AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1998
REGISTRATION STATEMENT NO. 333-_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
THE MONEY STORE INC.
(Representative of the Trusts described herein)
AND THE ORIGINATORS LISTED BELOW
The Money Store/D.C. Inc. TMS Mortgage Inc.
The Money Store/Kentucky Inc. The Money Store Investment Corporation
The Money Store/Minnesota Inc. The Money Store of New York, Inc.
The Money Store Home Equity Corp. The Money Store Commercial Mortgage Inc.
(Exact name of registrant as specified in its charter)
* *
- ----------------------- ------------------------------------
State of Incorporation IRS Employer Identification Number
-----------------
* -- See Schedule A
707 Third Street
West Sacramento, California 95605
(916) 617-1000
(Address, including zip code, and telephone number, including
area code,
of Registrant's principal executive office)
Marion A. Cowell, Jr., Esq.
Executive Vice President, General Counsel and Secretary
First Union Corporation
301 South College Street
Charlotte, North Carolina 28288-0013
(704) 374-6161
(Name, address, including zip code, and telephone number,
including area code,
of agent for service)
Copies to:
Richard L. Fried, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Robert J. Hahn, Esq.
Kilpatrick Stockton LLP
One First Union Center, Suite 3500
Charlotte, North Carolina 28202-6001
<PAGE>
SCHEDULE A
State of IRS Employer
REGISTRANT INCORPORATION IDENTIFICATION NUMBER
- ---------- ------------- ---------------------
The Money Store Inc. New Jersey 22-2293022
TMS Mortgage Inc. New Jersey 22-3217781
The Money Store/D.C. Inc. D.C. 22-2133027
The Money Store/Kentucky Inc. Kentucky 22-2459832
The Money Store Home Equity Kentucky 22-2522232
Corp.
The Money Store/Minnesota Inc. Minnesota 22-3003495
The Money Store Investment
Corporation New Jersey 22-2293019
The Money Store of New York, New York 22-3143559
Inc.
The Money Store Commercial
Mortgage Inc. New Jersey 22-2378261
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement
becomes effective.
If the only securities being registered on this Form are
being off ered pursuant to dividend or interest reinvestment
plans, pl ease check the following box. |_|
If any of the securities being registered on this Form are
to be off ered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933, check the following box.
|X|
If this Form is filed to register additional securities for
an offeri ng pursuant to Rule 462(b) under the Securities Act,
please ch eck the following box and list the Securities Act
registrat ion statement number of the earlier effective
registrat ion statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant
to Rule 4 62(c) under the Securities Act, check the following
box and l ist the Securities Act registration statement number of
the earli er effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the
following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
====================================================================================================
<CAPTION>
<S> <C> <C> <C> <C>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Securities to be Aggregate Price Aggregate Registration
Being Registered Registered(1) per Unit(2) Offering Price Fee
- ---------------------------------------------------------------------------------------------------
The Money Store $1,000,000.00 100% $1,000,000.00 $295.00
Asset Backed Notes and
The Money Store Asset
Backed Certificates
====================================================================================================
</TABLE>
(1) This Registration Statement and the registration fee pertain to the
initial offering of the securities registered hereunder by the
Registrants, and in addition cover offers and sales relating to
market-making transactions by First Union Capital Markets, a division
of Wheat First Securities, Inc. ("First Union Capital Markets"). First
Union Capital Markets is an affiliate of the Representative and the
Originators. The amount of the securities which may be initially
offered hereunder and the registration fee shall not be reduced by any
offers and sales relating to any such market-making transactions.
(2) Estimated solely for purposes of calculating the registration fee.
- -----------------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED _______________, 1998.
PROSPECTUS SUPPLEMENT
(To Prospectus dated _______ __, 1998)
THE MONEY STORE TRUST 1998-____
<TABLE>
<CAPTION>
<S> <C>
$__________ _____% Class A-1 Certificates $__________ _____% Class A-5 Certificates
$__________ _____% Class A-2 Certificates $__________ _____% Class A-6 Certificates
$__________ _____% Class A-3 Certificates $___________ Adjustable Rate Class A-7 Certificates
$__________ _____% Class A-4 Certificates $___________ _____% Class A-8 Certificates
$__________ _____% Class A-9 Certificates
</TABLE>
The Money Store Asset Backed Certificates, Series 1998-____
THE MONEY STORE INC.
Representative and Servicer
The Money Store Asset Backed Certificates Series 1998-____ (the "Certificates"),
will represent fractional undivided ownership interests in a trust fund,
designated as The Money Store Trust 1998-____ (the "Trust"). The primary assets
of the Trust will be four separate cross-supported pools ("Pool I," "Pool II,"
"Pool III" and "Pool IV," respectively, and collectively, the "Pools") of loans
having the characteristics described herein. Pool I and Pool II will consist of
one- to four-family ("single family") residential first and second mortgage
loans (collectively, the "Home Equity Loans") having original terms to stated
maturity of up to 40 years, and with fixed rates, in the case of Pool I, and
adjustable rates, in the case of Pool II. Pool III will consist of fixed rate,
single family residential first, second and more junior home improvement
mortgage loans having original terms to stated maturity of up to 30 years (the
"Home Improvement Loans"), certain of which Home Improvement Loans (the "FHA
Loans") are partially insured by the Federal Housing Administration (the "FHA")
of the United States Department of Housing and Urban Development ("HUD") under
Title I of the National Housing Act of 1934 ("Title I"). Pool IV will consist of
fixed rate five or more unit residential or mixed-use residential and commercial
first mortgage loans (the "Multifamily Loans" and, together with the Home Equity
Loans and the Home Improvement Loans, the "Loans") having original terms to
stated maturity of up to 30 years. The Trust will also include funds on deposit
in a separate trust account (the "Pre-Funding Account") to be established with
the Trustee (as defined herein). All of the Loans were originated or purchased
by certain wholly-owned subsidiaries (the "Originators") of The Money Store Inc.
