which the
Monthly Advances were made. The
Servicer's right to reimbursement for
such advances in excess of such
amounts is limited to late
collections of interest received on
the SBA Loans generally; PROVIDED,
HOWEVER, that the Servicer's right to
such reimbursement is subordinate to
the rights of the Certificateholders
and the holders of the Guaranteed
Interest. Monthly Advances are
intended to provide sufficient funds
for the payment of interest to the
Certificateholders at the then
applicable Class A or Class B
Remittance Rate, plus an additional
amount, if any, required to pay the
fees and expenses of the Trustee.
Compensating Interest................. Not later than each Determination
Date, with respect to each SBA Loan
as to which a principal prepayment in
full or a Curtailment was received
during the related Due Period, the
Servicer is required to remit to the
Trustee, from amounts otherwise
payable to the Servicer as servicing
compensation, an amount
("Compensating Interest") equal to
any excess of (a) 30 days' interest
on the Unguaranteed Percentage of the
related principal balance at the
Adjusted SBA Loan Remittance Rate
over (b) that portion of the amount
of interest actually received in
respect of the related SBA Loan
during such Due Period and available
to be paid to the Certificateholders.
Servicing Advances................. The Servicer will be entitled to
reimbursement for amounts advanced by
it constituting "out-of-pocket" costs
and expenses relating to (i) the
preservation and restoration of any
related Mortgaged Property or other
collateral, (ii) enforcement
proceedings, including foreclosures
and (iii) certain other customary
amounts described in the Agreement.
Such advances ("Servicing Advances")
are generally reimbursable to the
Servicer from Liquidation Proceeds,
Released Mortgaged Property Proceeds,
Insurance Proceeds and such other
amounts as may be collected by the
Servicer from the related Borrower or
otherwise relating to the SBA Loan in
respect of which such amounts are
owed; PROVIDED, -------- HOWEVER,
that Servicing Advances ------- in
excess of such amounts are
reimbursable to the same extent and
from the same sources as Monthly
Advances.
Servicing Fee.................... The Servicer is entitled to a
servicing fee of ___% per annum (the
"Servicing Fee") of the unpaid
principal balance of each SBA Loan,
calculated and paid monthly from the
interest portion of monthly payments,
Liquidation Proceeds and certain
other proceeds collected. See "The
Agreements-- Servicing and Other
Compensation and Payment of Expenses"
in the Prospectus.
Optional Termination by
the Servicer...................... The Servicer may, at its option,
terminate the Agreement on any date
on which the then outstanding
aggregate principal balance of the
Unguaranteed Interests is less than
10% of the sum of (i) the Original
Pool Principal Balance and (ii) the
original Pre-Funded Amount by
purchasing, on the next succeeding
Remittance Date, all
of the Unguaranteed Interests and any
other assets in the Trust Fund at a
price equal to the sum of (i) 100% of
the then outstanding Class A and
Class B Principal Balances, and (ii)
30 days' interest thereon at the then
applicable Class A and Class B
Remittance Rates (the "Termination
Price"). See "Description of the
Agreement and the
Certificates--Termination; Purchase
of SBA Loans" herein.
Tax Considerations .............. No real estate mortgage investment
conduit ("REMIC") election will be
made for the Trust Fund. Stroock &
Stroock & Lavan, special Federal tax
counsel ("Federal Tax Counsel"), will
give its opinion that the Trust Fund
will be classified as a "grantor
trust" for federal income tax
purposes. See "Federal Income Tax
Consequences" herein and "Federal
Income Tax Consequences" in the
Prospectus.
It is not anticipated that the Class
A Certificates or the Class B
Certificates will be treated as
issued with original issue discount
("OID").
Special considerations may apply to
cash method holders of Class B
Certificates by reason of the
subordination of the Class B
Certificates. Also, special
considerations may apply to
individuals and certain pass-through
entities that hold Class A
Certificates or Class B Certificates.
See "Risk Factors--Federal Income Tax
Considerations" and "Federal Income
Tax Consequences" herein and "Federal
Income Tax Consequences" in the
Prospectus.
ERISA Considerations.............. No Certificates may be purchased for,
or on behalf of, any employee benefit
plan or other retirement arrangement
which is subject to Title I of the
Employee Retirement Income Security
Act of 1974, as amended, and/or
Section 4975 of the Internal Revenue
Code of 1986, as amended, or any
entity whose underlying assets
include plan assets by reason of such
plan or account investing in such
entity (including insurance company
separate or general accounts and
collective investment funds). By its
acceptance of a Certificate, each
Certificateholder will be deemed to
have represented and warranted that
it is not subject to the foregoing
limitations. See "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment................. No representation will be made as to
whether or the extent to which the
Certificates constitute legal
investments for investors.
Rating .......................... It is a condition to their
issuance that the Class A
Certificates be rated "Aaa" and "AAA"
by Moody's Investors Service, Inc.
("Moody's") and Duff & Phelps Credit
Rating Co. ("Duff & Phelps"),
respectively, and that the Class B
Certificates be rated not lower than
"___" and "___" by Moody's and Duff &
Phelps, respectively. A security
rating is not a recommendation to
buy, sell or hold securities and may
be subject to revision or withdrawal
at any time. No person is obligated
to maintain the rating on any
Certificate. See "Ratings" herein.
Registration of the
Certificates.................... The Class A Certificates will be
represented by global certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of The
Depository Trust Company ("DTC"). The
Class B Certificates will be either
(i) registered in the name of Cede,
as the nominee of DTC, with similar
effect as the Class A Certificates,
or (ii) issued in physical form, as
determined by the Sellers prior to
the initial issuance of the
Certificates. No Holder of a
Certificate registered through DTC
will be entitled to receive
definitive certificates ("Definitive
Certificates") representing such
person's interest, except in the
event that Definitive Certificates
are issued in respect of such
person's interest under the limited
circumstances described herein. All
references herein to "Class A and
Class B Certificateholders" or
"Holders" will reflect the rights of
the beneficial owners of Class A and
Class B Certificates, as such rights
may be exercised, in the case of
those Certificates registered through
DTC, through DTC and Participants
except as otherwise specified herein.
See "Risk Factors" and "Description
of the Certificates--Registration of
Certificates" herein.
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors
in addition to the other information set forth in this Prospectus Supplement in
connection with the purchase of Certificates. Investors also should consider the
factors set forth under the heading "Risk Factors" in the Prospectus.
LIMITED LIQUIDITY
There is currently no secondary market for the Certificates. Although
[Name of Underwriting] (the "Underwriter") currently intends to make a secondary
market in the Certificates, it is under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a secondary market does
develop, that it will provide Holders of the Certificates with liquidity of
investment or that it will continue for the lives of the Certificates. In
addition, transfers of the Class B Certificates will be restricted as described
under "ERISA Considerations".
FEDERAL INCOME TAX CONSIDERATIONS
If the Class B Certificateholders receive distributions of less than
their proportionate share of the Trust Fund's receipts of principal or interest
(the "Shortfall Amount") because of the subordination of the Class B
Certificates, although the matter is not free from doubt, Federal Tax Counsel
believes that holders of Class B Certificates would be treated for federal
income tax purposes as if they had (1) received as distributions their full
share of such receipts, (2) paid over to the Class A Certificateholders an
amount equal to such Shortfall Amount, and (3) retained the right to
reimbursement of such amounts to the extent of future collections otherwise
available for deposit in the Spread Account. However, Federal Tax Counsel cannot
opine to such treatment.
Under this analysis, (1) Class B Certificateholders would be required
to accrue as current income any interest, OID income, or (to the extent paid on
the SBA Loans) accrued market discount of the Trust Fund that was a component of
the Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that amount would not be
available from any source to reimburse such loss), and (3) reimbursement of such
Shortfall Amount prior to such a claim of worthlessness would not be taxable
income to Class B Certificateholders because such amount was previously included
in income. Those results should not significantly affect the inclusion of income
for Class B Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B Certificateholders on the cash method
of accounting by, in effect, placing them on the accrual method. Moreover, the
character and timing of loss deductions is unclear.
A Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of reasonable servicing fees and other
fees paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Internal Revenue Code of 1986, as amended. If a Certificateholder is an
individual, estate or trust, the deduction for such Holder's share of such fees
will be allowed only to the extent that all of such Holder's miscellaneous
itemized deductions, including such Holder's share of such fees, exceed two
percent of such Holder's adjusted gross income. For other federal income tax
considerations, see "Federal Income Tax Consequences" herein and "Federal Income
Tax Consequences" in the Prospectus.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences" herein and "Federal Income Tax Consequences"
in the Prospectus, 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 Prospectus Supplement and the accompanying Prospectus do 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 state tax consequences of an investment in the Certificates.
NATURE OF COLLATERAL
As set forth herein under "The SBA Loan Pool--General," commencing in
1995 the Sellers increased their focus on originating SBA Loans to targeted
franchises and professionals and for financing business acquisitions. These
loans are secured primarily by liens on machinery and equipment, other business
assets and personal guarantees. In originating these loans, the Sellers place
primary emphasis on the creditworthiness of the small business concern and
related Obligor, and less emphasis is given to the value of the related
collateral. In some instances, the amount of the SBA Loan exceeds the sum of the
value of the related collateral. If such loans were to go into default, the
Trust may realize little or no liquidation proceeds.
Further, because the market value of equipment and other business
assets generally declines with age or obsolescence, such equipment and/or other
assets may not provide adequate security in the event it is repossessed and
sold. Some of the equipment, such as computers, also may be subject to sudden,
significant declines in value because of technological advances. Also, in
liquidation sales the Trust may be unable to realize the fair market value of
any collateral sold.
UNPERFECTED SECURITY INTERESTS IN CERTAIN COLLATERAL
For each SBA Loan secured by real property, assignments of the related
Mortgages will be transmitted by the applicable Seller for recording promptly
following the Closing Date. Also, the Sellers will deliver to the Trustee
blanket assignments of all other collateral securing the SBA Loans. In
connection with originating SBA Loans secured by collateral other than real
estate, the Sellers obtain and file UCC financing statements naming the related
Obligor as debtor where such action is necessary to perfect a security interest
in such collateral. Because of the administrative burden and expense that would
be entailed in so doing, these UCC financing statements will not be re-assigned
to the Trustee. The Trustee will have the benefit of the Sellers' security
interest in the collateral related to such SBA Loans. However, since assignments
will not be recorded in the name of the Trustee, if the Sellers were to become
debtors under the federal bankruptcy code or similar applicable state laws, a
creditor or trustee in bankruptcy thereof, or the Sellers as
debtors-in-possession, might be able to defeat the Trustee's security interest
in such collateral. Additionally, certain judgment creditors of, or tax and
other liens against, the Sellers or their property may have priority over the
Trustee's security interest.
JUNIOR LIENS
Approximately ___% of the SBA Loans secured by a Commercial Property
(other than certain SBA ss. 7(a) Loans originated in conjunction with a Section
7(a) Companion Loan) constitute a first lien on the related Commercial Property.
The majority of such SBA Loans also are secured by a first lien on related
business assets. However, certain SBA Loans secured by a Commercial Property
(including but not limited to those originated in conjunction with a Section
7(a) Companion Loan), along with substantially all of the SBA Loans secured by a
Residential Property, constitute second or third liens and the related Prior
Liens are not included in the SBA Loan Pool.
The primary risk to holders of SBA Loans secured by junior liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related Prior Liens to satisfy fully both such Prior Liens
and the SBA Loan. If a holder of a Prior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holders of each Prior Lien. The claims of the holders of all Prior Liens will be
satisfied in full out of proceeds of the liquidation of the Prior Liens, if such
proceeds are sufficient, before the Trust Fund receives any payments in respect
of the SBA Loan.
If the Servicer were to foreclose on any mortgage securing an SBA
Loan, it would do so subject to any related Prior Liens. For the debt related to
the SBA Loan to be paid in full at such sale, a bidder at the foreclosure sale
of the related Mortgaged Property would have to bid an amount sufficient to pay
off all sums due under the SBA Loan and the Prior Liens or purchase the
Mortgaged Property, for the full amount of the SBA Loan, subject to the Prior
Liens. Similarly, if the Servicer were to take possession of any other
Collateral, it would do so subject to any related Prior Lien. See "Federal
Income Tax Consequences" herein and "Federal Income Tax Consequences" in the
Prospectus.
SBA LOAN INTEREST RATES
The rate of interest borne by each SBA Loan (the "SBA Loan Interest
Rate") is equal to the Prime Rate as of the first Business Day or, with respect
to certain SBA Loans, the first day of the related calendar quarter, in each
case plus the appropriate margin. With respect to SBA ss. 7(a) Loans having
Unguaranteed Interests with an aggregate principal amount of approximately
$____________, the terms of the related Notes limit the maximum and minimum SBA
Loan Interest Rates, respectively. Generally, the terms of such Notes provide
that the SBA Loan Interest Rate cannot increase (or decrease) five percentage
points above (or below) the SBA Loan Interest Rate in effect when the related
SBA Loan was fully funded. These maximum and minimum SBA Loan Interest Rate
provisions will not have a disproportionate effect on the Holders of either
Class of Certificates. As described herein, if, as a result of such maximum and
minimum SBA Loan Rate provisions, more or less interest is collected on the SBA
Loans than would be collected in the absence of such provisions, such excess or
shortfall will be allocated to the Class A and Class B Certificates pro rata in
accordance with the amount of interest each such Class of Certificates would
otherwise be entitled to receive but for such adjustment. Because in determining
the Class A and Class B Interest Distribution Amounts, provision is made for
such maximum and minimum SBA Loan Rates, if the full amount of interest required
to be paid on the SBA Loans in accordance with their terms is collected, and
required amounts are received by the Trust Fund, such amounts will be sufficient
to pay interest on the Certificates, regardless of changes in the underlying
interest rates. See "The SBA Loan Pool -- Certain Characteristics of the SBA
Loan Pool" and "Description of the Agreement and the Certificates -- Class A and
Class B Interest Distribution Amounts" herein.
[THE GUARANTY
The rating of the Class B Certificates will be based in part on an
assessment of The Money Store Inc.'s ability to make payments under the
Guaranty. Any reduction in the rating assigned to the unsecured long-term debt
obligations of The Money Store Inc. by [__________] may result in a similar
reduction in the rating of the Class B Certificates.]
SPREAD ACCOUNT
As described herein, the Spread Account is intended to enhance the
likelihood of timely payment of principal and interest on the Certificates.
However, if the SBA Loan Pool experiences extremely high levels of delinquencies
and losses, the Spread Account could be depleted, resulting in shortfalls in
payments to the Certificateholders. Any such shortfall would be allocated
against payments of principal, first to the Class B Certificateholders and then
to the Class A Certificateholders. Additional shortfalls would be allocated
against payments of interest, first to the Class B Certificateholders and then
to the Class A Certificateholders. See "Description of the Agreement and the
Certificates -- Spread Account" herein.
THE SBA LOAN POOL
GENERAL
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate principal balances of the SBA ss. 7(a)
Loans expected to be delivered to the Trustee on the Closing Date, and the
Unguaranteed Interests or the Guaranteed Interests therein, as the case may be,
at the close of business on the Cut-Off Date and all dollar amounts are based on
the principal balances thereof at the close of business on the Cut-Off Date. All
of the SBA Loans were, and all of the Subsequent SBA Loans will have been,
originated or acquired by the Sellers and consist of adjustable-rate loans,
evidenced by promissory notes (the "SBA Notes") and, in the case of the SBA ss.
7(a) Loans, partially guaranteed by the SBA. The principal portion of the
Unguaranteed Interests of the SBA ss. 7(a) Loans aggregated approximately
$______________ as of the Cut-Off Date. The SBA ss. 7(a) Loans were originated
to businesses located in ___ states and the District of Columbia. The SBA ss.
7(a) Loans were primarily originated to businesses located in ___________,
__________, ___________ and ___________.
Historically, most of the SBA ss. 7(a) Loans originated by the Sellers
were loans primarily secured by first liens on commercial real property used by
the related borrower or its affiliates in the conduct of their business.
Commencing in 1995, the Sellers increased their focus on originating loans to
targeted franchisees, health care professionals and other professionals, such as
attorneys and accountants, and for financing business acquisitions. These loans
generally are secured by second liens on personal real estate, personal
guarantees, liens on machinery and equipment and other business assets. The
Seller's believe that this approach is consistent with their philosophy of
expanding into selected markets that present opportunities for growth. In
originating these loans, the Sellers concentrate on analyzing the underlying
business and the borrower's ability to repay the related loan. The Sellers'
believe that at the time of origination each such loan is adequately secured by
one or more items of Collateral. See "The SBA Loan Lending Program--Underwriting
Criteria for SBA ss. 7(a) Loans" in the Prospectus.
Approximately ____% of the SBA ss. 7(a) Loans (by principal balance)
were originated to businesses located in California, a state currently
experiencing economic difficulties. This concentration results primarily from
the Servicer being headquartered in California, where it began originating SBA
Loans in the early 1980s and where it expanded its marketing efforts and market
share prior to the current economic conditions. The Sellers believe that the
concentration of SBA ss. 7(a) Loans in the Trust Fund originated to businesses
located in California is representative of their SBA ss. 7(a) Loan portfolio as
a whole.
PAYMENTS ON THE SBA LOANS
The SBA Loans have payments of principal and interest due on the first
of the month with interest payable in arrears at a rate equal to the Prime Rate
as of the first Business Day or, with respect to certain SBA Loans, the first
day of the related calendar quarter, in each case plus the appropriate margin
(subject to applicable lifetime floors and caps). For example, the Prime Rate on
October 1st is used to determine the interest rate paid for the months of
October, November and December. Since interest is paid in arrears, interest and
principal for these months is scheduled to be received in November, December and
January, respectively. The monthly payment received is apportioned between
interest and principal based upon a "simple interest" basis, which means that
payments are applied as they are received first to accrued interest, then to
principal, with interest calculated on the number of days between the current
and previous payments. If a monthly payment is received prior to its due date,
less of such payment will be allocated to interest than would be the case if
such payment were received on its due date. Conversely, if a monthly payment is
received after its due date, more of such payment will be allocated to interest
than would be the case if such payment were received on its due date. None of
the SBA Loans is a balloon loan and each is fully amortizing in accordance with
its terms. However, the monthly payments are re-calculated each quarter to
reflect changes in interest rates, the then-current principal balance and the
then-remaining term to maturity.
CERTAIN CHARACTERISTICS OF THE SBA LOAN POOL
Set forth below is a description of certain characteristics of the SBA
ss. 7(a) Loans expected to constitute the SBA Loan Pool as of the Closing Date.
As described herein, the Sellers reserve the right to sell to the Trust Fund
Section 7(a) Companion Loans and SBA 504 Loans in an aggregate principal amount
of up to approximately $__________ and having the characteristics set forth
under "-- Section 7(a) Companion Loans and SBA 504 Loans." If such loans are not
sold to the Trust Fund, it is expected that the Sellers will sell to the Trust
Fund SBA ss. 7(a) Loans having overall characteristics substantially similar to
the SBA ss. 7(a) Loans being delivered on the Closing Date. Certain of the
percentage columns may not sum to 100.00% due to rounding.
[Each chart will set forth at least the following information for the
specific characteristic: (i) aggregate unpaid principal balance, (ii) percentage
based upon aggregate principal balance and (iii) number of SBA Loans].
The geographic distribution of the SBA ss. 7(a) Loans by state as of
the Cut-Off Date was as follows:
<PAGE>
The interest rates borne by the SBA Notes (the "Note Rates") were
distributed as follows as of the Cut-Off Date:
<PAGE>
The Margins added to the Prime Rate on each Interest Adjustment Date
to determine the new Note Rates were distributed as of the Cut-Off Date as
follows:
<PAGE>
The minimum lifetime Note Rates borne by the SBA ss. 7(a)
Loans were as follows (1):
- -----------------------------
(1) For purposes of determining the weighted average minimum lifetime Note Rate,
those SBA ss. 7(a) Loans not containing a stated minimum lifetime Note Rate are
assumed to have a minimum lifetime Note Rate equal to the applicable Margin.
<PAGE>
The maximum lifetime Note Rates borne by the SBA ss. 7(a) Loans were
as follows:
<PAGE>
The distribution of the number of remaining months to maturity of the
SBA ss. 7(a) Loans as of the Cut-Off Date was as follows:
<PAGE>
The distribution of the number of months since origination of the SBA
ss. 7(a) Loans as of the Cut- Off Date was as follows:
<PAGE>
The years in which the SBA ss. 7(a) Loans were originated was as
follows:
<PAGE>
The Excess Spread as a percentage of the principal balance of the
Unguaranteed Interests of the SBA ss. 7(a) Loans as of the Cut-Off Date was as
follows: (1)
- -------------------------
(1) With respect to each SBA ss. 7(a) Loan, the Excess Spread is included in the
related Unguaranteed Interest.
<PAGE>
The Unguaranteed Percentage of the SBA ss. 7(a) Loans as of the
Cut-Off Date was as follows:
<PAGE>
The distribution of the debt-service coverage ratios at origination of
the SBA ss. 7(a) Loans was as follows: (1)
- ------------------------
(1) Represents the ratio of the pro forma annual debt service payments to annual
net operating income.
(2) For these SBA ss. 7(a) Loans, the Borrower had a negative net operating
income for the fiscal year for which ratio was determined. The Sellers believed
that based upon the projected net operating income and certain other factors, it
was appropriate to originate such SBA ss. 7(a) Loan.
<PAGE>
The distribution of the original terms of the SBA ss. 7(a) Loans was
as follows:
<PAGE>
The distribution of the original balances of the SBA ss. 7(a) Loans
was as follows:
<PAGE>
The distribution of the original balances of the Unguaranteed
Interests was as follows:
<PAGE>
The distribution of the principal balances of the SBA ss. 7(a) Loans
as of the Cut-Off Date was as follows:
<PAGE>
The distribution of the principal balances of the Unguaranteed
Interests as of the Cut-Off Date was as follows:
<PAGE>
The type of program under which the SBA ss. 7(a) Loans were originated
was as follows:
<PAGE>
SECTION 7(A) COMPANION LOANS AND SBA 504 LOANS.
The Section 7(a) Companion Loans and SBA 504 Loans, if any, to be
included in the Trust Fund are expected to have the following characteristics as
of the Cut-Off Date (unless otherwise indicated):(1)
Average unpaid principal balance...................$____________
Maximum original principal balance.................$____________
Minimum original principal balance.................$____________
Range of Note Rates............................. ___%-___%
Weighted average Note Rate...................... ___%
Weighted average age............................ mos.
Weighted average original term.................. mos.
Weighted average gross margin................... ___%
Weighted average original L-T-V (based
on net discounted collateral value)............... ___%
Weighted average original L-T-V (without
giving effect to discounts to
collateral values)................................ ___%
Weighted average original debt service
coverage ratio.............................................
[If a significant portion of the Trust Fund will consist of Section
7(a) Companion Loans and/or SBA 504 Loans, charts similar to those set
forth above for the SBA ss. 7(a) Loans will be included.]
- -------------------
(1) The actual characteristics of the Section 7(a) Companion Loans and SBA 504
Loans, if any, to be included in the Trust Fund may vary somewhat from the
characteristics presented. The Sellers do not expect that any such variation
will be material.
<PAGE>
The following table sets forth the Prime Rate for the first business
day of each of the following calendar quarters as reported in THE WALL STREET
JOURNAL:
199 199 199 199
---- ---- ---- ---
QUARTER
1st % % % %
2nd
3rd
4th
The values set forth in the table above are historical and may not be indicative
of future values of the Prime Rate.
<PAGE>
THE SBA LOAN PROGRAM
GENERAL
The Small Business Act of 1953 (the "Act"), which created the Small
Business Administration, also established the general business loan program
under Section 7(a) of the Act (the "Section 7(a) Program"). The Section 7(a)
Program was intended to encourage lenders to provide loans to qualifying small
businesses. Loans made under the Section 7(a) Program can be used to construct,
expand or convert facilities, to purchase building equipment or materials or to
finance machinery and equipment, business acquisitions and inventory. Money lent
under the Section 7(a) Program also can be used for working capital.
The Act also established the SBA 504 Loan Program (the "SBA 504 Loan
Program") to encourage lenders to provide fixed asset financing to existing
qualifying small businesses. SBA 504 Loans may be used for plant acquisition,
construction, renovation, expansion, land and site improvements, acquisition and
installation of machinery and equipment and the interest on interim financing.
SBA 504 Loans are not guaranteed by the SBA.
THE SECTION 7(A) LOAN GUARANTY PROGRAMS
The SBA administers three levels of lender participation in the
Section 7(a) Program. Under the first level, known as the Guaranteed Participant
Program, the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guaranty the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications. As of __________, 199_, the most recent date for which such
information is available, loans made under the Guaranteed Participant Program
accounted for approximately $___ billion aggregate principal balance,
representing approximately __% of the total outstanding principal balance of
loans originated under the Section 7(a) Program as of such date.
Under the second level of lender participation, known as the Certified
Lender Program, the lender (the "Certified Lender") gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Loans made under this portion of the Section 7(a) Program accounted for
approximately $___ billion aggregate principal balance, representing
approximately __% of the Section 7(a) Program portfolio as of __________,
199_.
Under the third level of lender participation, known as the Preferred
Lender Program, the lender (the "Preferred Lender") has the authority to approve
a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements. The granting of Preferred Lender
status is based upon a lender's ability to originate and service loans in a
particular territory to the satisfaction of the SBA. Preferred Lender Program
loans accounted for approximately $___ billion aggregate principal balance,
representing approximately __% of the Section 7(a) Program portfolio as of
__________, 199_.
SECTION 7(A) LOAN PARAMETERS
Under each of the Guaranteed Participant, Certified Lender and
Preferred Lender Programs, the SBA guarantees loans of $100,000 or less up to
80%, and loans in excess of $100,000 up to 75%, subject to a per borrower
guaranty maximum of $750,000. Between May 15, 1995 and October 12, 1995,
refinancings generally were not allowed under any program. Loans processed under
the International Trade Loan Program provided for a maximum guaranty per
borrower is $1,250,000. For applications submitted between January 1, 1995 and
October 12, 1995, the maximum loan size for most loans originated under all
three programs was reduced administratively to $500,000. For applications
approved as of October 12, 1995, the guaranty is limited to the lesser of the
amount determined under the applicable percentages or a per borrower guaranty
maximum of $750,000.
Loans originated under the Section 7(a) Program can bear either fixed
or adjustable rates of interest, as negotiated between the lender and the
borrower at origination. Adjustable-rate loans generally adjust on the first
business day of each calendar quarter based on a specified margin over the
lowest prime rate, as published in THE WALL STREET Journal. For loans made
pursuant to the Guaranteed Participant, Certified Lender or Preferred Lender
Programs, this margin cannot exceed 2.75% per annum.
Terms to maturity for guaranteed loans vary depending upon the use of
proceeds and an evaluation of the borrower's ability to repay the loan. For
instance, working capital loans are limited to seven year terms unless an
extension is obtained, which can increase the term to a maximum of 10 years.
Real estate loans generally have terms up to 25 years, and machinery and
equipment loans generally have a maximum term of 15 years. If the loan proceeds
are to be used for multiple qualifying purposes, a blended term based on the
foregoing criteria may be offered by the Lender.
U.S. SBA SECTION 7(A) PORTFOLIO PERFORMANCE
The performance of loans originated under the Section 7(a) Program was
analyzed by the General Accounting Office ("GAO") in a report to the Chairman of
the Committee on Small Business of the House of Representatives dated December
1991 (GAO/RCED-92-49 SBA's Business Loan Portfolio) (the "GAO Report"). The GAO
Report indicates that the number of loans originated under the Section 7(a)
Program has been steadily decreasing. By 1990, the portfolio only had two-thirds
as many outstanding loans as in 1981. Despite this decrease in the overall
number of loans, however, the total amount of principal outstanding in the
portfolio increased from $8.9 billion in 1981 to $9.9 billion in 1990. This
increase was due primarily to a change in SBA regulations in August 1988 that
raised the guaranteed loan ceiling from $500,000 to $750,000.
The delinquency history of the portfolio improved from 1981 to 1990.
After an increase from 1981 to 1982, the default percentage decreased over the
next eight years. The differences in defaults and liquidations between the three
guaranteed programs has been substantial. The Preferred Lender Program had the
best performance of the three programs, with default and liquidation percentages
as of September 30, 1990 of 3.7% and 3.0%, respectively. The Certified Lender
Program's default and liquidation percentages as of September 30, 1990 were 4.4%
and 6.8%, respectively. The Guaranteed Participant Program had defaults as of
September 30, 1990 of 6.0% and liquidations of 11.4%, respectively. This
delinquency experience is consistent with the fact that Preferred and Certified
Lenders have more experience in originating, servicing and collecting loans than
their Guaranteed Participant Lender counterparts. Set forth below are the
default and liquidation percentages as set forth in the GAO Report for the
Section 7(a) Program as a whole for the periods indicated. Separate data is not
readily available from the SBA for each of the three Programs.
DEFAULT AND LIQUIDATION PERCENTAGES
IN THE SECTION 7(A) PORTFOLIO
Fiscal Year ended Default Liquidation
SEPTEMBER 30, PERCENTAGE PERCENTAGE
1981 9.5% 10.0%
1982 12.4 13.8
1983 11.5 16.4
1984 10.2 16.5
1985 9.5 17.0
1986 9.6 16.4
1987 8.3 15.4
1988 7.1 13.3
1989 6.9 11.5
1990 5.7 10.3
The above default and liquidation percentages are historical only and
are not indicative of the future performance of the Section 7(a) Program. Also,
no assurance is given, or can be made, that the default and liquidation
experience of the Sellers' portfolio of SBA Loans in general, or the SBA Loans
in the SBA Loan Pool, will correspond to the experience realized by the Section
7(a) Program as a whole.
[TO THE EXTENT AVAILABLE, THE ABOVE INFORMATION WILL BE UPDATED IN
THE RELATED PROSPECTUS SUPPLEMENT]
THE SELLERS' PARTICIPATION IN SBA SECTION 7(A) PROGRAM
The Sellers have been named as Preferred Lenders by the SBA in each
major SBA loan market in which they operate (except for newly established
offices). Based upon this experience, the Sellers expect to be upgraded to
Preferred Lender status in all markets where they now operate. However, it is
unknown when such upgradings will occur. See "The Sellers" herein.
THE SECTION 7(A) COMPANION PROGRAM
As described above, for most applications submitted between January 1,
1995 and October 12, 1995 the maximum loan size for most loans originated under
the Section 7(a) Program was reduced administratively to $500,000. To assist
qualified borrowers in obtaining more financing when needed, the Sellers
introduced a program (the "Section 7(a) Companion Program") pursuant to which
TMSCMI originated a loan (the "Section 7(a) Companion Loan") to the related
borrower in situations in which the total amount financed would otherwise exceed
the current $500,000 limit. The maximum amount for a Section 7(a) Companion Loan
currently is approximately $800,000, which maximum may be increased where the
Collateral or LTV warrants it. Although Section 7(a) Companion Loans are not
guaranteed by the SBA, they are secured by a first lien on the related primary
collateral, with the Section 7(a) Loan being secured by a second lien on such
collateral.
Section 7(a) Companion Loans may be utilized by a borrower for all
eligible Section 7(a) Loan purposes. Section 7(a) Companion Loans are originated
only in conjunction with a Seller obtaining an SBA guarantee of the companion
Section 7(a) Loan under the Certified Lender Program (the SBA currently
prohibits Section 7(a) Companion Loans in connection with the Preferred Lender
Program). Section 7(a) Companion Loans bear interest and have terms to maturity
as described above under "--Section 7(a) Loan Parameters."
SBA 504 LOAN PROGRAM
The SBA 504 Loan Program was established to encourage lenders to
provide fixed asset financing to existing qualifying small businesses. SBA 504
Loans may be used for plant acquisition, construction, renovation, expansion,
land and site improvements, acquisition and installation of machinery and
equipment as well as certain closing costs and professional fees and the
interest on interim financing. The lender provides approximately 50% of project
costs in a conventional loan agreement, with borrowers providing a minimum 10%
equity contribution. The SBA provides the remainder of the financing. Each SBA
504 Loan must be approved by the SBA.
The funds used by the SBA to originate its portion of a project
generated pursuant to the SBA 504 Loan Program are obtained by issuing
SBA-guaranteed debentures on behalf of a certified development company (a
"CDC"). A CDC is an organization sponsored by private interests or by state or
local governments. The debentures are pooled monthly and sold through a
certificate mechanism to the public market. The SBA 504 Loans are not guaranteed
by the SBA.
SBA 504 Loans bear interest and have terms to maturity as described
above under "--Section 7(a) Loan Parameters."
