PROSPECTUS SUPPLEMENT
(To Prospectus dated
March 7, 1997)
$90,000,000
[THE MONEY STORE LOGO]
THE MONEY STORE BUSINESS LOAN BACKED CERTIFICATES, SERIES 1997-1
$75,600,000 Class A Certificates
$7,200,000 Class M Certificates
$7,200,000 Class B Certificates
The Money Store Business Loan Backed Certificates, Series 1997-1 (the
"Certificates"), evidence the entire beneficial ownership interest in a trust
fund (the "Trust Fund") created by The Money Store Commercial Mortgage Inc.
("TMSCMI" or the "Seller"). The Trust Fund consists primarily of a pool of loans
originated in conjunction with either the SBA 504 Loan Program or the SBA
ss.7(a) Program (collectively, the "Business Loans"). The Certificates will be
issued pursuant to a Pooling and Servicing Agreement, among TMSCMI as Seller and
as servicer (in such capacity, the "Servicer"), The Money Store Inc., as
Representative (the "Representative"), and Marine Midland Bank, as trustee.
(cover continued on next page)
See "Risk Factors" on page S-36 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 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 Business 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 CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF TMSCMI OR ANY OF ITS AFFILIATES OR SUBSIDIARIES,
EXCEPT FOR THE LIMITED GUARANTY OF THE REPRESENTATIVE AS PROVIDED HEREIN.
NEITHER THE CERTIFICATES NOR THE BUSINESS 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.
The Underwriter has agreed to purchase the Certificates from the
Seller at approximately 99.50% of the principal amounts thereof, plus accrued
interest, subject to the terms and conditions set forth in the Underwriting
Agreement referred to herein under "Underwriting." Aggregate proceeds to the
Seller from the sale of the Certificates offered hereby (before deducting
expenses payable by the Seller estimated at $200,000) will be approximately
$89,550,000, plus accrued interest thereon.
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 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") or the Euroclear System ("Euroclear") in Europe on or about March 27,
1997.
Prudential Securities Incorporated
March 25, 1997
<PAGE>
(cover continued from previous page)
Additional Business Loans (the "Subsequent Business Loans") may be
purchased by the Trust from the Seller from time to time on or before the close
of business on June 24, 1997 from funds on deposit in the Pre- Funding Account.
On the Closing Date (as defined herein) an aggregate cash amount of
approximately $2,200,000 will be deposited into the Pre-Funding Account.
Each Business Loan was, and each Subsequent Business Loan will be,
originated by the Seller in accordance with the Seller's underwriting criteria
described in the attached Prospectus under "The SBA Loan Lending
Program--Origination of Section 7(a) Companion Loans" and "-Origination of SBA
504 Loans."
The Certificates will consist of three classes of certificates (the
"Class A Certificates," the "Class M Certificates" and the "Class B
Certificates"). The Class M 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 each Class of Certificates, the Class M Certificates
are subordinate to the Class A Certificates in the right to receive payments of
principal. The Class B Certificates are subordinate to the Class M and the Class
A Certificates in the right to receive payment of interest and, after interest
has been paid with respect to each Class of Certificates, the Class B
Certificates are subordinate to the Class A and the Class M 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 April 15, 1997. To the extent of
Available Funds (as defined herein), and prior to payments of principal on the
Certificates, holders of Class A, the Class M and the 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, the Class M and the
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. The Class B Certificates will have the
benefit of a limited guaranty (the "Limited Guaranty") of The Money Store Inc.
to protect against losses that would otherwise be absorbed by such Certificates.
See "Description of the Agreement and the Certificates-Limited Guaranty" herein.
Additionally, any Pre-Funded Amount (as defined herein) remaining in the
Pre-Funding Account at the close of business on June 24, 1997 will be
distributed as a principal prepayment on June 25, 1997 (together with accrued
interest at the applicable Class Remittance Rate on the amount of such
prepayment) to the Certificates. The interest due the Certificates on the July
1997 Remittance Date will be adjusted to take account of such distribution.
There is currently no secondary market for the Certificates.
Prudential Securities Incorporated (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 "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 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.
<PAGE>
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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.
--------------------------------------------------
<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."
Securities Offered................ The Money Store Business Loan
Backed Certificates, Series 1997-1, Class A,
Class M and Class B (the "Class A
Certificates, the Class M Certificates" and
the "Class B Certificates," respectively, and
collectively, the "Certificates"). Each Class
of the Certificates will be issued in the
aggregate initial principal amount (for each
such Class, the "Initial Certificate
Principal Amount") set forth on the cover
page.
The Class B Certificates are subordinate to
the Class A and the Class M Certificates in
the right to receive payments of interest
and, after interest has been paid to each
Class of Certificates, the Class B
Certificates are subordinate to the Class A
and the Class M 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 Class M Certificates are subordinate to
the Class A Certificates in the right to
receive payments of interest and, after
interest has been paid to each Class of
Certificates, the Class M Certificates are
subordinate 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 Class B Certificates also
will have the benefit of the Limited Guaranty
of The Money Store Inc. to protect against
losses that otherwise would be absorbed by
such Certificates. See "Description of the
Agreement and the Certificates-Limited
Guaranty" 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
Commercial Mortgage Inc. ("TMSCMI" or the
"Seller"), TMSCMI, as servicer (in such
capacity, the "Servicer"), The Money Store
Inc., as representative(the "Representative")
and provider of the Limited Guaranty, and
Marine Midland Bank, as trustee (the
"Trustee").
Denominations................ Each Class of Certificates will be issued in
book-entry form only 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
a pool of loans made to small business
concerns in conjunction with either the SBA
504 Loan Program described in the attached
Prospectus under "The Trusts--SBA 504 Loans"
(such loans, the "SBA 504 Loans") or the
SBAss.7(a) Program described in the attached
Prospectus under "The Trusts--SBAss.7(a)
Loans" (such loans, the "Section 7(a)
Companion Loans" and, together with the SBA
504 Loans, the "Business Loans"). See "-- The
Business Loan Pool" herein. None of the
Business Loans are insured or guaranteed by
the United States Small Business
Administration (the "SBA") or any other
governmental agency.
Cut-Off Date................ The "Cut-Off Date" is February 28, 1997;
provided, however, that for any Business Loan
originated after such date, the Cut-Off Date
shall be the date of the origination of such
Business Loan.
Seller...................... TMSCMI, a New Jersey corporation, is
a wholly-owned subsidiary of The Money Store
Inc., a New Jersey corporation. All of the
Business Loans were originated by TMSCMI. The
Seller will deposit the Business Loans into
the Trust Fund and will make representations
and warranties with respect to such Business
Loans.
Servicer.................... TMSCMI will service the Business Loans in
accordance with the terms of the Agreement.
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
TMSCMI no longer can serve in such capacity.
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, commencing March 15, 1997.
Pre-Funding Account.......... On the Closing Date, cash in an amount not
to exceed approximately $2,200,000 (the
"Pre-Funded Amount") will be deposited into
the Pre- Funding Account. Amounts in the Pre-
Funding Account may be used only (i) to
acquire Subsequent Business 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 occurs under the Agreement
or (iii) the close of business on June 24,
1997, amounts will, from time to time, be
withdrawn from the Pre-Funding Account to
purchase Subsequent Business Loans in
accordance with the Agreement. Any
Pre-Funding 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 June 24, 1997 will be distributed
as a principal prepayment on June 25, 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") to be held
with the Trustee. The amount deposited in the
Capitalized Interest Account will be used by
the Trustee on the Remittance Dates occurring
during the Funding Period to fund the excess,
if any, of (i) the amount of interest accrued
for each such Remittance Date at the weighted
average Class Remittance Rates on the portion
of the Certificates having principal balances
exceeding the Principal Balances of the
Business 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 Class of
Certificates also will receive on such date,
from the Capitalized Interest Account,
accrued interest at the applicable Class
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 (excluding any Extra Interest
exceeding the Realized Loss Amount for such
Remittance Date) received from any source by
the Servicer or any Subservicer during the
preceding calendar month with respect to
principal and interest on the Business Loans
(net of the Servicing Fee (as defined under
"-Servicing Fee" herein), (ii) advances by
the Servicer and (iii) amounts to be
transferred from the Pre-Funding Account and
the Capitalized Interest Account with respect
to the Remittance Dates during the Funding
Period. Notwithstanding the foregoing, for
each Remittance Date occurring after the
Spread Account Trigger Date, the Available
Funds also shall include all Extra Interest
received from any source by the Servicer
during the preceding calendar month. The
"Spread Account Trigger Date" will be the
first Remittance Date on which the aggregate
Principal Balance of the Business Loans is
less than 20% of the sum of (i) the aggregate
Principal Balance of the Business Loans as of
the Cut-Off Date plus (ii) the aggregate
Principal Balance of the Subsequent Business
Loans as of the applicable Cut-Off Date.
As described below under "-Principal," for
each Remittance Date the Certificateholders
are entitled to receive the then outstanding
Principal Balance of any Business Loan which
has become a Liquidated Business Loan. If the
Net Liquidation Proceeds of such Liquidated
Business Loan are less than its outstanding
Principal Balance (such difference, the
"Realized Loss" for such Liquidated Business
Loan), a portion of the Extra Interest (as
defined under "Description of the Agreement
and the Certificates--Interest Distribution
Amounts") for such Remittance Date up to the
aggregate Realized Losses for such Remittance
Date (the "Realized Loss Amount") will be
included in the Available Funds for such
Remittance Date only. If the Realized Loss
Amount for any Remittance Date exceeds the
Extra Interest for such Remittance Date
(plus, for each Remittance Date occurring
after the Spread Account Trigger Date on
which the Realized Loss Amount is to be
allocated to the Class M or Class A
Certificates, any amount on deposit in the
Spread Account), such excess Realized Loss
Amount will be allocated to the Certificates
as described under "--Losses on Liquidated
Business Loans." Excess Interest on
subsequent Remittance Dates will not be
available to cover such losses, except in the
event a required Guaranty Payment is not
made.
Interest.................... To the extent of the Available Funds, and
prior to payments of principal, on each
Remittance Date the Class A, the Class M and
the 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 Certificate Balance (as defined below)
for the respective Class, outstanding
immediately prior to such Remittance Date.
If, on any Remittance Date,
Certificateholders do not receive the full
amount of interest to which they are entitled
(which, in the case of the Class B
Certificates, includes amounts received from
any Guaranty Payments), such shortfall, plus
interest thereon compounded monthly at the
then applicable Class Remittance Rate (as
defined below), will be added to the amount
of interest they are entitled to receive on
succeeding Remittance Dates. The aggregate
amount of interest payable to a Class of
Certificates on each Remittance Date is
referred to herein as the "Interest
Distribution Amount" for the respective
Class. 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 accrued interest at the applicable Class
Remittance Rate on the amount of such
prepayment. Further, the Interest
Distribution Amounts for each Class for the
July 1997 Remittance Date will be based on 30
days' interest on the related Certificate
Balance on June 25, 1997 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 Remittance Rate" for the respective
Class) equal to:
Class A: During the first two Interest
Accrual Periods, the Initial Prime Rate (as
defined below), minus 2.10% 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 2.10% per annum, subject to the
adjustments described under "Description of
the Agreement and the Certificates- Interest
Distribution Amounts" herein.
Class M: During the first two Interest
Accrual Periods, the Initial Prime Rate minus
1.65% per annum. During each subsequent
Interest Accrual Period, the Prime Rate in
effect on the preceding Adjustment Date minus
1.65% per annum, subject to the adjustments
described under "Description of the Agreement
and the Certificates-Interest Distribution
Amounts" herein.
Class B: During the first two Interest
Accrual Periods, the Initial Prime Rate minus
1.40% per annum. During each subsequent
Interest Accrual Period, the Prime Rate in
effect on the preceding Adjustment Date minus
1.40% per annum, subject to the adjustments
described under "Description of the Agreement
and the Certificates--Interest Distribution
Amounts" herein.
The "Initial Prime Rate")" will equal the
lowest prime lending rate published in the
Money Rate Section of The Wall Street Journal
on Thursday, March 27, 1997.
The Class Remittance Rate for each Class of
Certificates will be adjusted on the first
Business Day (as defined under "Certain
Definitions" herein) of each January, April,
July and October, commencing July 1, 1997
(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 Certificates on each Remittance Date
is based upon the amount of interest due on
the Business Loans in the month preceding
such Remittance Date. For each such monthly
payment, the related Business Loan Interest
Rate is based on the Prime Rate in effect for
such Business Loan in the month preceding the
month such monthly payment is due. For
example, the monthly payment due on a
Business Loan in July, 1997 will be based
upon the Prime Rate in effect for such
Business Loan in June, 1997 (which, for
Business Loans adjusting quarterly, generally
will be the Prime Rate in effect on April 1,
1997). This monthly payment will be
distributed to Certificateholders on the
Remittance Date in August, 1997. For this
Remittance Date, interest on the Certificates
will accrue based upon the Prime Rate in
effect on the first Business Day of July,
1997.
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 Business 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, among other factors described
herein, the actual amount of interest
distributed to the Certificateholders may be
subject to the adjustments described under
"Description of the Agreement and the
Certificates-Interest Distribution Amounts"
herein.
As of any date, the "Certificate Balance" for
a Class of Certificates will equal the
initial principal balance for such Class on
the Closing Date reduced by the sum of (i)
all amounts previously distributed to
Certificateholders of such Class and
allocable to principal and (ii) all Realized
Losses, if any, allocated to such Class of
Certificates.
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 M Certificates will receive an amount
equal to the lesser of (A) such remaining
Available Funds and (B) the sum of (i) the
Class M Principal Distribution Amount (as
defined below)and (ii) the Class M 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 and Class M Certificates, holders
of the Class B Certificates will receive an
amount equal to the lesser of (A) such
remaining Available Funds and (B) the Class B
Principal Distribution Amount (as defined
below). The holders of the Class B
Certificates also will be entitled to receive
Guaranty Payments. See "Description of the
Agreement and the Certificates Limited
Guaranty" herein.