(the "Representative"). The Money Store Inc. will act as the servicer (in such
capacity, the "Servicer") of the Loans and the administrator (in such capacity,
the "Claims Administrator") of the FHA Loans. Except for certain representations
and warranties relating to the Loans and certain other matters, The Money Store
Inc.'s obligations with respect to the Loans are limited to its contractual
servicing obligations.
-----------------------------
SEE "RISK FACTORS" ON PAGE S-40 HEREIN AND PAGE 23 OF THE PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE CERTIFICATES OFFERED HEREBY.
-----------------------
<PAGE>
________ certificate guaranty insurance policies (the "Certificate Guaranty
Insurance Policies") with respect to the Class A Certificates,
as defined herein, will be issued by:
[NAME OF CERTIFICATE GUARANTY INSURER]
Full and complete payment to [Name of Trustee] as Trustee for the holders of the
Class A Certificates, of Insured Payments (as defined herein), consisting
primarily of interest due to such holders in respect of the Certificates on each
Remittance Date and principal at the times described herein, is unconditionally
and irrevocably guaranteed pursuant to the terms of the Certificate Guaranty
Insurance Policies. See "The Certificate Guaranty Insurance Policies and the
Certificate Guaranty Insurer" herein for a more complete description of the
Certificate Guaranty Insurance Policies. The Certificate Guaranty Insurer does
not insure any Certificateholders' LIBOR Interest Carryover (as defined herein).
(COVER CONTINUED ON NEXT PAGE)
THE CLASS A CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE MONEY
STORE INC., FIRST UNION NATIONAL BANK, FIRST UNION CORPORATION,
[CERTIFICATE GUARANTY INSURER] OR ANY OF THEIR
RESPECTIVE AFFILIATES OR SUBSIDIARIES.
EXCEPT FOR THE FHA LOANS, THE LOANS ARE NOT INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY, AND NO GOVERNMENTAL
AGENCY HAS PASSED UPON
THE ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION NOR 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 Class A Certificates will be purchased by First Union Capital Markets, a
division of Wheat First Securities, Inc. ("First Union Capital Markets"), an
affiliate of the Representative and the Originators, and [Name of Underwriters]
(together with First Union Capital Markets, the "Underwriters") from the
Originators, and will be offered by the Underwriters from time to time in
negotiated transactions at varying prices to be determined at the time of sale.
Proceeds to the Originators from the sale of the Class A Certificates in the
amounts listed above are expected to be approximately _____% of the aggregate
principal balance of such Certificates, plus, with respect to the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-8 and Class A-9
Certificates, accrued interest thereon at the applicable Pass-Through Rate from
_______, 1998 (or _______, 1998 with respect to the Class A-7 Certificates) to
but not including the Closing Date, but before deducting expenses payable by the
Originators, estimated to be $________. See "Summary of Terms--Securities
Offered" and "Underwriting" herein.
First Union Capital Markets expects to enter into market making transactions in
the Class A Certificates and may act as principal or agent in any such
transactions. Any such purchases or sales will be made at prices related to
prevailing market prices at the time of sale. This Prospectus Supplement and the
Prospectus may be used by First Union Capital Markets in connection with such
transactions.
The Class A Certificates are offered by the Underwriters subject to prior sale,
when, as and if issued to and accepted by the Underwriters, subject to approval
of certain legal matters by counsel for the Underwriters. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the Class A Certificates
will be made in book-entry form only through the Same Day Funds Settlement
System of The Depository Trust Company on or about _______, 1998.
__________ ___, 1998.
FIRST UNION CAPITAL MARKETS
[NAMES OF OTHER UNDERWRITERS]
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
Additional loans (collectively, the "Subsequent Loans") may be purchased by the
Trust from the Originators from time to time on or before the close of business
of _______, 1998 from funds on deposit in the Pre-Funding Account. Any
Subsequent Loan acquired by the Trust for Pools I or II will be assigned to one
of such Pool based upon whether such Subsequent Loan is a Home Equity Loan
bearing interest at a fixed rate or an adjustable rate (in either such case, a
"Subsequent Home Equity Loan"). Any Subsequent Loan acquired by the Trust for
Pool III will be a Home Improvement Loan (a "Subsequent Home Improvement Loan").
Any Subsequent Loan acquired by the Trust for Pool IV will be a Multifamily Loan
(a "Subsequent Multifamily Loan"). See "The Loan Pools--General." On the Closing
Date (as defined herein), an aggregate cash amount not to exceed approximately
$______________, in the case of Pool I, approximately $______________, in the
case of Pool II, approximately $_____________, the case of Pool III, and
approximately $____________, in the case of Pool IV, will be deposited into the
Pre-Funding Account. The amount in the Pre-Funding Account allocated to each
Pool may be used to acquire Subsequent Loans for the respective Pool. See "The
Agreement--Pre-Funding Account" herein.
The Certificates will consist of [9] classes of regular certificates (the "Class
A-1 Certificates," the "Class A-2 Certificates," the "Class A-3 Certificates,"
the "Class A-4 Certificates," the "Class A-5 Certificates," the "Class A-6
Certificates," the "Class A-7 Certificates," the "Class A-8 Certificates" and
the "Class A-9 Certificates," respectively, and collectively, the "Class A
Certificates") and one class of residual certificates (the "Class R
Certificates"). Only the Class A Certificates are offered hereby. The Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Certificates generally
will represent the right to receive payments measured by amounts distributable
on or with respect to the Home Equity Loans in Pool I. The Class A-7
Certificates generally will represent the right to receive payments measured by
amounts distributable on or with respect to the Home Equity Loans in Pool II.
The Class A-8 Certificates generally will represent the right to receive
payments measured by amounts distributable on or with respect to the Home
Improvement Loans in Pool III. The Class A-9 Certificates generally will
represent the right to receive payments measured by amounts distributable on or
with respect to the Multifamily Loans in Pool IV. However, due to the
cross-support provisions described herein, the holders of each Class of
Certificates may receive cash from any Loan, either by direct allocation or
credit support from another Pool. See "Description of the
Certificates--Cross-Support Provisions and Spread Amount" herein.