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The value of an investment in the Certificates may be affected by,
among other things, a change in interest rates. If interest rates fall below the
then current Note Rates on the SBA Loans, the rate of prepayment on such SBA
Loans may increase. Prepayments, delinquencies and defaults may also be
influenced by a number of other factors including economic conditions.
On each Remittance Date, the Certificateholders are entitled to
receive 30 days' interest on the Class A or Class B Principal Balance, as the
case may be, immediately prior to such Remittance Date at the applicable Class A
or Class B Remittance Rate, subject to the adjustments described under
"Description of the Agreement and the Certificates--Class A and Class B Interest
Distribution Amounts" herein. This is the case even if Principal Prepayments or
Curtailments are received with respect to the SBA Loans during the related Due
Period. With respect to such Principal Prepayments and Curtailments the Servicer
will remit to the Trustee for deposit in the Certificate Account, from amounts
otherwise payable to it as servicing compensation, Compensating Interest as
described under "Description of the Agreement and the Certificates--Payments on
the SBA Loans; Distributions on the Certificates" herein.
For the Certificates, the net effect of each distribution respecting
interest generally will be the pass-through on each Remittance Date to each
Certificateholder of an amount which is equal to 30 days' interest at the Class
A or Class B Remittance Rate, as the case may be, subject to the adjustments
described herein.
The Excess Spread on the guaranteed portions of the SBA ss. 7(a) Loans
will be available to make up shortfalls in amounts to which Certificateholders
are entitled on Remittance Dates. The amount of Excess Spread varies from loan
to loan and will be eliminated when a borrower prepays a loan in full. However,
the Excess Spread will not be affected by any applicable lifetime interest rate
caps on the SBA ss. 7(a) Loans. This is because the Guaranteed Interests are
sold with lifetime interest rate caps equal to the cap on the related SBA ss.
7(a) Loan less the sum of the Excess Spread, the fee payable to the Agent of the
SBA and, with respect to the Additional Fee SBA Loans, the Additional Fee. In
addition, the Excess Spread on an SBA ss. 7(a) Loan in default will be paid by
the SBA until the purchase by the SBA of the related Guaranteed Interest (up to
120 days of accrued interest).
With respect to SBA ss. 7(a) Loans for which the Guaranteed Interest
was sold in the secondary market on or after September 1, 1993 and SBA ss. 7(a)
Loans approved by the SBA on or after October 12, 1995 (the "Additional Fee SBA
Loans"), a fee equal to 40 basis points and 50 basis points, respectively, per
annum on the outstanding balance of the Guaranteed Interest of such Additional
Fee SBA Loans (the "Additional Fee") is required to be paid by the related
Seller to the SBA. Although such Additional Fee is the responsibility of the
related Seller, the Additional Fee will be funded from the interest received by
the related Obligor. Accordingly, any such Additional Fee will reduce the Excess
Spread on the related SBA ss. 7(a) Loan.
Unscheduled payments, delinquencies, defaults on the SBA Loans and
distributions from the Pre-Funding Account, if any, on the Remittance Dates in
________, _________ and ______, 199__ and the Special Remittance Date will
affect the amount of funds available to make distributions on each Remittance
Date. In addition, the Servicer may, at its option, on any date on which the
then outstanding aggregate principal balance of the Unguaranteed Interests is
less than 10% of the sum of (i) the Original Pool Principal Balance and (ii) the
original Pre-Funded Amount, if any, purchase from the Trust Fund all of the
Unguaranteed Interests and any other assets in the Trust Fund at a price equal
to the sum of (x) 100% of the then outstanding Class A and Class B Principal
Balances, and (y) 30 days' interest thereon at the then applicable Class A and
Class B Remittance Rates (the "Termination Price"). See "Description of the
Agreement and the Certificates--Termination; Purchase of SBA Loans" herein.
However, because the SBA Loans may prepay, the weighted average life of the
Certificates or the date on which the outstanding aggregate principal balances
of the Unguaranteed Interests will be less than 10% of the sum of (i) the
Original Pool Principal Balance and (ii) the Original Pre-Funded Amount, if any,
cannot be determined.
None of the SBA Loans are balloon loans and each is fully amortizing
in accordance with its terms. The SBA Loans may be prepaid at any time without
payment of a prepayment fee or penalty. In general, when the level of prevailing
interest rates for similar loans significantly declines, the rate of prepayment
is likely to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions. Prepayments, liquidations
and purchases of the Unguaranteed Interests will result in distributions to
Certificateholders of amounts which would otherwise be distributed over the
remaining terms of the SBA Loans.
The final scheduled Remittance Date for the Certificates is _________,
20__, which is the date two months after the Original Pool Principal Balance
would be reduced to zero, assuming that no prepayments are received on the SBA
Loans and that distributions of principal of and interest on each of the SBA
Loans are timely received. The weighted average life of the Certificates is
likely to be shorter than would be the case if payments actually made on the SBA
Loans conformed to the foregoing assumptions, and the final Remittance Date with
respect to the Certificates could occur significantly earlier than the final
scheduled Remittance Date because (i) prepayments are likely to occur and (ii)
the Servicer may cause a termination of the Trust Fund when the then outstanding
aggregate principal balance of the Unguaranteed Interests is less than 10% of
the sum of (i) the Original Pool Principal Balance and (ii) the Original
Pre-Funded Amount, if any.
The "weighted average life" of a Certificate refers to the average
amount of time that will elapse from the Closing Date to the date on which each
dollar in respect of principal of such Certificate is repaid. The weighted
average lives of the Certificates will be influenced by, among other factors,
the rate at which principal payments (including Monthly Payments, Principal
Prepayments, Excess Payments and Curtailments) are made on the SBA Loans.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Constant
Prepayment Rate ("CPR"), represents an assumed constant rate of prepayment per
annum relative to the then outstanding principal balance of a pool of new SBA
loans. The CPR does not purport to be either a historical description of the
prepayment experience of any pool of SBA loans or a prediction of the
anticipated rate of prepayment of any pool of SBA loans, including the SBA
Loans.
The Sellers make no representation as to the particular factors that
will affect the prepayment of the SBA Loans, as to the percentage of the
principal balance of the SBA Loans that will be paid as of any date or as to the
overall rate of prepayment on the SBA Loans.
Greater than anticipated prepayments of principal will increase the
yield on Certificates purchased at a price less than par. Greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield due to
principal prepayments on the SBA Loans occurring at a rate that is faster (or
slower) than the rate anticipated by the investor in the period immediately
following the issuance of the Certificates will not be entirely offset by a
subsequent like reduction (or increase) in the rate of principal payments. The
weighted average lives of the Certificates will also be affected by the amount
and timing of delinquencies and defaults on the SBA Loans and the recoveries, if
any, on defaulted SBA Loans and foreclosed properties. 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 SBA Loans and foreclosed properties result in
principal payments on the Certificates faster than otherwise scheduled.
The following table under the heading "Weighted Average Lives of the
Class A and Class B Certificates" assumes, among other things, that (i) (a) the
scheduled payment in each month for each SBA Loan has been based on the
outstanding balance as of the first day of the month preceding the month of such
payment, (b) the Initial Note Rate for each SBA Loan for the _____ and ______
199_ scheduled payments is _____% plus the applicable Gross Margin and (c)
thereafter, the scheduled payments and remaining term to stated maturity for
each SBA loan is as set forth below (rather than based on the actual SBA Loan
characteristics) so that such scheduled payments would amortize the remaining
balance by its stated maturity date, (ii) scheduled monthly payments of
principal and interest on the SBA Loans will be timely received on the first day
of each month (with no defaults), commencing __________, 199_, (iii) the
Servicer does not exercise its option to purchase the SBA Loans and thereby
cause a termination of the Agreement, (iv) principal prepayments on the SBA
Loans represent prepayments in full of individual SBA Loans and will be received
on the last day of each month commencing __________, 199_ at the respective
percentages of CPR set forth in the table and (v) the Certificates will be
issued on __________, 199_. The following table also assumes that the
Pre-Funding Account is established, the Original Pre-Funded Amount equals its
maximum permitted amount and the entire Pre-Funded Amount is used to purchase
SBA ss. 7(a) Loans at the end of the Pre-Funding Period.
NOTE RATE GROSS MARGIN BALANCE REMAINING TERM
- --------- ------------ --------- --------------
% % $
% % $
Based upon the foregoing assumptions, some or all of which are
unlikely to reflect actual experience, the following table indicates the
projected weighted average lives of each Class of Certificates at various CPRs.
As used in the table, 0% CPR indicates no Principal Prepayments, Curtailments or
Excess Payments. The Class A and Class B Certificates were priced assuming __%
CPR. If the entire Pre-Funded Amount were used to purchase Section 7(a)
Companion Loans and SBA 504 Loans, rather than SBA ss. 7(a) Loans, the weighted
average lives of the Class A and Class B Certificates would not differ
materially.
WEIGHTED AVERAGE LIVES OF THE CLASS A AND CLASS B CERTIFICATES
Weighted Earliest Retirement
Average at Servicer's
CPR LIFE (YEARS)(1) OPTION(2)
0%
4%
8%
12%
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each payment of principal by the number of years from the date
of issuance to the related Remittance Date, (ii) summing the result, and
(iii) dividing the sum by the total principal distributions.
(2) Assuming early termination of the Trust Fund when the then outstanding
aggregate principal balance of the Unguaranteed Interest is less than
10% of the sum of (i) the Original Pool Principal Balance and (ii)
the original Pre-Funded Amount, if any.
<PAGE>
Since the individual characteristics of the SBA Loans will not
correspond to those assumed above, the actual weighted average lives and the
earliest retirement dates of the Certificates will vary from those of the
underlying SBA Loans even if any indicated CPR is met. In addition, there is no
assurance that Principal Prepayments, Curtailments or Excess Payments will
occur, or, if they do occur, that they will occur at a constant rate
approximating any of the indicated CPRs.
THE SELLERS
TMSIC and TMSCMI are New Jersey corporations, and wholly-owned
subsidiaries of The Money Store Inc. (the "Parent"). MSNY, a New York
corporation, is a wholly-owned subsidiary of TMSIC. TMSIC is headquartered in
Sacramento, California and began originating SBA ss. 7(a) Loans in 1979. TMSCMI
is headquartered in Sacramento, California and began originating SBA 504 Loans
in 1994 and Section 7(a) Companion Loans in 1995. MSNY is headquartered in
Sacramento, California and began originating SBA ss. 7(a) Loans in 1980. MSNY
only originates SBA ss. 7(a) Loans to businesses located in the State of New
York. The Sellers became the largest originator of SBA guaranteed loans in 1983
and have maintained that position in each of the past __ SBA fiscal years. The
Sellers originated approximately $___ million of SBA Loans during calendar 199_
and, at December 31, 199_ and December 31, 199_, were servicing a portfolio of
SBA Loans aggregating approximately $___ billion and $___ billion, respectively.
The Parent, headquartered in Union, New Jersey, is a publicly-owned
financial services company engaged, through its operating divisions, primarily
in originating, servicing and selling consumer and commercial loans. As of
_____________, 19__, the Parent maintained ___ offices in __ states and the
District of Columbia through which it conducted business in the following areas:
(i) mortgage loans; (ii) SBA Loans; (iii) government guaranteed student loans
and (iv) automotive loans. The Parent, through its subsidiaries, also originates
loans partially insured by the Federal Housing Administration under Title I of
the National Housing Act.
At ___________, 199_, the Sellers originated SBA Loans through ___ sales
regions in __ states, comprising __ SBA Districts. The Sellers have originated
SBA Loans in approximately __ out of __ total SBA jurisdictions/field
territories. They possess PLP status in __ SBA jurisdictions and they possess
Guaranteed Participant Program ("GPP") status in an additional ___. For the year
ended December 31, 199_, the Sellers originated approximately __% of their SBA
ss. 7(a) Loans under the Preferred Lender Program ("PLP"), with substantially
all of the remainder originated under the Certified Lender Program ("CLP"). New
offices originate under the GPP until approved within the SBA District. The
Sellers apply the same level of loan review and documentation for all loans,
regardless of the program under which they were originated. In the normal course
of their business, the Sellers may have originated CLP loans in areas where they
are Preferred Lenders due to specific eligibility requirements of the Section
7(a) Program. The Sellers believe that such practice is common in the industry,
that the SBA is aware of it and has raised no objection thereto.
DELINQUENCY EXPERIENCE
The following table sets forth the Sellers' delinquency and charge-off
experience with respect to their portfolio of SBA Loans as of the dates
indicated. There can be no assurance, and no representation is made, that the
delinquency and charge-off experience with respect to the SBA Loans included in
the Trust Fund will be similar to that reflected in the table below. The Sellers
believe that the increase in net loan charge-offs as a percentage of their SBA
loan portfolio as of and for the years ended December 31, 199_, 199_ and 199_,
is primarily due to general adverse economic conditions. The Sellers commenced
originating Section 7(a) Companion Loans in January 1995 and SBA 504 Loans in
1994. Accordingly, no meaningful delinquency and charge-off experience exists
for these loans. There can be no assurance, and no representation is made, that
the delinquency and charge-off experience with respect to the Section 7(a)
Companion Loans and the SBA 504 Loans will be similar to that of the SBA ss.
7(a) Loans.
SBA LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
As of and for the Years _____ Months Ended
ENDED DECEMBER 31, 199 _________, 199
-------------------------- --------------
199 199 199
--- --- ---
30-59 days past due(1)
60-89 days past due(1)
90+ days past due(1)
Loans charged-off, net
Loans charged-off, net,
as a percentage of the SBA
unguaranteed interests(2)
SBA unguaranteed interests(3)
Total SBA Loan serviced
portfolio(4)
--------------------
(1) The delinquency percentages are calculated based upon the aggregate
guaranteed and unguaranteed interests of the SBA Loans which are
delinquent by the number of days indicated divided by total aggregate
principal balance of the guaranteed and unguaranteed interests of the
SBA Loans contained in the Sellers' SBA loan portfolio.
(2) The percentage of loan charge-offs is calculated based upon the dollar
amount of charge-offs divided by the dollar amount of the principal
portion of unguaranteed interests contained in the Sellers' SBA loan
portfolio.
(3) Amounts shown are the aggregate principal balances of the unguaranteed
interests of loans in the Sellers' SBA loan portfolio on the last day
of the related period.
(4) Includes guaranteed interests serviced for others.
-------------------------
CERTAIN LITIGATION
Because the nature of the business of the Parent and the Sellers
involves the collection of numerous accounts, the validity of liens and
compliance with state and federal lending laws, the Parent and the Sellers are
subject to claims and legal actions in the ordinary course of their business.
While it is impossible to estimate with certainty the ultimate legal and
financial liability with respect to such claims and actions, including that
described above, the Parent and the Sellers believe that the aggregate amount of
such liabilities will not result in monetary damage which in the aggregate would
have a material adverse effect on the financial condition of the Parent or the
Sellers.
DESCRIPTION OF THE AGREEMENT AND THE CERTIFICATES
GENERAL
The Certificates will be issued by a Trust Fund organized and existing
under the laws of the State of New York. Each Certificate represents a certain
fractional undivided ownership interest in the Trust Fund created and held
pursuant to the Agreement, subject to the limits and the priority of
distribution described therein. The Trust Fund consists primarily of the right
to receive the Unguaranteed Interests in such SBA Loans as are from time to time
subject to the Agreement, together with all proceeds thereof and certain related
assets.
The Certificates will not represent obligations of the Sellers, any of
their affiliates or the SBA.
The Class A Certificates will be issued in book-entry form and the
Class B Certificates will be issued either in book-entry or physical form, as
determined by the Sellers prior to issuance of the Certificates. Each Class of
Certificates will be issued in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof, except that one Certificate of each Class
may be issued in a different denomination, and, if so issued, will be held in
physical form.
The Servicer will be responsible for ensuring that each SBA Loan is
serviced in accordance with the Agreement and the SBA Rules and Regulations.
However, MSNY will service the SBA Loans originated or acquired by it.
PAYMENTS ON THE SBA LOANS; DISTRIBUTIONS ON THE CERTIFICATES
The Agreement requires that the Servicer cause an account (the
"Principal and Interest Account") to be established and maintained at one or
more Designated Depository Institutions.
All funds in the Principal and Interest Account are required to be
held (i) uninvested, up to the limits insured by the FDIC (as defined under
"Certain Definitions") or (ii) invested in Permitted Instruments. Any investment
earnings on funds held in the Principal and Interest Account are for the account
of the Servicer.
The Servicer is required to deposit in the Principal and Interest
Account (within two Business Days of receipt): (i) all payments received after
the Cut-Off Date on account of interest on the SBA Loans (net of the portion
thereof required to be paid to the holders of the Guaranteed Interest, the Agent
of the SBA's Fee, the Additional Fee and the Servicing Fee and other servicing
compensation payable to the Servicer as permitted by the Agreement), (ii) the
Unguaranteed Percentage of all payments received after the Cut-Off Date on
account of principal on the SBA Loans, including the Unguaranteed Percentage of
all Excess Payments, Principal Prepayments, Curtailments, Net Liquidation
Proceeds, Insurance Proceeds (other than amounts to be applied to the
restoration or repair of the related Mortgaged Property, or to be released to
the Obligor) and Released Mortgaged Property Proceeds, (iii) any amounts paid in
connection with the repurchase of the Unguaranteed Interest of an SBA Loan and
the amount of any adjustment for substituted SBA Loans, (iv) the amount of any
losses incurred in connection with investments in Permitted Instruments and (v)
certain amounts relating to insufficient insurance policies and Foreclosed
Property.
The Servicer may make withdrawals from the Principal and Interest
Account only for the following purposes:
(i) to remit to the Trustee on each Determination
Date (as defined below) for deposit in the Certificate
Account, the portion of the Available Funds for the related
Remittance Date that is net of Compensating Interest, Monthly
Advances and amounts then on deposit in the Spread Account
(and, with respect to the Determination Dates occurring in
______, _________ and ___________, net of amounts then on
deposit in the Pre-Funding Account and the Capitalized
Interest Account);
(ii) to reimburse itself for any accrued unpaid
Servicing Fees, unreimbursed Monthly Advances and for
unreimbursed Servicing Advances to the extent deposited in the
Principal and Interest Account (and not netted from Monthly
Payments received). The Servicer's right to reimburse itself
for unpaid Servicing Fees and, except as provided in the
following sentence, Servicing Advances and Monthly Advances
shall be limited to Liquidation Proceeds, Released Mortgaged
Property Proceeds, Insurance Proceeds and such other amounts
as may be collected by the Servicer from the Mortgagor or
otherwise relating to the SBA Loan in respect of which such
unreimbursed amounts are owed. The Servicer's right to
reimbursement for Monthly Advances and Servicing Advances in
excess of such amounts shall be limited to any late
collections of interest received on the SBA Loans generally,
including Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and any other amounts. The
Servicer's right thereto shall be subordinate to the rights of
the Certificateholders and the holders of the Guaranteed
Interest;
(iii) to withdraw any amount received from an Obligor
that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code in accordance with a final,
nonappealable order of a court having competent jurisdiction;
(iv) (a) to make investments in Permitted Instruments
and (b) to pay itself interest paid in respect of Permitted
Instruments or by a Designated Depository Institution on funds
deposited in the Principal and Interest Account;
(v) to withdraw any funds deposited in the
Principal and Interest Account that were not required
to be deposited therein or were deposited therein in
error;
(vi) to pay itself servicing compensation or
interest as permitted under the definition of Excess
Proceeds; and
(vii) to clear and terminate the Principal
and Interest Account upon the termination of the
Agreement;
Not later than the close of business on each Determination Date, the
Servicer will remit to the Trustee for deposit in the Certificate Account any
required Monthly Advance and/or Compensating Interest.
The Servicer is 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 Property or other Collateral, (ii)
any enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage. Each such expenditure will constitute a "Servicing Advance".
The Servicer is obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Servicer may recover Servicing
Advances to the extent set forth in clause (ii) above.
On the 15th day of each month commencing in _______, 199_, or, if such
15th day is not a Business Day, the first Business Day immediately following
(each such day being a "Remittance Date"), until the principal balances of the
Class A and Class B Certificates are reduced to zero, the Trustee or Paying
Agent will be required to distribute to each person in whose names a Certificate
is registered at the close of business on the last day of the month immediately
preceding the month of the related Remittance Date (the "Record Date") such
Certificateholder's Percentage Interest multiplied by the amount to be
distributed to the Class A or Class B Certificateholders, as the case may be on
such Remittance Date as described below under "--Flow of Funds" herein.
Additionally, any Pre-Funded Amount remaining at the close of business
on __________, 199_ (together with __ days' interest thereon at the applicable
Remittance Rates) will be distributed by or on behalf of the Trustee on the
Special Remittance Date to the Class A and Class B Certificates. Such
distribution will be made to each person in whose name a Certificate of the
applicable Class is registered on ___________, 199__.
On each Remittance Date, the Trustee will mail to each
Certificateholder a statement setting forth, among other things, certain
information as to the distribution being made on such Remittance Date, the fees
to be paid to the Servicer and Trustee and the loss and delinquency status of
the SBA Loans. Although the information contained in such statements will be
prepared by the Servicer, neither such information nor any other financial
information furnished to Certificateholders will be examined and reported upon,
and an opinion will not be expressed by, an independent public accountant.
CERTIFICATE ACCOUNT
The Trustee has agreed to establish and maintain in its trust
department a non-interest-bearing trust account (the "Certificate Account").
PRE-FUNDING ACCOUNT
If Section 7(a) Companion Loans and SBA 504 Loans are not included in
the Trust Fund on the Closing Date, the Pre-Funded Amount will be deposited on
the Closing Date into the Pre-Funding Account. Amounts in the Pre-Funding
Account may be used only (i) to acquire Subsequent SBA Loans, and (ii) to make
accelerated payments of principal on the Certificates. During the Funding Period
amounts will, from time to time, be withdrawn from the Pre-Funding Account to
purchase Subsequent SBA Loans in accordance with the Agreement. Any Pre-Funded
Amount remaining at the end of the Funding Period will be distributed as a
principal prepayment on the next Remittance Date to the Certificates. However,
any Pre-Funded Amount remaining at the close of business on ______________, 199_
will be distributed as a principal prepayment on the Special Remittance Date.
All funds in the Pre-Funding Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds in the
Pre-Funding Account will be applied to payment of interest on the Certificates.
CAPITALIZED INTEREST ACCOUNT
If the Pre-Funding Account is established, on the Closing Date, the
Representative also will make a cash deposit into the Capitalized Interest
Account. The amount, if any, deposited therein will be used by the Trustee on
the Remittance Dates occurring in ____________, ____________ and _________,
199__ to fund the excess, if any, of (i) the amount of interest accrued for each
such Remittance Date at the weighted average on the portion of the Class A and
Class B Certificates having principal balances exceeding the principal balances
of the Unguaranteed Interests, over (ii) the amount of any earnings on funds in
the Pre-Funding Account that are available to pay interest on the Certificates
on each such Remittance Date. Additionally, if a principal prepayment is made on
the Special Remittance Date to any Class of Certificates, such Class of
Certificates also will receive on such date, from the Capitalized Interest
Account, an amount equal to __ days' interest at the applicable Remittance Rate
on the amount of such principal prepayment. Any amounts remaining in the
Capitalized Interest Account on the Special Remittance Date and not used for
such purposes are required to be paid directly to the Representative on such
Special Remittance Date.
All funds in the Capitalized Interest Account are required to be held
(i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
FLOW OF FUNDS
The Agreement requires the Servicer to withdraw on each Determination
Date that portion of the Available Funds in the Principal and Interest Account
and to remit such amount together with the Monthly Advances and Compensating
Interest for the related Remittance Date to the Trustee for deposit in the
Certificate Account. Upon receipt on each Determination Date of such amount, the
Trustee is required to deposit such amount into the Certificate Account.
On each Remittance Date the Trustee is required to withdraw from the
Certificate Account the sum of (i) that portion of the Available Funds received
from the Servicer, and (ii) the amounts, if any, deposited therein from the
Spread Account as described below under "--Spread Account" herein, and (iii)
with respect to the Remittance Dates in _________, __________ and __________
199_, the amounts, if any, deposited therein from the Pre-Funding Account and
the Capitalized Interest Account, and make distributions thereof in the
following order of priority:
(i) First, to the Class A Certificates in an
amount up to the Class A Interest Distribution Amount;
(ii) Second, to the Class B Certificates in an
amount up to the Class B Interest Distribution Amount;
(iii) Third, to the Class A Certificates in
an amount up to the sum of (a) the Class A Principal
Distribution Amount and (b) the Class A Carry Forward
Amount;
(iv) Fourth, to the Class B Certificates, in an
amount up to the sum of (a) the Class B Principal
Distribution Amount and (b) the Class B Carry-Forward
Amount;
(v) Fifth, to the Expense Account in an amount up
to one-twelfth of the Annual Expense Escrow Amount plus any
amount required to be paid to the Trustee pursuant to the
Agreement resulting from insufficiencies in the Expense
Account;
(vi) Sixth, to the Servicer in an amount up to
the Reimbursable Amounts;
(vii) Seventh, to the Spread Account, any
remainder unless and until the amount therein equals
the Specified Spread Account Requirement; and
(viii) Eighth, to the Spread Account
Depositor, any amounts in excess of the Specified
Spread Account Requirement.
CLASS A AND CLASS B INTEREST DISTRIBUTION AMOUNTS
To the extent of the Available Funds, and prior to payments of
principal, on each Remittance Date the Class A and Class B Certificateholders,
in that order, will be entitled to receive interest accrued for the related
Interest Accrual Period at the then applicable Class A or Class B Remittance
Rate on the Class A or Class B Principal Balance, as the case may be,
outstanding immediately prior to such Remittance Date, subject to the adjustment
set forth in the next paragraph. If, on any Remittance Date, the Class A or
Class B Certificates do not receive the full amount of interest to which they
are entitled, such shortfall, plus interest thereon at the then applicable Class
A or Class B Remittance Rate, compounded monthly, will be added to the amount of
interest they are entitled to receive on succeeding Remittance Dates. The
aggregate amounts of interest payable to the Class A and Class B Certificates on
each Remittance Date are referred to herein as the "Class A Interest
Distribution Amount" and the "Class B Interest Distribution Amount"
respectively.
As stated herein, many of the SBA Loans contain minimum and/or maximum
Note Rate provisions. As a result, if the then current Prime Rate plus the
applicable margin would exceed the applicable maximum Note Rate (or fall below
the applicable minimum Note Rate), the actual Note Rate borne by such SBA Loan
will be less than (or greater than) the Note Rate that such SBA Loan would bear
if such limits were not in effect. Additionally, as described under "Summary of
Terms -- Interest", for the Remittance Dates occurring in each February, May,
August and November, interest accruing on the Class A and Class B Certificates
will be based upon the Prime Rate in effect on the first Business Day of the
preceding January, April, July and October, respectively, while interest
payments on the SBA Loans adjusting quarterly required to be distributed on such
Remittance Dates generally will be based on the Prime Rate in effect on the
first Business Day of the preceding October, January, April and July,
respectively. Accordingly, for each Remittance Date the aggregate amount of
interest payable with respect to each of the SBA Loans in accordance with their
terms, net of the interest payable to the holders of the Guaranteed Interest,
the Excess Spread (other than the portion thereof allocated to the Servicing Fee
on the Guaranteed Interest), the Servicing Fee, the Agent of the SBA's Fee, the
Additional Fee (with respect to the Additional Fee SBA Loans), the Extra
Interest (as defined below) and the fees and expenses of the Trustee allocable
to such interest, might exceed or be less than the interest accrued on the SBA
Loans at the weighted average Class A and Class B Remittance Rates. Any such
excess or shortfall will be allocated to the Class A and Class B Certificates
pro rata in accordance with the amount of interest each such Class of
Certificates would otherwise be entitled to receive but for such adjustment.
With respect to each SBA Loan, the "Extra Interest Percentage" will
equal the excess of (i) the Note Rate that would be in effect for such SBA Loan
as of the Cut-Off Date without giving effect to any applicable lifetime floor or
cap over (ii) the sum of the rates used in determining the Servicing Fee and the
Trustee's fees and expenses and the initial weighted average Class A and Class B
Remittance Rates.
For each Remittance Date, the "Extra Interest" for an SBA Loan will
equal the product of (i) the principal portion of the Unguaranteed Interest of
such SBA Loan for such Remittance Date and (ii) one-twelfth of the applicable
Extra Interest Percentage.
CLASS A AND CLASS B PRINCIPAL DISTRIBUTION AMOUNTS
With respect to each Remittance Date, the "Class A Principal
Distribution Amount" and the "Class B Principal Distribution Amount" will equal
the Class A Percentage or the Class B Percentage, as the case may be, multiplied
by the total of (i) the Unguaranteed Percentage of all payments and other
recoveries of principal of an SBA Loan (net of amounts reimbursable to the
Servicer pursuant to the Agreement) received by the Servicer or any Subservicer
during the related Due Period, excluding amounts received with respect to SBA
Loans which have been delinquent 24 months or have been determined to be
uncollectible, in whole or in part, by the Servicer to the extent that the Class
A Certificateholders or the Class B Certificateholders, as the case may be, have
previously received the Class A Percentage or the Class B Percentage, as the
case may be, of the principal portion of the Unguaranteed Interest of such SBA
Loans; (ii) the principal portion of any Unguaranteed Interest actually
purchased by a Seller for breach of a representation and warranty or other
defect and actually received by the Trustee as of the related Determination
Date; (iii) any adjustments with respect to substitutions of SBA Loans for which
a Seller has breached a representation or warranty deposited in the Principal
and Interest Account and transferred to the Certificate Account as of the
related Determination Date; (iv) the Unguaranteed Percentage of all losses on
SBA Loans which were finally liquidated during the applicable Due Period; (v)
the Unguaranteed Percentage of the then outstanding principal balance of any SBA
Loan which, as of the first day of the related Due Period, is delinquent 24
months or determined by the Servicer to be uncollectible in whole or in part;
and (vi) amounts, if any, released from the Pre-Funding Account on the _______,
_______ and _________ 199_ Remittance Dates.
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates will be issued in
June 199_ with a May 31, 199_ Cut-Off Date and that distributions on the
Certificates are made on the 15th day of each month (or, if such 15th day is not
a Business Day, the next succeeding Business Day):
May 31 ........................... Cut-Off Date. The Original Pool
Principal Balance will be the aggregate
principal amount of the Unguaranteed
Interests of the SBA Loans at the close
of business on May 31, 199_ after
application of all payments collected on
or before such date.
June 1-30........................ The Subservicers remit to the Servicer
for deposit in the Principal and
Interest Account all amounts received on
account of the Unguaranteed Interests of
the SBA Loans.
June 30........................... First Record Date. Distribution on July
15, 199_ will be made to
Certificateholders of record on the
Closing Date. Subsequent record dates
will be the last day of the month
preceding the Remittance Date.
July __ .......................... Determination Date. The Servicer
determines the amount of principal and
interest that will be distributed to the
Certificateholders on July 15, and
transfers funds in the Principal and
Interest Account to the Trustee for
deposit in the Certificate Account
together with any Monthly Advances,
Compensating Interest and, to the extent
necessary, amounts from the Spread
Account.
July 15............................ Remittance Date. The Trustee or the
Paying Agent will distribute to
Certificateholders the amounts required
to be distributed pursuant to the
Agreement.
SPREAD ACCOUNT
On the Closing Date, the Spread Account Depositor will make an initial
cash deposit into the Spread Account in an amount equal to ___% of the Original
Pool Principal Balance (the "Initial Deposit"). Thereafter, on each Remittance
Date the Trustee will deposit into the Spread Account the Available Funds, if
any, remaining after payment of interest and principal to the holders of the
Certificates, amounts required to be deposited into the Expense Account and
certain amounts reimbursable to the Servicer, each as described above, until the
aggregate amount then on deposit in the Spread Account (the "Spread Balance")
equals the sum of (i) the then outstanding principal balance of the Unguaranteed
Interests of all SBA Loans 180 days or more delinquent and (ii) the greater of
(a) ___% of the then outstanding aggregate principal balance of the Unguaranteed
Interests of all the SBA Loans, or (b) the amount of the Initial Deposit;
provided, however, that for purposes of clauses (i) and (ii)(a), there shall be
excluded the principal portion of the Unguaranteed Interest of SBA Loans which
have been delinquent 24 months or have been determined to be uncollectible, in
whole or in part, by the Servicer, to the extent that the Certificateholders
have previously received the Unguaranteed Portion of the principal balance of
such SBA Loans (the sum of such amounts is referred to herein as the "Specified
Spread Account Requirement").
On each Determination Date, to the extent funds are available
therefor, the Trustee will withdraw from the Spread Account for deposit into the
Certificate Account the amount, if any, by which (i) the sum of (a) the Class A
and Class B Interest Distribution Amounts, (b) the Class A and Class B Principal
Distribution Amounts and (c) the Class A and Class B Carry-Forward Amounts
exceeds (ii) the Available Funds for such Remittance Date (but excluding from
such definition, amounts in the Spread Account).