With respect to each Remittance Date, the
"Class A Principal Distribution Amount," the
"Class M Principal Distribution Amount" and
the "Class B Principal Distribution Amount"
will equal the Class A Percentage, the Class
M Percentage or the Class B Percentage (each
as defined below), as the case may be,
multiplied by the total of (i) all payments
and other recoveries of principal of a
Business 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"); (ii) the principal portion of
any Business 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 Business
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 Business
Loan which, during the related Due Period,
has become a Liquidated Business Loan; and
(v) amounts, if any, released from the
Pre-Funding Account on the Remittance Dates
during the Funding Period.
With respect to each Remittance Date, the
"Class A Carry-Forward Amount" will equal the
aggregate amount, if any, by which (i) the
Class A Principal Distribution Amount with
respect to any preceding Remittance Date
exceeded (ii) the amount of the actual
principal distribution to the Class A
Certificateholders on such Remittance Date.
With respect to each Remittance Date
occurring prior to the Remittance Date on
which the Certificate Balance of the Class B
Certificates has been reduced to zero, the
"Class M Carry- Forward Amount" will equal
the aggregate amount, if any, by which (i)
the Class M Principal Distribution Amount
with respect to any preceding Remittance Date
exceeded (ii) the amount of the actual
principal distribution to the Class M
Certificateholders on such Remittance Date.
With respect to each Remittance Date
occurring on and after the Remittance Date on
which the Certificate Balance of the Class B
Certificates is reduced to zero, the Class M
Carry-Forward amount will equal zero.
However, the Class M Certificateholders will
still be entitled to receive, to the extent
Available Funds are sufficient (and, on each
Remittance Date occurring after the Spread
Account Trigger Date, from amounts on deposit
in the Spread Account), the Class M Carry-
Forward Amount that existed prior to the
Remittance Date on which the Certificate
Balance of the Class B Certificates was
reduced to zero.
The Class B Certificates will not be entitled
to receive any carry-forward amounts since,
so long as they are outstanding, the Class B
Certificates will have their Certificate
Balance reduced by the Actual Loss Amount
applicable for any Remittance Date. See
"--Losses on Liquidated Business Loans."
However, if an Actual Loss Amount is
allocated to the Class B Certificates, they
will be entitled to receive a corresponding
Guaranty Payment.
With respect to each Remittance Date, the
"Class A Percentage" will equal 84%,
representing the beneficial ownership
interest of the Class A Certificates in the
Trust Fund.
With respect to each Remittance Date, the
"Class M Percentage" will equal 8%,
representing the beneficial ownership
interest of the Class M Certificates in the
Trust Fund.
With respect to each Remittance Date, the
"Class B Percentage" will equal 8%,
representing the beneficial ownership
interest of the Class B Certificates in the
Trust Fund.
On each Remittance Date occurring after the
Spread Account Trigger Date, Available Funds
remaining after payment of interest and
principal to the 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 "Remittance
Amount" for such Class for such Remittance
Date.
Subordination of Class M
and Class B Certificates...... The rights of the Holders of the Class M
Class M 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 applicable
Interest Distribution Amount to each Class of
Certificates, principal, and to afford the
Holders of the Class A Certificates a measure
of protection against losses resulting from
liquidated Business Loans equal to (i) the
sum of the outstanding Certificate Balances
of the Class M and Class B Certificates and
(ii) the amount of funds, if any, remaining
in the Spread Account after payment of
interest on the 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 and Class M Certificates to the
extent described above under "-Securities
Offered." This subordination is intended to
enhance the likelihood of regular receipt by
the Holders of Class A and Class M
Certificates of the full amount of their
scheduled monthly payments of interest and,
after distribution of the applicable Interest
Distribution Amount to each Class of
Certificates, principal, and to afford the
Holders of the Class A and the Class M
Certificates a measure of protection against
losses resulting from liquidated Business
Loans equal to (i) the then outstanding
Certificate Balance of the Class B
Certificates and (ii) the amount of funds, if
any, remaining in the Spread Account after
payment of interest on the Certificates.
If the Available Funds for any Remittance
Date (plus, for each Remittance Date
occurring after the Spread Account Trigger
Date, amounts on deposit in the Spread
Account) are insufficient to permit the
distribution of the entire Class A Principal
Distribution Amount, the Class A
Certificateholders will have the right to
receive on future Remittance Dates, until any
such shortfall is distributed, future
distributions of Available Funds that would
otherwise have been payable as principal to
the Class M and Class B Certificateholders,
in that order. If the Available Funds for any
Remittance Date (plus, for each Remittance
Date occurring after the Spread Account
Trigger Date, amounts on deposit in the
Spread Account) are insufficient to permit
the distribution of the entire Class M
Principal Distribution Amount, the Class M
Certificateholders will have the rights to
receive on future Remittance Dates, until any
such shortfall is distributed, future
distributions of Available Funds that would
otherwise have been payable as principal to
the Class B Certificateholders (subject to
the prior rights of the Class A
Certificateholders to receive such amounts to
satisfy any shortfall described in the
preceding sentence).
Losses on Liquidated
Business Loans............... As described above, the Class A, Class M
and Class B Principal Distribution Amounts
include the Class A, Class M and Class B
Percentage, respectively, of the then
outstanding Principal Balance of all Business
Loans which have become Liquidated Business
Loans (i.e., 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 Business Loans).
If the Realized Loss Amount for any
Remittance Date exceeds the amount of the
available Extra Interest for such Remittance
Date, the amount of such excess (the "Actual
Loss Amount"), will be allocated to the Class
B Certificates by reducing their Certificate
Balance until the Certificate Balance of the
Class B Certificates is reduced to zero.
Thereafter, any Actual Loss Amount will be
allocated to the Class M Certificates by
reducing their Certificate Balance until the
Certificate Balance of the Class M
Certificates is reduced to zero. Any future
Actual Loss Amount then will be allocated to
the Class A Certificates by reducing their
Certificate Balance until the Certificate
Balance of the Class A Certificates is
reduced to zero. Notwithstanding the
foregoing, for each Remittance Date occurring
after the Spread Account Trigger Date, the
Holders of the Class M and Class A
Certificates (and, if a required Guaranty
Payment is not made, the Holders of the Class
B Certificates) will be entitled to receive
amounts on deposit in the Spread Account to
off-set any Actual Loss Amount that otherwise
would be allocated to such Holders.
Limited Guaranty.............. To mitigate the effects of the subordination
subordination of the Class B Certificates,
the Class B Certificateholders are entitled
to receive on each Remittance Date an amount
equal to the Guaranty Payment, if any, under
the limited guaranty provided by The Money
Store Inc. (the "Limited Guaranty"). The
Limited Guaranty may be replaced by an
Alternate Credit Enhancement." See
"Description of the Agreement and the
Certificates -- Alternate Credit Enhancement"
herein. The "Guaranty Payment" for any
Remittance Date on which the Class B
Certificates are outstanding will equal the
sum of (i) the difference, if any, between
(A) the Class B Interest Distribution Amount
for such Remittance Date and (B) the portion
of the Available Funds to be distributed to
the Class B Certificates on account of
interest on such Remittance Date and (ii) the
Actual Loss Amount, if any, for such
Remittance Date that is allocated to the
Class B Certificates.
The Limited Guaranty is an unsecured general
obligation of The Money Store Inc. and will
not be supported by any letter of credit or
other enhancement arrangement. If on any
Remittance Date the holders of the Class B
Certificates do not receive the entire
Guaranty Payment to which they are entitled,
they will be entitled to receive such
shortfalls, together with interest thereon at
the then applicable Class Remittance Rate for
the Class B Certificates, first from amounts,
if any, on deposit in the Spread Account and
then on future Remittance Dates (even after
the Certificate Balance of the Class B
Certificates has been reduced to zero) to the
extent there is sufficient Extra Interest
available for such payments.
Alternate Credit
Enhancement..................... If, at The Money Store Inc.'s option,
option, Alternate Credit Enhancement (as
defined below) is provided and Moody's,
Standard & Poor's and Duff & Phelps (the
"Rating Agencies") shall have notified The
Money Store Inc. that substitution of such
Alternate Credit Enhancement for the Limited
Guaranty will not result in the downgrade or
withdrawal of the then current rating by the
Rating Agencies of the Certificates, and upon
the delivery of an opinion of counsel that
such action would not cause the Trust Fund 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 a letter of credit, certificate
insurance policy or surety bond provided by a
third party ("Alternate Credit Enhancement").
On each Remittance Date after delivery of the
Alternate Credit Enhancement, an amount equal
to the lesser of the amount that would have
been payable under the Limited Guaranty and
the amount available under such Alternate
Credit Enhancement will be made available for
payments on the Class B Certificates. Neither
The Money Store Inc. nor any other person
will be obligated to replace such enhancement
after it has been exhausted.
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 April 15,
1997 (each, a "Remittance Date"). Any Pre-
Funded Amount remaining at the close of
business on June 24, 1997 (together with
accrued interest thereon at the applicable
Class Remittance Rates) will be distributed
by or on behalf of the Trustee on the Special
Remittance Date to the Certificates. Such
distribution will be made to each person in
whose name a Certificate of the applicable
Class is registered on May 31, 1997.
The last scheduled Remittance Date for each
Class of Certificates is April 15, 2028. 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............... March 27, 1997.
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"), which
will not be part of the Trust Fund, with the
Trustee.
No amounts will be required to be deposited
into the Spread Account until the Remittance
Date following the Spread Account Trigger
Date. On each Remittance Date following the
Spread Account Trigger Date, the Trustee will
deposit into the Spread Account the funds, 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 1% of the sum of (i) the
Original Pool Principal Balance and (ii) the
aggregate Principal Balances of the
Subsequent Business Loans as of the
applicable Cut-Off Date (such required amount
is referred to herein as the "Specified
Spread Account Requirement"); provided,
however, that the Specified Spread Account
Requirement will not exceed the sum of the
outstanding Aggregate Class A, Aggregate
Class M and Aggregate Class B Certificate
Principal Balances.
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 occurring
after the Spread Account Trigger Date.
The Spread Account Depositor will not be
required to refund any amount 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 Business 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 Business Loan Pool........ The following is a description of the
Business Loans expected to be delivered to
the Trustee on the Closing Date. As stated
above, the Agreement will provide that
Subsequent Business Loans may be purchased by
the Trust from the Seller from time to time
during the Funding Period from funds on
deposit in the Pre-Funding Account. All of
the Subsequent Business Loans will have been
originated by the Seller in accordance with
the underwriting criteria described in the
Prospectus under "The SBA Lending Program--
Origination of SBA 504 Loans." The Agreement
will provide that the Business Loans,
following the conveyance of any Subsequent
Business Loans to the Trust, must, in the
aggregate, conform to certain specified
characteristics. See "The
Agreements--Representations and Warranties"
in the Prospectus.
All the SBA 504 Loans and the Section 7(a)
Companion Loans were originated by the Seller
in accordance with the underwriting criteria
described in the Prospectus under "The SBA
Loan Lending Program--Origination of SBA 504
Loans" and "The SBA Lending
Program--Origination of the Section 7(a)
Companion Loans," respectively. Although the
Business Loans were originated in conjunction
with SBA guaranteed loans, none of the
Business Loans are guaranteed or insured by
the SBA or any other governmental agency.
None of the Business 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
approximately 148 Business Loans, 88 of which
will be SBA 504 Loans and 60 of which will be
Section 7(a) Companion Loans. Substantially
all of the Business Loans are secured
primarily by first liens on commercial real
property used by the related borrower or its
affiliates in the conduct of their business.
The Business Loans also may be secured by
second liens on personal real estate,
personal guarantees, liens on machinery and
equipment and other business assets. The
majority of the Business Loans were
originated to borrowers engaged in the
following industries: hospitality, eating and
drinking establishments, recreation,
furniture retail and automobile sales.
For substantially all of the Section 7(a)
Companion Loans, the lien on the related
primary collateral is prior to the lien of
the related SBA ss. 7(a) Loan. For each of
the Section 7(a) Companion Loans, an
affiliate of the Seller originated, and is
currently servicing, the related SBA ss. 7(a)
Loan. The Business Loans were originated to
businesses located in 25 states, with
approximately 31.6% being originated to
businesses located in California. As of the
Cut-Off Date, no more than approximately
36.8% of the Business Loans (by Principal
Balance) representing 37 Business Loans, were
made to borrowers whose businesses are
included in the same four digit standard
industrial code classification. See "The
Business Loan Program" herein.
As of the Cut-Off Date, the aggregate and
average unpaid Principal Balance of the
Business Loans were approximately $87,800,000
and $593,000, respectively, and the maximum
and minimum original Principal Balance of the
Business Loans were approximately $2,240,000
and $30,000, respectively. The aggregate
original Principal Balance of the Business
Loans was approximately $88,900,000.
As of the Cut-Off Date, the Business Loans
bore interest at rates (each, a "Note Rate")
which ranged from 9.75% to 11.25% per annum
and the weighted average Note Rate was
approximately 10.31% per annum. As of the
Cut-Off Date, the Business Loans had a
weighted average age of approximately 12
months, a weighted average original term of
approximately 299 months, a weighted average
gross margin of approximately 2.06%, a
weighted average lifetime floor of
approximately 4.72%, and a weighted average
debt-service coverage ratio of approximately
1.50. Approximately 31.5% of the Business
Loans (by principal balance) do not have a
lifetime interest rate cap. As of the Cut-Off
Date, the weighted average lifetime cap of
Business Loans with lifetime interest rate
caps was approximately 15.53%. As described
herein, the existence of a lifetime interest
rate cap or floor will not limit the Extra
Interest included in the related Business
Loan. See "The Business Loan Pool" herein.