Distributions of principal and interest to the holders of the Class A
Certificates (the "Class A Certificateholders" or "Holders") 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 _______, 1998 (each such day, a "Remittance
Date"). On each Remittance Date, the owners of the Class A-1 through Class A-6,
Class A-8 and Class A-9 Certificates as of the preceding Record Date (as defined
herein) will be entitled to receive interest on the outstanding principal
balances of the respective Class at the rates set forth on the front cover, and
distributions with respect to principal as described herein. On the first
Remittance Date, the owners of the Class A-7 Certificates will be entitled to
receive interest on the outstanding principal balance of the respective Class at
the rate of _____% per annum. On each Remittance Date thereafter, the owners of
the Class A-7 Certificates will be entitled to receive interest on the
outstanding principal balance of such Class at the adjustable rates determined
as set forth herein. The owners of the Class A-7 Certificates also will receive
distributions with respect to principal as described herein. Additionally, any
Pre-Funded Amount (as defined herein) remaining in the Pre-Funding Account at
the close of business on _______, 1998 will be distributed as a principal
prepayment on _______, 1998 (together with __ days' accrued interest (or, in the
case of the Class A-7 Certificates, __ days' accrued interest) at the applicable
Pass-Through Rates on the amount of such prepayment) to the Class A Certificates
then entitled to receive distributions of principal. The interest due such Class
A Certificates on the _______, 1998 Remittance Date will be adjusted to take
account of such distribution.
There is currently no secondary market for the Class A Certificates. The
Underwriters intend to make a secondary market for the Class A Certificates, but
have no obligation to do so. There can be no assurance that a secondary market
for the Class A Certificates will develop or, if one does develop, that it will
offer sufficient liquidity of investment or continue.
As described herein, a real estate mortgage investment conduit ("REMIC")
election will be made in connection with certain assets of the Trust for federal
income tax purposes. As described more fully herein, the Class A Certificates
will constitute "regular interests" in the REMIC and the Class R Certificates
will constitute the single class of "residual interest" in the REMIC. See
"Federal Income Tax Consequences" in the Prospectus and "Federal Income Tax
Considerations" herein.
The Class A Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by the Originators pursuant to the
Prospectus dated _______, 1998, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
(END OF COVER PAGE)
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
[CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS WHICH
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE
COVERING TRANSACTIONS. FOR A DETAILED DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."]
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.]
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by or on behalf
of the Trust with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "1934 Act"), on or
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates made by this Prospectus
Supplement. The Representative will provide without charge to each person to
whom this Prospectus Supplement and Prospectus are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to The
Money Store Inc., 707 Third Street, West Sacramento, California 95605 Attention:
Finance Department, Telephone: (916) 617-2001.
<PAGE>
SUMMARY OF TERMS
THIS FOLLOWING SUMMARY OF CERTAIN PERTINENT INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED
BUT NOT DEFINED IN THIS SUMMARY OF TERMS HAVE THE MEANINGS ASSIGNED TO SUCH
TERMS ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT.
Securities Offered............... The Money Store Asset Backed Certificates,
Series 1998-____, Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6, Class
A-7, Class A-8 and Class A-9 (the "Class A-1
Certificates," the "Class A-2 Certificates,"
the "Class A-3 Certificates," the "Class A-4
Certificates," the "Class A-5 Certificates,"
the "Class A-6 Certificates," the "Class A-7
Certificates," the "Class A-8 Certificates"
and the "Class 9 Certificates," respectively,
and collectively, the "Class A
Certificates").
The Class A-1 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-2 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-3 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-4 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-5 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-6 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-7 Certificates will be issued in
the initial principal amount of $___________
and will bear interest for the first
Remittance Date at the rate of _____% per
annum. For each Remittance Date thereafter,
the Class A-7 Certificates will bear interest
at a rate equal to LIBOR (as defined herein)
plus _____% (or _____% for each Remittance
Date occurring after the Optional Servicer
Termination Date), subject to the Net Funds
Cap (as defined herein), but in no event
greater than ____% per annum.
The Class A-8 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The Class A-9 Certificates will be issued in
the initial principal amount of $__________
and will bear interest at the rate of _____%
per annum.
The statistical information presented in this
Prospectus Supplement concerning the Pool I,
Pool II, Pool III and Pool IV Loans (each as
defined herein) is based on preliminary Pools
expected to be delivered to the Trustee and
Co-Trustee on the Closing Date. The
Representative expects that loans (including
the Subsequent Loans) that were not contained
in the preliminary Pools will be added to the
final Pools. While the statistical
distribution of the characteristics for the
final Pools of Loans will vary somewhat from
the statistical distribution of such
characteristics for the preliminary Pools of
Loans presented in this Prospectus
Supplement, the Representative does not
believe that the characteristics of the final
Pools will differ materially.
Cut-Off Date..................... __________, 1998.
Closing Date..................... __________,1998.
Issuer........................... The Money Store Trust 1998-____ (the "
Trust").
Representative, Servicer and
Claims Administrator........... The Money Store Inc., a
New Jersey corporation (in its capacity as
sponsor of the Trust, the "Representative,"
in its capacity as the servicer of the
Loans, the "Servicer," and in its capacity
as the administrator of the insurance claims
to the FHA (the "Claims") with respect to
the FHA Loans, the "Claims Administrator").
In the Agreement (as defined herein), the
Claims Administrator will appoint its
subsidiary, TMS Mortgage Inc., a New Jersey
corporation, to assist in performing the
functions of the Claims Administrator. The
principal offices of The Money Store Inc.
are located at 707 Third Street, West
Sacramento, California 95605 (telephone
number (916) 617-1000) and 2840 Morris
Avenue, Union, New Jersey 07083 (telephone
number (908) 686-2000). On June 30, 1998,
the Representative became a wholly-owned
subsidiary of First Union National Bank a
national banking association, which is the
principal banking subsidiary of First Union
Corporation. First Union Corporation also is
the ultimate parent of First Union Capital
Markets and [List other First Union entities
involved in the transaction]. See "The
Representative and the Originators" herein
and in the Prospectus.
Trustee.......................... [NAME OF TRUSTEE,] a _________ banking
corporation,] in its capacity as trustee. See
"The Trustee" herein.