The Spread Account Depositor will not be required to refund any
amounts previously properly distributed to it, regardless of whether there are
sufficient funds on a subsequent Remittance Date to make a full distribution to
holders of the Certificates on such Remittance Date.
The funding and maintenance of the Spread Account is intended to
enhance the likelihood of timely payment of principal and interest to the
holders of the Certificates; however, if the SBA Loan Pool experiences levels of
delinquencies and losses above the scenarios used to obtain the ratings on the
Class B Certificates, the Spread Account could be depleted, and shortfalls could
result. See "Ratings" herein.
[THE GUARANTY
As additional credit support for the Class B Certificates, the Class B
Certificateholders are entitled to receive on each Remittance Date the amount
equal to the Guaranty Payment, if any, under the Guaranty. The "Guaranty
Payment" for any Remittance Date will equal the difference, if any, between the
sum of the Class B Interest Distribution Amount and the Class B Principal
Distribution Amount for such Remittance and the portion of the Available Funds
allocated to the Class B Certificates on such Remittance Date, but no more than
$__________ in the aggregate.
The Guaranty will be an unsecured general obligation of The Money
Store Inc. and will not be supported by any letter of credit or other credit
enhancement arrangement. The Guaranty will not benefit in any way, or result in
any payment to, the Class A Certificateholders.
As compensation for providing the Guaranty, The Money Store
Inc. will be entitled to receive a fee (the "Guaranty Fee" equal to ________).]
REGISTRATION OF CERTIFICATES
The Class A Certificates will initially be registered in the name of
Cede, the nominee of DTC. The Class B Certificates will be either (i) registered
in the name of Cede, as the nominee of DTC, with similar effect as the Class A
Certificates, or (ii) issued in physical form, as determined by the Sellers
prior to the initial issuance of the Certificates.
Certificates Registered Through DTC. DTC is a limited-purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the 1934 Act. See "Description of the Certificates
- -- Book-Entry Registration" in the Prospectus.
Certificates Not Registered through DTC. With respect to (i) any
Certificate not originally registered through DTC, or (ii) any Definitive
Certificate issued in exchange for a Book-Entry Certificate in connection with
the events described above (together, "Physical Certificates"), the Trustee will
be required to make payments and furnish reports directly to the related
Certificateholder.
If (i) any mutilated Physical Certificate is surrendered to the
Certificate Registrar (as defined under "Certain Definitions"), or the Trustee
and the Certificate Registrar receive satisfactory evidence of the destruction,
loss or theft of any Physical Certificate, and (ii) there is delivered to the
Servicer, the Trustee and the Certificate Registrar such security or indemnity
as may be required by each of them to save each of them harmless, then, in the
absence of notice to the Servicer, the Trustee and the Certificate Registrar
that such Physical Certificate has been acquired by a bona fide purchaser, the
Servicer shall execute and deliver, and the Trustee shall authenticate, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Physical Certificate, a new Physical Certificate of like tenor and Percentage
Interest, but bearing a number not contemporaneously outstanding. Upon the
issuance of any such new Physical Certificate, the Servicer and the Trustee may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses connected
therewith. Any such duplicate Physical Certificate shall constitute complete and
indefeasible evidence of ownership in the Trust Fund, as if originally issued,
whether or not the mutilated, destroyed, lost or stolen Physical Certificate
shall be found at any time.
Physical Certificates will be transferable and exchangeable at the
corporate trust office of the Trustee or, at the election of the Trustee, at the
office of the Certificate Registrar. No service charge will be made 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.
Prior to due presentation of a Physical Certificate for registration
of transfer, the Servicer, the Trustee, the Sellers, the Paying Agent and the
Certificate Registrar may treat the Person in whose name any Physical
Certificate is registered as the owner of such Physical Certificate for the
purpose of receiving distributions with respect to such Certificate and for all
other purposes whatsoever, and the Servicer, the Trustee, the Seller and the
Certificate Registrar shall not be affected by notice to the contrary.
All Physical Certificates surrendered for registration of transfer or
exchange are required, if surrendered to any Person other than the Trustee, to
be delivered to the Trustee and to be promptly canceled by it. No Physical
Certificate is to be authenticated in lieu of or in exchange for any Physical
Certificate so canceled, except as expressly permitted by the Agreement. All
canceled Certificates may be held by the Trustee in accordance with its standard
retention policy.
REMOVAL AND RESIGNATION OF SERVICER
The Majority Certificateholders, by notice in writing to the Servicer,
may, pursuant to the Agreement, remove the Servicer upon the occurrence of any
of the following events:
(i) (A) the failure by the Servicer to make any
required Servicing Advance, to the extent such failure
materially or adversely affects the interests of the
Certificateholders; (B) the failure by the Servicer to make
any required Monthly Advance; (C) the failure by the Servicer
to remit any Compensating Interest; or (D) any failure by the
Servicer to remit to Certificateholders, or to the Trustee for
the benefit of the Certificateholders, any payment required to
be made under the terms of the Agreement, which continues
unremedied (in the case of the events described in clauses
(i)(A), (i)(C) and (i)(D) for 30 days after the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Trustee
or to the Servicer and the Trustee by any Certificateholder;
or
(ii) failure by the Servicer or the Sellers duly to
observe or perform, in any material respect, any other
covenants, obligations or agreements of the Servicer or the
Sellers, as set forth in the Agreement, which failure
continues unremedied for a period of 60 days after the date on
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer or the
Sellers, as the case may be, by the Trustee or to the
Servicer, or the Sellers, as the case may be, and the Trustee
by any Certificateholder; or
(iii) a decree or order of a court or agency or
supervisory authority having jurisdiction for the appointment
of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against the Servicer and
such decree or order shall have remained in force,
undischarged or unstayed for a period of 60 days; or
(iv) the Servicer shall consent to the appointment of
a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Servicer or of or
relating to all or substantially all of the Servicer's
property; or
(v) the Servicer shall admit in writing its inability
to pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations.
The Servicer may not assign the Agreement nor resign from the
obligations and duties thereby imposed on it except by mutual consent of the
Servicer, the SBA, the Trustee and the Majority Certificateholders, or upon the
determination that the Servicer's duties thereunder are no longer permissible
under applicable law or administrative determination and such incapacity cannot
be cured by the Servicer. No such resignation shall become effective until a
successor has assumed the Servicer's responsibilities and obligations in
accordance with the Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). If, however, the Trustee is
unable to act as Successor Servicer, or if the SBA so requests, the Trustee may
appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to the SBA, Moody's
and Duff & Phelps having a net worth of not less than $15,000,000 and which is
an approved SBA guaranteed lender in good standing, operating pursuant to an
effective Loan Guaranty Agreement as the Successor Servicer in the assumption of
all or any part of the responsibilities, duties or liabilities of the Servicer.
TERMINATION; PURCHASE OF SBA LOANS
The Agreement will terminate upon notice to the Trustee of the earlier
of either: (a) the final payment or other liquidation of the last SBA Loan, or
the disposition of all property acquired upon foreclosure of any SBA Loan and
the remittance of all funds due thereunder or (b) mutual consent of the Servicer
and all Certificateholders in writing; provided, however, that in no event will
the trust established by the Agreement terminate later than twenty-one years
after the death of the last surviving lineal descendant of Joseph P. Kennedy,
late Ambassador of the United States to the Court of St. James, alive as of the
Cut-Off Date.
The Servicer may, at its option, terminate the Agreement on any date
on which the then outstanding aggregate principal balance of the Unguaranteed
Interests is less than 10% of the sum of (i) the Original Pool Principal Balance
and (ii) the Original Pre-Funded Amount by purchasing, on the next succeeding
Remittance Date, all of the Unguaranteed Interests and any other assets in the
Trust Fund at a price equal to the sum of (i) 100% of the then Outstanding Class
A and Class B Principal Balances, and (ii) 30 days' accrued interest thereon at
the then applicable Class A and Class B Remittance Rates (the "Termination
Price"); provided, however, that under certain circumstances set forth in the
Agreement, the Servicer may not take such action prior to providing Moody's and
Duff & Phelps with an opinion of counsel that such termination would not be
deemed a fraudulent conveyance by the Servicer.
THE TRUSTEE
[Name of Trustee], a ___________ located in _____________________, has
been named Trustee pursuant to the Agreement.
The Agreement requires that the Trustee shall at all times be (i) a
national banking association or banking corporation or trust company organized
and doing business under the laws of the United States of America or of any
State, (ii) authorized under such laws to exercise corporate trust powers, (iii)
having a combined guaranteed capital and surplus of at least $30,000,000, (iv)
having unsecured and unguaranteed long-term debt obligations rated at least Baa3
by Moody's and BBB- by Duff & Phelps (provided Duff & Phelps is rating the
unsecured and unguaranteed long-term debt obligations of the Trustee), or such
other ratings as is acceptable to the SBA, (v) is subject to supervision or
examination by a federal or state authority, (vi) is an approved SBA guaranteed
lender in good standing, operating pursuant to an effective Loan Guaranty
Agreement, and (vii) is reasonably acceptable to the SBA. If at any time the
Trustee shall cease to be eligible in accordance with the provisions described
in this paragraph, it shall resign upon request of the Majority
Certificateholders in the manner and with the effect specified in the Agreement.
The Trustee, or any trustee or trustees hereafter appointed, may
resign at any time in the manner set forth in the Agreement. Upon receiving
notice of resignation, the Servicer shall promptly appoint a successor trustee
or trustees meeting the eligibility requirements set forth above in the manner
set forth in the Agreement. If no successor trustee shall have been appointed
and have accepted appointment within 60 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
No resignation or removal of the Trustee and no appointment of a
successor trustee shall become effective until the acceptance of appointment by
a successor trustee.
The Majority Certificateholders with the consent of the SBA, Moody's
and Duff & Phelps, or the SBA, may remove the Trustee under the conditions set
forth in the Agreement and appoint a successor trustee in the manner set forth
therein.
The Servicer shall give notice of each removal of the Trustee to the
Certificateholders, which notice shall include the name of the successor trustee
and the address of its corporate trust office.
Upon acceptance of appointment by a successor trustee in the manner
provided in the Agreement, the Servicer shall give notice thereof to the
Certificateholders.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more Persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Agreement, such powers, duties, obligations, rights and trusts
as the Servicer and the Trustee may consider necessary or desirable.
Neither the Trustee, its authorized agent(s) nor representative(s)
will conduct an independent review and assessment on whether SBA Loans should be
foreclosed or the underlying property should be liquidated when a default has
occurred with respect thereto.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP, special federal tax counsel ("Federal Tax Counsel"), as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Investors should consult their own
tax advisors in determining the federal, state, local and other tax consequences
to them of the purchase, ownership and disposition of Certificates. For purposes
of this tax discussion (except with respect to information reporting, or where
the context indicates otherwise), the terms "Certificateholder" and "holder"
mean the beneficial owner of a Certificate.
TAX STATUS OF THE TRUST FUND
Upon the issuance of the Certificates, Stroock & Stroock & Lavan LLP,
special federal tax counsel, will deliver its opinion to the effect that, under
then current law, assuming compliance with the Agreement, the Trust Fund will be
classified for federal income tax purposes as a grantor trust and not as an
association taxable as a corporation or a taxable mortgage pool. Accordingly,
each Certificateholder will be subject to federal income taxation as if it owned
directly its interest in each asset owned by the Trust Fund and paid directly
its share of expenses paid by the Trust Fund.
For purposes of federal income tax, the Spread Account Depositor will
be deemed to have retained a fixed portion of the interest due on each SBA Loan
(the "Spread"). The Spread will be treated as "stripped coupons" within the
meaning of Section 1286 of the Code. The Servicer may also be deemed to have
retained a "stripped coupon" if and to the extent that the Servicing Fee is
determined to be unreasonable. In addition, because the Class B Remittance Rate
exceeds the Class A Remittance Rate, a portion of the interest accrued on each
SBA Loan will be treated as a "stripped coupon" purchased by the Class B
Certificateholders. Accordingly, each Class A Certificateholder will be treated
as owning its pro rata percentage interest in the principal of, and interest
payable on, the Unguaranteed Interest of each SBA Loan (minus the portion of the
interest payable on such SBA Loan that is treated as Spread or as a stripped
coupon purchased by the Class B Certificateholders), and such interest in the
Unguaranteed Interest of each SBA Loan will be treated as a "stripped bond"
within the meaning of Section 1286 of the Code. Similarly, each Class B
Certificateholder will be treated as owning its pro rata percentage interest in
the principal of the Unguaranteed Interest of each SBA Loan, plus a
disproportionate share of the interest payable on each SBA Loan.
CLASS A CERTIFICATEHOLDERS
Because Class A Certificates represent stripped bonds, they will be
subject to the original issue discount ("OID") rules of the Code. Accordingly,
the tax treatment of a Class A Certificateholder will depend upon whether the
amount of OID on a Class A Certificate is less than a statutorily defined de
minimis amount.
In general, under regulations issued under Section 1286 of the
Internal Revenue Code of 1986, as amended (the "Code"), the amount of OID on an
SBA Loan treated as a "stripped bond" will be de minimis if it is less than 0.25
percent of the stated redemption price at maturity, as defined in Section
1273(a)(2) of the Code, for each year remaining after the purchase date until
the maturity of the SBA Loan. The maturity date is based on the weighted average
maturity date (and a reasonable prepayment assumption may have to be taken into
account in determining weighted average maturity). Under the regulations, the
portion of the interest on each SBA Loan payable to the Class A
Certificateholders will be treated as "qualified stated interest". As a result,
the amount of OID on an SBA Loan will equal the amount by which the price at
which a Certificateholder is deemed to have acquired an interest in an SBA Loan
(the "Purchase Price") is less than the portion of the remaining principal
balance of the SBA Loan allocable to the interest acquired. Although Federal Tax
Counsel cannot opine on the matter, the Trust Fund intends to take the positions
(i) that the amount of OID on the SBA Loans will be determined by aggregating
all payments on the SBA Loans allocable to the Class A Certificateholders (not
including the Spread), and treating the portion of all payments on the SBA Loans
allocable to Class A Certificateholders as a single obligation on an aggregate
basis, rather than being determined separately with respect to each SBA Loan,
and (ii) that no separate allocation of consideration must be made to accrued
interest or to amounts held in the Certificate Account.
Based on these positions, the Trust Fund anticipates that the
Certificates will not be issued initially with OID (or that any OID present will
be de minimis). The Internal Revenue Service ("IRS") could require, instead,
that the computation be performed on an SBA-Loan-by-SBA-Loan basis. In the
preamble to the regulations under Section 1286 of the Code, the IRS requests
comment on appropriate aggregation rules. Any such recalculation could adversely
affect the timing and character of a Class A Certificateholder's income. The IRS
might also require that a portion of the purchase price for a Certificate be
allocated to accrued interest on each SBA Loan and to amounts held in the
Certificate Account pending distribution to Certificateholders at the time of
purchase as though such accrued interest and collections on the SBA Loans were
separate assets purchased by the Certificateholder. Any such allocation would
reduce the Purchase Price and thus increase the discount (or decrease the
premium) on the SBA Loans.
If the amount of OID is de minimis under the rule set forth above, the
Class A Certificates would not be treated as having OID. Each Class A
Certificateholder would be required to report on its federal income tax return
its share of the gross income of the Trust Fund, including interest and certain
other charges accrued on the SBA Loans and any gain upon collection or
disposition of the SBA Loans (but not including any portion of the Spread). Such
gross income attributable to interest on the SBA Loans would exceed the Class A
Remittance Rate by an amount equal to the Class A Certificateholder's share of
the expenses of the Trust Fund for the period during which it owns a Class A
Certificate. The Class A Certificateholder would be entitled to deduct its share
of expenses of the Trust Fund to the extent described below. Any amounts
received by a Class A Certificateholder from the Spread Account or from the
subordination of the Class B Certificates will be treated for federal income tax
purposes as having the same character as the payments they replace. A Class A
Certificateholder would report its share of the income of the Trust Fund under
its usual method of accounting. Accordingly, interest would be includable in a
Certificateholder's gross income when it accrues on the SBA Loans, or, in the
case of Certificateholders who are cash basis taxpayers, when received by the
Servicer on behalf of Certificateholders. The actual amount of discount on an
SBA Loan would be includable in income as principal payments are received on the
SBA Loans.
If, contrary to the treatment anticipated by the Trust Fund, the OID
on an SBA Loan is not de minimis, a Class A Certificateholder will be required
to include in income, in addition to the amounts described above, any OID as it
accrues, regardless of when cash payments are received, using a method
reflecting a constant yield on the SBA Loans. It is possible that the Internal
Revenue Service (the "IRS") could require use of a prepayment assumption in
computing the yield of an SBA Loan. If an SBA Loan is deemed to be acquired by a
Certificateholder at a significant discount, such treatment could accelerate the
accrual of income by a Certificateholder.
Although the Trustee intends to account for OID, if any, reportable by
holders of Class A Certificates by reference to the price paid for a Class A
Certificate by an initial purchaser, the amount of OID will differ for
subsequent purchasers. Such subsequent purchasers should consult their tax
advisers regarding the proper calculation of OID on the interest in SBA Loans
represented by a Class A Certificate.
As to SBA Loans that are real estate mortgages, a Certificateholder
may be able (or may be required) to account for any discount on such SBA Loans
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 1% (i.e., 100 basis points),
including any amount of servicing in excess of reasonable servicing, is stripped
off from the SBA Loans. As noted above, the Trust Fund intends to account for
the SBA Loans on an aggregate basis and does not intend to report separately for
this purpose with respect to the SBA Loans that are real estate mortgages.
In the event that an SBA Loan is treated as purchased at a premium
(i.e., its Purchase Price exceeds the portion of the remaining principal balance
of such SBA Loan allocable to the Certificateholder), such premium will be
amortizable by the Certificateholder as an offset to interest income (with a
corresponding reduction in the Certificateholder's basis) under a constant yield
method over the term of the SBA Loan if an election under Section 171 of the
Code is made with respect to the interests in the SBA Loans represented by the
Certificates or was previously in effect. Any such election will also apply to
all debt instruments held by the Certificateholder during the year in which the
election is made and all debt instruments acquired thereafter.
A Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of reasonable servicing fees and other
fees paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Code. If a Certificateholder is an individual, estate or trust, the deduction
for such holder's share of such fees will be allowed only to the extent that all
of such holder's miscellaneous itemized deductions, including such holder's
share of such fees, exceed two percent of such holder's adjusted gross income.
CLASS B CERTIFICATEHOLDERS
In General. Except as described below, it is believed that the Class B
Certificateholders will be subject to tax in the same manner as Class A
Certificateholders. However, no federal income tax authorities address the
precise method of taxation of an instrument such as the Class B Certificates and
Federal Tax Counsel cannot opine on this issue. In the absence of applicable
authorities, the Trustee intends to report income to Class B Certificateholders
in the manner described below.
Each Class B Certificateholder will be treated as owning (i) the Class
B Percentage of the principal portion of the Unguaranteed Interest on each SBA
Loan plus (ii) a disproportionate portion of the interest on each SBA Loan (not
including the Spread). Income will be reported to a Class B Certificateholder
based on the assumption that all amounts payable to the Class B
Certificateholders are taxable under the coupon stripping provisions of the Code
and treated as a single obligation. In applying those provisions, the Trustee
will take the position that a Class B Certificateholder's entire share of the
interest on an SBA Loan will qualify as "qualified stated interest." Thus,
except to the extent modified by the effects of subordination of the Class B
Certificates, as described below, income will be reported to Class B
Certificateholders in the manner described above for holders of the Class A
Certificates.
Effect of Subordination. If the Class B Certificateholders receive
distributions of less than their share of the Trust Fund's receipts of principal
or interest (the "Shortfall Amount") because of the subordination of the Class B
Certificates, it is believed that holders of Class B Certificates would probably
be treated for federal income tax purposes as if they had (l) received as
distributions their full share of such receipts, (2) paid over to the Class A
Certificateholders an amount equal to such Shortfall Amount, and (3) retained
the right to reimbursement of such amounts to the extent of future collections
otherwise available for deposit in the Spread Account. However, Federal Tax
Counsel cannot opine to such treatment.
Under this treatment, (1) Class B Certificateholders would be required
to accrue as current income any interest, OID income, or (to the extent paid on
the SBA Loans) accrued market discount of the Trust Fund that was a component of
the Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that that amount would not
be available from any source to reimburse such loss), and (3) reimbursement of
such Shortfall Amount prior to such a claim of worthlessness would not be
taxable income to Class B Certificateholders because such amount was previously
included in income. Those results should not significantly affect the inclusion
of income for Class B Certificateholders on the accrual method of accounting,
but could accelerate inclusion of income to Class B Certificateholders on the
cash method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions is unclear and Federal Tax
Counsel cannot opine as to such character or timing.
STATUS OF THE CERTIFICATES AS REAL PROPERTY LOANS
The Certificates generally will be "real estate assets" for purposes
of Section 856(c)(5)(A) of the Code, and interest income on the Certificates
generally will be "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, to the extent
that the SBA Loans are mortgages secured by real property. The Certificates
generally will be treated as "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, to the
extent that the SBA Loans are secured by residential real property.
SALES OF CERTIFICATES
A holder that sells a Certificate will recognize gain or loss equal to
the difference between the amount realized on the sale and its adjusted basis in
the Certificate. In general, such adjusted basis will equal the holder's cost
for the Certificate, increased by the amount of any income previously reported
with respect to the Certificate, and decreased by the amount of any losses
previously reported with respect to the Certificate and the amount of any
distributions received thereon. Any such gain or loss generally will be capital
gain or loss if the assets underlying the Certificate were held as capital
assets, except that, in the case of a Certificate that was acquired with more
than a de minimis amount of market discount, such gain will be treated as
ordinary interest income to the extent of the portion of such discount that
accrued during the period in which the seller held the Certificate and that was
not previously included in income.
FOREIGN INVESTORS
A Certificateholder who is not a "United States person" (as defined
below) and is not subject to federal income tax as a result of any direct or
indirect connection to the United States other than its ownership of a
Certificate generally will not be subject to United States income or withholding
tax in respect of payments of interest or original issue discount on a
Certificate, provided that the holder complies to the extent necessary with
certain identification requirements (including delivery of a statement, signed
by the Certificateholder under penalties of perjury, certifying that such holder
is not a United States person and providing the name and address of such
holder). However, distributions of interest to a holder who is not a United
States person will be subject to withholding tax at a rate of 30 percent, unless
such withholding tax rate is reduced by an applicable treaty, to the extent that
such interest distributions are attributable to SBA Loans originated on or prior
to July 18, 1984. For these purposes, the term "United States person" means a
citizen or a resident of the United States, a corporation, partnership, or other
entity created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, or a trust not
described in Section 7701(a)(31) of the Code.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds
from the sale of Certificates, to Certificateholders who are not "exempt
recipients" may be subject to the "backup withholding" tax under Section 3406 of
the Code at a rate of 31 percent, if such holders fail to furnish certain
information, including their taxpayer identification numbers, to the Trustee,
its agent, or the broker effecting a sale of the Certificate, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a Certificateholder would be allowed as a credit against such
Certificateholder's federal income tax. Furthermore, certain penalties may be
imposed by the IRS on a Certificateholder who is required to supply information
but who does not do so in the proper manner.
ERISA CONSIDERATIONS
Neither an Underwriter Exemption (as defined in the Prospectus) nor
Prohibited Transaction Class Exemption 83-1 is applicable to the purchase,
holding or transfer of the Certificates. Therefore, no Certificates may be
purchased for, or on behalf of, any employee benefit plan or other retirement
arrangement which is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue
Code of 1986, as amended, or any entity whose underlying assets include plan
assets by reason of such plan or account investing in such entity (including
insurance company separate or general accounts and collective investment funds).
Each Certificateholder will be deemed to have represented and warranted that it
is not subject to the foregoing limitations. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Class A and Class B Certificates, dated
__________, 199__ (the "Underwriting Agreement"), the Sellers have agreed to
sell and the Underwriter has agreed to purchase all the Class A and Class B
Certificates. The Class A and Class B Certificates will be offered by the
Underwriter to the public in negotiated transactions. After the Class A and
Class B Certificates are released for sale to the public, the offering price and
other selling terms may be varied by the Underwriter. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Class A
and Class B Certificates may be deemed to be underwriters and any commissions
received by them and any profit on the resale of the Class A and Class B
Certificates by them may be deemed to be underwriting discounts and commissions
under the 1933 Act.
The Sellers have agreed to indemnify the Underwriter against certain
liabilities including liabilities under the 1933 Act.
In addition to purchasing the Certificates pursuant to the
Underwriting Agreement, the Underwriter and its affiliates have performed
investment banking services for the Representative and its affiliates.
RATINGS
It is a condition to their issuance that the Class A Certificates be
rated "Aaa" and "AAA" by Moody's and Duff & Phelps, respectively, and that the
Class B Certificates be rated at least "___" and "___" by Moody's and Duff &
Phelps, respectively. A rating of "Aaa" and "AAA" is the highest rating assigned
by Moody's and Duff & Phelps, respectively. According to Moody's, securities
which are rated "Aaa" are judged to be of the best quality and, according to
Duff & Phelps, a rating of "AAA" indicates that the capacity to pay interest and
repay principal is extremely strong. According to Moody's, such securities carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. According to Moody's, securities
which are rated "___" possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. According
to Duff & Phelps, a rating of "___" indicates that the capacity to pay interest
and repay principal is average, although a security with these ratings is more
susceptible to adverse effects of changes in circumstances and economic
conditions than securities in higher categories. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
Certificate.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Eric Elwin, Esq., Corporate
Counsel to the Sellers. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the Underwriter by Stroock
& Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan LLP also
will render opinions relating to the transfer of the Unguaranteed Interests from
the Sellers to the Trust Fund and as to the material federal income tax
consequences associated with the purchase, ownership and disposition of the
Certificates. See "Risk Factors -- The Status of the SBA Loans in the Event of
Bankruptcy of the Sellers" and "Material Federal Income Tax Consequences" herein
and "Federal Income Tax Consequences" in the Prospectus. Stroock & Stroock &
Lavan LLP has performed legal services for The Money Store Inc. and the Sellers
and it is expected that it will continue to perform such services in the future.
FINANCIAL INFORMATION
The Sellers have determined that their financial statements are not
material to the offering made hereby. Except for certain representations and
warranties relating to the SBA Loans, the obligations of the Sellers with
respect to the SBA Loans are primarily limited to contractual servicing
obligations.
[Financial statements of The Money Store Inc. have been incorporated
by reference into this Prospectus Supplement and the Prospectus. See
"Incorporation of Certain Documents by Reference" in the Prospectus.]
The Trust Fund has been formed to own the SBA Loans and to issue the
Certificates. The Trust Fund had 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 the Trust
Fund are included in this Prospectus Supplement.
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
Account...................................................... *
Act.......................................................... S-49
Additional Fee............................................... S-6
Additional Fee SBA Loans..................................... S-6
Adjusted SBA Loan Remittance Rate............................ S-21
Adjustment Date.............................................. S-11
Agent of the SBA............................................. S-6
Agent of the SBA's Fee....................................... S-6
Aggregate Class A Certificate Principal Balance.............. *
Aggregate Class B Certificate Principal Balance.............. *
Agreement.................................................... S-4
Annual Expense Escrow Amount................................. *
Assignment of Mortgage....................................... *
Available Funds.............................................. S-9
BIF.......................................................... *
Business Day................................................. *
Capitalized Interest Account................................. S-9
CDC.......................................................... S-52
Cede......................................................... S-24
Certificate Account.......................................... S-60
Certificateholder or Holder.................................. *
Certificate Register......................................... *
Certificate Registrar........................................ *
Certificates................................................. S-1
Certified Lender............................................. S-49
Class A Carry-Forward Amount................................. S-13
Class A Certificates......................................... S-2
Class A Certificate Balance.................................. S-12
Class A Interest Distribution Amount......................... S-10
Class A Percentage........................................... S-13
Class A Principal Distribution Amount........................ S-12
Class A Remittance Amount.................................... S-14
Class A Remittance Rate...................................... S-10
Class B Carry-Forward Amount................................. S-13
Class B Certificates......................................... S-2
Class B Certificate Balance.................................. S-12
Class B Interest Distribution Amount........................ S-10
Class B Percentage........................................... S-13
Class B Principal Distribution Amount........................ S-12
Class B Remittance Amount.................................... S-14
Class B Remittance Rate...................................... S-10
Closing Date................................................. S-14
CLP.......................................................... S-56
Code......................................................... S-68
Collateral................................................... *
Commercial Property ...................................... *
Compensating Interest........................................ S-21
CPR........................................................... S-54
Curtailment................................................... *
Cut-Off Date.................................................. S-7
Definitive Certificates....................................... S-24
Designated Depository Institution............................. *
Determination Date............................................ S-20
DTC........................................................... S-24
Due Date ..................................................... *
Due Period.................................................... S-12
Duff & Phelps................................................. S-23
ERISA......................................................... S-23
Event of Default ............................................. *
Excess Payments............................................... *
Excess Proceeds............................................... *
Excess Spread................................................. S-7
Expense Account............................................... *
Extra Interest................................................ S-62
Extra Interest Percentage..................................... S-62
FDIC.......................................................... *
Federal Tax Counsel........................................... S-23
FHLMC ....................................................... *
FNMA ......................................................... *
Foreclosed Property ......................................... *
Foreclosed Property Disposition ............................ *
Funding Period............................................... S-8
GAO Report................................................... S50
Guaranty..................................................... S-16
Initial Class A Certificate Principal Amount................. S-4
Initial Class B Certificate Principal Amount................. S-4
Initial Deposit.............................................. S-15
Insurance Proceeds........................................... *
Interest Accrual Period...................................... S-8
IRS.......................................................... S-69
Liquidated SBA Loan ........................................ *
Liquidation Proceeds......................................... *
Loan Guaranty Agreement .................................... *
Majority Certificateholders.................................. *
Monthly Advance.............................................. S-20
Monthly Payment ............................................ *
Moody's ..................................................... S-23
Mortgage .................................................... *
Mortgaged Property........................................... *
Multi-Party Agreement ...................................... S-20
Net Liquidation Proceeds.................................... *
Note Rate.................................................... S-17
Notes........................................................ S-8
OID.......................................................... S-23
Obligor .................................................... S-6
Opinion of Counsel........................................... *
Original Class A Certificate Principal Balance............... *
Original Class B Certificate Principal Balance............... *
Original Pool Principal Balance.............................. S-7
Parent....................................................... S-55
Paying Agent................................................. *
Percentage Interest.......................................... *
Permitted Instruments........................................ *
Person ...................................................... *
Physical Certificates........................................ S-64
PLP.......................................................... S-56
Pool Principal Balance....................................... *
Preferred Lender............................................. S-49
Pre-Funded Amount............................................ S-8
Pre-Funding Account.......................................... S-8
Premium Protection Fee....................................... S-6
Prime Rate................................................... S-11
Principal and Interest Account............................... S-58
Principal Balance .......................................... *
Principal Prepayment......................................... *
Prior Lien................................................... *
Prospectus................................................... S-2
Purchase Price............................................... S-69
Record Date ................................................. S-14
Registered Holder .......................................... *
Reimbursable Amounts......................................... *
Released Mortgaged Property Proceeds......................... S-21
REMIC........................................................ S-22
Representative............................................... S-4
Remittance Date.............................................. S-14
Residential Property......................................... *
Responsible Officer ......................................... *
SAIF ........................................................ *
SBA ......................................................... S-1
SBA File ................................................... *
SBA Form 1086 ............................................... *
SBA Loans.................................................... S-5
SBA Loan Interest Rate ...................................... *
SBA Loan Schedule ........................................... *
SBA Notes.................................................... S-28
SBA Rules and Regulations ................................... *
SBA 504 Loan Program........................................ S-49
SBA 504 Loans ............................................... S-5
SBA ss. 7(a) Loans .......................................... S-5
Section 7(a) Companion Loans ............................... S-5
Section 7(a) Companion Program ............................. S-51
Sellers ..................................................... S-4
Servicer..................................................... S-4
Servicer's Certificate ....................................... *
Servicing Advances ......................................... S-22
Servicing Fee................................................. S-22
Servicing Officer ............................................ *
Shortfall Amount.............................................. S-25
Specified Spread Account Requirement.......................... S-15
Spread........................................................ S-68
Spread Account ............................................... S-15
Spread Account Agreement...................................... S-15
Spread Account Custodian...................................... *
Spread Account Depositor...................................... S-15
Spread Balance................................................ S-15
Subsequent SBA Loans.......................................... S-2
Subservicer................................................... *
Subservicing Agreement........................................ *
Tax Return ................................................... *
Termination Price............................................. S-22
TMSCMI........................................................ S-1
Trustee....................................................... S-4
Trust Fund.................................................... S-4
UCC........................................................... S-20
Underwriter................................................... S-2
Underwriting Agreement........................................ S-72
Unguaranteed Interest......................................... S-1
Unguaranteed Percentage ...................................... S-7
Weighted average life ........................................ S-53
* Defined in "Certain Definitions."