Transfer of Assets......... Each Note will be endorsed by the Seller by
means of an allonge (i.e., a separate piece
of paper attached to the Note) and delivered
to the Trustee. On or before the Closing Date
(or, with respect to a Subsequent Business
Loan, on or before the related transfer
date), the Trustee will acknowledge receipt
of each such Note for each Business Loan in
the Business Loan Pool and that each such
Note has been endorsed as follows: "Pay to
the order of Marine Midland Bank, and its
successors and assigns, as trustee under that
certain Pooling and Servicing Agreement dated
as of February 28, 1997, for the benefit of
the holders of The Money Store Business Loan
Backed Certificates, Series 1997-1, Class A,
Class M and Class B, without recourse."
With respect to each Business Loan in the
Business Loan Pool, the Seller also 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 Business Loan, in the case of (a)
below, at or prior to the related transfer
date):
(a) For each Business 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: "Marine Midland
Bank, ("Assignee") its successors and
assigns, as trustee under the Pooling and
Servicing Agreement dated as of February 28,
1997." The original assignments will be
transmitted by the 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 Business Loans:
(1) Blanket assignment of all collateral
securing the Business Loan, including without
limitation, all rights under applicable
guarantees and insurance policies.
(2) Irrevocable power of attorney of the
Seller to the Trustee to execute, deliver,
file or record and otherwise deal with the
collateral for the Business 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 Business Loans in
the Business Loan Pool and naming the Trustee
as Secured Party and the Seller as the
Debtor. See "Risk Factors--Unperfected
Security Interests in Certain Collateral"
herein and "The Agreements-Sale of Business
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.
Servicing of the
Business Loans.............. TMSCMI will service the Business Loan in
accordance with the Agreement and will cause
the Business 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 a
Business 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
Remittance Rates for each Class of
Certificates, plus the rate used in
determining certain expenses of the Trust
Fund (the "Adjusted Business Loan Remittance
Rate") on the Aggregate Class A, Class M and
Class B Certificate 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-
Interest Distribution Amounts" herein)
exceeds (ii) the amount received by the
Servicer as of the related Record Date in
respect of interest on the Business Loans
(plus for the Remittance Dates during the
Funding Period, 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
Business 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 Business Loans
generally; provided, however, that the
Servicer's right to such reimbursement is
subordinate to the rights of the
Certificateholders. Monthly Advances are
intended to provide sufficient funds for the
payment of interest to the Certificateholders
at the then applicable Class Remittance
Rates, 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 Business 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
related principal balance of such Business
Loan at the Adjusted Business Loan Remittance
Rate over (b) that portion of the amount of
interest actually received in respect of the
related Business Loan during such Due Period
and available to be paid to the Certificate-
holders.
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
Business 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 0.40% per annum (the "Servicing Fee") of
the unpaid principal balance of each Business
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 Business Loans is less than 10% of the
sum of (i) the aggregate Principal Balance of
the Business Loans as of the Cut-Off Date
(the "Original Pool Principal Balance") and
(ii) the original Pre-Funded Amount by
purchasing, on the next succeeding Remittance
Date, all of the Business Loans and any other
assets in the Trust Fund at a price equal to
the sum of (i) 100% of the then outstanding
Aggregate Class A, Class M and Class B
Certificate Principal Balances, and (ii) 30
days' interest thereon at the then applicable
Class Remittance Rates (the "Termination
Price"). See "Description of the Agreement
and the Certificates-Termination; Purchase of
Business Loans" herein.
Tax Considerations ......... No real estate mortgage investment conduit
("REMIC") election will be made for the Trust
Fund. Stroock & Stroock & Lavan LLP, 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 any Class of
Certificates will be treated as issued with
original issue discount ("OID").
Special considerations may apply to cash
method holders of Class M and Class B
Certificates by reason of the subordination
of the Class M and Class B Certificates.
Also, special considerations may apply to
individuals and certain pass-through entities
that hold Class A Certificates or Class M 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" by
Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies Inc. ("Standard
& Poor's"), "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and "AAA" by Duff &
Phelps Credit Rating Co. ("Duff & Phelps"),
that the Class M Certificates be rated not
lower than "A" by Standard & Poor's, not
lower than "A2" by Moody's and not lower than
"A" by Duff & Phelps, and that the Class B
Certificates be rated not lower than "BBB" by
Standard & Poor's, not lower than "Baa2" by
Moody's and not lower than "BBB" by Duff &
Phelps. 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. The ratings of the Class B
Certificates are based, in part, on an
assessment of The Money Store Inc.'s ability
to make payments under the Limited Guaranty.
Any reduction in the ratings assigned to the
unsecured long-term debt obligations of The
Money Store Inc. by Standard & Poor's,
Moody's or Duff & Phelps may result in a
similar reduction of the rating of the Class
B Certificates. See "Ratings" herein.
Registration of the
Certificates............ Each Class of Certificates will be
represented by global certificates registered
in the name of Cede & Co. ("Cede"), as the
nominee of The Depository Trust Company
("DTC") in the United States, or Cedel Bank,
societe anonyme ("CEDEL") or the Euroclear
System ("Euroclear") in Europe. 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, Class M and
Class B Certificateholders" or "Holders" will
reflect the rights of the beneficial owners
of Class A, Class M and Class B Certificates,
as such rights may be exercised, in the case
of those Certificates registered through DTC,
CEDEL or Euroclear, through DTC and
Participants, or CEDEL or Euroclear, as the
case may be, except as otherwise specified
herein. See "Risk Factors" and "Description
of the Agreement and 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
Prudential Securities Incorporated (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 Certificates will be restricted as
described under "ERISA Considerations."
Federal Income Tax Considerations
If the Class B or Class M 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
and Class M Certificates, although the matter is not free from doubt, Federal
Tax Counsel believes that holders of such Class of 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 (or in the case of the Class B Certificateholders, paid over
to the Class A and/or Class M 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 or Class M Certificateholders would
be required to accrue as current income any interest, OID income, or (to the
extent paid on the Business 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 (and/or Class M Certificateholders),
(2) a loss would only be allowed to the Class B or Class M 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 or Class M Certificateholders on the accrual method of accounting,
but could accelerate inclusion of income to Class B or Class M
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.
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 Business Loan Pool-- General,"
substantially all of the Business Loans are secured primarily by first liens on
commercial real property used by the related borrower or its affiliates in the
conduct of their business. The Business Loans also may be secured by second
liens on personal real estate, personal guarantees, liens on machinery and
equipment and other business assets.
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 Business Loan secured by real property, assignments of the
related Mortgages will be transmitted by the Seller for recording promptly
following the Closing Date. Also, the Seller will deliver to the Trustee blanket
assignments of all other collateral securing the Loans. In connection with
originating Business Loans secured by collateral other than real estate, the
Seller obtains and files 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 Seller's security interest
in the collateral related to such Loans. However, since assignments will not be
recorded in the name of the Trustee, if the Seller were to become a debtor under
the federal bankruptcy code or similar applicable state laws, a creditor or
trustee in bankruptcy thereof, or the Seller as debtor-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 Seller or its
property may have priority over the Trustee's security interest.
Junior Liens on Secondary Collateral
Substantially all of the Business Loans are secured primarily by a
first lien on a commercial real property. However, certain Business Loans also
are secured by second or junior liens on various collateral and the related
Prior Liens are not included in the Business Loan Pool.
The primary risk to holders of Business Loans partially 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 Business Loan (after giving effect to any proceeds
received from other collateral). 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 Business Loan.
If the Servicer were to foreclose on any mortgage securing a Business
Loan, it would do so subject to any related Prior Liens. For the debt related to
the Business 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 Business Loan and the Prior Liens or purchase the
Mortgaged Property, for the full amount of the Business 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.
Business Loan Interest Rates
The rate of interest borne by each Business Loan (the "Business Loan
Interest Rate") is equal to the Prime Rate as of the first Business Day or, with
respect to certain Business Loans, the first day of the related calendar
quarter, in each case plus the appropriate margin. With respect to Business
Loans having an aggregate principal balance as of the Cut-Off Date of
approximately $60,100,000, the terms of the related Notes limit the maximum and
minimum Business Loan Interest Rates, respectively. Generally, the terms of such
Notes provide that the Business Loan Interest Rate cannot increase (or decrease)
more than five percentage points above (or below) the Business Loan Interest
Rate in effect when the related Business Loan was fully funded. These maximum
and minimum Business Loan Interest Rate provisions will not have a
disproportionate effect on the Holders of any Class of Certificates. As
described herein, if, as a result of, among other things, such maximum and
minimum Business Loan Interest Rate provisions, more or less interest is
collected on the Business Loans than would be collected in the absence of such
provisions, such excess or shortfall will be allocated to the 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 Interest Distribution Amounts for each Class of Certificates,
provision is made for such maximum and minimum Business Loan Interest Rates, if
the full amount of interest required to be paid on the Business 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
Business Loan Pool-Certain Characteristics of the Business Loan Pool" and
"Description of the Agreement and the Certificates-Interest Distribution
Amounts" herein.
Extra Interest
As described herein, for each Remittance Date the Extra Interest
collected during the related Due Period will be available to off-set Realized
Losses incurred during such Due Period only (provided, however, that for each
Remittance Date occurring after the Spread Account Trigger Date, Extra Interest
on deposit in the Spread Account will be available to off-set current as well as
future Realized Losses). However, if the Loan Pool experiences extremely high
levels of Realized Losses, the Extra Interest available for any Remittance Date
(plus any amounts on deposit in the Spread Account) could be depleted, resulting
in Realized Losses being allocated to the Certificateholders. Any such Realized
Losses would be allocated first to the Class B Certificates, then to the Class M
Certificates and, finally, to the Class A Certificates by reducing the
Certificate Balance of the related Class of Certificates. However, so long as
the Class M and Class B Certificates are outstanding, no Realized Losses will be
allocated to the Class A Certificates and so long as the Class B Certificates
are outstanding, no Realized Losses will be allocated to the Class M
Certificates. Extra Interest for a subsequent Remittance Date will be available
to off-set Realized Losses for such Remittance Date, but not for any other
Remittance Date (except in the event a required Guaranty Payment is not made and
except to the extent that amounts are on deposit in the Spread Account). See
"Description of the Agreement and the Certificates--Flow of Funds" and "--Spread
Account" herein.
Limited Guaranty
The Limited Guaranty will be an unsecured obligation of The Money
Store Inc. 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 Money Store Inc.'s ability to make payments under
the Limited Guaranty. Any reduction in the ratings assigned to the unsecured
long-term debt obligations of The Money Store Inc. by Standard & Poor's, Moody's
or Duff & Phelps may result in a similar reduction of the rating of the Class B
Certificates.
Alternate Credit Enhancement
If the Limited Guaranty of the Money Store Inc. is replaced with an
Alternate Credit Enhancement and such Alternate Credit Enhancement is exhausted,
neither The Money Store Inc. nor any other person will be obligated to replace
such enhancement. Consequently, the Class B Certificates may bear a greater risk
of loss on the Business Loans than if the Limited Guaranty was in place. See
"Description of the Agreement and the Certificates Alternate Credit Enhancement"
herein.
<PAGE>
THE BUSINESS LOAN POOL
General
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate principal balances of a preliminary
pool of Business Loans expected to be delivered to the Trustee on the Closing
Date, determined 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. As used herein, the term "Cut-Off Date" means February 28,
1997 with respect to each Business Loan originated on or prior to such date and
the applicable date of origination for each Business Loan originated after such
date. All of the Business Loans were, and all of the Subsequent Business Loans
will have been, originated by the Seller and consist of adjustable-rate loans,
evidenced by promissory notes (the "Business Notes").
The Agreement will provide that Subsequent Business Loans may be
purchased by the Trust from the Seller from time to time during the Funding
Period from funds on deposit in the Pre- Funding Account. All of the Subsequent
Business Loans will have been originated by the Seller in accordance with the
underwriting criteria described in the Prospectus under "The SBA Loan Lending
Program--Origination of SBA 504 Loans." The Agreement will provide that the
Business Loans, following the conveyance of any Subsequent Business Loans to the
Trust, must, in the aggregate, conform to certain specified characteristics. See
"The Agreements--Representations and Warranties" in the Prospectus.
The SBA 504 Loans were originated in conjunction with the SBA 504 Loan
Program, which program was established to encourage lenders to provide fixed
asset financing for 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 Seller provides approximately 50% of the project costs on 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 receive the prior approval of the SBA. See "The SBA Loan Lending
Program--Origination of SBA 504 Loans" in the Prospectus.
In connection with administering the Section 7(a) Program, the SBA
reduced the maximum loan size to $500,000 for applications submitted between
January 1, 1995 and October 12, 1995. To assist qualified borrowers in obtaining
more financing when needed, the Seller introduced the Section 7(a) Companion
Loan Program pursuant to which the Seller originated a 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. 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 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. The Seller has not accepted applications
for Section 7(a) Companion Loans since October 1995, when the maximum loan size
under the Section 7(a) Program was increased. For each of the Section 7(a)
Companion Loans, an affiliate of the Seller originated, and is currently
servicing, the related SBA ss. 7(a) Loan.
Substantially all of the Business Loans are secured primarily by first
liens on commercial real property used by the related borrower or its affiliates
in the conduct of their business. The Business Loans also may be secured by
second liens on personal real estate, personal guarantees, liens on machinery
and equipment and other business assets. The majority of the Business Loans were
originated to borrowers engaged in the following industries; hospitality, eating
and drinking establishments, recreation, furniture retail and automobile sales.