[Co-Trustee ..................... [NAME OF CO-TRUSTEE,] a ________ banking
association headquartered in ________, will
be the Co-Trustee with respect to the Home
Improvement Loans. See "The Co-Trustee"
herein.]
[Custodian ...................... [NAME OF CUSTODIAN,] a ________ banking
association, headquartered in ________, will
be the Custodian with respect to the [Home
Improvement] Loans. In such capacity, it will
retain the files relating to the Home
Improvement Loans. See "The Custodian"
herein.] [First Union National Bank, Trust
Department, an affiliate of the
Representative, the Originators and First
Union Capital Markets, will maintain
possession of certain documents relating to
the Loans unless and until an Assignment
Event (as defined herein) occurs.]
Originators of the Loans......... Each Home Equity Loan to be included in Pool
I and Pool II, each of the Home Improvement
Loans to be included in Pool III and each of
the Multifamily Loans to be included in Pool
IV will have been originated and
underwritten, or purchased and
re-underwritten, by certain wholly-owned
subsidiaries of the Representative (the
"Originators"). Additionally, each Subsequent
Loan to be included in Pool I, Pool II, Pool
III and Pool IV will have been originated and
underwritten, or purchased and
re-underwritten, by an Originator.
Description of the Certificates.. The Money Store Asset Backed Certificates,
Series 1998-____ (the "Certificates") consist
of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6, Class A-7, Class
A-8 and Class A-9 Certificates (collectively,
the "Class A Certificates") and the Class R
Certificates. Only the Class A Certificates
are offered hereby.
The Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the
"Agreement"), dated as of the Cut-Off Date,
among the Representative, the Originators and
[NAME OF TRUSTEE], as trustee (the
"Trustee").
The Certificates will represent fractional
undivided ownership interests in the Trust,
the assets of which will consist primarily of
four separate pools ("Pool I," "Pool II,"
"Pool III" and "Pool IV," respectively, and
collectively, the "Pools") of Loans having
the characteristics described herein.
Pool I and Pool II will consist of one- to
four-family ("single-family") residential
first and second mortgage loans
(collectively, the "Home Equity Loans," which
term includes any Subsequent Home Equity
Loans acquired by either Pool I or Pool II,
unless the context requires otherwise)
expected to have aggregate principal balances
as of the Cut-Off Date of approximately
$______________ and $--------------,
respectively, and original terms to stated
maturity of up to 40 years. As described
herein, each of the Home Equity Loans in Pool
I (the "Pool I Home Equity Loans" or the
"Pool I Loans," which terms include any
Subsequent Home Equity Loans acquired by Pool
I, unless the context requires otherwise)
will bear interest at a fixed rate and each
of the Home Equity Loans in Pool II (the
"Pool II Home Equity Loans" or the "Pool II
Loans," which terms include any Subsequent
Home Equity Loans acquired by Pool II, unless
the context requires otherwise) will bear
interest at an adjustable rate as described
below. See "The Loan Pools--The Home Equity
Loan Pools" herein.
Pool III will consist of fixed rate, single
family residential first, second and more
junior home improvement loans (the "Home
Improvement Loans" or "Pool III Loans," which
terms include any Subsequent Home Improvement
Loans acquired by Pool III, unless the
context requires otherwise) expected to have
an aggregate principal balance as of the
Cut-Off Date of approximately $_____________
and original terms to stated maturity of up
to 30 years.
Pool IV will consist of five or more unit
residential or mixed-use residential and
commercial first mortgage loans (the
"Multifamily Loans" or "Pool IV Loans," which
terms include any Subsequent Multifamily
Loans acquired by Pool IV, unless the context
requires otherwise) expected to have an
aggregate principal balance as of the Cut-Off
Date of approximately $____________ and
original terms to stated maturity of up to 30
years. See "The Loan Pools--The Multifamily
Loan Pool" herein.
Collectively, the Home Equity Loans, the Home
Improvement Loans and the Multifamily Loans
are at times referred to herein as the
"Loans."
The Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5 and Class A-6 Certificates
generally will be entitled to receive
payments measured by amounts distributable on
or with respect to the Pool I Home Equity
Loans in the order and priorities described
herein. The Class A-7 Certificates generally
will be entitled to receive payments measured
by amounts distributable on or with respect
to the Pool II Home Equity Loans. The Class
A-8 Certificates generally will be entitled
to receive payments measured by amounts
distributable on or with respect to the Pool
III Home Improvement Loans. The Class A-9
Certificates generally will be entitled to
receive payments measured by amounts
distributable on or with respect to the Pool
IV Multifamily Loans. However, due to the
cross-support provisions described herein,
the holders of each Class of Certificates may
receive cash from any Loan, either by direct
allocation or credit support from another
Pool. See "Description of the
Certificates--Cross-Support Provisions and
Spread Amount" herein. Also, amounts, if any,
on deposit in the Spread Account described
herein will be available to cover shortfalls
in amounts due Certificateholders, without
distinction as to Pool.
The Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5 and Class A-6 Certificates are
also referred to herein as the "Pool I
Certificates" and the holders of the Class
A-1, Class A-2, Class A-3, Class A-4, Class
A-5 and Class A-6 Certificates are also
referred to herein as the "Pool I
Certificateholders." The Class A-7
Certificates are also referred to herein as
the "Pool II Certificates" and the holders of
the Class A-7 Certificates are also referred
to herein as the "Pool II
Certificateholders." The Class A-8
Certificates are also referred to herein as
the "Pool III Certificates" and the holders
of the Class A-8 Certificates are also
referred to herein as the "Pool III
Certificateholders." The Class A-9
Certificates are also referred to herein as
the "Pool IV Certificates" and the holders of
the Class A-9 Certificates are also referred
to herein as the "Pool IV
Certificateholders."
The projected last Remittance Dates for the
Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6, Class A-7-I, Class
A-7-II, Class A-8 and Class A-9 Certificates
are, ________, -------, -------, ---------,
---------, ---------, ---------, ________,
_______, and, _______, respectively. It is
expected that the actual last Remittance Date
for each Class of Class A Certificates will
occur significantly earlier than its
projected last Remittance Date. See
"Maturity, Prepayment and Yield
Considerations" herein.