<PAGE>
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the definitions contained in
the Agreement and used in this Prospectus Supplement. Reference is made to the
Agreement for the full definitions of all terms.
ACCOUNT: The Certificate Account, the Expense Account and, if
applicable, the Pre-Funding Account and the Capitalized Interest Account, each
established by the Trustee for the benefit of the Certificateholders; and the
Spread Account held by the Spread Account Custodian pursuant to the Spread
Account Agreement. The Trustee's obligation to establish and maintain the
Certificate Account pursuant to the Agreement is not delegable.
ADDITIONAL FEE: With respect to each Additional Fee SBA Loan, the
fee payable to the SBA by the related Seller equal to 40 basis points per annum
on the outstanding balance of the Guaranteed Interest of such Additional Fee SBA
Loans.
ADDITIONAL FEE SBA LOAN: An SBA ss. 7(a) Loan sold in the secondary
market on or after September 1, 1993, and, thus, subject to the Additional Fee.
AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class A Aggregate Certificate Principal Balance less
the sum of all amounts previously distributed to the Class A Certificateholders
in respect of principal.
AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Aggregate Class B Certificate Principal Balance less
the sum of all amounts previously distributed to the Class B Certificateholders
in respect of principal.
ANNUAL EXPENSE ESCROW AMOUNT: The product of ___% per annum and the
Pool Principal Balance, which is computed and payable on a monthly basis and
represents the estimated annual Trustee's fees and Trust Fund expenses.
ASSIGNMENT OF MORTGAGE: With respect to those SBA Loans secured by
a Mortgaged Property, an assignment of the Mortgage, notice of transfer or
equivalent instrument sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect of record the transfer of the
related SBA Loan to the Trustee.
BIF: The Bank Insurance Fund, or any successor thereto.
BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking institutions in the States of California, New York or New
Jersey are authorized or obligated by law or executive order to be closed.
CERTIFICATEHOLDER or HOLDER: Each Person in whose name a Class A or
Class B Certificate is registered in the Certificate Register, except that,
solely for the purposes of giving any consent, waiver, request or demand
pursuant to the Agreement, any Certificate registered in the name of the
Sellers, the Servicer, any Subservicer or any affiliate of any of them, shall be
deemed not to be outstanding and the undivided Percentage Interest evidenced
thereby shall not be taken into account in determining whether the requisite
percentage of Certificates necessary to effect any such consent, waiver, request
or demand has been obtained.
CERTIFICATE REGISTER: The Certificate Register established and
maintained in accordance with the Agreement.
CERTIFICATE REGISTRAR: Initially, ________________, and
thereafter, any successor appointed pursuant to the Agreement.
COLLATERAL: All items of property (including a Mortgaged Property),
whether real or personal, tangible or intangible, or otherwise, pledged by an
Obligor or others to a Seller to secure payment under an SBA Loan.
COMMERCIAL PROPERTY: Real property (other than
agricultural property or Residential Property) that is
generally used by the Obligor in the conduct of its business.
CURTAILMENT: With respect to an SBA Loan, any payment of principal
received during a Due Period as part of a payment that is in excess of five
times the amount of the Monthly Payment due for such Due Period and which is not
intended to satisfy the SBA Loan in full, nor is intended to cure a delinquency.
DESIGNATED DEPOSITORY INSTITUTION: With respect to the Principal
and Interest Account, an entity which is an institution whose deposits are
insured by either the BIF or SAIF administered by the FDIC, the unsecured and
uncollateralized long-term debt obligations of which shall be rated A2 or better
by Moody's and A or better by Duff & Phelps or P1 by Moody's and A1 by Duff &
Phelps, and which is either (i) a federal savings association duly organized,
validly existing and in good standing under the federal banking laws, (ii) an
institution duly organized, validly existing and in good standing under the
applicable banking laws of any state, (iii) a national banking association duly
organized, validly existing and in good standing under the federal banking laws,
or (iv) a principal subsidiary of a bank holding company, in each case acting or
designated by the Servicer as the depository institution for the Principal and
Interest Account.
DETERMINATION DATE: That day of each month which is the third Business
Day prior to the 15th day of such month.
DUE DATE: The day of the month on which the Monthly Payment is due
from the Obligor on an SBA Loan.
EVENT OF DEFAULT: The Events of Default of the Servicer specified in
the Agreement.
EXCESS PAYMENTS: With respect to a Due Period, any amounts received
on an SBA Loan in excess of the Monthly Payment due on the Due Date relating to
such Due Period which does not constitute either a Curtailment or a Principal
Prepayment or payment with respect to an overdue amount. Excess Payments are
payments of principal for purposes of the Agreement.
EXCESS PROCEEDS: As of any Remittance Date, with respect to any
Liquidated SBA Loan, the excess, if any, of (a) the Unguaranteed Percentage of
the total Net Liquidation Proceeds, over (b) the Principal Balance of such SBA
Loan as of the date such SBA Loan became a Liquidated SBA Loan plus 30 days
interest thereon at the then applicable Adjusted SBA Loan Remittance Rate;
provided, however, that such excess shall be reduced by the amount by which
interest accrued on the advance, if any, made by the Servicer at the related SBA
Loan Interest Rate(s) exceeds interest accrued on such advance at the then
applicable weighted average Class A and Class B Remittance Rates.
EXPENSE ACCOUNT: The expense account established and maintained by the
Trustee in accordance with the Agreement.
FDIC: The Federal Deposit Insurance Corporation and any successor
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation and any successor
thereto.
FNMA: The Federal National Mortgage Association and any successor
thereto.
FORECLOSED PROPERTY: Property, the title to which is acquired in
foreclosure or by deed in lieu of foreclosure.
FORECLOSED PROPERTY DISPOSITION: The final sale of a Foreclosed
Property acquired in foreclosure or by deed in lieu of foreclosure. The proceeds
of any Foreclosed Property Disposition constitute part of the definition of
Liquidation Proceeds.
INSURANCE PROCEEDS: Proceeds paid by any insurer pursuant to any
insurance policy covering an SBA Loan, Collateral or Foreclosed Property,
including but not limited to title, hazard, life, health and/or accident
insurance policies.
LIQUIDATED SBA LOAN: Any defaulted SBA Loan or Foreclosed Property
as to which the Servicer has determined that all amounts which it reasonably and
in good faith expects to recover have been recovered from or on account of such
SBA Loan.
LIQUIDATION PROCEEDS: Cash, including Insurance Proceeds, proceeds
of any Foreclosed Property Disposition, revenues received with respect to the
conservation and disposition of a Foreclosed Property, and any other amounts
received in connection with the liquidation of defaulted SBA Loans, whether
through trustee's sale, foreclosure sale or otherwise.
LOAN GUARANTY AGREEMENT: The Loan Guaranty Agreement (Deferred
Participation) (SBA Form 750) dated August 13, 1980 between the SBA and The
Money Store Investment Corporation, as such agreement may be amended from time
to time.
MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A and
Class B Certificates evidencing an Aggregate Class A Certificate Principal
Balance and Aggregate Class B Certificate Principal Balance, as the case may be,
in excess of 50% of the Aggregate Class A Certificate Principal Balance and
Aggregate Class B Certificate Principal Balance, as the case may be.
MONTHLY PAYMENT: The monthly payment of principal and/or interest
required to be made by an Obligor on the related SBA Loan, as adjusted pursuant
to the terms of the related SBA Note.
MORTGAGE: The mortgage, deed of trust or other
instrument creating a lien on a Mortgaged Property.
MORTGAGED PROPERTY: The underlying real property, if any, securing an
SBA Loan, consisting of a Commercial Property or Residential Property and any
improvements thereon.
NET LIQUIDATION PROCEEDS: Liquidation Proceeds net of (i) any
reimbursements to the Servicer made therefrom pursuant to the Agreement and (ii)
amounts required to be released to the related Obligor pursuant to applicable
law.
OPINION OF COUNSEL: A written opinion of counsel, who may, without
limitation, be counsel for the Sellers or Servicer, reasonably acceptable to the
Trustee and experienced in matters relating thereto.
ORIGINAL CLASS A CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class A Certificates issued on the Closing Date.
ORIGINAL CLASS B CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class B Certificates on the Closing Date.
PAYING AGENT: Initially, ________________, and thereafter, any other
Person that meets the eligibility standards for the Paying Agent specified in
the Agreement and is authorized by the Trustee to make payments on the
Certificates on behalf of the Trustee.
PERCENTAGE INTEREST: With respect to a Class A or Class B Certificate,
the portion of the Trust Fund evidenced by such Class A or Class B Certificate,
expressed as a percentage, the numerator of which is the denomination
represented by such Class A or Class B Certificate and the denominator of which
is the Original Class A Certificate Principal Balance or Original Class B
Certificate Principal Balance, as the case may be.
PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall
include the following:
(a) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal
and interest by, the United States or any agency or instrumentality
thereof, provided such obligations are backed by the full faith and
credit of the United States, FHA debentures, Federal Home Loan Bank
consolidated senior debt obligations, and FNMA senior debt
obligations, but excluding any of such securities whose terms do
not provide for payment of a fixed dollar amount upon maturity or
call for redemption;
(b) federal funds, certificates of deposit, time deposits and
banker's acceptances (having original maturities of not more than
365 days) of any bank or trust company incorporated under the laws
of the United States or any state thereof, provided that the
short-term debt obligations of such bank or trust company at the
date of acquisition thereof have been rated Prime-1 or better by
Moody's and Duff 1+ or better by Duff & Phelps;
(c) deposits of any bank or savings and loan association
which has combined capital, surplus and undivided profits of at
least $3,000,000 which deposits are held only up to the limits
insured by the BIF or SAIF administered by the FDIC, provided that
the unsecured long-term debt obligations of such bank or savings
and loan association have been rated A3 or better by Moody's and A
or better by Duff & Phelps;
(d) commercial paper (having original maturities of not more
than 365 days) rated Prime-1 or better by Moody's and Duff 1+ or
better by Duff & Phelps;
(e) debt obligations rated Aaa by Moody's and AAA by Duff &
Phelps (other than any such obligations that do not have a fixed
par value and/or whose terms do not promise a fixed dollar amount
at maturity or call date);
(f) investments in money market funds rated Aaa or better by
Moody's and Duff 1+ or better by Duff & Phelps the assets of which
are invested solely in instruments described in clauses (i)-(v)
above;
(g) certain guaranteed investment contracts and
repurchase agreements satisfying the criteria set forth
in the Agreement; and
(h) any other investment acceptable to the Rating Agencies,
written confirmation of which shall be furnished to the Trustee
prior to any such investment.
PERSON: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, national banking association,
unincorporated organization or government or any agency or political subdivision
thereof.
POOL PRINCIPAL BALANCE: The aggregate Principal Balances as of any
date of determination.
PRINCIPAL AND INTEREST ACCOUNT: The principal and interest account
established by the Servicer pursuant to the Agreement.
PRINCIPAL BALANCE: With respect to any SBA Loan or related Foreclosed
Property, at any date of determination, (i) the Unguaranteed Percentage of the
principal balance of the SBA Loan outstanding as of the Cut- Off Date (or, with
respect to any Subsequent SBA Loan, as of the date set forth in the Agreement),
after application of principal payments received on or before such date, minus
(ii) the sum of (a) the Unguaranteed Percentage of the principal portion of the
Monthly Payments received during each Due Period ending prior to the most recent
Remittance Date, which were distributed pursuant to the Agreement on any
previous Remittance Date, and (b) the Unguaranteed Percentage of all Principal
Prepayments, Curtailments, Excess Payments, Insurance Proceeds, Released
Mortgaged Property Proceeds, Net Liquidation Proceeds and net income from a
Foreclosed Property to the extent applied by the Servicer as recoveries of
principal in accordance with the provisions of the Agreement, which were
distributed pursuant to the Agreement on any previous Remittance Date.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on an
SBA Loan equal to the outstanding principal balance thereof, received in advance
of the final scheduled Due Date which is intended to satisfy an SBA Loan in
full.
PRIOR LIEN: With respect to any SBA Loan secured by a lien which is
not a first priority lien, each loan relating to the corresponding Collateral
having a prior priority lien.
REGISTERED HOLDER: With respect to any SBA Loan, the Person identified
as such in the applicable SBA Form 1086, and any permitted assignees thereof.
REIMBURSABLE AMOUNTS: As of any date of determination, an amount
payable to the Servicer and/or a Seller with respect to (i) the Monthly Advances
and Servicing Advances reimbursable pursuant to the Agreement, (ii) any advances
reimbursable pursuant to the Agreement and not previously reimbursed, and (iii)
any other amounts reimbursable to the Servicer or a Seller pursuant to the
Agreement.
RESIDENTIAL PROPERTY: Any one or more of the following, (i) single
family dwelling unit not attached in any way to another unit, (ii) row house,
(iii) two-family house, (iv) low-rise condominium, (v) planned unit development,
(vi) three- or four-family house, (vii) high-rise condominium, (viii) mixed use
building or (ix) manufactured home (as defined in FNMA/FHLMC Seller-Servicers'
Guide) to the extent that it constitutes real property in the state in which it
is located.
RESPONSIBLE OFFICER: When used with respect to the Trustee, any
officer assigned to the Corporate Trust Division, including any Vice President,
Assistant Vice President, any Assistant Secretary, any trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also, with respect to a
particular matter, any other officer to whom such matter is referred because of
such officer's knowledge of and familiarity with the particular subject. When
used with respect to a Seller, the President, any Vice President, Assistant Vice
President, or any Secretary or Assistant Secretary.
SAIF: The Savings Association Insurance Fund, or any successor
thereto.
SBA FILE: The SBA File maintained with respect to each SBA Loan in
accordance with the Agreement.
SBA FORM 1086: The Secondary Participation Guaranty and Certification
Agreement on SBA Form 1086, pursuant to which investors purchase the SBA
Guaranteed Portion.
SBA LOAN INTEREST RATE: With respect to any date of determination, the
then applicable annual rate of interest borne by an SBA Loan, pursuant to its
terms, which, as of the Cut-Off Date, is shown on the SBA Loan Schedule.
SBA LOAN SCHEDULE: The schedule of SBA Loans attached as an exhibit to
the Agreement, such schedule identifying each SBA Loan by address of the related
premises, and the name of the Obligor and setting forth as to each SBA Loan the
following information: (i) the Principal Balance as of the close of business on
the Cut-Off Date, (ii) the Account Number, (iii) the original principal amount
of the SBA Loan, (iv) the SBA Loan Date and original number of months to
maturity, in months, (v) the SBA Loan Interest Rate as of the Cut-Off Date and
guaranteed rate payable to the Registered Holder and the Agent of the SBA, (vi)
when the first Monthly Payment was due, (vii) the Monthly Payment as of the
Cut-Off Date, (viii) the remaining number of months to maturity as of the
Cut-Off Date, (ix) the Unguaranteed Percentage, (x) the SBA loan number, (xi)
the margin which is added to the Prime Rate to determine the SBA Loan Interest
Rate, and (xii) the lifetime minimum and maximum SBA Loan Interest Rates, if
applicable.
SBA RULES AND REGULATIONS: The Small Business Act, as amended,
codified at 15 U.S.C. 631 ET SEQ., all rules and regulations promulgated from
time to time thereunder and the Loan Guaranty Agreement.
SERVICER'S CERTIFICATE: The monthly certificate of the Servicer,
delivered to the Trustee in accordance with the Agreement.
SERVICING OFFICER: Any officer of the Servicer involved in, or
responsible for, the administration and servicing of the SBA Loans whose name
appears on a list of servicing officers furnished to the Trustee by the
Servicer, as such list may from time to time be amended.
SPREAD ACCOUNT CUSTODIAN: , in its capacity as Spread Account
Custodian under the Spread Account Agreement, or any successor thereto.
SUBSERVICER: The Money Store of New York, Inc. or any other person
with whom the Servicer has entered into a Subservicing Agreement and who
satisfies any requirements set forth in the Agreement in respect of the
qualification of a Subservicer.
SUBSERVICING AGREEMENT: Any agreement between the Servicer and any
Subservicer relating to subservicing and/or administration of certain SBA Loans
as provided in the Agreement, a copy of which shall be delivered, along with any
modifications thereto, to the Trustee and the SBA.
TAX RETURN: The federal income tax return to be filed on behalf of the
Trust Fund together with any and all other information reports or returns that
may be required to be furnished to the Certificateholders or filed with the
Internal Revenue Service or any other governmental taxing authority under any
applicable provision of federal, state or local tax laws.
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE SELLERS OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms..................................................S-4
Risk Factors......................................................S-25
The SBA Loan Pool.................................................S-28
The SBA Loan Program..............................................S-49
Yield, Maturity and Prepayment
Considerations....................................................S-52
The Sellers.......................................................S-55
Description of the Agreement and the
Certificates......................................................S-57
The Trustee.......................................................S-67
Federal Income Tax Consequences...................................S-68
ERISA Considerations..............................................S-72
Legal Investment..................................................S-72
Underwriting......................................................S-72
Ratings...........................................................S-73
Legal Matters.....................................................S-73
Financial Information.............................................S-73
Index of Principal Terms..........................................S-75
Certain Definitions...............................................S-79
PROSPECTUS
Prospectus Supplement............................................... 3
Available Information............................................... 3
Reports to Certificateholders....................................... 4
Incorporation of Certain Documents by
Reference........................................................... 5
Summary of Terms.................................................... 17
Risk Factors........................................................ 21
The Trusts.......................................................... 24
Use of Proceeds..................................................... 25
The Representative and the Originators.............................. 25
The SBA Loan Lending Program........................................ 32
Description of the Certificates..................................... 36
Credit Enhancement.................................................. 41
Maturity, Prepayment and Yield
Considerations...................................................... 45
The Agreements...................................................... 55
Legal Aspects of the SBA Loans...................................... 56
Federal Income Tax Consequences......................................76
ERISA Considerations................................................ 78
Legal Investment Considerations..................................... 78
Plan of Distribution................................................ 78
Legal Matters....................................................... 78
Experts............................................................. 78
Financial Information............................................... 78
Rating.............................................................. 79
Index of Principal Terms............................................ 80
THE MONEY STORE SBA LOAN
TRUST 199_
$___________ Class A Certificates
$__________ Class B Certificates
(Approximate)
THE MONEY STORE INVESTMENT
CORPORATION
THE MONEY STORE COMMERCIAL
MORTGAGE INC.
THE MONEY STORE OF NEW YORK, INC.
The Money Store SBA Loan-
Backed Adjustable Rate
Certificates,
Series 199_
PROSPECTUS SUPPLEMENT
[Name of Underwriter]
____________, 199_
<PAGE>
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE SBA ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store SBA Asset Backed Certificates
(the "Certificates"), issuable in Series, which may be sold from time to time on
terms determined at the time of sale and described in the related Prospectus
Supplement, evidencing specified interests in one or more trust funds (each, a
"Trust"), the primary assets of which will consist of the right to receive
payments and other recoveries attributable to certain unguaranteed interests
(the "Unguaranteed Interests") in pools (each, a "Pool") of certain loans
partially guaranteed by the U.S. Small Business Administration and certain loans
originated in connection with such loans (the "SBA Loans"), and certain other
related or similar assets more particularly described herein (collectively, the
"Trust Assets"). The Trust Assets and other assets of any Trust will be
described in the Prospectus Supplement for the related Series of Certificates.
Certain of the Trust Assets may have been originated by wholly-owned
subsidiaries (the "Originators") of The Money Store Inc. ("The Money Store" or
the "Representative"). Certain other of the Trust Assets may have been acquired
by The Money Store, an Originator or an affiliate thereof from other lenders or
government agencies. In addition, if so specified in the related Prospectus
Supplement, the Trust will include monies on deposit in one or more trust
accounts to be established with a Trustee (as defined herein), which may include
a Pre-Funding Account (as defined herein) which would be used to purchase
additional Trust Assets for the related Trust from time to time during the
Funding Period (as defined herein) specified in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, certain
Certificates may evidence a fractional undivided ownership interest in a Trust
which will hold a beneficial ownership interest in another trust fund which will
contain the Trust Assets. Certificates may also be entitled to the benefits of
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, guaranties of The Money
Store, supplemental interest payments or other forms of credit enhancement or
maturity protection, to the extent described in the related Prospectus
Supplement. The Prospectus Supplement for each Series of Certificates will name
the entities (which will include The Money Store or one of its affiliates and
may include other entities) which will act, directly or through one or more
sub-servicers, as master servicers (each, in such capacity, the "Master
Servicer") of such Trust Assets.
SEE RISK FACTORS ON PAGE 26 HEREIN FOR A DISCUSSION OF CERTAIN RISK
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES
OFFERED HEREBY.
The date of this Prospectus is ________ __, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
Each Series of Certificates will be issued in one or more classes
(each, a "Class"). Each Class of Certificates will evidence a fractional
undivided ownership interest of a specified percentage or portion of future
interest payments and a specified percentage or portion of future principal
payments on the Trust Assets in the related Trust. A Series of Certificates may
include one or more Classes that receive certain preferential treatment with
respect to one or more other Classes. One or more Classes of Certificates may be
entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other Classes of Certificates 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" or
"Holders") will be made on certain dates specified in the related Prospectus
Supplement (each, a "Remittance Date"), which may be monthly, quarterly,
semi-annually or at such other intervals as are specified therein. The rate (the
"Pass-Through Rate") at which Certificateholders will receive distributions of
interest on any Class of Certificates or the method of calculating such
Pass-Through Rate, which may be fixed or variable, will be set forth in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made only from the assets of the related Trust.
The Certificates will not represent an obligation of or interest in
the Representative, the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as specified in the Prospectus Supplement) by any other person. The only
obligations of the Representative or the Originators with respect to a Series of
Certificates will be pursuant to certain limited representations and warranties.
Except for certain representations and warranties relating to the Trust Assets
and certain other exceptions, the Master Servicer's obligations with respect to
the related Series of Certificates will be limited to its contractual servicing
obligations. If the amount available for distribution to Certificateholders on
any Remittance Date is less than the amount due to them, the Master Servicer, to
the extent provided in the related Prospectus Supplement, may be obligated,
under certain terms and conditions, to advance cash to such Certificateholders,
to the extent such deficiency is attributable to delinquent payments of
principal and interest during the immediately preceding Due Period (as defined
herein). See "Description of the Certificates--Monthly Advances and Compensating
Interest."
The yield to Certificateholders on each Class of Certificates of a
Series may be affected by the rate of payment of principal (including
prepayments) of the Trust Assets 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.
If specified in a Prospectus Supplement, an election may be made to
treat each Trust as a "real estate mortgage investment conduit" ("REMIC") for
federal income tax purposes. See "Federal Income Tax Consequences."
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.
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
"Plan of Distribution" herein and in the related Prospectus Supplement. The
intention of any underwriter to make a secondary market in the Certificates will
be set forth in the related Prospectus Supplement. 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.
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) the aggregate principal amount, Pass-Through Rate or
Rates or other applicable annual rate or rates of interest (or the manner of
determining such rate or rates) and authorized denominations of each Class of
such Certificates; (ii) certain information concerning the Trust Assets and
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, guaranty of The Money
Store, supplemental interest payments or other forms of credit enhancement or
maturity protection, if any, relating to the Pools or all or part of the related
Certificates; (iii) the specified interest of each Class of Certificates in, and
manner and priority of, the distributions on the Trust Assets; (iv) information
as to the nature and extent of subordination with respect to such Series of
Certificates, if any; (v) the Remittance Dates; (vi) information as to the
Master Servicer; (vii) the circumstances, if any, under which each Trust may be
subject to early termination; (viii) whether the Representative intends to elect
to cause the Trust to be treated as a REMIC; and (ix) additional information
with respect to the plan of sale of such Certificates.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities an
Exchange Commission (the "Commission") with respect to the Certificates. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor,
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. The Commission also maintains a Website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information filed electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the 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.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the
related Trust will be provided to the Certificateholders as described in the
related Prospectus Supplement. If specified in the related Prospectus
Supplement, a Series of Certificates may be issuable in book-entry form. In such
event, the related Certificates will be registered in the name of Cede, the
nominee of The Depository Trust Company. All reports will be provided to Cede,
which in turn will provide such reports to its Participants and Indirect
Participants (as defined herein). Such Participants and Indirect Participants
will then forward such reports to the beneficial owners of Certificates. See
"Description of the Certificates--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. With respect to
any Class of Certificates that is supported by a Guaranty of The Money
Store, the Money Store's Annual Report on Form 10-K for the year ended December
31, 1995, and Quarterly Reports on Form 10-Q for the periods ended March 31,
June 30 and September 30, 1996, which have been filed with the Commission, are
hereby incorporated by reference in this Prospectus and the related Prospectus
Supplement. With respect to any Class of Certificates that is supported by a
Guaranty of The Money Store, all documents filed by The Money Store pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus and prior to the termination
of the offering of the Certificates shall be deemed to be incorporated by
reference into this Prospectus and the related Prospectus Supplement and to be
a part hereof from the respective dates of filing such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus. The Representative will provide without charge to each person to
whom a copy of the Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to The Money Store Inc., 3301 C Street, Suite 100-M,
Sacramento, California 95816, Attention: Investor Relations, Telephone:
(916) 446-5000.
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Capitalized terms used but not defined in this Prospectus shall have
the meanings assigned to such terms elsewhere in this Prospectus.
Securities
Offered........................... The Money Store SBA Asset Backed
Certificates (the "Certificates"),
evidencing interests in
certain Pools of SBA Loans and certain
other Trust Assets (each, as defined
below), may be issued from time to time in
Series pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement")
among The Money Store Inc., as
Representative (the "Representative") of
certain Trusts, Originators, a Master
Servicer, and a Trustee, each as defined
herein and as specified in the related
Prospectus Supplement for such Series of
Certificates.
Issuers.......................... Certain trust funds (each, a "Trust")
represented by The Money Store, the
primary assets of which will be the right
to receive payments and other recoveries
attributable to a Pool of SBA Loans and
certain other Trust Assets.
Representative
and Master
Servicer.......................... The Money Store Inc. ("The Money
Store"), a New Jersey corporation. The
Prospectus Supplement relating to any
Series of Certificates will name the
entities (which may include The Money Store
or one of its affiliates and may
additionally include other unrelated
entities) which will act, directly or
through one or more Sub-Servicers (as
defined herein), as master servicers (each,
in such capacity, the "Master Servicer").
The principal offices of The Money Store
are located in Sacramento, California and
Union, New Jersey. See "The
Representative and the Originators."
The Trust
Assets............................ The Certificates will evidence fractional
undivided ownership interests in certain
Trusts further described herein. The
primary assets of each Trust may consist of
one or more pools (each, a "Pool") of
assets (the "Trust Assets"), which may
include the Unguaranteed Interest of (i)
loans originated under the U.S. Small
Business Administration (the "SBA") general
business loan program created under Section
7(a) of the Small Business Act of 1953
("SBA ss. 7(a) Loans"), (ii) loans made to
small businesses in connection with the
origination of an SBA ss. 7(a) Loan, which
related SBA ss. 7(a) Loan may or may not be
part of a Trust Fund (the "Section 7(a)
Companion Loans"), and (iii) loans
originated under the SBA's 504 program
("SBA 504 Loans"). The SBA ss. 7(a) Loans,
the Section 7(a) Companion Loans and the
SBA 504 Loans are referred to herein
collectively as the ("SBA Loans").
The "Unguaranteed Interest" will equal (i)
as to any SBA ss. 7(a) Loan, all payments
and other recoveries on such SBA ss. 7(a)
Loan not constituting the Guaranteed
Interest therein and (ii) as to any Section
7(a) Companion Loan or SBA 504 Loan, all
payments and other recoveries on such
Section 7(a) Companion Loan or Rule 504
Loan.
The payment terms of the SBA Loans to be
included in any Pool will be described in
the related Prospectus Supplement and may
include any of the following features,
combinations thereof or other features
described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed
rate (a "Fixed Rate") or may be payable at
a rate that is adjustable from time to time
in relation to an index, that may be fixed
for a period of time or under certain
circumstances and is followed by an
adjustable rate, a rate that otherwise
varies from time to time, or a rate that is
convertible from an adjustable rate to a
fixed rate (each, an "Adjustable Rate").
The specified rate of interest on an SBA
Loan is its "Mortgage Interest Rate."
Changes to an Adjustable Rate may be
subject to periodic limitations, maximum
rates, minimum rates or a combination of
such limitations. Accrued interest may be
deferred and added to the principal of an
SBA Loan for such periods and under such
circumstances as may be specified in the
related Prospectus Supplement. SBA Loans
may permit the payment of interest at a
rate lower than the Mortgage Interest Rate
for a period of time or for the life of the
SBA Loan, and the amount of any difference
may be contributed from funds supplied by
the seller of the properties securing the
related SBA Loan (the "Mortgaged
Properties") or another source or may be
treated as accrued interest and added to
the principal of the SBA Loan.
(b) Principal may be payable on a level basis
to fully amortize the SBA Loan over its
term, may be calculated on the basis of an
assumed amortization schedule that is
significantly longer than the original term
to maturity or on an interest rate that is
different from the Mortgage Interest Rate,
or may not be amortized during all or a
portion of the original term. Payment of
all or a substantial portion of the
principal may be due on maturity (a
"balloon" payment). From time to time,
principal may include interest that has
been deferred and added to the principal
balance of the SBA Loan.
(c) Monthly payments of principal and interest
may be fixed for the life of the SBA Loan,
may increase over a specified period of
time ("graduated payments"), or may change
from period to period. SBA Loans may
include limits on periodic increases or
decreases in the amount of monthly payments
and may include maximum or minimum amounts
of monthly payments.
(d) Prepayments of principal may be subject to
a prepayment fee, which may be fixed for
the life of the SBA Loan or may adjust or
decline over time, and may be prohibited
for the life of the SBA Loan or for certain
periods ("Lockout Periods"). Certain SBA
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 SBA Loans may permit
prepayments without payment of a fee unless
the prepayment occurs during specified time
periods. The SBA Loans may include
due-on-sale clauses which permit the
mortgagee to demand payment of the entire
SBA Loan in connection with the sale or
certain other transfers of the related
Mortgaged Properties. Other SBA Loans may
be assumable by persons meeting the then
applicable underwriting standards of the
originator.
The Mortgaged Properties relating to SBA
Loans may be located in any one of the
fifty states, the District of Columbia, the
Commonwealth of Puerto Rico or any other
commonwealth, territory or possession of
the United States. Unless otherwise
specified in the related Prospectus
Supplement, all of the Mortgaged
Properties 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 SBA
Loans underlying a given Series of
Certificates may have been originated by
the Representative, the Originators or
affiliates thereof and certain SBA Loans
may have been purchased by the
Representative, an Originator or an
affiliate thereof in the open market or in
privately negotiated transactions,
including transactions with entities
affiliated with the Representative.
The SBA ss. 7(a) Loans will have been
originated under Section 7(a) (the "Section
7(a) Program") of the Small Business Act of
1953 (the "SBA Act"). The Section 7(a)
Program was intended to encourage lenders
to provide loans to qualifying small
businesses. To assist qualified borrowers
in obtaining more financing when needed,
the Originators originate Section 7(a)
Companion Loans in conjunction with the
origination of an SBA ss. 7(a) Loan to the
same borrower. Although the Section 7(a)
Companion Loan is not guaranteed by the
SBA, it is secured by a lien on collateral
prior to, or pari passu with, the lien of
the related SBA ss. 7(a) Loan.
The SBA has also established a program (the
"SBA 504 Loan Program") to encourage
lenders to provide fixed asset financing to
qualifying small businesses. In the SBA 504
Loan Program, the Originators provide
approximately 50% of project costs in a
conventional loan agreement, with borrowers
providing a minimum 10% equity
contribution. The SBA provides the
remainder of the financing. The loans
originated by the Originators under the SBA
504 Loan Program are not guaranteed by the
SBA. The funds used by the SBA to originate
its portion of an SBA 504 Loan are
generated by issuing SBA-guaranteed
debentures on behalf of a certified
development company.
SBA ss. 7(a) Loans originated by the
Originators generally range in size from
$50,000 to $1.3 million. The maximum amount
for a Section 7(a) Companion Loans is
currently $1,750,000, although this amount
may be increased where the Originators
believe the collateral or other factors
warrant such increase. The maximum size of
an SBA 504 Loan originated by the
Originators is currently $1.75 million.