The Seller believes that at the time of origination each Business Loan was
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 31.6% of the Business Loans (by Principal Balance) were
originated to businesses located in California, a state that recently
experienced economic difficulties. This concentration results primarily from the
Seller and its affiliates being headquartered in California, where they began
originating small business loans in the early 1980s and where they expanded
their marketing efforts and market share prior to the current economic
conditions. The Seller believes that the concentration of Business Loans in the
Trust Fund originated to businesses located in California is representative of
the small business loan portfolio of the Seller and its affiliates as a whole.
Payments on the Business Loans
The Business 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 Business 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 July 1st is used to determine the interest rate paid for the months of
July, August and September. Since interest is paid in arrears, interest and
principal for these months is scheduled to be received in August, September and
October, 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 Business 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. The Business Loans accrue interest at an
effective annual rate based upon the actual number of days elapsed during the
year divided by 360.
Certain Characteristics of the Business Loan Pool
Set forth below is a description of certain characteristics of
Business Loans expected to constitute the Business Loan Pool as of the Closing
Date. It is expected that the Seller will sell to the Trust Fund Business Loans
having overall characteristics substantially similar to the Business Loans
described herein. Certain of the percentage columns may not sum to 100.00% due
to rounding.
The geographic distribution of the Business Loans by state as of the
Cut-Off Date was as follows:
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF BUSINESS LOANS
Percentage of
Aggregate Cut-Off Date
Number of Cut-Off Date Current Percentage of
State Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
AL 2 $ 2,360,082.02 2.69 1.35
AZ 5 2,564,097.30 2.92 3.38
CA 46 27,719,399.37 31.57 31.08
CO 20 11,326,520.41 12.90 13.51
FL 6 1,581,918.69 1.80 4.05
GA 2 2,902,506.16 3.31 1.35
ID 1 91,987.00 0.10 0.68
IL 5 2,884,551.60 3.29 3.38
IN 3 1,385,147.38 1.58 2.03
KY 4 2,001,552.97 2.28 2.70
MA 2 1,742,432.14 1.98 1.35
MD 2 1,594,452.50 1.82 1.35
MI 1 73,882.71 0.08 0.68
NJ 4 2,207,772.79 2.51 2.70
NM 1 251,324.39 0.29 0.68
NV 1 511,418.00 0.58 0.68
NY 8 5,311,181.75 6.05 5.41
OH 1 1,007,492.27 1.15 0.68
OR 10 6,282,684.38 7.15 6.76
PA 3 1,574,451.82 1.79 2.03
SC 3 1,099,204.55 1.25 2.03
TN 1 780,926.98 0.89 0.68
TX 3 3,454,194.87 3.93 2.03
VA 3 2,271,799.01 2.59 2.03
WA 11 4,827,829.36 5.50 7.43
- ----------------------------------------------------------------------------------------------------------------------------------
Total............ 148 $ 87,808,810.42 100.0% 100.0%
==================================================================================================================================
</TABLE>
<PAGE>
The interest rates borne by the Business Notes (the "Note Rates") were
distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
GROSS INTEREST RATE RANGE
Percentage of
Gross Number Aggregate Cut-Off Date Percentage
Interest Rate of Cut-Off Date Current of
Range Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
9.50% * Gross Coupon *= 10.00% 28 $ 18,244,553.38 20.78 18.92
10.00% * Gross Coupon *= 10.50% 95 56,012,290.66 63.79 64.19
10.50% * Gross Coupon *= 11.00% 24 13,430,328.07 15.29 16.22
11.00% * Gross Coupon *= 11.50% 1 121,638.31 0.14 0.68
- ----------------------------------------------------------------------------------------------------------------------------------
Total................................ 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than
</TABLE>
<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:
<TABLE>
<CAPTION>
DISTRIBUTION OF MARGINS
Aggregate Percentage of
Gross Number of Cut-Off Date Cut-Off Date Percentage of
Margin Loans Principal Balance Principal Balance Loan Count
<C> <C> <C> <C> <C>
1.0 *Margin * 1.5 18 $ 11,833,621.34 13.48 12.16
1.5 *Margin * 2.0 67 40,886,907.19 46.56 45.27
2.0 *Margin * 2.5 55 31,653,670.45 36.05 37.16
2.5 *Margin * 3.0 8 3,434,611.44 3.91 5.41
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equal less than
</TABLE>
The minimum lifetime Note Rates borne by the Business Loans were as
follows (1):
<TABLE>
<CAPTION>
DISTRIBUTION OF LIFE FLOOR
Aggregate Percentage of
Gross Number of Cut-Off Date Cut-Off Date Percentage of
Life Floor Loans Principal Balance Principal Balance Loan Count
<C> <C> <C> <C> <C>
1.000* Floor*= 1.500 14 $ 9,742,584.04 11.10 9.46
1.500* Floor*= 2.000 19 9,877,630.80 11.25 12.84
2.000* Floor*= 2.500 9 6,786,404.72 7.73 6.08
2.500* Floor*= 3.000 3 1,236,599.54 1.41 2.03
3.500* Floor*= 4.000 1 368,830.90 0.42 0.68
4.500* Floor*= 5.000 3 1,882,181.49 2.14 2.03
5.000* Floor*= 5.500 24 19,453,640.13 22.15 16.22
5.500* Floor*= 6.000 41 21,891,146.70 24.93 27.70
6.000* Floor*= 6.500 23 10,428,944.63 11.88 15.54
6.500* Floor*= 7.000 1 396,078.40 0.45 0.68
7.500* Floor*= 8.000 1 824,304.68 0.94 0.68
8.000* Floor*= 8.500 2 1,756,219.35 2.00 1.35
8.500* Floor*= 9.000 2 1,187,191.00 1.35 1.35
9.000* Floor*= 9.500 2 848,829.13 0.97 1.35
9.500* Floor*=10.000 3 1,128,224.91 1.28 2.03
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equal less than.
</TABLE>
- -----------------------------
(1) For purposes of determining the weighted average minimum lifetime Note
Rate, those Business 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 Business Loans were as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF LIFE CAP
Percentage of
Number of Aggregate Cut-Off Date
Gross Mortgage Cut-Off Date Aggregate Percentage of
Life Cap Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
CAP *= 0.000 45 $ 27,643,219.10 31.48 30.41
12.500 * CAP *= 13.000 1 824,304.68 0.94 0.68
13.000 * CAP *= 13.500 2 1,756,219.35 2.00 1.35
13.500 * CAP *= 14.000 3 1,556,021.90 1.77 2.03
14.000 * CAP *= 14.500 1 235,576.84 0.27 0.68
14.500 * CAP *= 15.000 6 3,010,406.40 3.43 4.05
15.000 * CAP *=15.500 34 21,729,716.14 24.75 22.97
15.500 * CAP *=16.000 36 20,905,770.65 23.81 24.32
16.000 * CAP *=16.500 19 9,580,770.47 10.91 12.84
16.500 * CAP *=17.000 1 566,804.89 0.65 0.68
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equal less than.
</TABLE>
<PAGE>
The distribution of the number of remaining months to maturity of the
Business Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
Aggregate Percentage of
Number of Cut-Off Date Cut-Off Date Percentage of
Remaining Term Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
96 *Rem Term *= 108 1 $ 211,342.49 0.24 0.68
108 *Rem Term *= 120 1 143,236.39 0.16 0.68
156 *Rem Term *= 168 1 563,428.49 0.64 0.68
180 *Rem Term *= 192 1 192,799.39 0.22 0.68
204 *Rem Term *= 216 11 5,399,456.04 6.15 7.43
216 *Rem Term *= 228 10 4,154,956.78 4.73 6.76
228 *Rem Term *= 240 7 6,221,583.01 7.09 4.73
240 *Rem Term *= 252 2 518,961.51 0.59 1.35
252 *Rem Term *= 264 1 78,722.53 0.09 0.68
264 *Rem Term *= 276 4 1,254,846.47 1.43 2.70
276 *Rem Term *= 288 60 33,336,164.20 37.96 40.54
288 *Rem Term *= 300 24 17,318,616.01 19.72 16.22
324 *Rem Term *= 336 1 207,675.00 0.24 0.68
336 *Rem Term *= 348 6 4,126,329.27 4.70 4.05
348 *Rem Term *= 360 18 14,080,692.84 16.04 12.16
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than.
</TABLE>
<PAGE>
The distribution of the number of months since origination of the
Business Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
AGE OF LOAN
Aggregate Percentage of
Number of Cut-Off Date Cut-Off Date Percentage of
Age Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
Age = 0 3 $ 1,841,675.00 2.10 2.03
1 * Age *= 12 57 40,083,384.71 45.65 38.51
12 * Age *= 24 77 40,445,460.02 46.06 52.03
24 * Age *= 36 11 5,438,290.69 6.19 7.43
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than.
</TABLE>
The years in which the Business Loans were originated are as follows:
<TABLE>
<CAPTION>
YEARS OF ORIGINATION
Number of Aggregate Percentage of
Year of Mortgage Cut-Off Date Cut-Off Date Percentage of
Origination Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
1994 9 $ 5,225,037.82 5.95 6.08
1995 78 40,419,416.62 46.03 52.70
1996 57 39,208,049.55 44.65 38.51
1997 4 2,956,306.43 3.37 2.70
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
</TABLE>
<PAGE>
The distribution of the debt-service coverage ratios at origination of
the Business Loans was as follows: (1)
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE RATIO
Debt Service Aggregate Percentage of
Coverage Ratio Number of Cut-Off Date Cut-Off Date Percentage of
Range Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
Dsc Ratio = 0.00 (2) 4 $ 1,808,395.84 2.06 2.70
0.00 * Dsc Ratio*= 0.50 7 4,448,833.85 5.07 4.73
0.50 * Dsc Ratio*= 1.00 15 7,976,597.34 9.08 10.14
1.00 * Dsc Ratio*= 1.50 77 46,388,136.92 52.83 52.03
1.50 * Dsc Ratio*= 2.00 26 13,491,464.24 15.36 17.57
2.00 * Dsc Ratio*= 2.50 10 6,588,419.02 7.50 6.76
2.50 * Dsc Ratio*= 3.00 2 3,083,350.80 3.51 1.35
3.00 * Dsc Ratio*= 3.50 2 874,396.41 1.00 1.35
3.50 * Dsc Ratio*= 4.00 1 722,015.63 0.82 0.68
4.00 * Dsc Ratio*= 4.50 3 2,222,335.45 2.53 2.03
6.50 * Dsc Ratio*= 7.00 1 204,864.92 0.23 0.68
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than.
</TABLE>
- ---------------------
(1) Represents the ratio of annual net operating income to the pro forma
annual debt service payments.
(2) For these Business Loans, the Borrower had a negative net operating
income for the fiscal year for which ratio was determined. The Seller
believed that based upon the projected net operating income and certain
other factors, it was appropriate to originate such Business Loan.
<PAGE>
The distribution of the original terms of the Business Loans in months
was as follows:
<TABLE>
<CAPTION>
ORIGINAL TERM
Aggregate Percentage of
Number of Cut-Off Date Cut-Off Date Percentage of
Original Term Loans Principal Balance Principal Balance Loan Count
<C> <C> <C> <C> <C>
108 * Orig. Term *= 120 2 $ 354,578.88 0.40 1.35
168 * Orig. Term *= 180 1 563,428.49 0.64 0.68
192 * Orig. Term *= 204 1 192,799.39 0.22 0.68
204 * Orig. Term *= 216 1 356,175.50 0.41 0.68
216 * Orig. Term *= 228 2 405,921.42 0.46 1.35
228 * Orig. Term *= 240 24 14,628,370.79 16.66 16.22
240 * Orig. Term *= 252 1 385,528.12 0.44 0.68
252 * Orig. Term *= 264 3 597,684.04 0.68 2.03
264 * Orig. Term *= 276 1 91,987.00 0.10 0.68
288 * Orig. Term *= 300 87 51,817,639.68 59.01 58.78
324 * Orig. Term *= 336 1 207,675.00 0.24 0.68
348 * Orig. Term *= 360 24 18,207,022.11 20.73 16.22
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than.
</TABLE>
<PAGE>
The distribution of the original balances of the Business Loans was as
follows:
<TABLE>
<CAPTION>
ORIGINAL AGGREGATE LOAN AMOUNTS
Aggregate Percentage of
Original Aggregate Number of Cut-Off Date Cut-Off Date Percentage of
Principal Balance Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
0* Balance*= 50,000 1 $ 28,847.97 0.03 0.68
50,000* Balance*= 100,000 8 627,493.87 0.71 5.41
100,000* Balance*= 150,000 12 1,495,285.93 1.70 8.11
150,000* Balance*= 200,000 9 1,584,861.29 1.80 6.08
200,000* Balance*= 250,000 13 2,821,069.31 3.21 8.78
250,000* Balance*= 300,000 6 1,676,113.60 1.91 4.05
300,000* Balance*= 350,000 6 1,946,927.67 2.22 4.05
350,000* Balance*= 400,000 9 3,186,075.54 3.63 6.08
400,000* Balance*= 450,000 4 1,705,169.33 1.94 2.70
450,000* Balance*= 500,000 4 1,892,532.28 2.16 2.70
500,000* Balance*= 550,000 6 3,154,387.55 3.59 4.05
550,000* Balance*= 600,000 7 4,013,679.87 4.57 4.73
600,000* Balance*= 650,000 7 4,325,998.20 4.93 4.73
650,000* Balance*= 700,000 4 2,710,282.64 3.09 2.70
700,000* Balance*= 750,000 6 4,362,475.63 4.97 4.05
750,000* Balance*= 800,000 7 5,396,380.68 6.15 4.73
800,000* Balance*= 850,000 2 1,671,742.86 1.90 1.35
850,000* Balance*= 900,000 8 6,941,669.73 7.91 5.41
900,000* Balance*= 950,000 1 929,764.34 1.06 0.68
950,000* Balance*=1,000,000 4 3,835,683.46 4.37 2.70
1,000,000* Balance*=1,100,000 4 4,052,881.32 4.62 2.70
1,100,000* Balance*=1,200,000 3 3,482,441.90 3.97 2.03
1,200,000* Balance*=1,300,000 4 4,838,077.58 5.51 2.70
1,300,000* Balance*=1,400,000 2 2,684,128.82 3.06 1.35
1,400,000* Balance*=1,500,000 4 5,756,263.64 6.56 2.70
1,500,000* Balance 7 12,688,575.41 14.45 4.73
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................... 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than.