The Class A Certificates are issuable in
book-entry form in minimum denominations of
$1,000 original principal amount and integral
multiples of $1,000 in excess thereof, except
that one certificate of each Class of Class A
Certificates may be issued in a different
denomination and, if so issued, will be held
in physical form.
Pre-Funding Account.............. On the Closing Date, an aggregate cash amount
(the "Pre-Funded Amount") will be deposited
into the Pre-Funding Account in an amount not
to exceed approximately $______________, in
the case of Pool I, approximately
$______________, in the case of Pool II,
approximately $_____________, in the case of
Pool III, and $____________, in the case of
Pool IV. Amounts allocated to Pool I, Pool
II, Pool III and Pool IV, as the case may be,
may be used only (i) to acquire Subsequent
Loans for the related Pool and (ii) to make
accelerated payments of principal on the
Certificates of the related Pool. 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 _______, 1998, amounts will,
from time to time, be withdrawn from the
Pre-Funding Account to purchase Subsequent
Home Equity Loans, Subsequent Home
Improvement Loans or Subsequent Multifamily
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 Class A Certificates of the
related Pool as set forth herein under "--
Principal." However, any Pre-Funded Amount
remaining at the close of business on
_______, 1998 will be distributed as a
principal prepayment on _______, 1998 (the
"Special Remittance Date") to the Class A
Certificates.
The Pre-Funding Account moneys funded from
the sale of Pool I, Pool II, Pool III or Pool
IV Certificates, respectively, may not be
used to acquire Loans relating to any other
Pool.
Capitalized Interest Account.... On the Closing Date, the Representative also
will make a cash deposit in an account (the
"Capitalized Interest Account") in the name
of the Trustee on behalf of the Trust. The
amount, if any, deposited in the Capitalized
Interest Account will be used by the Trustee
on the Remittance Dates occurring in _______,
_______ and _______ 1998 to fund the excess,
if any, of (i) the amount of interest accrued
for each such Remittance Date at the weighted
average Pass-Through Rates of the Class A
Certificates on the portion of the Class A
Certificates having principal balances
exceeding the principal balances of the Loans
over (ii) the amount of any earnings on funds
in the Pre-Funding Account that are
available to pay interest on the Class A
Certificates on each such Remittance Date.
Additionally, if a principal prepayment is
made on the Special Remittance Date to any
Class of Class A Certificates, such Class A
Certificates also will receive on such date,
from the Capitalized Interest Account, an
amount equal to __ days' interest (or, in the
case of the Class A-7 Certificates, __ days'
interest) at the applicable Pass-Through
Rates on the amount of such principal
prepayment. Any amounts remaining in the
Capitalized Interest Account on the Special
Remittance Date and not used for such
purposes are required to be paid directly to
the holders of the Class R Certificates on
such Special Remittance Date.
Remittance and Record
Dates.......................... Distributions on the Class A Certificates
will be made by or on behalf of the Trustee
on the 15th day of each month, or if such day
is not a business day, on the first business
day thereafter, commencing _______, 1998
(each, a "Remittance Date"), to each person
in whose name a Class A Certificate is
registered on the last day of the preceding
calendar month (the "Record Date"), except
that the final distribution on each Class of
Class A Certificates will be made only upon
presentation and surrender of such
Certificates at the office or agency
designated for that purpose. Any Pre-Funded
Amount remaining at the close of business on
_______, 1998 (together with __ days'
interest (or, in the case of the Class A-7
Certificates, __ days' interest) thereon at
the applicable Pass-Through Rates) will be
distributed by or on behalf of the Trustee on
the Special Remittance Date to the Classes of
Class A Certificates of the related Pool then
entitled to receive payments of principal in
the order and percentages as described herein
under "--Principal." Such distribution will
be made to each person in whose name a Class
A Certificate of any such Class is registered
on _______, 1998.
Interest......................... To the extent funds are available therefor
from receipts on the Pool I, Pool II, Pool
III or Pool IV Loans, as the case may be,
advances by the Servicer, payments under the
related Certificate Guaranty Insurance Policy
(and, with respect to the Pool III
Certificates, any FHA Payments, as defined
below under "--Obligations of the Claims
Administrator") and, for the Remittance Dates
occurring in _______, _______ and _______
1998, any amounts transferred to the
Certificate Account (as defined under "The
Agreement--Payments on the Loans" herein)
from the Pre-Funding Account or the
Capitalized Interest Account, on each
Remittance Date, the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6,
Class A-8 and Class A-9 Certificateholders
will receive 30 days' interest at the rate of
_____% per annum (the "Class A-1 Pass-Through
Rate"), _____% per annum (the "Class A-2
Pass-Through Rate"), _____% per annum (the
"Class A-3 Pass-Through Rate"), _____% per
annum (the "Class A-4 Pass-Through Rate"),
_____% per annum (the "Class A-5 Pass-Through
Rate"), _____% per annum (the "Class A-6
Pass-Through Rate"), _____% per annum (the
"Class A-8 Pass-Through Rate") and _____% per
annum (the "Class A-9 Pass-Through Rate"),
respectively, on the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6,
Class A-8 and Class A-9 Principal Balances
(as defined under "Description of the
Certificates-Distributions on the Class A
Certificates" herein) outstanding immediately
prior to such Remittance Date. Also, to the
extent funds are available therefor, the
Class A-7 Certificateholders will receive one
month's interest (based on the actual number
of days elapsed) at the rate (the "Class A-7
Pass-Through Rate") of LIBOR plus % (or % for
each Remittance Date occurring after the
Optional Servicer Termination Date), subject
to the Net Funds Cap, but in no event greater
than % (which maximum rate will be effective
commencing with the Remittance Date occurring
in __________ 199_).