The Prospectus Supplement for each Series
of Certificates will specify with respect
to all SBA Loans expected to be included in
the related Pool as of the related closing
date, among other things, (i) the expected
aggregate outstanding principal balance and
the expected average outstanding principal
balance of the SBA Loans in such Pool as of
the date specified in the Prospectus
Supplement, (ii) the largest expected
principal balance and the smallest expected
principal balance of any of the SBA Loans,
(iii) the types of Mortgaged Properties
and/or other assets securing the SBA Loans,
(iv) the original terms to maturity of the
SBA Loans, (v) the expected weighted
average term to maturity of the SBA Loans
as of the date specified in the Prospectus
Supplement and the expected range of the
terms to maturity, (vi) the earliest
origination date and latest maturity date
of any of the SBA Loans, (vii) the expected
weighted average Combined Loan-to-Value
Ratio of the SBA Loans, (viii) the expected
weighted average Mortgage Rate and ranges
of Mortgage Rates borne by the SBA Loans,
(ix) in the case of SBA Loans having
Adjustable Rates, the expected weighted
average of the Adjustable Rates as of the
date set forth in the Prospectus Supplement
and maximum permitted Adjustable Rates, if
any, (x) the amount of any Certificate
Guaranty Insurance Policy, Mortgage Pool
Insurance Policy, Special Hazard Insurance
Policy or Bankruptcy Bond (each as defined
herein) to be maintained with respect to
such Pool, (xi) the amount, if any, and
terms of any other credit enhancement to be
provided with respect to all or any SBA
Loans or the Pool and (xii) the expected
geographic location of the Mortgaged
Properties.
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 Trust Assets
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
Holders. 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 Trust Assets for the
related Trust subject to the satisfaction
of certain conditions specified under the
Agreements.
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 Trust Assets that the
Representative anticipates will be acquired
and conveyed to the Trust during the
applicable Funding Period.
Prior to the conveyance of any additional
Trust Assets to the Trust, the Repre-
sentative will be required to give notice
of the additional Trust Assets to be
conveyed to the Trust to the Trustee(s) and
any third-party credit enhancement
provider. Upon the satisfaction of the
conditions set forth in the Agreement,
including the receipt by the Trustee of an
executed assignment, an Officer's
Certificate and a legal opinion, the
Trustee will release from the Pre-Funding
Account the necessary funds to purchase the
additional Trust Assets 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.
Multi-Party
Agreement......................... In connection with each issuance of
Certificates, the applicable Originators,
the Master Servicer and the Trustee will
enter into an agreement (the "Multi- Party
Agreement"), which will set forth the
relationship of the parties with respect
to the SBA ss. 7(a) Loans and the proceeds
thereof and the consent of the SBA to the
transactions contemplated by the related
Agreement.
Description of the
Certificates...................... Each Certificate will represent a
fractional undivided ownership interest in
the Trust created pursuant to the related
Agreement. The primary assets of such Trust
will be a Pool of SBA Loans and certain
other Trust Assets. 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,
Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy, Bankruptcy Bond or
other insurance policies, cash accounts,
letters of credit, financial guaranty
insurance policies, third party guarantees,
supplemental interest payments or other
forms of credit enhancement or maturity
protection, as described herein and in the
related Prospectus Supplement.
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 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 its 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 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 amounts of such
distributions may vary among Classes, over
time, or otherwise as specified in the
related Prospectus Supplement.
The Certificates will be issuable in fully
registered form, in minimum denominations
of $1,000 and integral multiples of $1,000
in excess thereof (or such other amounts as
may be set forth in a Prospectus
Supplement), except that one Certificate of
each Class may be issued in a different
denomination. See "Description of
Certificates."
Credit
Enhancement ...................... The Trust Assets 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 may be
limited. Such credit enhancement may
include one or more of the following types:
A. Subordination
and Reserve
Accounts...................... The rights of the holders of
Subordinated Certificates of a Series to
receive distributions with respect to the
Trust Assets and other assets in 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 or delinquencies. The protection
afforded to the holders of Senior
Certificates through subordination may be
accomplished by the preferential right of
such holders 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 Remittance Date 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, the same Class of Certificates
may constitute Senior Certificates with
respect to certain types of payments or
certain losses or delinquencies and
Subordinated Certificates with respect to
other types of payments or 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 support, such as
hazard losses not covered by Standard
Hazard Insurance Policies or losses due to
the bankruptcy of a Mortgagor not covered
by a Bankruptcy Bond. If further specified
in the related Prospectus Supplement, one
or more reserve 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 Subordinated Certificates
for a specified time or until a specified
level is reached. 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.
B. Certificate
Guaranty
Insurance
Policy........................ A certificate guaranty insurance policy or
policies ("Certificate Guaranty Insurance
Policy") may be obtained and maintained for
each Class or Series of Certificates.
Certificate Guaranty Insurance Policies
generally unconditionally and irrevocably
guarantee that the full amount of the
distributions of principal and interest, as
well as any other amounts specified in the
related Prospectus Supplement, will be
received by an agent of the Trustee, for
distribution by the Trustee to
Certificateholders. Certificate Guaranty
Insurance Policies 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 Master
Servicer's obligation to repurchase or
substitute for any SBA Loans, to guarantee
any specified rate of prepayments or to
provide funds to redeem Certificates on any
specified date.
C. 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 Trust Assets.
The accelerated amortization will be
achieved by applying certain excess
interest collected on the Trust Assets to
the payment of 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 Trust
Assets 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 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. An 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.
D. Mortgage Pool
Insurance
Policy........................ A mortgage pool insurance policy or
policies ("Mortgage Pool Insurance
Policy") may be obtained and maintained for
each Series pertaining to SBA Loans,
limited in scope, covering defaults on the
related SBA Loans in an initial amount
equal to a specified percentage of the
aggregate principal balance of all SBA
Loans included in the Pool as of the
Cut-off Date or such other date as is
specified in the related Prospectus
Supplement.
E. Special Hazard
Insurance
Policy........................ In the case of SBA Loans or Contracts,
certain physical risks that are not
otherwise insured against by Standard
Hazard Insurance Policies may be covered
by a special hazard insurance policy or
policies (a "Special Hazard Insurance
Policy"). The level of coverage of each
Special Hazard Insurance Policy will be
specified in the related Prospectus
Supplement.
F. Bankruptcy
Bonds......................... A mortgagor bankruptcy bond or bonds
("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 an SBA Loan or a reduction by such
court of the principal amount of an SBA
Loan, and will cover certain unpaid
interest on the amount of such a principal
reduction. The level of coverage of each
Bankruptcy Bond will be specified in the
related Prospectus Supplement.
G. Cross
Support...................... If so specified in the Prospectus
Supplement, the ownership interests of
separate Trusts or separate groups of
assets 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 asset groups or Trusts. If specified
in the related Prospectus Supplement, the
coverage provided by one or more forms of
credit support 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.
H. 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 Remittance Date and the
interest that would be available to pay
such interest assuming no defaults or
delinquencies on the Trust Assets. 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 Trust Assets.
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 Trust
Assets.
I. 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.
J. The Guaranty.................. If so specified in the Prospectus
Supplement, and in order to provide
additional credit enhancement, The Money
Store may provide a guaranty of
amounts due on certain Classes of
Certificates. The amount and formula for
calculating such guaranty shall be
as set forth in the Prospectus Supplement.
K. Other Credit
Enhancement................... Other credit enhancement arrangements,
as described in the related Prospectus
Supplement, including (but not limited to)
one or more reserve funds, letters of
credit, financial guaranty insurance
policies, a guaranty of The Money
Store or third party guarantees, may be
used to provide coverage for certain risks
of defaults or losses. These arrangements
may be in addition to or in substitution
for any forms of credit support described
in the Prospectus. Any such arrangement
must be acceptable to each nationally
recognized rating agency that provides a
rating for the related Series of
Certificates (the "Rating Agency").
Monthly Advances.................. If so specified in the related
Prospectus Supplement, the Master Servicer
will be required under each Agreement to
remit to the Trustee no later than the day
of each month which is at least three
business days prior to the Remittance Date
and is in no case earlier than the seventh
business day of such month (the
"Determination Date") the amount (a
"Monthly Advance"), if any, by which (a)
the sum of (x) 30 days' interest at the
weighted average Adjusted SBA Loan
Remittance Rate (as defined herein under
"Description of the Certificates--Monthly
Advances and Compensating Interest") on the
then outstanding principal balance of the
related Series of Certificates and (y) the
amount, if any, required to be deposited
into the related Reserve Account (as
specified in the related Prospectus
Supplement) for the related Remittance
Date exceeds (b) the amount received by the
Master Servicer in respect of interest on
the SBA Loans as of the related Record Date
(less certain amounts not required to be
deposited into the related Trust). Such
advances by the Master Servicer are
reimbursable in the first instance from
late collections of interest, including
amounts received in connection with the
liquidation of defaulted SBA Loans
("Liquidation Proceeds"), amounts paid by
any insurer pursuant to any insurance
policy covering an SBA Loan, Mortgaged
Property or REO Property ("Insurance
Proceeds"), and proceeds received by the
Master Servicer in connection with
condemnation, eminent domain or a release
of lien ("Released Mortgaged Property
Proceeds") collected with respect to the
related SBA Loans as to which the advances
were made, and certain other amount that
would otherwise be distributed on the
Certificates. See "Description of the
Certificates--Monthly Advances and
Compensating Interest."
Compensating
Interest.......................... If so specified in the related
Prospectus Supplement, with respect to each
SBA Loan as to which the Master Servicer
receives a principal payment in full in
advance of the final scheduled due date (a
"Principal Prepayment") or receives a
principal payment that exceeds the
scheduled payment by a specified multiple,
but which was not intended by the Mortgagor
to satisfy the SBA Loan in full or to cure
a delinquency (a "Curtailment"), the Master
Servicer will be required to remit to the
Trustee, from amounts otherwise payable to
the Master Servicer as servicing
compensation, an amount ("Compensating
Interest") equal to any excess of (a) 30
days' interest on the principal balance of
each such SBA Loan as of the beginning of
the related Due Period at the applicable
weighted average Adjusted SBA Loan
Remittance Rate over (b) the amount of
interest actually received on the related
SBA Loan during such Due Period (less
certain amounts not required to be
deposited into the related Trust).
Optional
Termination....................... The Master Servicer, certain insurers, the
holders of REMIC Residual Certificates (as
defined herein), 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
related Trust Assets and other assets in
the related Trust under the circumstances
and in the manner described in "The
Agreement--Termination; Purchase of SBA
Loans."
Mandatory
Termination...................... The Trustee, the Master 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 SBA Loans."
Trustee .......................... The trustee or trustees under any
Agreement relating to a Series of
Certificates (each, a "Trustee") will be
specified in the related Prospectus
Supplement.
Federal
Income Tax
Consequences...................... The federal income tax consequences of
the purchase, ownership and disposition of
the Certificates of each series will depend
on whether an election is made to treat
the corresponding Trust (or certain assets
of the Trust) as a "real estate mortgage
investment conduit" ("REMIC") under the
Internal Revenue Code of 1986, as amended
(the "Code").
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 ("REMIC Regular Certificates") and
which class of Certificates will be
designated as the residual interest in the
REMIC ("REMIC Residual Certificates"). To
the extent provided herein and in the
related Prospectus Supplement, in the
opinion of Stroock & Stroock & Lavan,
special Federal tax counsel ("Federal Tax
Counsel"), Certificates representing an
interest in the REMIC generally will be
considered "real estate assets" for
purposes of Section 856(c)(5)(A) of the
Code and assets described in Section
7701(a)(19)(C) of the Code.
In the opinion of Federal Tax Counsel, for
federal income tax purposes, REMIC Regular
Certificates generally will be treated as
debt obligations of the Trust with payment
terms equivalent to the terms of such
Certificates. Holders of REMIC Regular
Certificates will be required to report
income with respect to such Certificates
under an accrual method, regardless of
their normal tax accounting method.
Original issue discount, if any, on REMIC
Regular Certificates will be includible in
the income of the Holders 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. The REMIC 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.
Each holder of a REMIC Residual Certificate
will be required to take into account
separately its pro rata portion of the
REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess
inclusions") generally may not be offset by
such a holder's net operating loss
carryovers or other deductions, and in the
case of a tax-exempt holder of a REMIC
Residual Certificate will be treated as
"unrelated business taxable income." In
certain situations, particularly in the
early years of a REMIC, holders of a REMIC
Residual Certificate may have taxable
income, and possibly tax liabilities with
respect to such income, in excess of cash
distributed to them. "DISQUALIFIED
ORGANIZATIONS," AS DEFINED IN "FEDERAL
INCOME TAX CONSEQUENCES-- REMIC RESIDUAL
CERTIFICATES--TAX ON DISPOSITION OF REMIC
RESIDUAL CERTIFICATES; RESTRICTION ON
TRANSFER; HOLDING BY PASS-THROUGH
ENTITIES," ARE PROHIBITED FROM ACQUIRING OR
HOLDING ANY BENEFICIAL INTEREST IN THE
REMIC RESIDUAL CERTIFICATES.
GRANTOR TRUST. If no election is to be made
to treat the Trust 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. In the opinion of Federal
Tax Counsel, 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 Trust Assets 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 Trust Assets and
will be entitled, subject to certain
limitations, to deduct their pro rata share
of expenses of the Trust.
To the extent provided in the related
Prospectus Supplement, Non-REMIC
Certificates may represent "real estate
assets" for purposes of Section
856(c)(5)(A) 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 "Federal Income Tax
Consequences" herein and, if applicable, in
the related Prospectus Supplement.
ERISA
Considerations.................... Fiduciaries of employee benefit plans or
other retirement plans or arrangements,
including individual retirement accounts,
certain Keogh plans, and collective
investment funds, separate accounts and
insurance company general accounts in which
such plans, accounts or arrangements are
invested, that are subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should
carefully review with their legal advisors
whether an investment in Certificates will
cause the assets of the related Trust to be
considered plan assets under the Department
of Labor ("DOL") regulations set forth in
29 C.F.R. Section 2510.3-101 (the "Plan
Asset Regulations"), thereby subjecting the
Trustee and the Master Servicer to the
fiduciary investment standards of ERISA,
and whether the purchase, holding or
transfer of Certificates gives rise to a
transaction that is prohibited under ERISA
or subject to the excise tax provisions of
Section 4975 of the Code, unless a DOL
administrative exemption applies. See
"ERISA Considerations."
Legal
Investment........................ Each Prospectus Supplement will describe
the extent, if any, to which the Classes
of Certificates offered thereby will
constitute "mortgage-related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
and whether they will be legal investments
for certain types of institutional
investors under SMMEA. See "Legal
Investment" herein.
Registration of
Certificates...................... Certificates may be represented by
global certificates registered in the name
of Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee. In such case,
Certificateholders will not be entitled to
receive definitive certificates
representing such Holders' interests,
except in certain circumstances described
in the related Prospectus Supplement. See
"Description of the
Certificates--Book-Entry Registration"
herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
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
Holders of the Certificates with liquidity of investment or that it will
continue for the lives of the Certificates. In addition, transfers of certain
Classes of Certificates may be restricted as set forth in the related Prospectus
Supplement.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, Direct or Indirect Participants 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 limited due to lack of a physical
certificate representing the Certificates.
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 Class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration."
NATURE OF SECURITY
Certain of the SBA Loans will be loans secured by junior liens
subordinate to the rights of the mortgagee under each related senior mortgage.
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a junior
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee are satisfied in full, including any related foreclosure costs. In
addition, a mortgagee may not foreclose on the mortgaged property unless it
forecloses subject to any related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder. In
servicing mortgage loans in their portfolios, it has been the Originators'
practice to satisfy each such senior mortgage at or prior to the foreclosure
sale only to the extent that they determine any amounts so paid will be
recoverable from future payments and collections on the mortgage loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the SBA Loans--Foreclosure/Repossession."
An overall decline in the market value of residential or commercial
real estate, the general condition of a Mortgaged Property, or other factors,
could adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the SBA Loans which are junior mortgage loans, together
with any senior liens on the Mortgaged Properties, equal or exceed the value of
the Mortgaged Properties. Such a decline could extinguish the interest of the
related Trust in the Mortgaged Property before having any effect on the interest
of the related senior mortgagee. Certain of the SBA Loans may be secured by
Mortgaged Properties located in California and Texas. Certain areas of the
country, including California and Texas, have experienced declines in real
estate values over the last few years. Economic conditions in California are
often volatile and from time to time have been adversely affected by natural
disasters, contractions in the defense industry and declining real estate
values. The President of the United States has endorsed a list of military bases
to be closed within the next two to six years, which list includes significant
bases in California. These closures, which have been approved by Congress, along
with the recent general decline in defense spending, could have an adverse
affect on economic conditions in California. The Representative will not be able
to quantify the impact of any property value declines on the SBA Loans or
predict whether, to what extent or how long such declines may continue. In
periods of such declines, the actual rates of delinquencies, foreclosures and
losses on the SBA Loans could be higher than those historically experienced in
the mortgage lending industry in general.
Certain of the SBA Loans may constitute "Balloon Loans." Balloon Loans
are originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. 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 such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the SBA Loan. The ability of a
Mortgagor to refinance such an SBA Loan will be affected by a number of factors,
including the level of available mortgage rates at the time, the value of the
related Mortgaged Property and other collateral securing the SBA Loan, the
Mortgagor's equity in the related Mortgaged Property, the financial condition of
the Mortgagor and the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the
refinancing of a balloon payment, 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 SBA 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 Representative, the Originators, the Master Servicer or
the Trustee will be obligated to provide funds to refinance any SBA Loan.
General economic conditions have an impact on the ability of borrowers
to repay loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of bankruptcy of a Mortgagor, it is possible that a Trust could experience a
loss with respect to such Mortgagor's SBA 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 SBA Loan or permanently
reduce the principal balance of such SBA Loan, thus either delaying or
permanently limiting the amount received by the Trust with respect to such SBA
Loan. Moreover, in the event a bankruptcy court prevents the transfer of the
related Mortgaged Property to a Trust, any remaining balance on such SBA Loan
may not be recoverable.
Even assuming that the Mortgaged Properties and other collateral
securing an SBA Loan provide adequate security for the SBA Loans, substantial
delays could be encountered in connection with the liquidation of defaulted SBA
Loans and corresponding delays in the receipt of related proceeds by the
Certificateholders could occur. An action to foreclose on a Mortgaged Property
securing an SBA Loan is regulated by state statutes and rules and is subject to
many of the delays and expenses of other lawsuits if 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
Master Servicer to foreclose on or sell the Mortgaged Property or to obtain
Liquidation Proceeds (net of expenses) sufficient to repay all amounts due on
the related SBA Loan. The Master Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated SBA Loan and not yet repaid, including
payments to prior lienholders, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties and other collateral securing an SBA Loan fail to provide
adequate security for the SBA Loans and insufficient funds are available from
applicable Credit Enhancement, Certificateholders could experience a loss on
their investment.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted 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 loan than would be the case with a
larger loan.
ENVIRONMENTAL CONSIDERATIONS
Under environmental legislation and case law applicable in various
states, including California, a secured party that takes a deed in lieu of
foreclosure, acquires a mortgaged property at a foreclosure sale or which, prior
to foreclosure, has been involved in decisions or actions which may lead to
contamination of a 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 holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the SBA
Loans--Environmental Considerations."
In each Agreement the Originators will represent and warrant that at
the time of origination of each SBA Loan, the related commercial real property
was below regulatory agency action levels of contamination from toxic substances
or hazardous wastes and that as of the Cut-Off Date, the Originators have no
knowledge of any contamination from toxic substances or hazardous wastes on any
commercial real property, except for commercial real property subject to ongoing
environmental rehabilitation. The Servicer will agree that if it has reasonable
cause to believe a property may have contamination from toxic substances or
hazardous wastes (unless subject to ongoing environmental rehabilitation), it
will not foreclose upon the related SBA Loan until after it obtains a Phase I
environmental report. See "The Agreements--Representations and Warranties"
herein.
Beginning in November 1995, the SBA approved a program that allows
lenders, subject to certain conditions, to take as collateral commercial real
property that is subject to ongoing environmental rehabilitation. These
conditions include the lender identifying a party that has accepted
responsibility for, and has commenced clean-up under, an environmental
rehabilitation program approved by the appropriate regulatory agency. The party
responsible for clean-up must execute an indemnity agreement approved by the
SBA, which agreement holds such party accountable for completing all required
remediation. The indemnity agreement inures to the benefit of subsequent holders
of the property. The lender must obtain adequate financial data on the
indemnitor indicating that the indemnitor will be able to complete the required
remediation.
PREPAYMENT CONSIDERATIONS
The SBA Loans may be prepaid in full or in part at any time. The rate
of prepayments of the SBA Loans cannot be predicted and may be affected by a
wide variety of economic, social, and other factors, including prevailing
interest rates and the availability of alternative financing. Therefore, no
assurance can be given as to the level of prepayments that a Trust will
experience.
THE STATUS OF THE SBA LOANS IN THE EVENT OF BANKRUPTCY OF AN ORIGINATOR
The Originators believe that upon the sale of a Series of Certificates
to an independent third party for fair value and without recourse, such sale
will constitute an absolute and unconditional sale of such Certificates and the
interests in the SBA Loans evidenced thereby. However, in the event of the
bankruptcy of an Originator at a time when it or any affiliate thereof holds any
interest in the SBA Loans, a trustee in bankruptcy or other creditor could
attempt to recharacterize the sale of the SBA Loans as a borrowing by such
Originator or any such affiliate with the result that Certificateholders are
deemed to be creditors of such Originator or such affiliate, secured by a pledge
of the SBA Loans. If such an attempt were successful, a trustee in bankruptcy
could elect to accelerate payment of the Certificates and liquidate the SBA
Loans with the Certificateholders entitled to the then outstanding principal
amount thereof together with accrued interest. Thus, the Holders of Certificates
could lose the right to future payments of interest, might suffer reinvestment
loss in a lower interest rate environment and, if the SBA Loans are sold for a
price less than the then outstanding Class A and Class B Principal Balances,
might suffer a loss of principal.
In connection with the issuance of each Series of Certificates, the
Trustee will receive an opinion of Stroock & Stroock & Lavan, special counsel,
to the effect that if it were litigated, a court ultimately would uphold the
Originators' intention that the transfer of the SBA Loans in each SBA Loan to a
Trust constitutes a sale under applicable law. Therefore, the SBA Loans would
not be property of the Originators in the event of the appointment of a receiver
or conservator for the Originators. Such opinion is limited to matters of New
York and federal law and the conclusions thereof are based upon a reasoned
analysis of the transaction and legal principles derived from existing case law
believed to be applicable by analogy. It should be recognized, however, that a
court is not bound by such legal opinion.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of businesses financed by the SBA Loans, sales of
Mortgaged Properties subject to "due-on-sale" provisions and liquidations due to
default, as well as the receipt of proceeds from insurance policies. In
addition, repurchases or purchases from a Trust of SBA Loans required to be made
by the Servicer under the Agreement will have the same effect on the
Certificateholders as a prepayment of the related SBA Loans. See "Yield,
Maturity and Prepayment Considerations" herein. Also, if a Pre-Funding Account
is established and during the Funding Period the entire Pre-Funded Amount is not
used to purchase Subsequent SBA Loans, the Certificates will be prepaid in part
from and to the extent of such remaining amounts.
Collections on the SBA Loans may vary due to the level and frequency
of delinquent payments and of prepayments. Collections on the SBA Loans may also
vary due to seasonal business patterns and payment habits of borrowers.
The SBA Loans may be "simple interest" or "date-of-payment loans". If
a payment is received on an SBA Loan later than scheduled, a smaller portion of
such payment will be applied to principal and a greater portion will be applied
to interest than would have been the case had the payment been received on its
scheduled due date, resulting in such SBA Loan having a longer average life than
would have been the case had the payment been made as scheduled. Conversely, if
a payment on an SBA Loan is received earlier than scheduled, more of such
payment will be applied to principal and less to interest than would have been
the case had the payment been received on its scheduled due date, resulting in
such SBA Loan having a shorter average life than would have been the case had
the payment been made as scheduled. However, this effect is mitigated because
the monthly payment amount is recalculated periodically to reflect changes in
the interest rate, the then-current principal balance and the then- remaining
term to maturity.
CERTIFICATE RATING
The rating of the Certificates will depend primarily on the
creditworthiness of any third party provider of credit enhancement, if any, as
set forth in the related Prospectus Supplement. Any reduction in the rating
assigned to the claims-paying ability of such provider below the rating
initially given to a Series of Certificates would likely result in a reduction
in the rating of such Series of Certificates. See "Rating."
UNAUDITED STATEMENTS
On each Remittance Date, the Trustee will mail to each
Certificateholder a statement setting forth, among other things, certain
information as to the distribution being made on such Remittance Date, the fees
to be paid to the Servicer and Trustee and the loss and delinquency status of
the SBA Loans. Although the information contained in such statements will be
prepared by the Servicer, neither such information nor any other financial
information furnished to Certificateholders will be examined and reported upon,
and an opinion will not be expressed by, an independent public accountant. See
"Description of the Agreement and the Certificates -- Payments on the SBA Loans;
Distribution on the Certificates" herein.
THE TRUSTS
A Trust for any Series of Certificates will include the Trust Assets
consisting of a Pool* comprised of (i) SBA ss. 7(a) Loans, (ii) Section 7(a)
Companion Loans and (iii) SBA 504 Loans, in each case, as specified in the
related Prospectus Supplement, together with payments in respect of such Trust
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the
related Trust and, to the extent specified in a Prospectus Supplement, payments
in respect of the assets of other trusts established by the Representative, the
Originators or any of their 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 Trust Assets.
Certain of the Trust Assets may have been originated by the
Originators. Other Trust Assets may have been acquired by the Representative, an
Originator or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative.
The following is a brief description of the Trust Assets expected to
be included in the Trusts. If specific information respecting the Trust Assets
is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Trust Assets relating to such Series (the "Trust Asset Schedule") will be
attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
GENERAL
The real property which secures repayment of the SBA Loans (the "Mortgaged
Properties") may be located in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any other commonwealth, territory
or possession of the United States. The SBA Loans in a Pool will provide for
payments to be made monthly ("monthly pay"), bi-weekly or at such other times as
may be set forth in a Prospectus Supplement. The payment terms of the SBA Loans
to be included in a Trust will be described in the related Prospectus Supplement
and may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate). The specified rate of interest on
an SBA Loan is its Mortgage Interest Rate. Changes to an Adjustable
Rate may be subject to periodic limitations, maximum rates, minimum
rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of an SBA Loan for such periods and
under such circumstances as may be specified in the related Prospectus
Supplement. SBA Loans may provide for the payment of interest at a rate
lower than the Mortgage Interest Rate for a period of time or for the
life of the SBA Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged Property
securing the related SBA Loan or another source or may be treated as
accrued interest added to the principal of the SBA Loan.
- ---------------
* Whenever the terms "Pool" and "certificates" are used in this Prospectus,
such terms will be deemed to apply, unless the context indicates otherwise,
to one specific Pool and the Certificates representing certain undivided
fractional interests, as described below, in a single Trust consisting
primarily of the SBA Loans in such Pool. Similarly, the term "Pass-Trough
Rate" will refer to the Pass-Through Rate borne by the Certificates of one
specific Series and the term "Trust" will refer to one specific Trust.
(b) Principal may be payable on a level basis to fully
amortize the SBA Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the Mortgage Interest Rate, or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion
of the principal may be due on maturity ("balloon" payments). Principal
may include interest that has been deferred and added to the principal
balance of the SBA Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the SBA Loan, may increase over a specified period of
time ("graduated payments") or may change from period to period. SBA
Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts
of monthly payments. SBA Loans having graduated payment provisions may
require the monthly payments of principal and interest to increase for
a specified period, provide for deferred payment of a portion of the
interest due monthly during such period, and recoup the deferred
interest through negative amortization whereby the difference between
the scheduled payment of interest and the amount of interest actually
accrued is added monthly to the outstanding principal balance.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the SBA Loan or may decline
over time, and may be prohibited for the life of the SBA Loan or for
certain periods ("lockout periods"). Certain SBA 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 SBA Loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The SBA Loans may include due-on-sale clauses which permit the
mortgagee to demand payment of the entire SBA Loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
SBA Loans may be assumable by persons meeting the then applicable
underwriting standards of the Originator.
The Prospectus Supplement for each Series of Certificates will contain
information with respect to all the SBA Loans expected to be included in the
related Pools as of the related closing date, including (i) the expected
aggregate outstanding principal balance and the expected average outstanding
principal balance of the SBA Loans as of the date set forth in the Prospectus
Supplement, (ii) the largest expected principal balance and the smallest
expected, principal balance of any of the SBA Loans, (iii) the types of
Mortgaged Properties and/or other assets securing the SBA Loans (iv) the
original terms to maturity of the SBA Loans, (v) the expected weighted average
term to maturity of the SBA Loans as of the date set forth in the Prospectus
Supplement and the expected range of the terms to maturity; (vi) the earliest
origination date and latest maturity date of any of the SBA Loans, (vii) the
expected weighted average Combined Loan-to-Value Ratio of the SBA Loans, (viii)
the expected Mortgage Interest Rate and ranges of Mortgage Interest Rates borne
by the SBA Loans, (ix) in the case of SBA Loans having Adjustable Rates, the
expected weighted average of the Adjustable Rates, if any; (x) the amount of any
Certificate Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond to be maintained with respect to such
Pool; (xi) the amount, if any, and terms of any other credit enhancement to be
provided with respect to all or any SBA Loans or the Pool; and (xii) the
expected geographic location of the Mortgaged Properties. If specific
information respecting the SBA Loans is not known to the Representative at the
time the related Certificates are initially offered, more general information of
the nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The only obligations of the Representative or the Originators with
respect to a Series of Certificates will be to provide (or, where the
Representative or an Originator acquired an SBA Loan from another originator,
obtain from such originator) certain representations and warranties concerning
the SBA Loans and to assign to the Trustee for such Series of Certificates the
Representative's or Originator's rights with respect to such representations and
warranties. See "The Agreements--Sale of SBA Loans." The obligations of the
Master Servicer with respect to the SBA Loans will consist principally of its
contractual servicing obligations under the related Agreement and its obligation
to make certain cash advances in the event of delinquencies in payments on or
with respect to the SBA Loans in the amounts described herein under "Description
of the Certificates--Advances." The obligations of a Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
If provided in the related Prospectus Supplement, the original
principal amount of a Series of Certificates may exceed the principal balance of
the Trust Assets initially being delivered to the Trustee. Cash in an amount
equal to such difference (the "Pre-Funded Amount") will be deposited into a
separate trust account (the "Pre- Funding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement (the "Funding
Period"), amounts on deposit in the Pre-Funding Account may be used to purchase
additional Trust Assets for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements. 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.
SBA ss. 7(A) LOANS
The SBA ss. 7(a) Loans will consist of the Unguaranteed Interests (as
defined below) in loans originated under Section 7(a) (the "Section 7(a)
Program") of the Small Business Act of 1953 (the "SBA Act"), which Act created
the Small Business Administration (the "SBA"). The Section 7(a) Program was
intended to encourage lenders to provide loans to qualifying small businesses.
Loans made under the Section 7(a) Program can be used to construct, purchase,
expand or convert facilities or to purchase building equipment, leaseholds or
materials. Money lent under the Section 7(a) Program also can, under certain
circumstances, be used for working capital.
The SBA Loans are partially guaranteed by the SBA pursuant to a Small
Business Administration Loan Guaranty Agreement (Deferred Participation) (SBA
Form 750), dated August 13, 1980 by and between The Money Store Investment
Corporation and the SBA (the "Loan Guaranty Agreement") and pertinent SBA
regulations found at 13 C.F.R. parts 120 and 121. As to any SBA Loan, the right
to receive the guaranteed portion of the principal balance thereof together with
interest thereon at a per annum rate in effect from time to time plus a fee paid
to the SBA's fiscal and transfer agent is referred to herein as the "Guaranteed
Interest". The Guaranteed Interest varies from SBA Loan to SBA Loan, will not be
included in the related Trust Fund and Certificateholders will have no right or
interest therein. As to any SBA Loan, the "Unguaranteed Interest" will equal all
payments and other recoveries on such SBA Loan not constituting the Guaranteed
Interest therein.
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the "Guaranteed Participant
Program", the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guaranty the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
Under the second level of lender participation, known as the "Certified
Lender Program," the lender (the "Certified Lender") gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Under the third level of lender participation, known as the "Preferred
Lender Program", the lender (the "Preferred Lender") has the authority to
approve a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are
more stringent than those for participants in the Certified Lender Program and
involve meeting additional requirements in terms of origination, servicing and
liquidation capabilities as well as loan volumes and portfolio quality.