</TABLE>
<PAGE>
The distribution of the Principal Balances of the Business Loans as of
the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
CURRENT AGGREGATE LOAN AMOUNTS
Percentage of
Aggregate Cut-Off Date Percentage
Current Aggregate Number of Cut-Off Date Principal of
Principal Balance Loans Principal Balance Balance Loan Count
<S> <C> <C> <C> <C>
0* Balance*= 50,000 1 $ 28,847.97 0.03 0.68
50,000* Balance*= 100,000 10 810,726.94 0.92 6.76
100,000* Balance*= 150,000 12 1,604,665.52 1.83 8.11
150,000* Balance*= 200,000 8 1,435,531.52 1.63 5.41
200,000* Balance*= 250,000 13 2,923,021.01 3.33 8.78
250,000* Balance*= 300,000 6 1,676,113.60 1.91 4.05
300,000* Balance*= 350,000 7 2,286,093.03 2.60 4.73
350,000* Balance*= 400,000 7 2,601,675.59 2.96 4.73
400,000* Balance*= 450,000 4 1,705,169.33 1.94 2.70
450,000* Balance*= 500,000 4 1,892,532.28 2.16 2.70
500,000* Balance*= 550,000 6 3,154,387.55 3.59 4.05
550,000* Balance*= 600,000 8 4,611,178.22 5.25 5.41
600,000* Balance*= 650,000 6 3,728,499.85 4.25 4.05
650,000* Balance*= 700,000 4 2,710,282.64 3.09 2.70
700,000* Balance*= 750,000 6 4,362,475.63 4.97 4.05
750,000* Balance*= 800,000 7 5,396,380.68 6.15 4.73
800,000* Balance*= 850,000 4 3,344,073.18 3.81 2.70
850,000* Balance*= 900,000 6 5,269,339.41 6.00 4.05
900,000* Balance*= 950,000 2 1,871,273.14 2.13 1.35
950,000* Balance*=1,000,000 3 2,894,174.66 3.30 2.03
1,000,000* Balance*=1,100,000 4 4,052,881.32 4.62 2.70
1,100,000* Balance*=1,200,000 4 4,624,903.54 5.27 2.70
1,200,000* Balance*=1,300,000 3 3,695,615.94 4.21 2.03
1,300,000* Balance*=1,400,000 2 2,684,128.82 3.06 1.35
1,400,000* Balance*=1,500,000 4 5,756,263.64 6.56 2.70
1,500,000* Balance 7 12,688,575.41 14.45 4.73
- ----------------------------------------------------------------------------------------------------------------------------------
Total............................ 148 $ 87,808,810.42 100.00% 100.00%
==================================================================================================================================
* Equals less than.
</TABLE>
<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:
1994 1995 1996 1997
Quarter
1st 6.00% 8.50% 8.50% 8.25%
2nd 6.25% 9.00% 8.25% N/A
3rd 7.25% 9.00% 8.25% N/A
4th 7.75% 8.75% 8.25% N/A
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.
In conjunction with administering the Section 7(a) Program, the SBA
reduced the maximum loan size to $500,000 for applications submitted between
January 1, 1995 and October 12, 1995. To assist qualified borrowers in obtaining
more financing when needed, the Seller introduced the Section 7(a) Companion
Program pursuant to which the Seller originated a 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 Seller has not accepted
applications for Section 7(a) Companion-Loans since October 1995, when the
maximum loan size under the Section 7(a) Program was increased. Section 7(a)
Companion Loans may be utilized by a borrower for all eligible SBA ss. 7(a) Loan
purposes. For each of the Section 7(a) Companion Loans, an affiliate of the
Seller originated, and is currently servicing, the related SBA ss. 7(a) Loan.
For a discussion of the underwriting criteria, servicing and collection
procedures, workout and liquidation policies and environmental policy for the
Section 7(a) Companion Loans, see "The SBA Loan Lending Program-- Origination of
Section 7(a) Companion Loans" in the Prospectus.
The SBA 504 Loan Program was established under the 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 Seller provides approximately 50% of project
costs in a conventional loan agreement, with borrowers providing a minimum 10%
equity contribution (although the Seller may require a higher percentage for
certain larger projects and projects with special credit risks). The SBA
provides the remainder of the financing. Although each SBA 504 Loan must receive
prior approval by the SBA, such loans are not guaranteed by the SBA. Each SBA
504 Loan originated by the Seller is secured by a first lien on the related
primary collateral, in addition to a lien on other Collateral. For a discussion
of the underwriting criteria, servicing and collection procedures, workout and
liquidation policies and environmental policy for the SBA 504 Loans, see "The
SBA Loan Lending Program--Origination of SBA 504 Loans" in the Prospectus.
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.
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
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.
Affiliates of the Seller have been named as Preferred Lenders by the
SBA in virtually all major SBA loan markets in which they operate. Based upon
this experience, such affiliates 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 Seller and The Money Store" herein.
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 of $1,250,000. As set forth above, 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 generally does not 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.
<PAGE>
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 Business Loans, the rate of prepayment on such
Business 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 of each Class are
entitled to receive 30 days' interest on the related Certificate Balance
immediately prior to such Remittance Date at the applicable Class Remittance
Rate, subject to the adjustments described under "Description of the Agreement
and the Certificates-Interest Distribution Amounts" herein. This is the case
even if Principal Prepayments or Curtailments are received with respect to the
Business 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 Business 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
applicable Class Remittance Rate, subject to the adjustments described herein.
Unscheduled payments, delinquencies and defaults on the Business 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 date on which the then outstanding aggregate
principal balance of the Business Loans is less than 10% of the sum of (i) the
Original Pool Principal Balance and (ii) the original Pre-Funded Amount,
purchase from the Trust Fund all of the Business Loans and any other assets in
the Trust Fund at a price equal to the sum of (x) 100% of the then outstanding
Aggregate Class A, Class M and Class B Certificate Principal Balances, and (y)
30 days' interest thereon at the then applicable Class Remittance Rates (the
"Termination Price"). See "Description of the Agreement and the
Certificates-Termination; Purchase of Business Loans" herein. However, because
the Business Loans may prepay, the weighted average life of the Certificates or
the date on which the outstanding aggregate principal balances of the Business
Loans will be less than 10% of the sum of (i) the Original Pool Principal
Balance and (ii) the original Pre-Funded Amount cannot be determined.
None of the Business Loans are balloon loans and each is fully
amortizing in accordance with its terms. The Business 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 Business Loans will result in
distributions to Certificateholders of amounts which would otherwise be
distributed over the remaining terms of the Business Loans.
The final scheduled Remittance Date for the Certificates is April 15,
2028, which is the Remittance Date following the latest date upon which a
Business Loan matures, including Subsequent Business Loans, plus 12 months. The
weighted average life of the Certificates is likely to be shorter than would be
the case if payments actually made on the Business 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 as described above.
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 Business 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
business loans. The CPR does not purport to be either a historical description
of the prepayment experience of any pool of business loans or a prediction of
the anticipated rate of prepayment of any pool of business loans, including the
Business Loans.
The Seller makes no representation as to the particular factors that
will affect the prepayment of the Business Loans, as to the percentage of the
principal balance of the Business Loans that will be paid as of any date or as
to the overall rate of prepayment on the Business 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 Business 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 Business Loans and the
recoveries, if any, on defaulted Business 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 Business Loans and foreclosed properties
result in principal payments on the Certificates faster than otherwise
scheduled. Also, the Class B Certificates are entitled to receive Guaranty
Payments pursuant to the Limited Guaranty of The Money Store Inc. Guaranty
Payments received by the Class B Certificateholders will have the same effect as
if a principal prepayment were received on the related Business Loan.
The following table under the heading "Weighted Average Lives of the
Certificates" assumes, among other things, that (i) (a) the scheduled payment in
each month for each 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
Rates for the March 1997 scheduled payments for the Business Loans delivered at
closing are as set forth in the chart below, and (c) thereafter, the scheduled
payments and remaining term to stated maturity for each Business Loan is as set
forth below (rather than based on the actual Business 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
Business Loans will be timely received on the first day of each month (with no
defaults), commencing March 1, 1997, (iii) the Servicer does not exercise its
option to purchase the Business Loans and thereby cause a termination of the
Agreement, (iv) principal prepayments on the Business Loans represent
prepayments in full of individual Business Loans and will be received on the
last day of each month commencing March 1997 at the respective percentages of
CPR set forth in the table and (v) the Certificates will be issued on March 27,
1997. The following table also assumes that the Subsequent Business Loans are
delivered on the Closing Date.
<TABLE>
<CAPTION>
Note Rate Gross Margin Balance Remaining Term
<S> <C> <C> <C>
10.350% 2.100% $ 2,259,314.41 229
10.162% 1.912% $14,234,719.20 287
10.073% 1.823% $11,838,997.05 353
10.408% 2.158% $14,653,734.46 214
10.409% 2.157% $39,978,012.67 286
10.259% 2.009% $ 7,035,222.21 353
</TABLE>
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, Class M and Class B Certificates were priced
assuming 6% CPR.
Weighted Average Lives of the Certificates
Weighted Earliest Retirement
Average at
CPR Life (Years)(1) Servicer's Option(2)
0% 16.49% 01/15/21
3% 12.54 09/15/19
6% 9.79 05/15/17
9% 7.84 05/15/14
12% 6.42 10/15/11
(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 results,
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 Business Loans is less than 10% of the
sum of (i) the Original Pool Principal Balance and (ii) the original
Pre-Funded Amount.
Since the individual charageristics of the Business 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 Business 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 SELLER AND THE MONEY STORE
TMSCMI is a New Jersey corporation and a wholly-owned subsidiary of
The Money Store Inc. (the "Parent"). TMSCMI is headquarted in Sacramento,
California and began originating SBA 504 Loans in 1994 and Section 7(a)
Companion Loans in 1995. TMSCMI originated approximately $45.6 million and $39.7
million of loans during calendar 1995 and 1996, respectively. The Money Store
Investment Corporation ("TMSIC"), a wholly-owned subsidiary of the Parent, is
headquartered in Sacramento, California and began originating SBA Section 7(a)
Loans in 1979. The Money Store of New York, Inc. ("MSNY"), a wholly owned
subsidiary of TMSIC, is headquartered in Sacramento, California and began
originating SBA Section 7(a) Loans in 1980. MSNY only originates SBA Section
7(a) Loans to businesses located in the State of New York. TMSIC and MSNY became
the largest originator of SBA guaranteed loans in 1983 and have maintained that
position in each of the past 14 SBA fiscal years. TMSIC and MSNY originated
approximately $595 million of SBA Section 7(a) Loans during calendar 1996 and,
at December 31, 1995 and December 31, 1996, were servicing a portfolio of SBA
Section 7(a) Loans aggregating approximately $1.91 billion and $2.19 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
December 31, 1996, the Parent maintained 217 offices in 50 states, the District
of Columbia and Puerto Rico through which it conducted business in the following
areas: (i) mortgage loans; (ii) SBA Loans and other business 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 December 31, 1996, TMSIC and MSNY originated SBA ss. 7(a) Loans
through 11 sales regions in 50 states, comprising 67 SBA Districts. TMSIC and
MSNY have originated SBA ss. 7(a) Loans in approximately 80 out of 85 total SBA
jurisdictions/field territories. They possess PLP status in 72 SBA jurisdictions
and they possess Guaranteed Participant Program ("GPP") status in an additional
13. For the year ended December 31, 1996, TMSIC and MSNY originated
approximately 86% of their SBA ss. 7(a) (measured by principal balance) 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. TMSIC and MSNY
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, TMSIC and MSNY may have originated CLP loans in areas where they were
Preferred Lenders due to specific eligibility requirements of the Section 7(a)
Program. TMSIC and MSNY 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 delinquency and charge-off
experience of the Seller, TMSIC and MSNY (collectively, the "Originators") with
respect to their portfolio of SBA ss. 7(a) Loans, Section 7(a) Companion Loans
and SBA 504 Loans as of the dates indicated. The Originators do not report
separately the delinquency and charge-off experience of the Section 7(a)
Companion Loans and the SBA 504 Loans. There can be no assurance, and no
representation is made, that the delinquency and charge-off experience with
respect to the Business Loans included in the Trust Fund will be similar to that
reflected in the table below.
<TABLE>
<CAPTION>
Delinquencies and Charge-Offs
(Dollars in thousands)
As of and for the Year
Ended December 31,
1993 1994 1995(2) 1996(2)
<C> <C> <C> <C> <C>
30-59 days past due(3) .......... 0.86% 0.89% 1.01% 1.08%
60-89 days past due(3) 0.36% 0.41% 0.35% 0.60%
90+ days past due(3) 4.69% 3.67% 3.97% 4.21%
Unguaranteed portion of
SBA ss. 7(a) Loans in the
serviced loan portfolio(4) $251,274 $353,037 $437,829 $627,563
Loans charged-off, net. $ 1,607 $ 1,293 $ 1,732 $ 2,533
Loans charged-off, net as a
percentage of the
unguaranteed portion of the
SBA ss. 7(a) Loans in the
serviced loan portfolio(5)....... 0.64% 0.37% 0.40% 0.41%
Total SBA ss. 7(a) loan
serviced portfolio(6) ...... $1,270,453 $1,605,645 $1,907,050 $2,282,384
</TABLE>
- -------------------
(1) Includes, for 1993 and 1996, only SBAss.7(a) Loans.