The amount of interest each Class of
Certificates is entitled to receive on each
Remittance Date is referred to as the "Class
A-1 Current Interest Requirement," the "Class
A-2 Current Interest Requirement," the "Class
A-3 Current Interest Requirement," the "Class
A-4 Current Interest Requirement," the "Class
A-5 Current Interest Requirement," the "Class
A-6 Current Interest Requirement," the "Class
A-7 Current Interest Requirement," the "Class
A-8 Current Interest Requirement" and the
"Class A-9 Current Interest Requirement,"
respectively.
The Class A-1 Current Interest Requirement,
the Class A-2 Current Interest Requirement,
the Class A-3 Current Interest Requirement,
the Class A-4 Current Interest Requirement,
the Class A-5 Current Interest Requirement
and the Class A-6 Current Interest
Requirement are also referred to herein
collectively as the "Pool I Current Interest
Requirement." The Class A-7 Current Interest
Requirement is also referred to herein as the
"Pool II Current Interest Requirement." The
Class A-8 Current Interest Requirement is
also referred to herein as the "Pool III
Current Interest Requirement." The Class A-9
Current Interest Requirement is also referred
to herein as the "Pool IV Current Interest
Requirement."
Notwithstanding the foregoing, if a principal
prepayment is made to a Class of Class A
Certificates on the Special Remittance Date,
each such Class also will receive on such
date ___ days' interest (or, in the case of
the Class A-7 Certificates, __days' interest)
at the applicable Pass-Through Rate on the
amount of such prepayment. Further, the
Current Interest Requirement for each such
Class for the _______ 1998 Remittance Date
will be based on 30 days' interest (or, in
the case of the Class A-7 Certificates, the
actual number of days since the _______ 1998
Remittance Date) on the related Principal
Balance on _______, 1998, after giving effect
to such principal prepayment.
As to any Remittance Date, the "Net Funds
Cap" will be a percentage equal to the
difference between (A) the sum of (i) the
weighted average Pool II Mortgage Interest
Rate and (ii), through and including the
Remittance Date occurring in __________,
199_, to the extent available, one-twelfth of
_______% of the principal balance of the Pool
I Loans immediately prior to the related Due
Period (and, with respect to the Remittance
Dates in _______, _______ and _______, 1998,
one-twelfth of ________% of the amount in the
Pre-Funding Account immediately prior to such
Remittance Date allocated to Pool I), in each
case expressed as a percentage of the Class
A-7 Principal Balance immediately prior to
such Remittance Date, minus (B) the sum of
(i) the percentages used in determining the
Servicing Fee, the Contingency Fee, the fee
due the Trustee, the premium due the
Certificate Guaranty Insurer and, (ii)
commencing with the Remittance Date in
_________, 1998, one-twelfth of ________% of
the principal balance of the Pool II Loans
immediately prior to the related Due Period
expressed as a percentage of the Class A-7
Principal Balance immediately prior to such
Remittance Date.
If on any Remittance Date the Pass-Through
Rate for the Class A-7 Certificates is based
upon the Net Funds Cap, the excess of (i) the
amount of interest the Class A-7 Certificates
would be entitled to receive on such
Remittance Date at a rate equal to LIBOR plus
the applicable margin (but in no event
greater than ____%) over (ii) the amount of
interest such Class will receive on such
Remittance Date at the Net Funds Cap,
together with the unpaid portion of any such
excess from prior Remittance Dates (and
interest accrued thereon at the then
applicable Pass-Through Rate, without giving
effect to the Net Funds Cap) is referred to
herein as the "Certificateholders' LIBOR
Interest Carryover." Any Certificateholders'
LIBOR Interest Carryover will be paid on
future Remittance Dates as set forth herein
under "The Agreement--Flow of Funds." No
Certificateholders' LIBOR Interest Carryover
will be paid to the Class A-7 Certificates
after the Principal Balance of such Class is
reduced to zero. The ratings of the Class A-7
Certificates do not address the likelihood of
the payment of the amount of any
Certificateholders' LIBOR Interest Carryover
and the Certificate Guaranty Insurance
Policies do not guaranty payment of any such
amount.
Interest with respect to the Class A
Certificates will accrue on the basis of a
360-day year consisting of twelve 30-day
months (or, in the case of the Class A-7
Certificates, on the basis of a 360-day year
consisting of the actual number of days
elapsed since interest was last paid). See
"Description of the Certificates" herein.
Principal........................ To the extent funds are available therefor
from receipts on the Pool I, Pool II, Pool
III or Pool IV Loans, as the case may be,
payments under the related Certificate
Guaranty Insurance Policy (and, with respect
to the Pool III Certificates, any FHA
Payments) and, if applicable, for the
Remittance Dates occurring in _______,
_______ and _______, 1998, any amounts
transferred to the Certificate Account from
the Pre-Funding Account or the Capitalized
Interest Account, and after payment of
interest as described above, on each
Remittance Date, the Pool I, Pool II, Pool
III and Pool IV Certificateholders will
receive an amount (the "Pool I Principal
Distribution Amount," the "Pool II Principal
Distribution Amount," the "Pool III Principal
Distribution Amount" and the "Pool IV
Principal Distribution Amount," respectively)
equal to the excess of (X) the sum, without
duplication, of (i) each payment of principal
received by the Servicer or any Subservicer
(exclusive of Curtailments, Principal
Prepayments and amounts described in clause
(iii) hereof) during the related Due Period
with respect to the Pool I, Pool II, Pool III
or Pool IV Loans, as the case may be, (ii)
all Curtailments and all Principal
Prepayments received by the Servicer or any
Subservicer during the related Due Period
with respect to the Pool I, Pool II, Pool III
or Pool IV Loans, as the case may be, (iii)
the principal portion of all Insurance
Proceeds, Released Mortgaged Property
Proceeds and Net Liquidation Proceeds
received by the Servicer or any Subservicer
during the related Due Period with respect to
the Pool I, Pool II, Pool III or Pool IV
Loans, as the case may be (and, with respect
to the Pool III Loans, any FHA Payments
received by the Claims Administrator with
respect to principal during the related Due
Period), (iv) that portion of the purchase
price for any Pool I, Pool II, Pool III or
Pool IV Loan, as the case may be, repurchased
and allocable to principal and any
Substitution Adjustments, in either case to
the extent received by the Trustee as of the
related Determination Date, (v) any proceeds
representing principal received by the
Trustee in connection with the liquidation of
Pool I, Pool II, Pool III or Pool IV, as the
case may be, or termination of the Trust,
(vi) the amount of any Subordination Deficit
(as defined under "Description of the
Certificates--Spread Amount" herein) with
respect to Pool I, Pool II, Pool III or Pool
IV, as the case may be, for such Remittance
Date, (vii) any moneys released from the
Pre-Funding Account, if any, on the _______,
_______ or _______ 1998 Remittance Date as a
prepayment of the Pool I, Pool II, Pool III
or Pool IV Certificates, and (viii) the
amount of any Subordination Increase Amount
(as defined under "Description of the
Certificates--Spread Amount" herein) with
respect to Pool I, Pool II, Pool III or Pool
IV, as the case may be, for such Remittance
Date, over (Y) the amount of any
Subordination Reduction Amount (as defined
under "Description of the
Certificates--Spread Amount" herein) with
respect to Pool I, Pool II, Pool III or Pool
IV, as the case may be, for such Remittance
Date.