THE SECTION 7(A) COMPANION LOANS
As described above, for applications submitted between January 1, 1995
and October 12, 1995, the maximum loan size for most loans originated under the
Section 7(a) Program was reduced administratively to $500,000. To assist
qualified borrowers in obtaining more financing when needed, the Originators
introduced a program (the "Section 7(a) Companion Program") pursuant to which an
Originator originated a loan (the "Section 7(a) Companion Loan") to the related
borrower in situations in which the total amount financed would otherwise have
exceeded the $500,000 limit. The Originators may originate Section 7(a)
Companion Loans in the future where a qualified borrower requests financing in
an amount that otherwise would exceed the limits of the Section 7(a) Program.
Although Section 7(a) Companion Loans are not guaranteed by the SBA, they are
secured by a lien on the related primary collateral, which lien is prior to, or
pari passu with, the lien of the related SBA ss. 7(a) Loan.
Section 7(a) Companion Loans may be utilized by a borrower for all
eligible SBA ss. 7(a) Loan purposes. Section 7(a) Companion Loans are originated
only in conjunction with a Seller obtaining an SBA guarantee of the accompanying
SBA ss. 7(a) Loan under the Certified Lender Program (the SBA currently
prohibits Section 7(a) Companion Loans in connection with the Preferred Lender
Program). Section 7(a) Companion Loans bear interest and have terms to maturity
as described above under "--Section 7(a) Loan Parameters."
SBA 504 LOANS
The SBA 504 Loans will consist of loans originated by the Originators
under the SBA 504 Loan Program (the "SBA 504 Loan Program"). The SBA 504 Loan
Program was established under the SBA Act to encourage lenders to provide fixed
asset financing to qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment as well as
certain closing costs and professional fees and the interest on interim
financing. The Originators provide approximately 50% of project costs in a
conventional loan agreement, with borrowers providing a minimum 10% equity
contribution. The SBA provides the remainder of the financing. Each loan by the
Originators must receive prior approval by the SBA.
The funds used by the SBA to originate its portion of a project
generated pursuant to the SBA 504 Loan Program are generated by issuing
SBA-guaranteed debentures on behalf of a certified development company (a
"CDC"). A CDC is an organization sponsored by private interests or by state or
local governments. The debentures are pooled monthly and sold through a
certificate mechanism to the public market. The loans originated by the
Originators under the SBA 504 Loan Program are not guaranteed by the SBA.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Certificates of each Series for general corporate
purposes, including repayment of debt and the origination and acquisition of SBA
Loans and other Trust Assets. The Representative expects Certificates to be sold
in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The SBA Loans will have been originated or acquired by the Originators.
The Money Store or one of its affiliates will act as the Master Servicer of the
SBA Loans and other Trust Assets. Except for certain representations and
warranties relating to the SBA Loans and other Trust Assets and certain other
matters, the obligations of The Money Store and the Originators with respect to
the SBA Loans and other Trust Assets will be limited to its contractual
servicing obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, SBA Loans, student
loans, and automobile loans.
Since 1967, The Money Store and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States.
THE SBA LOAN LENDING PROGRAM
The following describes the procedures used by the Originators in
originating substantially all of the SBA ss. 7(a) Loans to be transferred to a
Trust.
The Originators generate business principally through a national
network of sales offices serving local markets and a national products division
that markets nationally through a centralized sales operation. The national
network of sales offices is divided into sales territories, each serving a
specific geographic area. These offices are staffed by business development
officers ("BDOs"), with some offices in large metropolitan areas having several
BDOs and clerical support staff, all serving a local market. Each of the 11
sales territories is supervised by a regional sales manager.
BDOs locate customers primarily through a referral network of
commercial real estate brokers, business brokers, accountants, lawyers, chambers
of commerce, local business associations and other financial institutions. BDOs
work with the customer to match the correct loan product to their financing
needs. BDOs also screen applications for credit worthiness and eligibility for
the applicable SBA program and assemble the loan application for submission to
the underwriting department. BDOs are compensated primarily through commissions.
The national products division generates business primarily through a
national referral network of professional organizations and independent or
affiliated commercial loan brokers. Commercial loan representatives of the
national products division perform essentially the same tasks as a BDO, however,
customer contact is handled by telephone through a national sales center located
in Sacramento, California.
SBA ss. 7(a) Loans originated by the Originators generally range in
size from $50,000 to $1.3 million. In certain cases, an Originator may originate
a loan exceeding $1.3 million when an Originator believed the credit is
particularly strong and/or under programs, such as the International Trade Loan
Program, in which the guaranteed portion provided for larger guarantees. As
explained in further detail below, due to changes in the Section 7(a) Program,
the maximum size for most SBA ss. 7(a) Loans approved between January 1, 1995
and October 12, 1995 was $500,000. Average loan sizes for originations during
1993, 1994 and 1995 were approximately $366,000, $368,000, and $302,000,
respectively.
The Originators' loan origination network is organized on a functional
basis (I.E., business development, credit underwriting and processing). Middle
management consists of regional sales managers, credit managers and processing
managers, each of whom reports to a national supervisor. The national
supervisors report to the vice president of production, who reports to the
president of the SBA Loan Originators, who is located in Sacramento, California.
In addition to years of experience, the Originators consider their
employees' knowledge of SBA Rules and Regulations, responsiveness to customers,
professional demeanor and commitment to be important with respect to the
qualification and abilities of their personnel.
LOAN PURPOSE AND COLLATERAL FOR SBA SS. 7(A) LOANS
Prior to 1986, the Originators estimate that over 50% of their SBA ss.
7(a) Loans were made as working capital and equipment loans. Since 1986,
however, the Originators have refocused their lending on owner/user commercial
real estate loans to established businesses with track records generally of at
least three to four years. The Originators have continued to develop lending for
larger owner/user commercial real estate loans to established businesses. These
loans are generally larger and better collateralized than working capital,
equipment or general- purpose small-business loans. The SBA requires that
owner/users occupy at least 67% of the mortgaged premises in the case of
newly-constructed facilities and 51% in the case of existing facilities.
A majority of the SBA ss. 7(a) Loan originations have been first-lien
mortgages for either the purchase or refinancing of commercial real estate, with
the balance being loans made by the Originators to franchisees of national
franchisors and general business loans for business acquisition, equipment
purchases, working capital or debt consolidation. As described below, where an
SBA ss. 7(a) Companion Loan is originated in connection with an SBA ss. 7(a)
Loan, the SBA ss. 7(a) Companion Loan will be secured by a first-lien mortgage,
with the SBA ss. 7(a) Loan being secured by a second-lien mortgage in addition
to other collateral. SBA ss. 7(a) Loans generally are guaranteed personally by
the borrower. In cases where a second or third mortgage on a residential
property is taken as additional collateral, the Originators may not require the
borrower to obtain a title insurance policy.
COMPETITION
The Originators' main competitors vary by region to region and market
to market. Its primary competitors are small independent banks such as Truckee
River Bank and the San Diego Bank of Commerce and companies such as AT&T Capital
Corporation, ITT Small Business Finance Corp. and Heller First Capital
Corporation. The Originators do not believe that any one competitor, or a small
group of competitors, is dominant in the industry. Although methods of
competition vary according to region, the Originators believe that as one of the
few SBA lenders with a national network, they are able to compete effectively in
all markets in which they operate. The Originators believe that their experience
and breadth of operations give them a unique knowledge of the intricacies of SBA
lending. The Originators believe that this knowledge, coupled with the fact SBA
lending and associated activities constitute their sole business, enables them
to respond to customers quickly and efficiently.
UNDERWRITING CRITERIA FOR SBA SS. 7(A) LOANS
The Originators seek to control two risks through their underwriting
standards: (i) default of the actual credit and (ii) SBA repudiation of its
guaranty due to ineligibility, non-compliance with SBA lending regulations or
poor documentation. The Originators' underwriting emphasizes historical
operating performance and debt-service coverage to help determine the repayment
ability of the borrower. The Originators have established review procedures to
help ensure that all loans that they originate or acquire comply with the
requirements of the SBA.
Commercial loan officers ("CLOs") evaluate each applicant's financial
statements, credit reports, business plans and other data to determine if the
credit and collateral satisfy the Originators' standards. These standards
include historic debt-service-coverage, reasonableness of projections, strength
of management and sufficiency of secondary repayment, as well as the SBA's
eligibility rules. For each application, qualified personnel also perform a site
inspection to determine the appropriateness of the location for the proposed
business use, observe the economic conditions of the local market and inspect
the property for obvious structural defects or environmental issues (as
discussed further below).
The Originators' loan officers assess the reasonableness of projections
based primarily upon (i) their experience with other similar loans in the same
industry and area, (ii) their knowledge of the industry of the applicant, (iii)
their general experience in assessing small business loans and (iv) the business
experience of the applicant. The qualification of an applicant to prepare such
projections is generally based upon the applicant's experience in the business
area and market for which the loan is requested. Some applicants prepare
projections with the assistance of accountants, business consultants and/or
franchisors, while some applicants obtain no such assistance. Typically, there
is no independent third party review of such projections.
The Originators have a tiered system of generally acceptable maximum
Loan-to-Value Ratios or LTVs (as defined below) based on the type of property
securing a loan, the characteristics of the borrower and the industry of the
borrower. Maximum permissible Loan-to-Value Ratios also depend on the length of
time that the debt service coverage on the property has at least equaled a
specified ratio. Applicants having significantly higher earnings before interest
and taxes relative to their debt service than the Originators normally require
may be considered for higher Loan-to-Value Ratios. Conversely, applicants not
meeting the debt service requirement may be considered for a loan with a lower
Loan-to-Value Ratio than the permitted maximum based on the overall
creditworthiness of the applicant.
For commercial real estate transactions, the highest LTVs are typically
reserved for situations where general purpose property is being financed and the
subject business is in a non-cyclical industry. In such cases, if the debt
service coverage ratio (I.E., the ratio of the pro forma annual debt service
payments on the proposed loan to the subject businesses' annual net operating
income) equals and/or exceeds 1.2:1 for the most recent two full years and
interim period, a borrower may qualify for 100% LTV financing. Where general
purpose property is being financed and the business is either cyclical,
particularly interest rate sensitive and/or seasonal in nature, and where debt
service coverage meets or exceeds 1.2:1 for the most recent two full years and
interim period, the maximum permissible LTV is generally 90%. When special
purpose real estate is involved (e.g., restaurants), and debt service coverage
meets or exceeds 1.2:1 for the most recent two full years and interim period,
maximum LTVs of between 80%-90% are considered.
Applications significantly exceeding the previously mentioned debt
service requirements may receive special consideration from the loan committee
for loans with higher LTVs. Conversely, applications which do not meet the
stated debt service requirements, but still indicate a reasonable level of
repayment capacity, may still be considered at lower LTVs. These exceptions to
policy are entertained on a case-by-case basis as warranted by the overall
creditworthiness of the applicant. Other characteristics evaluated in
determining an appropriate LTV in these situations include (but are not limited
to): (i) experience, strength and continuity of business management; (ii)
overall financial strength of the subject business as evidenced by balance sheet
and profit/loss statements (e.g., current as well as pro forma liquidity and
equity positions, historical sales trends and profitability as well as
projections); and (iii) availability of additional sources of repayment (e.g.,
personal financial strength of the applicant including liquidity, supplementary
outside income(s) and/or additional collateral).
All loan applications are submitted to a centralized loan underwriting
and processing center in Sacramento, California. The loan application package is
screened initially for completeness by a credit manager or senior loan officer,
who then assigns the package to a CLO. CLOs are responsible for analyzing the
creditworthiness of the applicant and preparing a loan memorandum, which
includes a credit analysis (including a description of the collateral), states
the purpose of the loan, strengths and weaknesses of the credit, and eligibility
for the applicable SBA program. In addition, for each proposed loan, the CLOs
perform a collateral analysis, financial analysis (including historical debt
service coverage), personal resource analysis, and business and personal credit
checks. Any real property to be taken as collateral is appraised by an
independent appraiser.
If the CLO recommends the loan for approval, the loan memorandum and
supporting documents are submitted to the senior loan officer, credit manager,
or a senior credit officer for review based on the various levels of credit
authority. Upon concurrence of the CLOs recommendation by the senior loan
officer, credit manager or senior credit officer, as the case may be, a
commitment letter and SBA submission documents are generated by the CLO and, in
most cases, forwarded to the BDO. The BDO meets with the customer to explain the
commitment letter and SBA documentation, obtains required customer signatures
and deposits, and returns the signed documents to the processing center in
Sacramento. The loan package is forwarded to a loan processing manager, who
screens the loan package for completeness and then assigns the package to a loan
processor. The loan processor prepares the Loan Authorization and Agreement, and
all necessary documentation to submit to the SBA for a loan guarantee, and for
closing the loan in strict accordance to the credit memorandum, SBA regulations,
and state and federal law.
Once loan approval has been granted, approved applications under the
Preferred Lender Program are submitted directly to the SBA's central PLP
processing center for assignment of a authorization number. Loans not made
pursuant to the Preferred Lender Program require prior approval by an SBA
district office.
Once a loan is funded, the complete original file is forwarded to loan
servicing. When the loan package is received, the final physical file is
established in a uniform manner, and a computerized "tickler system" tracks
follow-up items, such as UCC filing renewals, insurance policy expirations and
deeds of trust recording. The loan file then undergoes a final post-closing
audit, to help verify that the loan was originated in accordance with the
Sellers' procedures and consistent with the SBA loan authorization. Once the
file has been audited and is complete, it is microfilmed.
The Originators originate loans to a variety of industries. However,
based upon their loss experience and economic forecasts obtained from industry
associations, chambers of commerce, academic institutions, governmental entities
and others, the Originators may de-emphasize lending in certain regions or
industries from time to time. The Originators also periodically have refined
their underwriting guidelines to exclude certain high- risk ventures, such as
car washes.
Collateral for SBA ss. 7(a) Loans originated by the Originators
generally consists of one or more of the following: (i) first liens on
commercial real estate (or second liens when the SBA ss. 7(a) Loan is originated
in conjunction with a Section 7(a) Companion Loan), (ii)second liens on
residential properties, (iii) personal guarantees and (iv) business assets. The
Originators believe that the pledge of a borrower's personal wealth provides
appropriate incentives, thereby minimizing defaults and maximizing recoveries.
Generally, the Originators do not take inventory or accounts receivable as
collateral, thereby allowing borrowers to obtain short-term financing with these
assets from other sources. The Originators also originate machinery and
equipment loans; however, some of these also are secured by real estate. For
example, loans are provided for medical/dental equipment, machinery, print shop
equipment and franchise restaurant equipment.
The Originators define the Loan-to-Value Ratio ("LTV") of an SBA ss.
7(a) Loan as the gross amount of the loan divided by the total "net collateral
value" of all collateral (primary and secondary, but excluding the value of any
personal guarantees) securing such loan. In determining "net collateral value",
the Originators apply discounts of appraised value based on the type of
collateral and lien position. Generally, first liens on commercial or
residential property are allowed a maximum "collateral value" of 100% of the
lower of cost or appraised value and, therefore, are not discounted. Second and
third mortgages are allowed a maximum collateral value of 80%, unless the first
lien is of nominal value. The maximum collateral value allowed for used
machinery and equipment is 30% of cost and 50% for new machinery and equipment.
In determining the appropriate LTV required for a particular credit, the
Originators review the historical debt-service coverage ratio, stability of the
industry, level of equity from the borrower, purpose of the loan, economic
condition of the market and size of the loan. The Originators usually require a
1.2x debt-service coverage ratio for the most recent two complete years and
interim period. The Originators generally do not give credit for rental income
when performing debt-service coverage analysis.
SERVICING AND COLLECTIONS OF SBA SS. 7(A) LOANS
The Originators service substantially all the SBA ss. 7(a) Loans they
originate. Servicing includes collecting payments from borrowers, remitting
payments on Guaranteed Interests to the Agent of the SBA, accounting for
principal and interest, contacting delinquent borrowers and supervising loan
liquidations.
Each quarter, borrowers are sent payment coupons and statements showing
the interest rate for the next quarter, the outstanding loan balance, the next
payment adjustment date and the monthly payment for that quarter.
The loan servicing department is responsible for all post-closing
follow-up until the loan is repaid. These duties include tracking receipt of
payments, performing field visits, analyzing post-closing financials, reviewing
UCC filings and coordinating post-closing borrower requests with the SBA (E.G.,
exchanges of collateral or assumptions). In addition, the loan servicing
department typically conducts field visits to the borrower's place of business
shortly after closing and within 24 months thereafter. Finally, all loan
documents require that borrowers submit updated financial statements. For
delinquent accounts, these statements are reviewed by the loan servicing
department to determine debt-service-coverage ratios and compliance with loan
covenants.
Delinquency reports are generated every ten days and borrowers are
contacted frequently to determine the cause of any delinquency. A customer
service officer maintains contact with each delinquent borrower until the loan
becomes current or is transferred to the credit services unit within the loan
servicing department. If a loan is chronically delinquent, even if currently
performing, the loan will be serviced by customer service until such loan is
repurchased by the SBA, and then by a credit services officer for the remainder
of the loan.
WORKOUTS AND LIQUIDATIONS OF SBA SS. 7(A) LOANS
When an SBA ss. 7(a) Loan becomes 75 days past due, the appropriate
Originator initiates procedures that result in the SBA's repurchase of the
Guaranteed Interest of the defaulted SBA ss. 7(a) Loan from the secondary market
investor. In most cases the repurchase process is completed within 30 days. The
SBA tries to minimize the repurchase time frame because it pays accrued interest
(up to 120 days) on the guaranteed portion of the loan until the loan is
repurchased. After it has repurchased a Guaranteed Interest, the SBA owns a
direct participation in the related loan.
A credit services officer is assigned the responsibility for the
workout or liquidation once an SBA ss. 7(a) Loan is repurchased. The loan
workout officer evaluates the borrower's corporate and personal ability to repay
and then formulates an appropriate workout plan. Generally, workout plans
indicate the expected recovery time period or the possibility of an assumption
of the debt by a third-party; plans also include liquidation options.
To some degree, the SBA is involved in every repurchased loan,
depending on the nature of the recovery and the particular SBA District. In most
cases, the SBA allows the Originators to perform workouts. In some instances,
the SBA takes over the servicing of repurchased loans. In the Originators'
experience, this happens primarily with new offices, where local SBA personnel
are unfamiliar with the Originators. In the majority of foreclosure situations,
title is assumed in the name of the SBA. In the remainder of the foreclosure
situations, at the direction of the SBA, title is assumed in the name of one of
the Originators.
In formulating workout plans, the Originators assess the value of the
collateral through a variety of sources including brokers, appraisers and other
market sources. The Originators also take steps to help protect the value of the
collateral, such as performing site visits, appraising properties and ensuring
payment of taxes and, where appropriate, maintenance of insurance. Where
necessary, the Originators engage property managers or take other measures
designed to protect the collateral value from deterioration.
Loan workouts are focused on allowing the business to recover from
temporary setbacks, if possible. The Originators believe that recoveries are
improved if the borrower is cooperative and works with the lender to achieve a
resolution. The Originators stress the development of a strong relationship with
borrowers over the long term. This generally results in cooperation by the
borrower in the workout, and the Originators generally receive substantial cash
flow from these troubled loans.
Although the SBA generally is reluctant to allow foreclosure on a
personal residence until all other avenues have been pursued, the Originators
believe that the possibility of foreclosure is a powerful incentive to borrowers
to make the loan current.
The Originators view SBA ss. 7(a) Loans as small business loans as
opposed to commercial real estate mortgages. Accordingly, the workout is more
complex and the period to recovery or reinstatement takes longer than for
typical commercial real estate loans. However, because the Originators often
receive substantial cash flow from troubled assets during the workout period,
loan workouts are generally more efficient than foreclosures on the collateral.
If a borrower is uncooperative or the business is not viable, the Originators
prepare a liquidation plan and determine the likely recovery value and best
method of liquidation. The SBA must approve all liquidation plans.
On average, the workout process requires approximately 24 months. The
length of the workout is determined primarily by the complexity and long-term
viability of the business, as well as the bankruptcy status of the borrower. In
particular, a bankruptcy may lengthen the workout timeframe by approximately 12
to 18 months.
In certain cases, the Originators may forbear payments of interest and
principal for a period of three to six months if the borrower is experiencing
temporary difficulties. Under SBA servicing policy, the lender has unilateral
authority to defer loans for up to 90 days. Past 90 days, the lender must obtain
approval from the investors in the guaranteed portions, which is usually
granted. For deferments in excess of 180 days, SBA approval must be obtained.
ENVIRONMENTAL POLICY
The Originators have developed an environmental credit policy to help
minimize potential environmental liabilities. This policy conforms to the
environmental requirements set by the SBA, and many of the Originators'
guidelines are stricter than those of the SBA. The standard
environmental-related requirements for SBA loans secured by commercial real
property include: (i) obtaining a commitment letter from the borrower
acknowledging that the closing is contingent upon compliance with environmental
laws, (ii) obtaining a detailed environmental questionnaire from the borrower
and, if possible, the previous owner of the property, (iii) performing a site
visit of the property, (iv) checking the property against a published list of
"Superfund" sites and, if the property is listed, performing an environmental
audit or, for any SBA Loan approved after January 1, 1996, searching a
comprehensive state and federal environmental data base for each commercial real
property taken as collateral for which a Phase I environmental report has not
been ordered or obtained and (v) obtaining a certificate from the borrower
providing representations and warranties as to the absence of hazardous
substances and providing a broad indemnification. If, after performance of these
requirements, there is any evidence of a potential environmental problem which
might require remediation, the applicable Originator will require remediation to
be performed or require a Phase I or a Phase II environmental report on the
property and the loan will be closed only after remediation to levels below
regulatory agency action levels, the property is subject to ongoing
rehabilitation approved by the SBA, or if no problem is revealed. A Phase I
environmental report describes the results of an audit of the related property
performed by a licensed environmental assessment firm, which audit includes (i)
an inspection of the related and adjacent properties; (ii) a historical review
of site records; (iii) a review of files of regulatory agencies concerning the
site; and (iv) interviews with individuals knowledgeable about the site use and
operations.
In preparing a Phase I environmental report, the licensed environmental
assessment firm may contact the United States Environmental Protection Agency,
state and local water control authorities, state and local environmental
departments and local fire departments to ascertain whether a particular
property has an environmental problem and, if so, the nature thereof. The
Originators typically do not contact such authorities unless an environmental
problem has been revealed.
In the Agreement the Originators will represent and warrant that at the
time of origination of each SBA Loan forming part of the Trust, even those
originated prior to January 1990, the related commercial real property was free
of contamination from toxic substances or hazardous wastes and that, as of the
Cut-Off Date, the Originators have no knowledge of any such contamination from
toxic substances or hazardous wastes on any commercial real property. The Master
Servicer will agree that if it has reasonable cause to believe a property may
have contamination from toxic substances or hazardous wastes, it will not
foreclose upon the related SBA Loan until after it obtains a favorable Phase 1
environmental report.
ORIGINATION OF SECTION 7(A) COMPANION LOANS
For most applications submitted between January 1, 1995 and October 12,
1995, the maximum loan size for a loan originated under the Section 7(a) Program
was reduced administratively to $500,000. To assist qualified borrowers in
obtaining more financing when needed, the Originators introduced the Section
7(a) Companion Program pursuant to which the Originators originated a Section
7(a) Companion Loan to a borrower requesting a Section 7(a) Loan from an
Originator where the total amount financed would otherwise exceed $500,000. The
Originators may originate Section 7(a) Companion Loans in the future where a
qualified borrower requests financing in an amount that otherwise exceeds the
limits of the Section 7(a) Program.
The Originators will not fund a Section 7(a) Companion Loan unless and
until the SBA issues its guaranty of the related Section 7(a) Loan. The
underwriting criteria, servicing and collection procedures, workout and
liquidation policies and environmental policy for the Section 7(a) Companion
Loans are substantially the same as those described above for the Section 7(a)
Loans, except that TMSCMI generally requires a debt-service coverage ratio of
1.1:1 and the required LTV for Section 7(a) Companion Loans is generally
50%-60%. Also, the SBA is not required to be involved in the workout or
liquidation of a Section 7(a) Companion Loan. However, if in connection with the
workout or liquidation of a Section 7(a) Companion Loan, the Originators wish to
workout or liquidate the related Section 7(a) Loan, the SBA will be involved in
such procedures.
ORIGINATION OF SBA 504 LOANS.
The SBA 504 Loans will consist of loans originated by an Originator
under the SBA 504 Loan Program (the "SBA 504 Loan Program"). The SBA 504 Loan
Program was established under the Act to encourage lenders to provide fixed
asset financing to existing qualifying small businesses. SBA 504 Loans may be
used for plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing.
Each SBA 504 Loan originated by an Originator is secured by a first
lien on the related primary collateral, with the SBA loan secured by a second
lien, in addition to a lien on other collateral. The borrower is required to
fund at least 10% of the total allowable project costs, however, an Originator
may require a higher percentage for certain larger projects and projects with
special credit risks. The LTV for SBA 504 Loans generally may not exceed
55%-60%. The Originators also generally require a minimum debt service coverage
ratio of 1.1:1 for the most recent two full years and interim periods.
Applications with a lower debt service coverage ratio may be considered, but
generally only if the LTV is below approximately 55%. When special purpose real
estate is involved (e.g., restaurants), or in the case of cyclical or interest
rate sensitive industries, the Originators also generally require LTVs below
approximately 55%.
SBA 504 Loans that are originated for construction purposes generally
possess an LTV of 80% during the construction phase pending issuance of the
SBA-guaranteed debenture upon completion of the construction. Additionally,
secondary collateral required by the CDC for the SBA loan also will serve as
collateral for the interim construction loan.
Except as set forth above, the underwriting criteria, servicing and
collection procedures, workout and liquidation policies and environmental policy
for the SBA 504 Loans are substantially the same as those described above for
the Section 7(a) Loans, except that the SBA is not involved in the workout or
liquidation procedures.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the date set forth in the related Prospectus Supplement (each such
date, a "Cut-off Date"), among The Money Store, the applicable Originators and
the Trustee for the benefit of the Certificateholders of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust. A form
of an Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following summaries describe certain
material provisions which may appear in each Agreement. The Prospectus
Supplement for a Series of Certificates will describe any provision of the
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 Agreement for each Series of Certificates and
the applicable Prospectus Supplement. The Representative will provide a copy of
the Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of a Certificate of such Series addressed to The
Money Store, 2840 Morris Avenue, Union, New Jersey 07083, Attention: Corporate
Counsel.
GENERAL
The Certificates of each Series will represent fractional undivided
ownership interests in a Trust created pursuant to the related Agreement and/or
such other assets as may be described in the related Prospectus Supplement. The
Certificates will be issued in fully registered form, in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof (or such other
amounts as may be set forth in a Prospectus Supplement), except that one
Certificate of each Class may be issued in a different denomination.
Definitive Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, at the office of a Certificate Registrar appointed by the Trustee.
No service charge will be made 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 Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
The Certificates will not represent obligations of the Representative,
the Originators or any affiliate thereof. The assets of each Trust will consist
of one or more of the following, as set forth in the related Prospectus
Supplement, (a) the SBA Loans that from time to time are subject to the related
Agreement and which are held in the related Pool; (b) the assets for the Trust
that from time to time are required by the Agreement to be deposited in certain
reserve accounts, including the Certificate Account, the Principal and Interest
Account, the Expense Account, the Letter of Credit Fee Account and the Insurance
Account (each, as defined herein), or to be invested in Permitted Investments
(as defined herein); (c) property and any proceeds thereof acquired by
foreclosure of the SBA Loans in such Pool, deed in lieu of foreclosure or a
comparable conversion; (d) any Primary Mortgage Insurance Policies; (e) any
Mortgage Pool Insurance Policies; (f) any Special Hazard Insurance Policies; (g)
any Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit,
guaranties of The Money Store or other credit enhancement or maturity
protection covering any Certificates, any SBA Loan in the related Pool or any
related Mortgaged Property which is required to be maintained pursuant to the
related Agreement.
Each Series of Certificates will be issued in one or more Classes. Each
Class of Certificates of a Series will evidence beneficial ownership of the
interest in assets of the related Trust specified in the related Prospectus
Supplement. A Class of Certificates may be divided into two or more Sub-Classes,
as 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 of Certificates of such Series. Certain Series or
Classes of Certificates may he covered by a Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond or other insurance policies,
cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, supplemental interest payments or other forms of credit
enhancement or maturity protection, 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 prior to one or more other Classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Assets in the related
Trust or 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.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Certificates will be made by the
Trustee on each Remittance Date, 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 Unless Definitive Certificates have been
issued, the registered holder of all Certificates will be Cede. Distributions
will be made by check mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (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.
DISTRIBUTIONS ON CERTIFICATES
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 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 its 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 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.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds available
in the related Certificate Account and other accounts to the extent described in
the related Prospectus Supplement. To the extent described in the related
Prospectus Supplement, on each Remittance Date, the Master Servicer will
withdraw from the applicable Certificate Account and such other accounts as may
be described in the related Prospectus Supplement and distribute to the
Certificateholders of each Class (other than a Series having a Class of
Subordinated Certificates, as described below), either the specified interest of
such Class in the Pool times the aggregate of all amounts on deposit in the
Certificate Account as of the Determination Date, or, in the case of Classes
which have been assigned an aggregate principal balance and Pass- Through Rate,
payments of interest and payments in reduction of such aggregate principal
balance from all amounts on deposit in the Certificate Account on the
Determination Date, in the priority and calculated in the manner set forth in
the related Prospectus Supplement.
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 Remittance Date may vary among Classes, over time
or otherwise as specified in the Prospectus Supplement. Differing allocations of
principal and interest to different Classes of Certificateholders will have the
effect of accelerating the amortization of Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the related Trust.
Distributions to any Class of Certificates will be made pro rata to all
Certificateholders of that Class, or as otherwise described in a Prospectus
Supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Certificateholders (rather than to guarantee or insure against losses) if so
provided in the related Prospectus Supplement, the Master Servicer will be
required to advance to the Trustee, on or before each Remittance Date (from its
own funds), the amount, if any, by which (a) the sum of (x) 30 days' interest at
the applicable weighted average Adjusted SBA Loan Remittance Rate (as defined
below) on the then outstanding principal balance of the related Series of
Certificates and (y) the amount, if any, required to be deposited into the
related Reserve Account (as specified in the Prospectus Supplement) for the
related Remittance Date exceeds (b) the amount received by the Master Servicer
and any Sub-Servicers in respect of interest on the SBA Loans as of the related
Record Date (less certain amounts not required to be deposited into the related
Trust) (such excess, the "Monthly Advance"). For each Class of Certificates, the
"Adjusted SBA Loan Remittance Rate" will equal the sum of the related
Pass-Through Rate and the rate used in determining certain expenses payable by
the related Trust, as more specifically set forth in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, not later than
the close of business on each Determination Date, with respect to each SBA Loan
for which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Certificate Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such SBA Loan as of the beginning of the
related Due Period at the applicable weighted average Adjusted SBA Loan
Remittance Rate, over (b) the amount of interest actually received on the
related SBA Loan for such Due Period (such difference, "Compensating Interest").
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
initially will be registered in the name of Cede, the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code ("UCC") and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. 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 and reports relating to the Certificates from the
Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments and reports relating to the
Certificates after the related Remittance Date because, while payments and such
reports are required to be forwarded to Cede, as nominee for DTC, on each such
date, DTC will forward such payments and reports to its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. Unless and until Definitive Certificates are issued, 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 Agreement. The beneficial holders of
such Certificates will only be permitted to exercise the rights of
Certificateholders under the 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 reports and 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 reports and
payments on behalf of their respective Certificateholders. Accordingly, although
Certificateholders will not possess certificates, the rules provide a mechanism
by which Certificateholders will receive distributions and reports and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, 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 an Agreement only at the direction of one or
more Participants to whose account with DTC 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, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the events specified in the related Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related 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 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 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 Remittance Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes
of a Series of Certificates or with respect to the Trust Assets 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
Guarantee Insurance Policy, Spread Amount, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts, Supplemental
Interest Payments, a letter of credit, a limited financial guaranty insurance
policy, a guaranty of The Money Store, other third party guarantees or
maturity protection, another method of credit enhancement described in the
related Prospectus Supplement, or the use of a cross-support feature, or (iii)
any combination of the foregoing. Credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Certificates and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, holders of one or more Classes of Certificates will
bear their allocable share of deficiencies. If a form of credit enhancement
applies to several Classes of Certificates, and if principal payments equal to
the aggregate principal balances of certain Classes will be distributed prior to
such distributions to other Classes, the Classes which receive such
distributions at a later time are more likely to bear any losses which exceed
the amount covered by credit enhancement. Coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Representative if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates. The Trustee of the related Trust will have the right
to sue providers of credit enhancement if a default is made on a required
payment.