(2) Includes, for 1995 and 1996, in addition to SBA Section 7(a) Loans, Section
7(a) Companion Loans and SBA 504 Loans.
(3) 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 Originators' SBA loan portfolio.
(4) Amounts shown are the aggregate principal balances of the unguaranteed
interests of loans in the Originators' SBA loan portfolio on the last day
of the related period.
(5) 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 Originators' SBA loan portfolio.
(6) Includes guaranteed interests serviced for others.
Certain Litigation
Because the nature of the business of the Parent, the Seller and their
affiliates involves the collection of numerous accounts, the validity of liens
and compliance with state and federal lending laws, the Parent, the Seller and
their affiliates 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 Seller 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, the Seller or their affiliates.
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 such
Business 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 Seller, any of
its affiliates (other than the obligation of The Money Store Inc. to make
Limited Guaranty Payments) or the SBA.
Each Class of Certificates will be issued in book-entry form. 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 Loan is
serviced in accordance with the Agreement.
Payments on the Business 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 Business Loans (net of the
Servicing Fee and other servicing compensation payable to the Servicer as
permitted by the Agreement), (ii) all payments received after the Cut-Off Date
on account of principal on the Business Loans, including 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 a Business Loan and the amount of any adjustment for substituted
Business 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 and the Extra Interest for the related Remittance
Date that is net of Compensating Interest and Monthly Advances (and,
with respect to the Determination Dates occurring during the Funding
Period, 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 Business 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 Business 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;
(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 April 1997, 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 Certificate Balance of each
Class of Certificates is 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, Class M 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 June 24, 1997 (together with accrued interest thereon at the applicable Class
Remittance Rates) will be distributed by or on behalf of the Trustee on the
Special Remittance Date to the Certificates. Such distribution will be made to
each person in whose name a Certificate of the applicable Class is registered on
May 31, 1997.
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, the loss and delinquency status of the
Business Loans and any Guaranty Payments included in the distribution to the
Class B Certificates. 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
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 Business 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
Business 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 June 24, 1997 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
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 during the Funding
Period to fund the excess, if any, of (i) the amount of interest accrued for
each such Remittance Date at the weighted average Class Remittance Rates on the
portion of the Certificates having principal balances exceeding the Principal
Balances of the Business 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 Class of
Certificates also will receive on such date, from the Capitalized Interest
Account, accrued interest at the applicable Class 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 (i) 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 and the
Extra Interest received from the Servicer, (ii) the amounts, if any, of Guaranty
Payments deposited therein as described below under "--Limited Guaranty" and
(iii) the amounts, if any, received from the Spread Account as described below
under "--Spread Account," and make distributions thereof in the following order
of priority (provided, however, that Guaranty Payments may be distributed only
pursuant to clauses (iii) and (vi) below and any Extra Interest exceeding the
Realized Loss Amount may be distributed only pursuant to clauses (ix), (x) and
(xi) below):
(i) First, to the Class A Certificates in an amount up to the
Interest Distribution Amount for such Class of Certificates;
(ii) Second, to the Class M Certificates in an amount up to the
Interest Distribution Amount for such Class of Certificates;
(iii) Third, to the Class B Certificates in an amount up to the
Interest Distribution Amount for such Class of Certificates;
(iv) Fourth, 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;
(v) Fifth, to the Class M Certificates, in an amount up to the
sum of (a) the Class M Principal Distribution Amount and (b) the Class
M Carry-Forward Amount;
(vi) Sixth, to the Class B Certificates, in an amount up to the
Class B Principal Distribution Amount;
(vii) Seventh, 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;
(viii) Eighth, to the Servicer in an amount up to the
Reimbursable Amounts;
(ix) Ninth, on each Remittance Date after the Spread Account
Trigger Date, to the Spread Account any remainder unless and until the
amount therein equals the Specified Spread Account Requirement;
(x) Tenth, to The Money Store Inc. or any provider of Alternate
Credit Enhancement, in an amount equal to any unreimbursed Guaranty
Payments or payments under the Alternate Credit Enhancement, as the
case may be; and
(xi) Eleventh, to the Spread Account Depositor any remainder.
Notwithstanding the foregoing, if on any Remittance Date a Guaranty
Payment required to have been made was not made, in whole or in part, the Class
B Certificates shall be entitled to receive on future Remittance Dates (even
after the Certificate Balance of the Class B Certificates is reduced to zero)
from the portion of the Extra Interest that otherwise would be distributed
pursuant to clauses (ix), (x) and (xi) above, an amount equal to the aggregate
amount of such missed Guaranty Payments, together with interest thereon at the
then applicable Class Remittance Rate for the Class B Certificates.
Interest Distribution Amounts
To the extent of the Available Funds, and prior to payments of
principal, on each Remittance Date the Class A, the Class M and the Class B
Certificateholders, in that order, will be entitled to receive interest accrued
for the related Interest Accrual Period at the then applicable Class Remittance
Rate on the Principal Balance for the respective Class outstanding immediately
prior to such Remittance Date, subject to the adjustment set forth in the next
paragraph. If, on any Remittance Date, the Certificateholders do not receive the
full amount of interest to which they are entitled (which, in the case of the
Class B Certificates, includes amounts received from Guaranty Payments), such
shortfall, plus interest thereon at the then applicable Class 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 a Class of Certificates on each Remittance Date is referred to herein
as the "Interest Distribution Amount".
As stated herein, many of the Business 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
Business Loan will be less than (or greater than) the Note Rate that such
Business 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
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 Business 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. Further, while the Certificates will accrue interest on the
basis of a 360-day year consisting of twelve 30- day months, the Business Loans
accrue interest at an effective annual rate based upon the actual number of days
elapsed during the year divided by 360. Accordingly, for each Remittance Date
the aggregate amount of interest payable with respect to each of the Business
Loans in accordance with their terms, net of 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 Business Loans at the
weighted average Class Remittance Rates. Any such excess or shortfall will be
allocated to the Class A, Class M 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 Business Loan, the "Extra Interest Percentage"
will be determined according to the following formula: Extra Interest =
(A)-(B-C), where A equals the Note Rate that would be in effect for such
Business Loan as of the Cut-Off Date without giving effect to any applicable
lifetime floor or cap, B equals the sum of the rates used in determining the
Servicing Fee and the Trustee's fees and expenses and the initial weighted
average Class Remittance Rates without giving effect to any applicable lifetime
floor or cap and C equals, with respect to each Remittance Date commencing in
June 1997, the difference, if any, between the Initial Prime Rate and the Prime
Rate as reported on March 21, 1997.
For each Remittance Date, the "Extra Interest" for a Business Loan
will equal the product of (i) the Principal Balance of such Business Loan for
such Remittance Date and (ii) one-twelfth of the applicable Extra Interest
Percentage.
Class A, Class M and Class B Principal Distribution Amounts
With respect to each Remittance Date, the "Class A Principal
Distribution Amount" the "Class M Principal Distribution Amount" and the "Class
B Principal Distribution Amount" will equal the Class A Percentage, the Class M
Percentage or the Class B Percentage, as the case may be, multiplied by the
total of (i) all payments and other recoveries of principal of a Business Loan
(net of amounts reimbursable to the Servicer pursuant to the Agreement) received
by the Servicer or any Subservicer during the related Due Period, (ii) the
principal portion of any Business 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 Business 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 Business Loan which, as of the
first day of the related Due Period, has become a Liquidated Business Loan and
(v) amounts, if any, released from the Pre-Funding Account on the April, May and
June 1997 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
March 1997 with a February 28, 1997 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):
February 28............... Cut-Off Date. The Original Pool Principal
Balance will be the aggregate Principal Balance of
the Business Loans at the close of business on
February 28, 1997 after application of all
payments collected on or before such date.
March 1-31................ The Servicer deposits in the Principal and
Interest Account all amounts received on account
of the Business Loans.
March 31.................. First Record Date. Distribution on April 15, 1997
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.
April 10 ................ Determination Date. The Servicer determines the
amount of principal and interest that will be
distributed to the Certificateholders on April 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, Guaranty Payments.
April 15 ................ Remittance Date. The Trustee or the Paying Agent
will distribute to Certificateholders the amounts
required to be distributed pursuant to the
Agreement.
Subordination of the Class M and Class B Certificates
The rights of the Holders of the Class M 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 in "--Flow of Funds." This subordination is intended to enhance the
likelihood of regular receipt by the Holders of Class A Certificates of the full
amount of their scheduled monthly payments of interest and, after distribution
of the applicable Interest Distribution Amount to each Class of Certificates,
principal, and to afford the Holders of the Class A Certificates a measure of
protection against losses resulting from liquidated Business Loans equal to (i)
the sum of the outstanding Certificate Balances of the Class M and Class B
Certificates and (ii) the amount of funds, if any, remaining in the Spread
Account after payment of interest on the 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 and Class M Certificates to the extent
described above in "--Flow of the Funds." This subordination is intended to
enhance the likelihood of regular receipt by the Holders of the Class A and
Class M Certificates of the full amount of their scheduled monthly payments of
interest and, after distribution of the applicable Interest Distribution Amount
to each Class of Certificates, principal, and to afford the Holders of the Class
A and Class M Certificates a measure of protection against losses resulting from
Liquidated Business Loans equal to (i) the then outstanding Certificate Balance
of the Class B Certificates and (ii) the amount of funds, if any, remaining in
the Spread Account after payment of interest on the Certificates.
If the Available Funds for any Remittance Date are insufficient to
permit the distribution of the entire Class A Principal Distribution Amount, the
Class A Certificateholders will have the right to receive on future Remittance
Dates, until any such shortfall is distributed, future distributions of
Available Funds that would otherwise have been payable as principal to the Class
M and Class B Certificateholders, in that order. If the Available Funds for any
Remittance Date (plus, for each Remittance Date occurring after the Spread
Account Trigger Date, amounts on deposit in the Spread Account) are insufficient
to permit the distribution of the entire Class M Principal Distribution Amount,
the Class M Certificateholders will have the right to receive on future
Remittance Dates, until any such shortfall is distributed, future distributions
of Available Funds that would otherwise have been payable as principal to the
Class B Certificateholders (subject to the prior rights of the Class A
Certificateholders to receive such amounts to satisfy any shortfall described in
the preceding sentence).
The Class B Certificateholders, however, will have the benefit of the
Limited Guaranty, which is intended to protect such Certificateholders from any
losses that otherwise would be allocated to the Class B Certificates.
Losses on Liquidated Business Loans
As described above, the Class A, Class M and Class B Principal
Distribution Amounts include the Class A, Class M and Class B Percentage,
respectively, of the then outstanding Principal Balance of all Business Loans
which have become Liquidated Business Loans. If the Net Liquidation Proceeds of
such Liquidated Business Loans are less than such outstanding Principal Balances
(such difference, the "Realized Loss Amount" for such Remittance Date) a portion
of the Extra Interest available for such Remittance Date up to the Realized Loss
Amount will be included in the Available Funds for such Remittance Date only. If
the Realized Loss Amount for any Remittance Date exceeds the amount of the
available Extra Interest for such Remittance Date, the amount of such excess
(the "Actual Loss Amount") will be allocated to the Class B Certificates by
reducing their Certificate Balance until the Certificate Balance of the Class B
Certificates is reduced to zero. Thereafter, any Actual Loss Amount will be
allocated to the Class M Certificates by reducing their Certificate Balance
until the Certificate Balance of the Class M Certificates is reduced to zero.
Any future Actual Loss Amount then will be allocated to the Class A Certificates
by reducing their Certificate Balance until the Certificate Balance of the Class
A Certificates is reduced to zero. Notwithstanding the foregoing, for each
Remittance Date occurring after the Spread Account Trigger Date, the Holders of
the Class M and Class A Certificates (and, if a required Guaranty Payment is not
made, the Holders of the Class B Certificates) will be entitled to receive
amounts on deposit in the Spread Account to off-set any Actual Loss Amount that
otherwise would be allocated to such Holders.
Limited Guaranty
To mitigate the effects of the subordination of the Class B
Certificates, the Class B Certificateholders are entitled to receive on each
Remittance Date an amount equal to the Guaranty Payment, if any, due under the
Limited Guaranty. The Limited Guaranty may be replaced by an Alternate Credit
Enhancement as described below. The Guaranty Payment for any Remittance Date
will equal the sum of (i) the difference, if any, between (A) the Class B
Interest Distribution Amount for such Remittance Date and (B) the portion of the
Available Funds to be distributed to the Class B Certificates on account of
interest on such Remittance Date and (ii) the Actual Loss Amount, if any, for
such Remittance Date that is allocated to the Class B Certificates. Guaranty
Payments are intended to provide the Class B Certificates with timely payment of
interest and protection against losses that otherwise would be absorbed by such
Certificates.
If on any Remittance Date a required Guaranty Payment is not made, the
Class B Certificateholders will be entitled to receive such amounts, together
with interest thereon at the then applicable Class Remittance Rate for the Class
B Certificates, first from amounts, if any, on deposit in the Spread Account and
then on future Remittance Dates (even after the Certificate Balance of the Class
B Certificates has been reduced to zero) to the extent there is sufficient Extra
Interest available for such payments.
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 for the
Limited Guaranty will not result in the downgrade or withdrawal of the then
current rating by the Rating Agencies of the Certificates, and upon the delivery
of an opinion of counsel that such action would not cause the Trust Fund 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.
On each Remittance Date after delivery of the Alternate Credit Enhancement, an
amount equal to the lesser of the amount that would have been payable under the
Limited Guaranty and the amount available under such Alternate Credit
Enhancement will be made available for payments on the Class B Certificates.