On each Remittance Date, the Pool I Principal
Distribution Amount will be distributed to
the Holders of the Pool I Certificates in the
following order of priority: (i) first, to
the Class A-1 Certificateholders until the
Class A-1 Principal Balance is reduced to
zero and such Certificateholders have
received an amount equal to the amount
described in clause (iv) of the definition of
Pool I Distribution Amount that is recovered
from such Certificateholders; (ii) second, to
the Class A-2 Certificateholders until the
Class A-2 Principal Balance is reduced to
zero and such Certificateholders have
received an amount equal to the amount
described in clause (iv) of the definition of
Pool I Distribution Amount that is recovered
from such Certificateholders, (iii) third, to
the Class A-3 Certificateholders until the
Class A-3 Principal Balance is reduced to
zero and such Certificateholders have
received an amount equal to the amount
described in clause (iv) of the definition of
Pool I Distribution Amount that is recovered
from such Certificateholders, (iv) fourth, to
the Class A-4 Certificateholders until the
Class A-4 Principal Balance is reduced to
zero and such Certificateholders have
received an amount equal to the amount
described in clause (iv) of the definition of
Pool I Distribution Amount that is recovered
from such Certificateholders, (v) fifth, to
the Class A-5 Certificateholders until the
Class A-5 Principal Balance is reduced to
zero and such Certificateholders have
received an amount equal to the amount
described in clause (iv) of the definition of
Pool I Distribution Amount that is recovered
from such Certificateholders; and (vi) sixth,
to the Class A-6 Certificateholders until the
Class A-6 Principal Balance is reduced to
zero and such Certificateholders have
received an amount equal to the amount
described in clause (iv) of the definition of
Pool I Distribution Amount that is recovered
from such Certificateholders.
On each Remittance Date, the Pool II
Principal Distribution Amount will be
distributed to the Class A-7
Certificateholders until the Class A-7
Principal Balance is reduced to zero and such
Certificateholders have received an amount
equal to the amount described in clause (iv)
of the definition of Pool II Distribution
Amount that is recovered from such
Certificateholders.
On each Remittance Date, the Pool III
Principal Distribution Amount will be
distributed to the Class A-8
Certificateholders until the Class A-8
Principal Balance is reduced to zero and such
Certificateholders have received an amount
equal to the amount described in clause (iv)
of the definition of Pool III Distribution
Amount that is recovered from such
Certificateholders.
On each Remittance Date, the Pool IV
Principal Distribution Amount will be
distributed to the Class A-9
Certificateholders until the Class A-9
Principal Balance is reduced to zero and such
Certificateholders have received an amount
equal to the amount described in clause (iv)
of the definition of Pool IV Distribution
Amount that is recovered from such
Certificateholders.
On any Remittance Date, the "Pool I
Distribution Amount," the "Pool II
Distribution Amount," the "Pool III
Distribution Amount" and the "Pool IV
Distribution Amount" will equal the sum of
(i) the Pool I, Pool II, Pool III or Pool IV
Principal Distribution Amount, as the case
may be, (ii) the Pool I, Pool II, Pool III or
Pool IV Current Interest Requirement, as the
case may be, (iii) the Pool I Carry-Forward
Amount, the Pool II Carry-Forward Amount,
the Pool III Carry-Forward Amount or the Pool
IV Carry-Forward Amount as the case may be,
and (iv) any amount received by the Trustee
from the Servicer that constitutes a Monthly
Advance with respect to a Pool I, Pool II,
Pool III or Pool IV Loan, as the case may be,
and 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.
The "Due Period" with respect to any
Remittance Date is the calendar month
preceding the month of such Remittance Date.
The "Pool I Carry-Forward Amount," the "Pool
II Carry-Forward Amount," the "Pool III
Carry-Forward Amount" and the "Pool IV
CarryForward Amount" with respect to any
Remittance Date will equal the amount, if
any, by which (i) the Pool I, Pool II, Pool
III or Pool IV Distribution Amount, as the
case may be, as of the immediately preceding
Remittance Date exceeded (ii) the amount of
the actual distribution to the Holders of the
Pool I, Pool II, Pool III or Pool IV
Certificates, as the case may be, made on
such Remittance Date (less the amount of
Insured Payments, if any, on such date)
together with interest on the amount of such
excess at one-twelfth the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 or Class
A-6 Pass-Through Rate, as the case may be,
with respect to the Pool I Certificates, the
Class A-7 Pass-Though Rate with respect to
the Pool II Certificates, the Class A-8
Pass-Through Rate with respect to the Pool
III Certificates or the Class A-9
Pass-Through Rate with respect to the Pool IV
Certificates. The Pool II Carry-Forward
Amount does not include any
Certificateholders' LIBOR Interest Carryover.
As described above, the Holders of the Class
A Certificates will be entitled to receive
monthly distributions of principal on each
Remittance Date that generally reflects
actual (as opposed to scheduled) collections
of principal during the related Due Period.
Recoveries for losses on Loans that were
finally liquidated during a Due Period (the
"Unrecovered Amounts") may or may not be
distributed to the holders of the Class A
Certificates on the related Remittance Date.