SUBORDINATION
To enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which they would be entitled to
receive in the absence of any losses or delinquencies, if so specified in the
related Prospectus Supplement, distributions of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series will
instead be payable to holders of one or more Classes of Senior Certificates,
under the circumstances and to the extent specified in the Prospectus
Supplement. If specified in the related Prospectus Supplement, the holders of
Senior Certificates will receive the amounts of principal and/or interest due to
them on each Remittance 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 the
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 SBA Loans were to exceed
the total amounts payable and 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 the
Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into one or more Reserve Accounts established and maintained with the
Trustee. If so specified in the Prospectus Supplement, such deposits may be made
on each Remittance Date, on each Remittance Date for specified periods or until
the balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the Class of
Certificates specified in the Prospectus Supplement at the times and under the
circumstances specified in the Prospectus Supplement. See "--Reserve Accounts"
below.
If so specified in the related Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the related 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
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. 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.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy may be obtained and maintained for any Class or Series
of Certificates. The issuer of any Certificate Guaranty Insurance Policy (a
"Certificate Guaranty 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 Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy will unconditionally and irrevocably guarantee to
Certificateholders that an amount equal to each full and complete Insured
Payment will be received by an agent of the Trustee (an "Insurance Paying
Agent") on behalf of Certificateholders, for distribution by the Trustee to each
Certificateholder. The "Insured Payment" will equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement.
The specific terms of any Certificate Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Certificate Guaranty
Insurance Policies may have limitations including (but not limited to)
limitations on the insurer's obligation to guarantee the Master Servicer's
obligation to repurchase or substitute for any SBA 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 Agreement, the Certificate Guaranty
Insurer may be subrogated to the rights of each Certificateholder to receive
payments under the Certificates to the extent of any payments by such
Certificate Guaranty Insurer under the related Certificate Guaranty
Insurance Policy.
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 Trust Assets. The accelerated
amortization will be achieved by applying certain excess interest collected on
the Trust Assets to the payment of 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 Trust Assets 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 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. An 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.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of SBA
Loans, a Mortgage Pool Insurance Policy issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement will be obtained and maintained
for each Series pertaining to SBA Loans. Each Mortgage Pool Insurance Policy
will, subject to the limitations described below, cover loss by reason of
default in payment on the related SBA Loans in the Pool in an amount, unless
otherwise specified in the related Prospectus Supplement, initially equal to a
specified percentage of the aggregate principal balance of all SBA Loans
included in the Pool as of the Cut-off Date or such other date as is specified
in such Prospectus Supplement. The Mortgage Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted SBA Loans and only upon satisfaction of certain
conditions precedent described below.
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 an SBA 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 the Mortgage Pool Insurance Policy, a bond or other credit
support may cover fraud in connection with the origination of SBA 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 Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted SBA Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted SBA
Loan occurring when the servicer of such SBA Loan, at the time of default or
thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent SBA Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach the original policy limit, coverage under
that Mortgage Pool Insurance Policy will be exhausted and any further losses
will be borne by the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the 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 holders of the related Certificates 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 located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreement--Hazard Insurance." No Special
Hazard Insurance Policy will 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.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
SBA Loan has been kept in force and other protection and preservation expenses
have been paid.
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 Agreement will provide that, if the related Mortgage Pool
Insurance Policy shall have been terminated or been exhausted through payment of
claims, the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on an SBA Loan or a reduction by such court of the
principal amount of an SBA 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 required amount of coverage under each Bankruptcy Bond will be set
forth in the related Prospectus Supplement. To the extent specified in an
applicable Prospectus Supplement, the Master 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. See "Certain Legal Aspects of the SBA
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, letters of credit, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the Prospectus
Supplement may be deposited by the Master Servicer or Representative on the date
specified in the 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 distributions
otherwise payable to holders of Subordinated Certificates on any Remittance Date
may instead be deposited into such Reserve Accounts. Such deposits may be made
on the date specified in the Prospectus Supplement, which may include each
Remittance Date, each Remittance 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 the Reserve Accounts will be used to
enhance the likelihood of timely payment of principal of, and interest on, or,
if so specified in the 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 the 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 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 ("Permitted Investments"). Any asset or instrument
deposited in the Reserve Account generally 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. Additional
information with respect to such instruments deposited in the Reserve Accounts
will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments
deposited in a Reserve Account will be available for withdrawal from such
Reserve Account for distribution to Certificateholders for the purposes, in the
manner and at the times specified in the Prospectus Supplement.
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 Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Trust Assets.
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 Trust Assets. 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 Trust Assets.
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.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include
in lieu of some or all of the foregoing or in addition thereto letters of
credit, financial guaranty insurance policies, a guaranty of The Money
Store, other third party guarantees, limited guarantees or insurance from
agencies or instrumentalities of the United States, 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 as may be described in the Prospectus
Supplement. 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. If any Class of Certificates has a floating
interest rate, or if any of the Trust Assets has a floating interest rate, the
Trust may include an interest rate swap contract, an interest rate cap agreement
or similar contract providing limited protection against interest rate risks.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a 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 which includes a cross-support feature will describe the
manner and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts 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.
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 Trust Assets
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 SBA Loans in a given Pool will
vary depending upon the type of SBA Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the SBA Loans in the related Pool. SBA Loans generally may be prepaid without
penalty in full or in part at any time.
In general, prepayment of SBA Loans is likely to increase when the
level of prevailing interest rates for similar loans declines significantly,
although the prepayment rate is influenced by a number of other factors,
including general economic conditions. Similarly, when the level of prevailing
interest rates rises, prepayment rates may decrease. No prediction can be made
as to the prepayment rate that the SBA Loans will actually experience.
The prepayment experience of the Pools may be affected by a wide
variety of factors, including general and local economic conditions, mortgage
market interest rates and the availability of alternative financing. The
Representative is unaware of any reliable studies that would project the
prepayment risks associated with the SBA Loans based upon current interest rates
and economic conditions or the historical prepayment experience of The Money
Store's and its affiliates' portfolios of SBA Loans.
Greater than anticipated prepayments of principal will increase the
yield on Certificates purchased at a price less than par. Similarly, greater
than anticipated prepayments of principal will decrease the yield on
Certificates purchased at a price greater than par. The effect on an investor's
yield of principal prepayments on the SBA Loans occurring at a rate that is
faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the applicable Class of Certificates may
not be offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The weighted average lives of Certificates will also be affected by the
amount and timing of delinquencies and defaults on the SBA Loans and the
recoveries, if any, on defaulted SBA Loans and foreclosed properties.
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 SBA Loans and foreclosed properties result
in principal payments on the Certificates faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on an SBA Loan, the
Mortgagor will be charged interest on the principal amount of the SBA 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. If so specified in the related
Prospectus Supplement, in the event that less than 30 days' interest is
collected on an SBA Loan during a Due Period, whether due to prepayment in full
or a Curtailment, the Master Servicer will be obligated to pay Compensating
Interest with respect thereto, but only to the extent of the aggregate Servicing
Fee and Contingency Fee for the related Remittance Date. To the extent such
shortfalls exceed the amount of Compensating Interest that the Master Servicer
is obligated to pay, and are not otherwise covered by Insured Payments, the
yield on the Certificates could be adversely affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Trust
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Certificates. See "The Agreement--Termination; Purchase of SBA
Loans."
If so specified in the related Prospectus Supplement, the effective
yield to certain Certificateholders may be slightly lower than the yield
otherwise produced by the applicable Remittance Rate and purchase price, because
while interest generally will accrue on such 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.
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 will
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. 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 AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
SALE OF SBA LOANS
Pursuant to each Agreement, at the time of issuance of Certificates of
a Series, the Originators and/or The Money Store will sell to the related Trust,
without recourse, all interest of the Originators and/or The Money Store in each
of the Trust Assets comprising the assets of such Trust and all interest in all
actual payments collected after the Cut-off Date with respect to such Trust
Assets.
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 Trust Assets
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 Originators and/or The Money Store will sell to the related
Trust, without recourse, the entire interest of the Originators and/or The Money
Store in the additional Trust Assets identified in a schedule attached to a
supplemental conveyance relating to such additional Trust Assets executed on
such date by the Originators and/or The Money Store. In connection with each
purchase of additional Trust Assets, the related Trust will be required to pay
to the Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Trust Asset as of its related
Cut-off Date. The purchase price will be withdrawn from the Pre- Funding Account
and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in "--Representations and Warranties"
below apply to each additional Trust Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied. The
Originators and/or The Money Store will convey the additional Trust Assets to
the related Trust on the applicable purchase date pursuant to the Agreement.
Any conveyance of additional Trust Assets will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Trust Asset must satisfy the eligibility
criteria specified in the related Agreement 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 related Prospectus
Supplement, the third-party credit enhancement provider, if any, shall have
approved the transfer of such additional Trust Assets to the related Trust;
(iii) neither the Originator nor The Money Store will have selected such
additional Trust Assets in a manner that either believes is adverse to the
interests of Certificateholders; and (iv) the Originator and The Money Store
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 Trust
Assets.
In connection with such transfer and assignment, the Representative
and/or the Originators will deliver to the Trustee or, with respect to the SBA
Notes relating to the SBA ss. 7(a) Loans being delivered pursuant to (a) below,
to fiscal and transfer agent of the SBA (the "Agent of the SBA"), the following
documents with respect to each SBA Loan (collectively, the "Trustee's Document
File"):
(a) The original SBA Note, endorsed by means of an allonge as follows
(bracketed language is only for SBA ss. 7(a) Loans): "Pay to the order
of [Name of Trustee], and its successors and assigns, as trustee under
that certain Pooling and Servicing Agreement dated as of ____________,
199_ for the benefit of [the United States Small Business
Administration and] holders of The Money Store SBA Loan-Backed
Certificates, Series
199_-_, Class __ and Class __[, as their respective interests may
appear], without recourse" and signed, by facsimile or manual
signature, in the name of the applicable Originator by a Responsible
Officer, with all prior and intervening endorsements showing a complete
chain of endorsement from the originator to the applicable Originator,
if such Originator was not the originator;
(b) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Mortgage, with evidence of recording thereon,
(ii) a copy of the Mortgage certified as a true copy by a Responsible
Officer of the applicable Originator where the original has been
transmitted for recording until such time as the original is returned
by the public recording office or duly licensed title or escrow officer
or (iii) a copy of the Mortgage certified by the public recording
office in those instances where the original recorded Mortgage has been
lost;
(c) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Assignment of Mortgage from the applicable
Seller endorsed as follows (bracketed language is only for SBA ss. 7(a)
Loans): "[NamE of Trustee], ("Assignee") its successors and assigns, as
trustee under the Pooling and Servicing Agreement dated as of
____________, 199_[, subject to the Multi-Party Agreement dated as of
_______________, 199_]" with evidence of recording thereon (provided,
however, that where permitted under the laws of the jurisdiction
wherein the Mortgaged Property is located, the Assignment of Mortgage
may be effected by one or more blanket assignments for SBA Loans
secured by Mortgaged Properties located in the same county), or (ii) a
copy of such Assignment of Mortgage certified as a true copy by a
Responsible Officer of the applicable Originator where the original has
been transmitted for recording (PROVIDED, HOWEVER, that where the
original Assignment of Mortgage is not being delivered to the Trustee,
each such Responsible Officer may complete one or more blanket
certificates attaching copies of one or more Assignments of Mortgage
relating to the Mortgages originated or acquired by the applicable
Originator);
(d) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of all intervening assignments, if any, showing a
complete chain of title from the originator to the applicable
Originator, including warehousing assignments, with evidence of
recording thereon if such assignments were recorded, (ii) copies of any
assignments certified as true copies by a Responsible Officer of the
applicable Originator where the originals have been submitted for
recording until such time as the originals are returned by the public
recording officer, or (iii) copies of any assignments certified by the
public recording office in any instances where the original recorded
assignments have been lost;
(e) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of any title insurance policies relating to the
Mortgaged Properties or (ii) copies of any title insurance policies or
other evidence of lien position, including but not limited to PIRT
policies, limited liability reports and lot book reports, to the extent
the Originators obtain such policies or other evidence of lien
position, certified as true by the applicable Originator;
(f) For all SBA Loans, blanket assignment of all collateral securing
the SBA Loan, including without limitation, all rights under applicable
guarantees and insurance policies;
(g) For all SBA Loans, irrevocable power of attorney of the applicable
Originator to the Trustee to execute, deliver, file or record and
otherwise deal with the collateral for the SBA Loans in accordance with
the Agreement. The power of attorney will be delegable by the Trustee
to the Servicer and any successor servicer and will permit the Trustee
or its delegate to prepare, execute and file or record UCC financing
statements and notices to insurers; and
(h) For all SBA Loans, blanket UCC-1 financing statements identifying
by type all collateral for the SBA Loans in the SBA Loan Pool and
naming the Trustee, and with respect to the SBA ss. 7(a) Loans, the
SBA, as Secured Parties and the applicable Originator as the Debtor.
REPRESENTATIONS AND WARRANTIES
Each Originator will represent to the Trustee and the
Certificateholders, among other things, with respect to each SBA Loan originated
or acquired by it, as of the related Cut-Off Date or such other date as may be
set forth in an Agreement:
(1) The information with respect to each SBA Loan set forth in the SBA
Loan Schedule is true and correct;
(2) All of the original or certified documentation set forth in the
Agreement (including all material documents related thereto) has been or will be
delivered to the Trustee or the Agent of the SBA, or as otherwise provided in
the related Agreement;
(3) Each SBA Loan has been originated or acquired by an Originator in
accordance with the applicable underwriting criteria set forth herein and is
being serviced by the Servicer or one or more Subservicers;
(4) With respect to those SBA Loans secured by a Mortgaged Property,
each Mortgage is a valid and subsisting lien of record on the Mortgaged Property
subject only to any applicable prior liens on such Mortgaged Property and
subject in all cases to such exceptions that are generally acceptable to banking
institutions in connection with their regular commercial lending activities, and
such other exceptions to which similar properties are commonly subject and which
do not individually, or in the aggregate, materially and adversely affect the
benefits of the security intended to be provided by such Mortgage;
(5) Each Section 7(a) Companion Loan, if any, is secured by a Mortgaged
Property, which security interest is senior or pari passu to the security
interest in such Mortgaged Property granted in connection with the related
Section 7(a) Loan and each Rule 504 Loan, if any, is secured by a Mortgaged
Property, which security interest is senior to the security interest in such
Mortgaged Property granted in connection with the related loan made by the SBA;
(6) Immediately prior to the transfer and assignment contemplated by
the Agreement, the applicable Originator held good and indefeasible title to,
and was the sole owner of, the Unguaranteed Interest of each SBA ss. 7(a) Loan,
each Section 7(a) Companion Loan and such Rule 504 Loan conveyed by the
Originator subject to no liens, charges, mortgages, encumbrances or rights of
others except as set forth in paragraphs (4) and (5) above or other liens which
will be released simultaneously with such transfer and assignment;
(7) As of the related Cut-Off Date, no SBA Loan will be 59
or more days delinquent in payment;
(8) To the best of the Originator's knowledge, there will be no
delinquent tax or assessment lien on any Mortgaged Property which is the primary
collateral for the related loan, and each such Mortgaged Property will be free
of material damage and will be in good repair;
(9) The SBA Loan will not be subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of the SBA Loan or any related Mortgage, or the
exercise of any right thereunder, render either the SBA Loan or any related
Mortgage unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(10) Each SBA Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity, disclosure and recording
laws and the applicable SBA Rules and Regulations;
(11) Pursuant to the SBA Rules and Regulations, the Originator requires
that the improvements upon each Mortgaged Property which is the primary
collateral for the related loan are covered by a valid and existing hazard
insurance policy with a generally acceptable carrier that provides for fire and
extended coverage;
(12) Pursuant to the SBA Rules and Regulations, the Originator requires
that if a Mortgaged Property is in an area identified in the Federal Register by
the Federal Emergency Management Agency as having special flood hazards, a flood
insurance policy is in effect with respect to such Mortgaged Property with a
generally acceptable carrier;
(13) Each SBA Loan will conform, and all such SBA Loans in the
aggregate will conform, to the descriptions thereof set forth in this Prospectus
and the related Prospectus Supplement;
(14) The terms of the SBA Loan and the related Mortgage or other
security agreement pursuant to which collateral was pledged will not have been
impaired, altered or modified in any respect, except by a written instrument
which has been recorded, if necessary, to protect the interest of the SBA and
the Certificateholders and which will have been delivered to the Trustee;
(15) Each Mortgaged Property which is the primary collateral for the
related SBA Loan will be, at the time of origination of such SBA Loan, and to
the best of the Originator's knowledge will be, as of the related Cut-Off Date,
below regulatory agency action levels of contamination from toxic substances or
hazardous wastes or is subject to ongoing environmental rehabilitation approved
by the SBA;
(16) With respect to each SBA Loan secured by a Mortgaged Property and
that is not a first mortgage loan, either (i) no consent for the SBA Loan is
required by the holder of any related prior lien or (ii) such consent has been
obtained;
(17) Any related Mortgage will contain customary and enforceable
provisions which render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of the
security, including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There will
be no homestead or other exemption available to the Mortgagor which would
materially interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage; and
(18) There will be no default, breach, violation or event of
acceleration existing under the SBA Loan and no event which, with the passage of
time or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration, and the
Originators will not have waived any default, breach, violation or event of
acceleration.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Originators, the Servicer, any Subservicer or the Trustee of a breach of any of
the representations and warranties contained in the Agreement relating to an
Originator or the SBA Loans which materially and adversely affects the value of
the SBA Loans or the interest of the Certificateholders in the related SBA Loan
in the case of a representation or warranty relating to a particular SBA Loan
(notwithstanding that such representation and warranty was made to the
applicable Originator's best knowledge), the party discovering such breach is
required to give prompt written notice to the other parties. Within 60 days of
the earlier to occur of its discovery or its receipt of notice of any such
breach, the appropriate Originator will (i) promptly cure such breach in all
material respects, (ii) purchase the Unguaranteed Interest of such SBA Loan from
its own funds at a price equal to the then current principal balance of the
Unguaranteed Interest of such SBA Loan as of the date of purchase, plus 30 days'
interest thereon at the related Adjusted SBA Loan Remittance Rate as of the next
succeeding Determination Date, plus any accrued unpaid Servicing Fees, Monthly
Advances and Servicing Advances reimbursable to the Servicer, which purchase
price shall be deposited in the Principal and Interest Account on the next
succeeding Determination Date or (iii) remove such SBA Loan from the related
Trust and substitute one or more qualified SBA Loans. In addition, the
Originators will agree to indemnify the related Trust, the Trustee, the SBA and
the Certificateholders, against any loss arising from a material breach of any
such representation and warranty. The obligation of the Originators to so
purchase or substitute and to indemnify the Certificateholders and the Trustee
will constitute the sole remedy respecting a material breach of any such
representation or warranty to the Certificateholders or the Trustee.
PAYMENTS ON THE SBA LOANS
The Agreement will require the Master Servicer to establish and
maintain one or more principal and interest accounts (each a "Principal and
Interest Account") at one or more institutions designated as a "Designated
Depository Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Servicer is required to deposit in the Principal and Interest
Account (within two Business Days of receipt): (i) all payments received after
the Cut-Off Date on account of interest on the SBA Loans (net of the portion
thereof required to be paid to the holders of the Guaranteed Interest, the Agent
of the SBA's Fee, the Additional Fee and the Servicing Fee and other servicing
compensation payable to the Servicer as permitted by the Agreement), (ii) the
Unguaranteed Percentage of all payments received after the Cut-Off Date on
account of principal on the SBA Loans, including the Unguaranteed Percentage of
all Excess Payments, Principal Prepayments, Curtailments, Net Liquidation
Proceeds, Insurance Proceeds (other than amounts to be applied to the
restoration or repair of the related Mortgaged Property, or to be released to
the Obligor) and Released Mortgaged Property Proceeds, (iii) any amounts paid in
connection with the repurchase of the Unguaranteed Interest of an SBA Loan and
the amount of any adjustment for substituted SBA Loans, (iv) the amount of any
losses incurred in connection with investments in Permitted Instruments and (v)
certain amounts relating to insufficient insurance policies and Foreclosed
Property.
GENERAL SERVICING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will agree to master service the SBA Loans in accordance with
the related Agreement and, with respect to the SBA Section 7(a) Loans, the
Multi-Party Agreement and the SBA Rules and Regulations. As used herein, "SBA
Rules and Regulations" means the SBA Act, all rules and regulations promulgated
from time to time thereunder and the Loan Guaranty Agreement. Pursuant to each
Agreement and in accordance with applicable SBA Rules and Regulations, the
Master Servicer will be required to make reasonable efforts to collect all
payments called for under the terms of the related SBA Loan. Nonetheless, the
Master Servicer, in determining the type of action that is reasonable to pursue
may consider, among other things, the unpaid principal balance of an SBA Loan
against the estimated cost of collection or foreclosure action, the unpaid
balance of the related prior mortgage, if any, the condition and estimated
market value ("as is" and "if repaired"), the estimated marketability of the
related Mortgaged Property and the borrower's ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the
"Servicing Fee") and, to the extent set forth in the related Prospectus
Supplement, a contingency fee (the "Contingency Fee") equal to the percentages
per annum specified in the related Prospectus Supplement of the principal
balance of each SBA Loan. The Contingency Fee is meant to provide additional
servicing compensation to a successor servicer if The Money Store or one of its
affiliates is replaced as Master Servicer under the related Agreement. However,
as long as The Money Store or one of its affiliates acts as Master Servicer, it
will be entitled to receive any applicable Contingency Fee, although such amount
is not deemed servicing compensation. Unless otherwise specified in the related
Prospectus Supplement, the Servicing Fee and Contingency Fee, if any, will each
be calculated and payable monthly from the interest portion of scheduled monthly
payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, any applicable prepayment penalties, premiums and late
payment charges, interest paid on funds in the Principal and Interest Account,
interest paid on earnings realized on Permitted Instruments, and certain other
excess amounts.
The Master Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property and other collateral acquired
in satisfaction of the related SBA Loan. Such expenditures 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 on the related senior mortgage, if any,
advances of delinquent property taxes, upkeep and maintenance of the property if
it is acquired through foreclosure and similar types of expenses. Each such
expenditure constitutes a "Servicing Advance." The Master Servicer will be
obligated to make the Servicing Advances incurred in the performance of its
servicing obligations. The Master Servicer will be entitled to recover Servicing
Advances to the extent permitted by the SBA Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance
Proceeds and such other amounts as may be collected by the Servicer from the
Mortgagor or otherwise relating to the SBA Loan. Servicing Advances will be
reimbursable to the Servicer from the sources described above out of the funds
on deposit in the Principal and Interest Account.
HAZARD INSURANCE
The Master Servicer will be required under each Agreement to comply
with the SBA Rules and Regulations concerning the issuance and maintenance of
fire and hazard insurance with extended coverage customary in the area where a
Mortgaged Property is located. Such requirements vary from region to region. If
at origination of an SBA Loan, to the best of the Master Servicer's knowledge
after reasonable investigation, the related Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available)
consistent with the SBA Rules and Regulations, the Master Servicer will require
the related obligor to purchase a flood insurance policy with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the lesser of (a) the full insurable value of the Mortgaged Property, or (b) the
maximum amount of insurance available under the National Flood Insurance Act of
1968, as amended. The Master Servicer will also be required to maintain, to the
extent such insurance is available and in accordance with the SBA Rules and
Regulations and the Master Servicer's policies, on Foreclosed Property
constituting real property, fire and hazard insurance in the amounts described
above and liability insurance. Any amounts collected by the Master 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 Obligor in accordance
with the SBA Rules and Regulations), are required to be deposited by the Master
Servicer in the Principal and Interest Account.
REALIZATION UPON DEFAULTED MORTGAGE
In accordance with SBA Rules and Regulations and with the prior written
consent of the SBA, the Master Servicer will be required to foreclose upon or
otherwise comparably effect the ownership in the name of the SBA of Mortgaged
Properties relating to defaulted SBA ss. 7(a) Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments. Although the
consent of the SBA will not be required for the Master Servicer to foreclose on
a Mortgaged Property relating to a Section 7(a) Companion Loan, the Master
Servicer will have to obtain such consent in connection with the related SBA ss.
7(a) Loan. No consent of the SBA will be required for the Master Servicer to
foreclose on a Mortgaged Property relating to an SBA 504 Loan. In connection
with such foreclosure or other conversion, the Master Servicer will be required
to exercise collection and foreclosure procedures with the same degree of care
and skill in its exercise or use, as it would exercise or use under the
circumstances in the conduct of its own affairs. The Master Servicer will take
into account the existence of any hazardous substances, hazardous wastes or
solid wastes on Mortgaged Properties in determining whether to foreclose upon or
otherwise comparably convert the ownership of such Mortgaged Property, and will
not foreclose on a Mortgaged Property where it has cause to believe
contamination from such substances exists unless it has received a Phase I
environmental report and such report reveals no environmental problems, or such
Mortgaged Property is subject to an environmental rehabilitation for which the
Originators are not responsible.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable
efforts to collect all payments called for under the terms and provisions of the
SBA Loans. Consistent with the foregoing and the SBA Rules and Regulations, the
Master Servicer may in its discretion waive any assumption fee or any other fee
or charge which the Master Servicer would be entitled to retain as servicing
compensation and may waive, vary or modify any term of any SBA Loan or consent
to the postponement of strict compliance with any such term or in any matter
grant indulgence to any Mortgagor, subject to the limitations set forth in the
Agreement. In the event the Master Servicer consents to the deferment of the due
dates for payments due on an SBA Loan, the Master Servicer will nonetheless make
payment of any required Monthly Advance with respect to the payments so extended
to the same extent as if such installment were due, owing and delinquent and had
not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to
enter into sub-servicing arrangements with sub-servicers meeting the
requirements of the related Agreement (each, a "Sub-Servicer"). Such
sub-servicing arrangements will not relieve the Master Servicer of any liability
it might otherwise have, had the sub- servicing arrangement not been entered
into.
The Master Servicer is required to deliver to the Trustee and the SBA
on or before March 31 of each year, an Officers' Certificate stating, as to each
signer thereof, that (i) the Master Servicer has fully complied with certain
provisions of the Agreement relating to servicing of the SBA Loans and payments
on the Certificates, (ii) a review of the activities of the Master Servicer
during such preceding year and of performance under the Agreement has been made
under such officers' supervision, and (iii) to the best of such officers'
knowledge, based on such review, the Master Servicer has fulfilled all its
obligations under the Agreement for such year, or, if there has been a default
in the fulfillment of any such obligation, specifying each such default known to
such officers and the nature and status thereof including the steps being taken
by the Master Servicer to remedy such default.
On or before March 31 of each year, the Master Servicer is required to
cause to be delivered to the Trustee a letter or letters of a firm of nationally
recognized independent certified public accountants reasonably acceptable to the
Trustee stating that such firm has, with respect to the Master Servicer's
overall servicing operations, examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF MASTER SERVICER
The Certificate Guaranty Insurer, if any, or the Holders of not less
than 50 percent of each Class of Certificates other than the Class R
Certificates, if any, (the "Majority Certificateholders"), by notice in writing
to the Master Servicer and with the prior written consent of the Certificate
Guaranty Insurer, if any, which consent may not be unreasonably withheld, may,
pursuant to the related Agreement, remove the Master Servicer upon the
occurrence of any of the following events:
(i) (A) an Event of Nonpayment (as defined below); (B) the failure by
the Master Servicer to make any required Servicing Advance to the
extent such failure materially or adversely affects the interests of
the Certificate Guaranty Insurer, if any, or the Certificateholders;
(C) the failure by the Master Servicer to make any required Monthly
Advance; (D) the failure by the Master Servicer to remit any
Compensating Interest; or (E) any failure by the Master Servicer to
remit to the Trustee any payment required to be made under the terms of
the related Agreement, which in each case continues unremedied (in the
case of the events described in clauses (i)(A), (i)(B), (i)(D) and
(i)(E) for 30 days) after the date upon which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Master Servicer by the Trustee or to the Master Servicer and the
Trustee by any Certificateholder or the Certificate Guaranty Insurer,
if any; or
(ii) failure by the Master Servicer or The Money Store (so long as
The Money Store is the Master Servicer) duly to observe or perform, in
any material respect, any other covenants, obligations or agreements of
the Master Servicer or the Representative, as set forth in the related
Agreement, which failure continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Master Servicer or
The Money Store, as the case may be, by the Trustee or to the Master
Servicer or The Money Store, as the case may be, and the Trustee by any
Certificateholder or the Certificate Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Master
Servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings of
or relating to the Master Servicer or of or relating to all or
substantially all of the Master Servicer's property; or
(v) the Master Servicer shall admit in writing its inability to pay
its debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations.
Unless otherwise specified in the related Prospectus Supplement, an
"Event of Nonpayment" will generally be defined in the Agreements as a shortfall
on any Remittance Date in moneys (excluding any amounts representing Insured
Payments) available to fund the full amount of the Distribution Amounts due on
such Remittance Date.
The Master Servicer may not assign its obligations under the Agreement
nor resign from the obligations and duties thereby imposed on it except by
mutual consent of the Master Servicer, the Certificate Guaranty Insurer, if any,
the SBA, the Trustee and the Majority Certificateholders, or upon the
determination that the Master Servicer's duties thereunder are no longer
permissible under applicable law and such incapacity cannot be cured by the
Master Servicer. No such resignation shall become effective until a successor
has assumed the Master Servicer's responsibilities and obligations in accordance
with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will
be the successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the SBA or the
Certificate Guaranty Insurer, if any, so request, the Trustee may appoint, or
petition a court of competent jurisdiction to appoint, any established mortgage
loan servicing institution acceptable to the SBA, the Certificate Guaranty
Insurer, if any, or such other entities as may be specified in a Prospectus
Supplement, having a net worth of not less than $15,000,000 and which is an
approved SBA guaranteed lender in good standing as the Successor Servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee,
the Contingency Fee, if any, and such other compensation as is described under
"--Servicing and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF SBA LOANS
The Trust established under each Agreement will terminate upon notice
to the Trustee following the earlier to occur of (i) the final payment or other
liquidation of such last SBA Loan remaining in the related Trust or the
disposition of all REO Property, (ii) the optional purchase of the assets of the
Trust by the Servicer or the Certificate Guaranty Insurer, if any, as described
below, (iii) mutual consent of the Master Servicer, the Certificate Guaranty
Insurer, if any, and all Certificateholders in writing; or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the Trust, as permitted by the REMIC provisions of the Code as
described below; provided, however, that in no event will any Trust terminate
later than twenty-one years after the death of the last survivor of the person
named in the related Agreement.
Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the SBA Loans are less than 10% of the Original Pool Principal Balance (or such
other percentage as may be specified in the related Prospectus Supplement), the
Master Servicer may, at its option, and in the absence of the exercise thereof
by the Master Servicer, the Certificate Guaranty Insurer, if any, may, at its
option, purchase, on the next succeeding Remittance Date, all of the SBA Loans
and any related REO Properties at a price equal to the Termination Price.
On any Remittance Date on or after the Cross-Over Date on which SBA
Loans with an aggregate principal balance as of the Cut-off Date that equals or
exceeds 25% of the Original Pool Principal Balance (or such other percentage as
may be specified in the related Prospectus Supplement) have become liquidated
SBA Loans, the Certificate Guaranty Insurer, if any, may determine to purchase
and may cause the purchase from the Trust of all SBA Loans and REO Properties in
the Pool at a price equal to the sum of the Termination Price and the
outstanding and unpaid fees and expenses of the Trustee and the Master Servicer.