Neither The Money Store Inc. nor any other person will be obligated to replace
such enhancement after it has been exhausted.
Spread Account
On each Remittance Date following the Spread Account Trigger 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 1% of the sum of (i) the Original Pool Principal Balance and (ii) the
aggregate Principal Balances of the Subsequent Business Loans as of the
applicable Cut-Off Date (such amount is referred to herein as the "Specified
Spread Account Requirement") provided, however, that the Specified Spread
Account Requirement will not exceed the sum of the outstanding Aggregate Class
A, Aggregate Class M and Aggregate Class B Certificate Principal Balances.
On each Remittance Date after the Spread Account Trigger 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 M Interest Distribution Amounts, (b)
the Class A and Class M Principal Distribution Amounts and (c) the Class A and
Class M Carry-Forward Amounts exceeds (ii) the Available Funds for such
Remittance Date allocable to the Class A and Class M Certificates. Additionally,
if all or a portion of a required Guaranty Payment is not made, the Trustee will
withdraw from the Spread Account for deposit in the Certificate Account the
amount of such delinquency.
Monthly Advances
The Servicer is required to remit to the Trustee no later than each
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 Remittance Rates for each Class of
Certificates, plus the rate used in determining certain expenses of the Trust
Fund (the "Adjusted Business Loan Remittance Rate") on the Aggregate Class A,
Class M and Class B Certificate 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 - Interest Distribution Amounts" herein)
exceeds (ii) the amount received by the Servicer as of the related Record Date
in respect of interest on the Business Loans (plus for the Remittance Dates
during the Funding Period, 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 Business 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 Business loans
generally; provided, however, that the Servicer's right to such reimbursement is
subordinate to the rights of the Certificateholders. Monthly Advances are
intended to provide sufficient funds for the payment of the interest to the
Certificateholders at the then applicable Class Remittance Rates, 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 Business
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 related principal balance of such Business Loan at the Adjusted Business
Loan Remittance Rate over (b) that portion of the amount of interest actually
received in respect of the related Business Loan during such Due Period and
available to be paid to the Certificateholders.
Registration of Certificates
Each Class of Certificates will initially be registered in the name of
Cede, the nominee of DTC. Certificates registered in the name of Cede are
referred to as 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 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 respective Class of
Certificates. CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank N.A. will act as depositary for CEDEL 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").
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. 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 Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the 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 is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for 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.
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 or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry 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.
DTC has advised the Trustee that 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 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. 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 Class A or Class B Certificates which conflict with actions taken with
respect to other Class A or Class B 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 Seller duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the Servicer or the Seller, 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
Seller, as the case may be, by the Trustee or to the Servicer, or the
Seller, 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,
marshaling 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, marshaling 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 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, the Trustee may appoint, or petition a
court of competent jurisdiction to appoint, any established mortgage loan
servicing institution acceptable to Standard & Poor's, 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 Business 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 Business Loan,
or the disposition of all property acquired upon foreclosure of any Business
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 Business Loans
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 Business Loans and any other assets in the Trust Fund at a
price equal to the sum of (i) 100% of the then outstanding Aggregate Class A,
Class M and Class B Certificate Principal Balances, and (ii) 30 days' accrued
interest thereon at the then applicable Class 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 Standard &
Poor's, 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
Marine Midland Bank, a trust company located in New York, New York,
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 BBB-
by Standard & Poor's, 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), (v) is subject to supervision or examination by a federal or state
authority, and (vi) is an approved SBA guaranteed lender in good standing,
operating pursuant to an effective Loan Guaranty Agreement. 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 Standard & Poor's,
Moody's and Duff & Phelps 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 Business 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, 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 Business
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 and Class M
Remittance Rates exceed the Class A Remittance Rate, portions of the interest
accrued on each Business Loan will be treated as a "stripped coupon" purchased
by the Class B and Class M Certificateholders. Accordingly, each Class A
Certificateholder will be treated as owning its pro rata percentage interest in
the principal of, and interest payable on, each Business Loan (minus the portion
of the interest payable on such Business Loan that is treated as Spread, as a
stripped coupon retained by the Servicer or as a stripped coupon purchased by
the Class B or Class M Certificateholders), and such interest in each Business
Loan will be treated as a "stripped bond" within the meaning of Section 1286 of
the Code. Similarly, each Class B and Class M Certificateholder will be treated
as owning its pro rata percentage interest in the principal of each Business
Loan, plus a disproportionate share of the interest payable on each Business
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 a
Business 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, multiplied by the number of years remaining after the
purchase date until the maturity of the Business 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 Business
Loan payable to the Class A Certificateholders will be treated as "qualified
stated interest." As a result, the amount of OID on an Business Loan will equal
the amount by which the price at which a Certificateholder is deemed to have
acquired an interest in an Business Loan (the "Purchase Price") is less than the
portion of the remaining principal balance of the Business 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
Business Loans will be determined by aggregating all payments on the Business
Loans allocable to the Class A Certificateholders (not including the Spread),
and treating the portion of all payments on the Business Loans allocable to
Class A Certificateholders as a single obligation on an aggregate basis, rather
than being determined separately with respect to each Business 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 a Business-Loan-by-Business-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 Business 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 Business 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 Business 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 Business Loans and any gain upon collection or
disposition of the Business Loans (but not including any portion of the Spread).
Such gross income attributable to interest on the Business 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 Business 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 a Business Loan would be
includable in income as principal payments are received on the Business Loans.
If, contrary to the treatment anticipated by the Trust Fund, the OID
on a Business 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 Business Loans. It is possible that the IRS
could require use of a prepayment assumption in computing the yield of an
Business Loan. If a Business 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 Business
Loans represented by a Class A Certificate.
As to Business Loans that are real estate mortgages, a
Certificateholder may be able (or may be required) to account for any discount
on such Business 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 Business Loans. As noted above, the Trust
Fund intends to account for the Business Loans on an aggregate basis and does
not intend to report separately for this purpose with respect to the Business
Loans that are real estate mortgages.
In the event that a Business Loan is treated as purchased at a premium
(i.e., its Purchase Price exceeds the portion of the remaining principal balance
of such Business 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 Business Loan if an election under Section 171 of
the Code is made with respect to the interests in the Business 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 and Class M Certificateholders
In General. Except as described below, it is believed that the Class B
and Class M 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 or Class M
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 and
Class M Certificateholders in the manner described below.
Each Class B and Class M Certificateholder will be treated as owning
(i) the Class B (or Class M) Percentage of the principal portion of each
Business Loan plus (ii) a disproportionate portion of the interest on each
Business 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 or Class M 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 or Class M Certificateholder's entire share of the interest
on a Business Loan will qualify as "qualified stated interest." Thus, except to
the extent modified by the effects of subordination of the Class B and Class M
Certificates, as described below, income will be reported to Class B and Class M
Certificateholders in the manner described above for holders of the Class A
Certificates.
Effect of Subordination
If the Certificateholders of one Class of Certificates 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
Certificates, it is believed that such Certificateholders 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
Certificateholders of the other Class of Certificates 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 or Class M Certificateholders would
be required to accrue as current income any interest, OID income, or (to the
extent paid on the Business 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 or Class M Certificateholders, (2) a loss would only be
allowed to the Class B or Class M 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 or Class M
Certificateholders because such amount was previously included in income.
Similarly, a loss would only be allowed to the Class A Certificateholders when
their right to receive reimbursement of such Shortfall Amount became worthless.
Those results should not significantly affect the inclusion of income for Class
B or Class M Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B or Class M 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
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 Business 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 Business Loans are secured by residential real estate mortgages.
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 Business 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, or an estate or 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.
<PAGE>
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 Certificates, dated March 21, 1997 (the
"Underwriting Agreement"), the Seller has agreed to sell and the Underwriter has
agreed to purchase all the Class A, Class M and Class B Certificates. The
Certificates will be offered by the Underwriter to the public in negotiated
transactions. After the 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 Certificates may be deemed to be underwriters and any
commissions received by them and any profit on the resale of the Certificates by
them may be deemed to be underwriting discounts and commissions under the 1933
Act.
The Representative and the Seller 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" by Standard & Poor's, "Aaa" by Moody's and "AAA" by Duff & Phelps,
that the Class B Certificates be rated not lower than "A" by Standard & Poor's,
not lower than "A2" by Moody's and not lower than "A" by Duff & Phelps, and that
the Class M Certificates be rated not lower than "BBB" by Standard & Poor's, not
lower than "Baa2" by Moody's and not lower than "BBB" by Duff & Phelps. 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. The ratings of the Class B Certificates
are based, in part, on an assessment of The Money Store Inc.'s ability to make
payments under the Limited Guaranty. Any reduction in the ratings assigned to
the unsecured long-term debt obligations of The Money Store In. by Standard &
Poor's and Duff & Phelps may result in a similar reduction of the rating of the
Class B Certificates.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Eric Elwin, Esq., Corporate
Counsel to the Seller. 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 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" in the Prospectus and "Federal Income Tax Consequences" herein and
"Federal Income Tax Consequences" in the Prospectus.
FINANCIAL INFORMATION
The Seller has determined that its financial statements are not
material to the offering made hereby. Except for certain representations and
warranties relating to the Business Loans, the obligations of the Seller with
respect to the Business Loans are primarily limited to contractual servicing
obligations.
Financial statements and other reports filed by The Money Store Inc.
with the Securities and Exchange Commission have been incorporated by reference
into the Prospectus Supplement and the Prospectus. See "Incorporation of Certain
Documents by Reference" in the Prospectus.
The Trust Fund has been formed to own the Business 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>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Certificates (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company, CEDEL or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL 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 issuances of securities generally
having the same characteristics as the Certificates and representing a pool of
Business Loans.
Secondary, cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
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 Business Loan 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 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 Business
Loan Backed Certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the 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
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, or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective 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 Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back- valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL 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 Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC' Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL, or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on 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 includable 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>
INDEX OF PRINCIPAL TERMS
Account..............................................S-109
Act...................................................S-57
Actual Loss Amount....................................S-19
Adjusted Business Loan Remittance Rate................S-29
Adjustment Date.......................................S-12
Aggregate Class A Certificate Principal Balance......S-109
Aggregate Class B Certificate Principal Balance......S-109
Aggregate Class M Certificate Principal Balance......S-109
Agreement..............................................S-5
Alternate Credit Enhancement..........................S-21
Annual Expense Escrow Amount.........................S-109
Assignee..............................................S-27
Assignment of Mortgage...............................S-110
BIF..................................................S-110
Business Day.........................................S-110
Business File........................................S-110
Business Loan Interest Rate...........................S-39
Business Loan Schedule...............................S-110
Business Loans.........................................S-1
Business Notes........................................S-41
Capitalized Interest Account...........................S-7
Cede..................................................S-34
CEDEL..................................................S-1
CEDEL Participants....................................S-82
Certificate Account...................................S-70
Certificate Owners....................................S-81
Certificate Register.................................S-111
Certificate Registrar................................S-111
Certificateholder or Holder..........................S-110
Certificates...........................................S-1
Certified Lender......................................S-58
Class A Certificates...................................S-2
Class B Certificates...................................S-2
Class M Certificates...................................S-2
CLP...................................................S-65
Code..................................................S-91
Collateral...........................................S-111
Commercial Property..................................S-111
Compensating Interest.................................S-31
Cooperative...........................................S-83
CPR...................................................S-61
Curtailment..........................................S-111
Definitive Certificates...............................S-34
Designated Depository Institution....................S-111
Determination Date....................................S-29
DTC...................................................S-34
Due Date.............................................S-111
Due Period............................................S-14
Duff & Phelps.........................................S-33
Euroclear..............................................S-1
Euroclear Operator....................................S-83
Euroclear Participants................................S-83
European Depositaries.................................S-81
Event of Default.....................................S-111
Excess Payments......................................S-112
Excess Proceeds......................................S-112
Expense Account......................................S-112
FDIC.................................................S-112
Federal Tax Counsel...................................S-32
FHLMC................................................S-112
FNMA.................................................S-112
Foreclosed Property..................................S-112
Foreclosed Property Disposition......................S-112
Funding Period.........................................S-7
Global Securities....................................S-100
GPP...................................................S-65
Initial Certificate Principal Amount...................S-4
Initial Prime Rate....................................S-11
Insurance Proceeds...................................S-112
IRS...................................................S-91
Limited Guaranty.......................................S-2
Liquidated Business Loan.............................S-112
Liquidation Proceeds.................................S-113
Majority Certificateholders..........................S-113
Monthly Advance.......................................S-29
Monthly Payment......................................S-113
Moody's...............................................S-33
Mortgage.............................................S-113
Mortgaged Property...................................S-113
MSNY..................................................S-64
Net Liquidation Proceeds.............................S-113
Note Rate.............................................S-26
Note Rates............................................S-45
OID...................................................S-32
Opinion of Counsel...................................S-113
Original Class A Certificate Principal Balance.......S-113
Original Class B Certificate Principal Balance.......S-113
Original Class M Certificate Principal Balance.......S-114
Original Pool Principal Balance.......................S-32
Originators...........................................S-65
Parent................................................S-64
Paying Agent.........................................S-114
Percentage Interest..................................S-114
Permitted Instruments................................S-114
Person...............................................S-115
Physical Certificates.................................S-85
PLP...................................................S-65
Pool Principal Balance...............................S-115
Preferred Lender......................................S-58
Pre-Funded Amount......................................S-6
Prime Rate............................................S-12
Principal and Interest Account........................S-67
Principal Balance....................................S-115
Principal Prepayment.................................S-116
Prior Lien...........................................S-116
Prospectus.............................................S-2
Purchase Price........................................S-91
Rating Agencies.......................................S-21
Realized Loss Amount...................................S-9
Record Date...........................................S-22
Reimbursable Amounts.................................S-116
Released Mortgaged Property Proceeds..................S-30
REMIC.................................................S-32
Remittance Date.......................................S-22
Representative.........................................S-1
Residential property.................................S-116
Responsible Officer..................................S-116
SAIF.................................................S-116
SBA....................................................S-1
SBA 504 Loans..........................................S-1
Section 7(a) Program..................................S-57
Seller.................................................S-1
Servicer...............................................S-1
Servicer's Certificate...............................S-116
Servicing Advances....................................S-31
Servicing Fee.........................................S-31
Servicing officer....................................S-117
Shortfall Amount......................................S-36
Special Remittance Date................................S-7
Specified Spread Account Requirement..................S-23
Spread................................................S-90
Spread Account Depositor..............................S-22
Spread Account Trigger Date............................S-8
Spread Balance........................................S-23
Standard & Poor's.....................................S-33
Subsequent Business Loans..............................S-2
Subservicer..........................................S-117
Subservicing Agreement...............................S-117
Successor Servicer....................................S-87
Tax Return...........................................S-117
Termination Price.....................................S-32
Terms and Conditions..................................S-83
TMSCMI.................................................S-1
TMSIC.................................................S-64
Trust Fund.............................................S-1
Trustee................................................S-5
UCC...................................................S-28
Underwriter............................................S-2
Underwriting Agreement................................S-97
<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, established by the Trustee for the
benefit of the Certificateholders; and the Expense Account established by the
Trustee for the benefit of the Trustee. The Trustee's obligation to establish
and maintain the Certificate Account pursuant to the Agreement is not delegable.
AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class A Certificate Principal Balance less the sum
of (i) all amounts previously distributed to the Class A Certificateholders in
respect of principal and (ii) all Realized Losses allocated to such Class of
Certificates.
AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class B Certificate Principal Balance less the sum
of (i) all amounts previously distributed to the Class B Certificateholders in
respect of principal and (ii) all Realized Losses allocated to such Class of
Certificates.
AGGREGATE CLASS M CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class M Certificate Principal Balance less the sum
of (i) all amounts previously distributed to the Class M Certificateholders in
respect of principal and (ii) all Realized Losses allocated to such Class of
Certificates.
ANNUAL EXPENSE ESCROW AMOUNT: The product of [0.06%] 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 Business 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 Business 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.
BUSINESS FILE: The Business File maintained with respect to each
Business Loan in accordance with the Agreement.
BUSINESS LOAN INTEREST RATE: With respect to any date of
determination, the then applicable annual rate of interest borne by a Business
Loan, pursuant to its terms, which, as of the CutOff Date, is shown on the
Business Loan Schedule.
BUSINESS LOAN SCHEDULE: The schedule of Business Loans attached as an
exhibit to the Agreement, such schedule identifying each Business Loan by
address of the related premises, and the name of the Obligor and setting forth
as to each Business 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 Business Loan, (iv) the Business Loan Date and
original number of months to maturity, in months, (v) the Business Loan Interest
Rate as of the Cut-Off Date, (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 CutOff Date, (ix) the margin which is added to the
Prime Rate to determine the Business Loan Interest Rate, and (x) the lifetime
minimum and maximum Business Loan Interest Rates, if applicable.
CERTIFICATEHOLDER or HOLDER: Each Person in whose name a Class A,
Class M 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 Seller,
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, Marine Midland Bank 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 a Business 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 a Business 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 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 A or better
by Standard & Poor's, A2 or better by Moody's and A or better by Duff & Phelps
or A1 by Standard & Poor's, P-1 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 a Business 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
a Business 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 Business Loan, the excess, if any, of (a the total Net Liquidation
Proceeds, over (b) the Principal Balance of such Business Loan as of the date
such Business Loan became a Liquidated Business Loan plus 30 days interest
thereon at the then applicable Adjusted Business 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 Business
Loan Interest Rate(s) exceeds interest accrued on such advance at the then
applicable weighted average Class 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 a Business Loan, Collateral or Foreclosed Property,
including but not limited to title, hazard, life, health and/or accident
insurance policies.
LIQUIDATED BUSINESS LOAN: Any defaulted Business 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 Business 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 Business Loans, whether
through trustee's sale, foreclosure sale or otherwise.
MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A, Class B
and Class M Certificates evidencing an Aggregate Class A Certificate Principal
Balance, Aggregate Class B Certificate Principal Balance and Aggregate Class M
Certificate Principal Balance, as the case may be, in excess of 50% of the
Aggregate Class A Certificate Principal Balance, Aggregate Class B Certificate
Principal Balance and Aggregate Class M 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 Business Loan, as adjusted
pursuant to the terms of the related Business 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 a
Business 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 Seller 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.
ORIGINAL CLASS M CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class M Certificates issued on the Closing Date.
PAYING AGENT: Initially, Marine Midland Bank, 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, Class B or Class M
Certificate, the portion of the Trust Fund evidenced by such Class A, Class B or
Class M Certificate, expressed as a percentage, the numerator of which is the
denomination represented by such Class A, Class B or Class M Certificate and the
denominator of which is the Original Class A Certificate Principal Balance,
Original Class B Certificate Principal Balance or Original Class M Certificate
Principal Balance, as the case may be.
PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall
include the following:
(i) 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;
(ii) 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, A-1+ or better
by Standard & Poor's and Duff 1+ or better by Duff & Phelps;
(iii) 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, AA or better by
Standard & Poor's and A or better by Duff & Phelps;
(iv) commercial paper (having original maturities of not more
than 365 days) rated Prime-1 or better by Moody's A-1+ or better by
Standard & Poor's and 1+ or better by Duff & Phelps;
(v) debt obligations rated Aaa by Moody's, AAA by Standard &
Poor'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);
(vi) investments in money market funds rated Aaa by Moody's, AAA
by Standard & Poor's and Duff 1+ by Duff & Phelps the assets of which
are invested solely in instruments described in clauses (i)-(v) above;
(vii) certain guaranteed investment contracts and repurchase
agreements satisfying the criteria set forth in the Agreement; and
(viii) 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 Business Loan or related
Foreclosed Property, at any date of determination, (i) the principal balance of
the Business Loan outstanding as of the Cut-Off Date (or, with respect to any
Subsequent Business 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 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)
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. The
Principal Balance of any Liquidated Business Loan or any Business Loan that has
been paid off will equal $0.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on a
Business Loan equal to the outstanding principal balance thereof, received in
advance of the final scheduled Due Date which is intended to satisfy a Business
Loan in full.
PRIOR LIEN: With respect to any Business Loan secured by a lien which
is not a first priority lien, each loan relating to the corresponding Collateral
having a prior priority lien.
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 the 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.
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 Business 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.
SUBSERVICER: Any 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 Subservicer relating to subservicing
and/or administration of certain Business Loans as provided in the Agreement, a
copy of which shall be delivered, along with any modifications thereto, to the
Trustee.
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>
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.
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.
See Risk Factors on page 17 herein for a discussion of certain risk
factors which should be considered by prospective purchasers of the Certificates
offered hereby.
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 date of this Prospectus is March 7, 1997.
<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 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."
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 SBAss. 7(a) Loan, which
related SBAss. 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 SBAss. 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 relating to the SBA ss.7(a)
Loans, 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 LLP, 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 deduc tions, 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 LLP, 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.
<PAGE>
THE TRUSTS
A Trust for any Series of Certificates will include the Trust Assets
consisting of a Poolc Trust.1lement.
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.
(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
require ments 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 LLP 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:
1933 Act................................................................3
Adjustable Rate.........................................................6
Agent of the SBA.......................................................43
Agreement...............................................................5
ARM....................................................................72
Assignee...............................................................43
Balloon Loans..........................................................18
Bankruptcy Bond........................................................11
Basis Risk Shortfall...................................................56
BDOs...................................................................25
Buydown Funds..........................................................57
CDC....................................................................24
Cede...................................................................16
Certificate Guaranty Insurance Policy..................................10
Certificate Guaranty Insurer...........................................37
Certificate Register...................................................33
Certificateholders......................................................2
Certificates............................................................1
Certified Lender.......................................................23
Certified Lender Program...............................................23
Class...................................................................1
Cleanup Costs..........................................................55
CLOs...................................................................26
Code...................................................................14
Commission..............................................................3
Compensating Interest..................................................13
Contingency Fee........................................................47
Curtailment............................................................13
Cut-off Date...........................................................32
Definitive Certificates................................................35
Detailed Description...................................................21
Determination Date.....................................................13
DOL....................................................................15
DTC....................................................................16
ERISA..................................................................15
Exchange Act............................................................3
Event of Nonpayment....................................................49
Federal Tax Counsel....................................................14
Final Determination....................................................50
Fixed Rate..............................................................6
Funding Account........................................................23
Funding Period..........................................................8
Guaranteed Participant Program.........................................23
Holders.................................................................2
Indirect Participant...................................................34
Insurance Paying Agent.................................................37
Insurance Proceeds.....................................................13
Insured Payment........................................................37
IRS....................................................................50
Liquidation Proceeds...................................................13
Loan Guaranty Agreement................................................23
Lockout Periods.........................................................6
Lower Tier REMIC.......................................................65
LTV....................................................................28
Majority Certificateholders............................................49
Master Servicer.........................................................1
Monthly Advance........................................................13
Mortgage Pool Insurance Policy.........................................11
Mortgaged Properties....................................................6
Multi-Party Agreement...................................................8
Multiple Variable Rate REMIC Regular Certificate.......................62
Non-REMIC Certificates.................................................15
OID Regulations........................................................58
Originators.............................................................1
Participants...........................................................34
Pass-Through Rate.......................................................2
Permitted Investments..................................................39
Plan...................................................................74
Plan Asset Regulations.................................................74
Pool....................................................................1
Pool Insurer...........................................................38
Preferred Lender.......................................................23
Preferred Lender Program...............................................23
Pre-Funded Amount.......................................................8
Pre-Funding Account.....................................................8
Prepayment Assumption..................................................58
Presumed Single Qualified Floating Rate................................61
Presumed Single Variable Rate..........................................61
Principal and Interest Account.........................................46
Principal Prepayment...................................................13
PTCE 83-1..............................................................75
Purchase Option Period.................................................51
Rating Agency..........................................................13
REIT...................................................................66
Released Mortgaged Property Proceeds...................................13
REMIC...................................................................2
REMIC Qualified Floating Rate..........................................58
REMIC Regular Certificates.............................................14
REMIC Regulations......................................................57
REMIC Residual Certificates............................................14
Remittance Date.........................................................2
Representative..........................................................1
Reserve Account........................................................10
RICs...................................................................66
SBA.....................................................................5
SBA Act.................................................................7
SBA Loans...............................................................1
SBA ss.7(a) Loans.......................................................5
Section 7(a) Companion Loans............................................5
Section 7(a) Companion Program.........................................24
Section 7(a) Program....................................................7
Senior Certificates.....................................................9
Servicing Advance......................................................47
Servicing Fee..........................................................47
Single Variable Rate REMIC Regular Certificate.........................61
SMMEA..................................................................15
Special Hazard Insurance Policy........................................11
Special Hazard Insurer.................................................38
Spread Amount..........................................................11
Standard Hazard Insurance Policies......................................7
Sub-Servicer...........................................................48
Subordinated Certificates...............................................9
Successor Servicer.....................................................50
Superlien..............................................................55
Termination Notice.....................................................51
Termination Price......................................................50
The Money Store.........................................................1
Tiered REMICs..........................................................57
Trust...................................................................1
Trust Asset Schedule...................................................21
Trust Assets............................................................1
Trustee................................................................14
Trustee's Document File................................................43
UCC....................................................................34
Underwriters...........................................................76
Unguaranteed Interests..................................................1
United States Person...................................................69
Variable Rate REMIC Regular Certificate................................60
Yield Supplement Agreement.............................................56
<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
Seller, 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 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.
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
Page
Summary of Terms...............................................S-4
Risk Factors..................................................S-36
The Business Loan Pool........................................S-41
The SBA Loan Program..........................................S-57
Yield, Maturity and Prepayment Considerations.................S-60
The Seller and The Money Store................................S-64
Description of The Agreement and the Certificates.............S-67
The Trustee...................................................S-88
Federal Income Tax Consequences...............................S-90
ERISA Considerations..........................................S-97
Legal Investment..............................................S-97
Underwriting..................................................S-97
Ratings.......................................................S-98
Legal Matters.................................................S-98
Financial Information.........................................S-98
Annex I......................................................S-100
Index of Principal Terms.....................................S-106
Certain Definitions..........................................S-109
PROSPECTUS
Prospectus Supplement............................................2
Available Information............................................3
Reports to Certificateholders....................................3
Incorporation of Certain Documents by Reference..................3
Summary of Terms.................................................5
Risk Factors....................................................17
The Trusts......................................................21
Use of Proceeds.................................................24
The Representative and the Originators..........................24
The SBA Loan Lending Program....................................25
Description of the Certificates.................................32
Credit Enhancement..............................................36
Maturity, Prepayment and Yield Considerations...................41
The Agreements..................................................42
Certain Legal Aspects of the SBA Loans..........................52
Federal Income Tax Consequences.................................56
Erisa Considerations............................................74
Legal Investment Considerations.................................76
Plan of Distribution............................................76
Legal Matters...................................................76
Experts.........................................................76
Rating..........................................................77
Financial Information...........................................77
Rating..........................................................77
Index of Principal Terms........................................78
Table of Contents...............................................78
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$90,000,000
[THE MONEY STORE LOGO]
The Money Store Business
Loan Backed Certificates
Series 1997-1
$75,600,000 Class A Certificates
$ 7,200,000 Class M Certificates
$ 7,200,000 Class B Certificates
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PROSPECTUS SUPPLEMENT
---------------------
Prudential Securities Incorporated
March 25, 1997
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