If a REMIC election is made for a Series of Certificates, following a
final determination by the Internal Revenue Service (the "IRS") or by a court of
competent jurisdiction, in either case from which no appeal is taken within the
permitted time for such appeal, or if any appeal is taken, following a final
determination of such appeal from which no further appeal can be taken, to the
effect that the REMIC does not and will no longer qualify as a REMIC pursuant to
Section 860D of the Code (the "Final Determination"), at any time on or after
the date which is 30 calendar days following such Final Determination (i) the
Majority Certificateholders may direct the Trustee on behalf of such Trust to
adopt a "plan of complete liquidation" (within the meaning of Section
860F(a)(4)(B)(i) of the Code) with respect to such REMIC and (ii) the
Certificate Guaranty Insurer, if any, may notify the Trustee of the Certificate
Guaranty Insurer's determination to purchase from the Trust all SBA Loans and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure,
or otherwise in respect of any SBA Loan, then remaining in such REMIC at a price
(the "Termination Price") equal to the sum of (x) 100% of the aggregate
principal balances of such SBA Loans as of the day of purchase minus amounts
remitted from the Principal and Interest Account to the Certificate Account
representing collections of principal on such SBA Loans during the current Due
Period, (y) 30 days' interest on such amount computed at the applicable weighted
average of the Adjusted SBA Loan Remittance Rates, and (z) the interest portion
of any unreimbursed Insured Payment made by the Certificate Guaranty Insurer, if
any. Upon receipt of such direction by the Majority Certificateholders or of
such notice from the Certificate Guaranty Insurer, the Trustee will notify the
holders of the Class R Certificates of such election to liquidate or such
determination to purchase, as the case may be (the "Termination Notice"). The
Holders of a majority of the percentage interest of the Class R Certificates
then outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "Purchase Option Period"), at their option, purchase from the
related Trust all SBA Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any SBA
Loan then remaining in the REMIC at a purchase price equal to the Termination
Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Certificateholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the SBA
Loans and such other property in the REMIC and distribute the proceeds of the
liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Certificateholders shall permit
or direct in writing, after the expiration of the Purchase Option Period and
(ii) in the event that the Certificate Guaranty Insurer has given the Trustee
notice of the Certificate Guaranty Insurer's determination to purchase the
assets described in clause (ii) preceding, the Certificate Guaranty Insurer
shall so purchase such assets within 60 days after the expiration of the
Purchase Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and the Certificate Guaranty Insurer, if
any, of an opinion of nationally recognized tax counsel selected by the Holders
of such Class R Certificates, which opinion shall be reasonably satisfactory in
form and substance to the Majority Certificateholders and the Certificate
Guaranty Insurer, if any, that the effect of the Final Determination is to
increase substantially the probability that the gross income of the REMIC will
be subject to federal taxation, purchase from the Trust all SBA Loans and all
property theretofore acquired by foreclosure, deed in lieu of foreclosure, or
otherwise in respect of any SBA Loan then remaining in the applicable REMIC at a
purchase price equal to the Termination Price. The foregoing opinion shall be
deemed satisfactory unless the Majority Certificateholders give the holders of a
majority of percentage interests in the Class R Certificates notice that such
opinion is not satisfactory within thirty days after receipt of such opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Certificateholders may
exercise any trust or power conferred on the Trustee with respect to the
Certificates or the Trusts, upon satisfaction of certain conditions set forth in
the Agreements; provided, however, that with respect to any action or event
affecting only one or more Classes of Certificates, only Holders of such Class
or Classes may exercise such trust or power.
AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer
and the Trustee by written agreement, upon the prior written consent of the SBA
and the Certificate Guaranty Insurer, if any, without the notice to, or consent
of, the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions of such Agreement, or any
agreement for the retention of each Trustee's Document File; provided, however,
that such action shall not, as evidenced by an Opinion of Counsel delivered to
the Trustee, adversely affect the interest of any Certificateholder or any other
party and further provided that no such amendment shall reduce in any manner the
amount of, or delay the timing of, any amounts which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party thereto
without the consent of such party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer, the Trustee and the Holders of the majority of the percentage
interest in each Class of Certificates affected thereby, upon the prior written
consent of the SBA and the Certificate Guaranty Insurer, if any, for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or of modifying in any manner any provisions
thereof; provided, however, that if a REMIC election is made for the applicable
Trust, no such amendment shall be made unless the Trustee receives an Opinion of
Counsel, at the expense of the party requesting the change, that such change
will not adversely affect the status of the Trust as a REMIC or cause a tax to
be imposed on the REMIC, and provided further, that no such amendment shall
reduce in any manner the amount of, or delay the timing of, any amounts which
are required to be distributed on any Certificates without the consent of the
Holders of 100% of each Class of Certificates affected thereby.
Each Agreement may be amended from time to time by the Master Servicer,
The Money Store and the Trustee by written agreement, upon the prior written
consent of the SBA and Certificate Guaranty Insurer, if any, without the notice
to or consent of the Certificateholders, in connection with the substitution of
cash, a letter of credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
CERTAIN LEGAL ASPECTS OF THE SBA LOANS
GENERAL
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the SBA Loans. Laws and practices
relating to the legal effects and enforcement of mortgages and deeds of trust
vary somewhat from state to state. In general, however, the most significant
applicable legal principles are similar in all states. The following discussion
addresses the more significant legal principles applicable to mortgages and
deeds of trust in all states. It should be noted that some of the SBA Loans may
relate to Mortgaged Properties located in California, which has enacted various
laws, not common to most other states, which impose special limitations on the
remedies available to the holders of mortgages and deeds of trust. These laws,
called "anti- deficiency laws," are discussed below.
NATURE OF THE TRUST ASSETS
The SBA Loans generally 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 property subject to the loan 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. Priority
between mortgages depends on their terms and generally on the order of recording
with a 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 formally has three parties, the borrower-property owner called the
trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. 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, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust or a security deed is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or security deed which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note,
deed of trust or security deed. In some 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 to certain other persons. The borrower, or any other
person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations. Before such
non-judicial sales 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.
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 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 general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, 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 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 obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights 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.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the SBA Loans (by
principal balance) will be originated to businesses located in California.
Foreclosure of a deed of trust in California may be effected by a judicial or
nonjudicial foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. California law also requires the
deed of trust beneficiary to exhaust all real property security in a single
action (i.e. in a judicial foreclosure) before a deficiency judgment may be
sought against the borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory
prohibitions which limit the remedies of a beneficiary under a deed of trust or
a mortgagee under a mortgage. In some states, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment would
be a personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the net amount realized upon
any sale of the real property sold at the foreclosure sale. Other statutes
require the beneficiary or mortgagee to exhaust the security afforded under a
deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in many instances the Master Servicer will not seek deficiency judgments against
defaulting mortgagors.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other 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 realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his
Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a 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 have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the property, thus leaving the lender a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
loan.
Federal and local real estate and tax laws provide priority to certain
tax liens over the lien of the mortgage. In addition, substantive requirements
are imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. 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. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the applicable laws. In some
cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Some courts have imposed general equitable principles to limit the
remedies available in connection with foreclosure. These equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to maintain adequately the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, some courts have been willing to relieve a
borrower from the consequences of the default if the borrower has not received
adequate notice of the default.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Trust Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Trust
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. 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 if a Mortgaged Property securing an SBA
Loan became the property of such Trust in certain circumstances and if such
Cleanup Costs were incurred. Moreover, certain states by statute impose a lien
for any Cleanup Costs incurred by such state on the property that is the subject
of such Cleanup Costs (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens. In the latter states, the security interest
of the Trustee in a property that is subject to such a Superlien could be
adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special Federal tax
counsel ("Federal Tax Counsel"), the following are the material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
offered hereby. The discussion, and the opinions referred to below, are based on
laws, regulations, rulings and decisions now in effect (or, in the case of
certain regulations, proposed), all of which are subject to change or possibly
differing interpretations. Because tax consequences may vary based upon the
status or tax attributes of the owner of a Certificate, prospective investors
should consult their own tax advisors in determining the federal, state, local
and other tax consequences to them of the purchase, ownership and disposition of
a Certificate. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), the terms
"Certificateholder" and "holder" mean the beneficial owner of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election will be made
with respect to the related Trust. In addition, if the related Prospectus
Supplement so provides, the transaction documents for a Trust may provide that
an election will be made on or after September 1, 1997 to qualify such Trust as
a Financial Asset Securitization Investment Trust pursuant to new provisions of
the Code which will be effective as of such date. To the extent provided in the
Prospectus Supplement for a series, Certificateholders may also have the benefit
of a Reserve Fund and of certain agreements (each, a "Yield Supplement
Agreement") under which payment will be made from the Reserve Fund in the event
that interest accrued on the SBA Loans at their Mortgage Interest Rates is
insufficient to pay interest on the Certificates of such Series (a "Basis Risk
Shortfall"). If a REMIC election is to be made, the Prospectus Supplement will
designate the Certificates of such series as "regular interests" ("REMIC Regular
Certificates") in the REMIC (within the meaning of Section 860G(a)(1) of the
Code) or as the "residual interest" ("REMIC Residual Certificates") in the REMIC
(within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates of
a series with respect to which a REMIC election will, or will not, be made. The
discussion below is divided into two parts, the first part applying only to
REMIC Certificates and the second part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will
agree in the Agreement to elect to treat the related Trust or certain assets of
such Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
related Trust or certain assets of such Trust will be a REMIC and the REMIC
Certificates will be considered to evidence ownership of "regular interests" or
"residual interests" within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Fund in
the event of a Basis Risk Shortfall will be required to allocate their purchase
price between their beneficial ownership interests in the related REMIC regular
interests and Yield Supplement Agreements, and will be required to report their
income realized with respect to each, calculated 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 related Certificate. No representation
is or will be made as to the fair market value of the Yield Supplement
Agreements or the relative values of the REMIC regular interests and the Yield
Supplement Agreements, upon initial issuance of the related REMIC Regular
Certificates or at any time thereafter. REMIC Regular Certificateholders are
advised to consult their own tax advisors concerning the determination of such
fair market values. Under the Agreement, holders of applicable classes of REMIC
Regular Certificates will 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.
Status of REMIC Certificates. The REMIC Certificates will be "real
estate assets" for purposes of Section 856(c)(5)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code (assets qualifying under one or
both of those sections, applying each section separately, "qualifying assets")
to the extent that the REMIC's assets are qualifying assets, but not to the
extent that the REMIC's assets consist of Yield Supplement Agreements. However,
if at least 95 percent of the REMIC's assets are qualifying assets, then 100
percent of the REMIC Certificates will be qualifying assets. Similarly, income
on the REMIC Certificates will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Trust Assets, the REMIC's assets will include payments on Trust Assets held
pending distribution to holders of REMIC Certificates, amounts in reserve
accounts (if any), other credit enhancements (if any) and possibly buydown funds
("Buydown Funds"). The Trust Assets may be qualifying assets under the foregoing
sections of the Code. However, Trust Assets that are not secured by residential
real property or real property used primarily for church purposes may not
constitute qualifying assets under Section 7701(a)(19)(C)(v) of the Code. In
addition, to the extent that the principal amount of a Trust Asset exceeds the
value of the property securing the Trust Asset, it is unclear and Federal Tax
Counsel is unable to opine whether the loans will be qualifying assets. The
regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Trust Assets and held pending
distribution to holders of Certificates ("cash flow investments") will be
treated as qualifying assets. It is unclear whether reserve funds or Buydown
Funds would also constitute qualifying assets. The Prospectus Supplement for
each series will indicate (if applicable) that it has Buydown Funds.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as
otherwise indicated herein, the REMIC Regular Certificates will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Certificates and not as ownership interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Certificates who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Payments of interest on REMIC Regular Certificates may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular Certificate
is outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount--Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Certificates issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders
of REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
Qualified Stated Interest. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includible in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the holder does not intend to enforce
are not considered. It is unclear whether the terms and conditions of the Trust
Assets underlying the REMIC Regular Certificates or the terms and conditions of
the REMIC Regular Certificates are considered when determining whether the
likelihood of late payment or nonpayment of interest is a remote contingency.
Accordingly, Federal Tax Counsel is unable to opine whether interest payments on
REMIC Regular Certificates that otherwise would not be treated as having
original issue discount would be considered to have original issue discount
because there are not reasonable remedies to compel timely payment of interest
or terms or conditions that would make the likelihood of late payment or
nonpayment of interest a remote contingency.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount, (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate, and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i) above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction will not significantly affect
the yield of the Variable Rate REMIC Regular Certificate.
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 objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. Despite the foregoing,
a variable rate of interest on a Variable Rate REMIC Regular Certificate will
not constitute an objective rate if it is reasonably expected that the average
value of such rate during the first half of the Variable Rate REMIC Regular
Certificate's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of the Variable
Rate REMIC Regular Certificate's term. Further, an objective rate does not
include a rate that is based on information that is within the control of or
unique to the circumstances of the issuer or a party related to the issuer. 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 qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a
"variable rate debt instrument" under the OID Regulations and provide for
interest at either a single qualified floating rate, a single objective rate, a
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate REMIC Regular Certificate"),
original issue discount is computed as described in "REMIC Regular Certificates-
Current Income on REMIC Regular Certificates--Original Issue Discount" based on
the following: (i) stated interest on the Single Variable Rate REMIC Regular
Certificate which is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually will constitute qualified
stated interest; (ii) by assuming that the variable rate on the Single Variable
Rate REMIC Certificate is a fixed rate equal to: (a) in the case of a Single
Variable Rate REMIC Regular Certificate with a qualified floating rate or a
qualified inverse floating rate, the value of, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate REMIC Regular Certificate with an objective rate
(other than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Rate REMIC Regular
Certificate; and (iii) the qualified stated interest allocable to an accrual
period is increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to be paid under
the assumed fixed rate described in (ii) above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A Holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the Holder held the "equivalent"
fixed rate debt instrument. Each accrual period appropriate adjustments will be
made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. Federal Tax Counsel is unable to opine under current law how a
Variable Rate REMIC Regular Certificate would be taxed if such REMIC Regular
Certificate were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
Interest-Only REMIC Regular Certificates. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at
a market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to payments of interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that all Holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC 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 the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC 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 a sale of a REMIC Regular Certificate by a bank or other financial
institution to which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate shortly following the REMIC's
receipt of the final payment in respect of the Trust Assets. The last
distribution on a REMIC Regular Certificate should be treated as a payment in
full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the
REMIC. Market discount on any of the Trust Assets held by the REMIC must be
included in the income of the REMIC as it accrues, rather than being included in
income only upon sale of the Trust Assets or as principal on the Trust Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (i.e., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. The REMIC Regulations do not provide for a similar election or other
adjustment. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to Trust Assets, on the one hand, and the
timing of deductions for interest (including original issue discount) on the
REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Trust Assets may not increase over time as a percentage of the
outstanding principal amount of the Trust Assets.
In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Trust Assets (the "Lower
Tier REMIC") will be treated as a single debt instrument for purposes of the
original issue discount provisions. Therefore, the Trust will calculate the
taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to certain special rules. The excess inclusions with respect to
a REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have them apply only with respect to tax years beginning after
August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Code Section 511, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Code Section 511. In addition, the Code provides that
under Treasury regulations, if a real estate investment trust ("REIT") owns a
REMIC Residual Certificate, to the extent excess inclusions of the REIT exceed
its real estate investment trust taxable income (excluding net capital gains),
the excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income
it derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than an SBA Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Trust Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would cause it to be subject to such tax. This provision will not affect the
REMIC's ability to accept substitute SBA Loans or to sell defective SBA Loans in
accordance with the Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed
on the Trust initially would be borne by the REMIC Residual Certificates in the
related REMIC rather than by the REMIC Regular Certificates, unless otherwise
specified in the Prospectus Supplement.
Dealers' Ability to Mark-to-Market REMIC Residual Certificates.
Treasury regulations provide that all REMIC Residual Certificates acquired on or
after January 4, 1995, and similar interests or arrangements acquired on or
after January 4, 1995 that are determined by the Commissioner to have
substantially the same economic effect as a REMIC Residual Certificate, are not
securities and cannot be marked to market pursuant to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations
(which have not yet been issued), if a holder sells a REMIC Residual Certificate
and acquires the same or other REMIC Residual Certificates, residual interests
in another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to
a "disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear and Federal Tax Counsel is unable to opine with
respect to this issue. The preamble to the REMIC Regulations indicates that the
Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. 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 (i.e., a computation of the present value of the
excess inclusions) 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 REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC 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 (or the tax, discussed below, on pass-through
entities, interests in which are held by disqualified organizations), the REMIC
Regulations further require that such information also be provided to the
Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates, and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass- through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass- through entity" against the gross amount of ordinary income of the
entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Expenses" below. No prediction can be made regarding
whether such legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. A different formulation of
this rule applies to transfers of REMIC Residual Certificates by or to foreign
transferees. See "Foreign Investors" below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the SBA
Loans. These deductions will be allocated entirely to the holders of the REMIC
Residual Certificates in the case of REMIC Trusts with multiple classes of REMIC
Regular Certificates that do not pay their principal amounts ratably. As a
result, the REMIC will report additional taxable income to holders of REMIC
Residual Certificates in an amount equal to their allocable share of such
deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC 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 REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts), the deductibility of such expenses
will be subject to the limitations described above. The reduction or
disallowance of these deductions may have a significant impact on the yield of
REMIC Regular Certificates to such a holder. In general terms, a single-class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single- class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (iv) a trust other than a "foreign trust"
as defined in Section 7701(a)(31) of the Code. Proposed Treasury regulations,
which would be effective with respect to payments made after December 31, 1997
if adopted in their current form, would provide alternative certification
requirements and means by which a holder of REMIC Certificates could claim the
exemption from federal income and withholding tax.
REMIC Residual Certificates. The Conference Report to the Tax Reform
Act of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on SBA Loans held by a
Trust will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC Residual
Certificate will not be entitled to the portfolio interest exception from the
30% withholding tax (or to any treaty exemption or rate reduction) for that
portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Trust Assets from 50 percent of the Prepayment Assumption to 200 percent
of the Prepayment Assumption. A transfer by a foreign transferor to a domestic
transferee will likewise be disregarded under the REMIC Regulations if the
transfer would have the effect of allowing the foreign transferor to avoid the
tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Representative or its designee will act as the tax matters
person for each REMIC. Each holder of a REMIC Residual Certificate, by the
acceptance of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
Tax Status of the Trust. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Trust Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Trust Assets that is allocable to such Non-REMIC
Certificate and may deduct the portion of the expenses incurred by the Trust
that is allocable to such Non-REMIC Certificate, at the same time and to the
same extent as such items would be reported by such holder if it had purchased
and held directly such interest in the Trust Assets and received directly its
share of the payments on the Trust Assets and incurred directly its share of
expenses incurred by the Trust when those amounts are received or incurred by
the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of certain itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds the "applicable amount"
($100,000 (or $50,000 in the case of a separate return by a married individual),
adjusted for changes in the cost of living subsequent to 1990) will be reduced
by the lesser of (i) 3 percent 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. A holder of a Non-REMIC Certificate that is not
a corporation cannot deduct such expenses for purposes of the alternative
minimum tax (if applicable). Such deductions will include servicing, guarantee
and administrative fees paid to the servicer of the SBA Loans. As a result, the
Trust will report additional taxable income to holders of Non-REMIC Certificates
in an amount equal to their allocable share of such deductions, and individuals,
estates, or trusts holding Non-REMIC Certificates may have taxable income in
excess of the cash received.
Status of the Non-REMIC Certificates. The Non-REMIC Certificates will
be "real estate assets" for purposes of Section 856(c)(5)(A) of the Code and
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of
those sections, applying each section separately, "qualifying assets") to the
extent that the Trust's assets are qualifying assets. The Non- REMIC
Certificates may not be qualifying assets under either of the foregoing sections
of the Code to the extent that the Trust's assets include Buydown Funds, reserve
funds, or payments on mortgages held pending distribution to Certificateholders.
Further, the Non-Remic Certificates may not be "real estate assets" to the
extent loans held by the trust are not secured by real property, and may not be
"loans . . . secured by an interest in real property" to the extent loans held
by the trust are not secured by residential real property or real property used
primarily for church purposes. In addition, to the extent that the principal
amount of a loan exceeds the value of the property securing the loan, it is
unclear and Federal Tax Counsel is unable to opine whether the loan will be a
qualifying asset.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The
federal income tax treatment of the Non-REMIC Certificates will depend on
whether they are subject to the rules of section 1286 of the Code (the "stripped
bond rules"). The Non-REMIC Certificates will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the Internal Revenue Service may
contend that the stripped bond rules apply on the ground that the Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Servicer
or its affiliates, as specified in the applicable Prospectus Supplement,
represent greater than an arm's length consideration for servicing the SBA Loans
and should be characterized for federal income tax purposes as an ownership
interest in the SBA Loans. The Internal Revenue Service has taken the position
in Revenue Ruling 91-46 that retained interest in excess of reasonable
compensation for servicing is treated as a "stripped coupon" under the rules of
Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest
is treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the Non-REMIC Certificate
was treated as zero under the original issue discount de minimis rule when the
Non-REMIC Certificate was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the SBA Loans. If neither of the above exceptions applies, the
original issue discount rules will apply to the Non-REMIC Certificates.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Trust Asset underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Trust Assets,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. It is unclear whether such regulations
would apply this rule to the Non-REMIC Certificates, whether Section 1272(a)(6)
might apply to the Non-REMIC Certificates in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles and Federal Tax Counsel
is unable to opine with respect to these issues. If required to report interest
income on the Non-REMIC Certificates to the Internal Revenue Service under the
stripped bond rules, it is anticipated that the Trustee will calculate the yield
of the Non- REMIC Certificates based on a representative initial offering price
of the Non-REMIC Certificates and a reasonable assumed rate of prepayment of the
Trust Assets (although such yield may differ from the yield to any particular
holder that would be used in calculating the interest income of such holder).
The Prospectus Supplement for each series of Non-REMIC Certificates will
describe the prepayment assumption that will be used for this purpose, but no
representation is made that the Trust Assets will prepay at that rate or at any
other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to
the principal amount of the Trust Assets allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption would not have any significant
effect on the yield used in calculating accruals of interest income. In the
case, however, of a Non- REMIC Certificate acquired at a discount or premium
(that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If an SBA Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the SBA Loan that is allocable to the Non-REMIC Certificate
and the portion of the adjusted basis of the Non-REMIC Certificate (see "Sales
of Non-REMIC Certificates" below) that is allocable to the SBA Loan. The method
of allocating such basis among the SBA Loans may differ depending on whether a
reasonable prepayment assumption is used in calculating the yield of the
Non-REMIC Certificates for purposes of accruing original issue discount. It is
not clear whether any other adjustments would be required to reflect differences
between the prepayment rate that was assumed in calculating yield and the actual
rate of prepayments.
In the case of a Non-REMIC Certificate which represents interests in
SBA Loans that are subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest payments
on the Trust Assets in accordance with its tax accounting method. In addition,
if the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below. The treatment of any discount will depend on whether the
discount is original issue discount as defined in the Code and, in the case of
discount other than original issue discount, whether such other discount exceeds
a de minimis amount. In the case of original issue discount, the holder (whether
a cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Trust Assets. However, original issue discount could arise with respect to
an SBA Loan ("ARM") that provides for interest at a rate equal to the sum of an
index of market interest rates and a fixed number. The original issue discount
for ARMs generally will be determined under the principles discussed in "REMIC
Regular Certificates-Current Income on REMIC Regular Certificates--Original
Issue Discount--Variable Rate REMIC Regular Certificates."
If discount other than original issue discount exceeds a de minimis
amount (described below), the holder will also generally be required to include
in income in each month the amount of such discount accrued through such month
and not previously included in income, but limited, with respect to the portion
of such discount allocable to any Trust Asset, to the amount of principal on
such Trust Asset received by the Trust in that month. Because the Trust Assets
may provide for monthly principal payments, such discount may be required to be
included in income at a rate that is not significantly slower than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the de minimis rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Trust Assets allocable to the Non-REMIC Certificate and (ii) the weighted
average life (in complete years) of the Trust Assets remaining at the time of
purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize the portion of such premium
that is allocable to an SBA Loan under a constant yield method based on the
yield of the SBA Loan to such holder, provided that such SBA Loan was originated
after September 27, 1985. Premium allocable to an SBA Loan originated on or
before that date should be allocated among the principal payments on the SBA
Loan and allowed as an ordinary deduction as principal payments are made or,
perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or
premium would be made based on the scheduled payments on the SBA Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
If an SBA Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the SBA Loan that is allocable to the Non-REMIC Certificate and the portion
of the adjusted basis of the Non-REMIC Certificate (see "Sales of Non-REMIC
Certificates" below) that is allocable to the SBA Loan. The method of allocating
such basis among the SBA Loans may differ depending on whether a reasonable
prepayment assumption is used in calculating the yield of the Non-REMIC
Certificates for purposes of accruing original issue discount. Other adjustments
might be required to reflect differences between the prepayment rate that was
assumed in accounting for discount or premium and the actual rate of
prepayments.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a de
minimis amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-REMIC Certificate to the extent attributable to
SBA Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Proposed Treasury regulations, which would be effective with respect to payments
made after December 31, 1997 if adopted in their current form, would provide
alternative certification requirements and means by which a holder of Non-REMIC
Certificates could claim the exemption from federal income and withholding tax.
Interest or original issue discount on a Non-REMIC Certificate attributable to
SBA Loans that were originated prior to July 19, 1984 will be subject to a 30%
withholding tax (unless such tax is reduced or eliminated by an applicable tax
treaty). For these purposes, the term "United States person" means a citizen or
a resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, or a trust other
than a "foreign trust," as defined in Section 7701(a)(31) of the Code.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" 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 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
Internal Revenue 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 Non-REMIC Certificates were treated as obligations of
a taxable mortgage pool, 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 taxable
mortgage pool rules.
ERISA CONSIDERATIONS
ERISA 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 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 (each a "Plan") 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 Representative, the Originators, 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
(the "Plan Asset Regulations"), 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 SBA 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 SBA Loans are noted below.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("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 transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass- through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. 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.
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 SBA Loans and the property securing such SBA Loans, and for
indemnifying holders of Certificates 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 SBA Loans, or 1%
of the principal balance of the largest covered pooled SBA 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 SBA Loans, plus
reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Representative, the Certificate Guaranty Insurer,
the Servicer, or the Trustee is a party in interest if the Plan does not pay
more than 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 and 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 agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Representative, the
Servicer, the Certificate Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to 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 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 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 Certificates on behalf of a Plan.
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
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL
may be available to a 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 the Exemption 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.
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 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
Each Prospectus Supplement will describe the extent, if any, to which
the Classes of Certificates offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. 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.
PLAN OF DISTRIBUTION
The Certificates offered hereby will be offered in Series, either
directly by the Representative 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 and their use by the Representative and the Originators, 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. 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. 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 place and time of delivery for the Certificates of a Series in
respect of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Certificates of each Series will be passed upon for the Representative by Eric
R. Elwin, Esq., Corporate Counsel of the Representative and certain legal
matters relating to the validity of the issuance of the Certificates of each
Series will be passed upon for the Underwriter of the Certificates of each
Series by Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock &
Lavan LLP has performed legal services for the Representative and it is expected
that it will continue to perform such services in the future.
EXPERTS
The consolidated financial statements of The Money Store Inc. as of
December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 incorporated by reference herein have been audited
by KPMG Peat Marwick LLP, independent accountants, as stated in their opinion
given upon their authority as experts in accounting and auditing.
FINANCIAL INFORMATION
A new Trust will be formed to own the Trust Assets 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 are included in this Prospectus.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement 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.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
Adjustable Rate...................................................... 5
Adjusted SBA Loan Remittance Rate.................................... 34
Agent of the SBA..................................................... 43
Agreement............................................................ 4
ARM.................................................................. 74
Balloon Loans........................................................ 18
Bankruptcy Bond...................................................... 11
Basis Risk Shortfall................................................. 57
Buydown Funds........................................................ 58
CDC.................................................................. 24
Cede................................................................. 16
Certificate Guaranty Insurance Policy................................ 10
Certificate Guaranty Insurer......................................... 37
Certificate Register................................................. 33
Certificates......................................................... 1
Certified Lender Program............................................. 23
Class................................................................ 2
Cleanup Costs........................................................ 56
Code................................................................. 14
Commission........................................................... 3
Compensating Interest................................................ 13
Contingency Fee...................................................... 47
Curtailment.......................................................... 13
Cut-off Date......................................................... 32
Definitive Certificates.............................................. 35
Designated Depository Institution.................................... 46
Detailed Description................................................. 21
Determination Date................................................... 13
DTC.................................................................. 16
ERISA................................................................ 15
Event of Nonpayment.................................................. 50
Federal Tax Counsel.................................................. 14
Final Determination.................................................. 51
Funding Period....................................................... 8
Guaranteed Interest.................................................. 23
Guaranteed Participant Program....................................... 23
Index................................................................ 81
Indirect Participant................................................. 34
Insurance Proceeds................................................... 13
Insurance Paying Agent............................................... 37
Insured Payment...................................................... 37
IRS.................................................................. 51
Liquidation Proceeds................................................. 13
Loan Guaranty Agreement.............................................. 23
Lockout Periods...................................................... 6
Lower Tier REMIC..................................................... 66
Majority Certificateholders.......................................... 49
Master Servicer...................................................... 1
Monthly Advance...................................................... 13
Mortgage Interest Rate............................................... 5
Mortgage Pool........................................................ 76
Mortgage Pool Insurance Policy....................................... 11
Mortgaged Properties................................................. 6
Multi-Party Agreement................................................ 8
1933 Act............................................................. 3
Non-REMIC Certificates............................................... 15
Originators.......................................................... 1
Participants......................................................... 34
Pass-Through Rate.................................................... 2
Permitted Instruments................................................ 46
Permitted Investments................................................ 40
Plan................................................................. 76
Pool................................................................. 1
Pool Insurer......................................................... 38
Preferred Lender..................................................... 23
Preferred Lender Program............................................. 23
Pre-Funding Account.................................................. 8
Prepayment Assumption................................................ 59
OID Regulations...................................................... 58
Rating Agency........................................................ 12
REMIC................................................................ 2
REMIC Certificates................................................... 57
REMIC Regular Certificates........................................... 14
REMIC Residual Certificates.......................................... 14
REMIC Regulations.................................................... 58
Remittance Date...................................................... 2
Representative....................................................... 1
Reserve Account...................................................... 10
SBA.................................................................. 5
SBA Act............................................................. 7
SBA Loans............................................................ 1
SBA Rules and Regulations............................................ 47
SBA 504 Loans........................................................ 5
SBA 504 Loan Program................................................. 7
SBAss. 7(a) Loans..................................................... 5
Section 7(a) Program................................................. 7
Section 7(a) Companion Loans......................................... 5
Senior Certificates.................................................. 8
Servicing Advance.................................................... 8
Servicing Fee........................................................ 47
SMMEA................................................................ 15
Special Hazard Insurance Policy...................................... 11
Special Hazard Insurer............................................... 38
Spread Amount........................................................ 11
Standard Hazard Insurance Policies................................... 6
Subordinated Certificates............................................ 9
Sub-Servicer......................................................... 48
Successor Servicer................................................... 50
Superlien............................................................ 56
Supplemental Interest Payments....................................... 40
Termination Notice................................................... 51
Termination Price.................................................... 51
Tiered REMICs........................................................ 95
Trust ............................................................... 1
Trust Assets......................................................... 1
Trustee.............................................................. 14
Trustee's Document File.............................................. 43
UCC.................................................................. 34
Underwriters......................................................... 78
Unguaranteed Interests............................................... 1
United States person................................................. 70
Variable Rate REMIC Regular Certificate.............................. 58
Yield Supplement Agreement........................................... 57
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* Whenever the terms "Pool" and "Certificates" are used in
this Prospectus, such terms will be deemed to apply,
unless the context indicates otherwise, to one specific
Pool and the Certificates representing certain undivided
fractional interests, as described below, in a single Trust
consisting primarily of the SBA Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates of one
specific Series and the term "Trust" will refer to one
specific Trust.
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE REPRESENTATIVE OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms........................................................... S-4
Risk Factors............................................................... S-35
Home Improvement Lending Programs.......................................... S-36
The Representative and the Originators..................................... S-40
The Loan Pool.............................................................. S-43
Maturity, Prepayment and Yield Considerations.............................. S-45
Description of the Certificates............................................ S-52
Description of the Limited Guaranty........................................ S-64
The Agreement.............................................................. S-65
Federal Income Tax Considerations.......................................... S-71
ERISA Considerations....................................................... S-72
Legal Investment Considerations............................................ S-73
Underwriting............................................................... S-74
Experts.................................................................... S-74
Legal Matters.............................................................. S-74
Rating of the Offered Certificates......................................... S-75
Financial Information...................................................... S-75
Index of Principal Terms................................................... S-76
Annex I--Global Clearance, Settlement and Tax Documentation Procedures..... I-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Prospectus Supplement....................................................... 3
Available Information....................................................... 3
Reports to Certificateholders............................................... 3
Incorporation of Certain Documents by Reference............................. 4
Summary of Terms............................................................ 5
Risk Factors................................................................ 18
The Trusts.................................................................. 24
Use of Proceeds............................................................. 35
The Representative and the Originators...................................... 35
The Single Family Loan Lending Program...................................... 37
Description of the Certificates............................................. 40
Credit Enhancement.......................................................... 44
Maturity, Prepayment and Yield Considerations............................... 49
The Agreements.............................................................. 50
Certain Legal Aspects of the Mortgage Loans................................. 59
Federal Income Tax Consequences............................................. 67
ERISA Considerations........................................................ 88
Legal Investment Considerations............................................. 88
Plan of Distribution........................................................ 88
Legal Matters............................................................... 88
Experts..................................................................... 89
Financial Information....................................................... 89
Rating...................................................................... 89
Index of Principal Terms.................................................... 90
</TABLE>
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$175,000,000
LOGO
THE MONEY STORE
HOME IMPROVEMENT TRUST
1997-I
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PROSPECTUS SUPPLEMENT
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LEHMAN BROTHERS
MARCH 27, 1997
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