However, Holders of Class A Certificates are
entitled to receive ultimate recovery of any
Unrecovered Amounts relating to the
applicable Pool of Loans. See "Description of
the Certificates--The Pool I, Pool II, Pool
III and Pool IV Distribution Amounts" herein.
Credit Enhancement............... The credit enhancement provided for the
benefit of the Class A Certificates consists
of (i) the spread amount, the spread account
and cross-support features, which utilize the
internal cash flows of the Trust as described
herein and (ii) the Certificate Guaranty
Insurance Policies. Additionally, the Pool
III Certificates have the benefit of the FHA
Insurance described herein.
Spread Amount.................... The subordination provisions of the Trust are
intended to provide for limited acceleration
of the Class A Certificates relative to the
amortization of the Loans, generally in the
early months of the transaction. The
accelerated amortization is achieved by
applying certain excess interest collected on
the Loans to the payment of principal on the
Class A Certificates, first for the related
Pool and then for any other Pool. This
acceleration feature is intended to create,
with respect to each Pool of Loans, an amount
(the "Spread Amount"), resulting from, and
equal to, the excess of the aggregate
principal balances of the Loans of the
related Pool (plus any amounts on deposit in
the Spread Account referred to below) over
the principal balances of the Certificates of
the related Pool. The Agreement provides
that, subject to certain floors, caps and
triggers, the required level of the Spread
Amount with respect to each Pool of Loans may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Certificates
of the related Pool 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. The Agreement also provides
that such excess interest, together with
certain other excess amounts, generated by
one Pool of Loans may be used to fund
shortfalls and increase the Spread Amount in
the other Pools of Loans, subject to certain
prior requirements for application of such
excess amounts. See "Description of the
Certificates--Spread Amount" and "Description
of the Certificates--Cross-Support Provisions
and Spread Amount" herein.
The Agreement also will provide that
following the Funding Period the required
level of the Spread Amount with respect to
each Pool of Loans may be increased. In such
event, cash up to the amount of such increase
may be deposited into an account (the "Spread
Account") to be maintained with the Trustee.
Amounts, if any, on deposit in the Spread
Account will be available to fund any Insured
Payments (as defined below) otherwise
required to be made on a Remittance Date,
without distinction as to the Pool.
Additionally, if the level of delinquencies
for the Pool III Loans exceeds certain
specified levels, excess interest received on
the Pool III Loans will not be available to
make accelerated payments of principal on
Certificates of other Pools. Rather, such
excess interest will be deposited into the
Spread Account and will be available to fund
any Insured Payments for any Pool otherwise
required to be made on a Remittance Date.
[Certificate Guaranty
Insurance Policies............ [NAME OF CERTIFICATE GUARANTY INSURER], a
stock insurance corporation (the "Certificate
Guaranty Insurer"), will provide separate
insurance policies (collectively, the
"Certificate Guaranty Insurance Policies")
relating to the Pool I, Pool II, Pool III and
Pool IV Certificates, respectively. Subject
to the requirements of the Certificate
Guaranty Insurance Policies described under
"The Certificate Guaranty Insurance Policies
and Certificate Guaranty Insurer,"
Certificate Guaranty Insurer unconditionally
and irrevocably guarantee that the full
amount of each Insured Payment (defined
herein) will be received by the Insurance
Paying Agent (the "Insurance Paying Agent"),
which initially will be [NAME OF INSURANCE
PAYING AGENT], for distribution by the
Trustee. Certificate Guaranty Insurer's
obligations under the Certificate Guaranty
Insurance Policies will be discharged to the
extent funds equal to the amount required to
be paid thereunder are received by the
Insurance Paying Agent, whether or not such
funds are properly applied by the Trustee or
the Insurance Paying Agent. The Certificate
Guaranty Insurance Policies are
noncancellable for any reason.
"Insured Payment" means (i) as of any
Remittance Date, any Deficiency Amount (as
defined below under "The Certificate Guaranty
Insurance Policies and Certificate Guaranty
Insurer") and (ii) any Preference Amount (as
defined below under "The Certificate Guaranty
Insurance Policies and Certificate Guaranty
Insurer").
As stated above, amounts, if any, in the
Spread Account will be used to fund Insured
Payments prior to draws being made on the
Certificate Guaranty Insurance Policies.
The Certificate Guaranty Insurance Policies
do not (i) cover The Money Store Inc.'s
obligation under the Agreement to repurchase
or substitute for Loans with respect to which
there has been a breach of representation,
(ii) cover any Certificateholders' LIBOR
Interest Carryover, (iii) guarantee any
specified rate of prepayments, or (iv)
provide funds to redeem the Certificates on
any specified date.
Subject to the terms of the Agreement,
Certificate Guaranty Insurer will be
subrogated to the rights of the Holders of
the Class A Certificates to the extent of any
Insured Payments made under the applicable
Certificate Guaranty Insurance Policy, but
its right to reimbursement will be subject to
the prior rights of the Holders of the Class
A Certificates to amounts to which such
Holders are entitled under the Agreement.]
FHA Insurance.................... Subject to the then remaining Reserve Amount
(as defined below) of the Co-Trustee, each
FHA Loan will be insured by the FHA in an
amount currently equal to 90% of the sum of
the following: (i) the unpaid principal and
uncollected interest earned to the date of
default, calculated on the actuarial method
even if the Mortgage Note (as defined herein)
relating to such FHA Loan provides for simple
interest, reduced by certain amounts received
by the Claims Administrator in connection
with enforcing a lien on the related
Mortgaged Property prior to the lien of the
related FHA Loan; (ii) the unpaid amount of
interest on the unpaid principal from the
date of default to the date of the initial
submission of the related Claim to the FHA
for payment plus 15 calendar days, but not
for any period greater than nine months from
the date of default, calculated at 7% per
annum; and (iii) the amount of certain
uncollected court costs, attorney's fees, and
expenses for recording the assignment of the
related Mortgage to the United States. See
"The Trusts--FHA Loans" in the Prospectus and
"Risk Factors--Limitations on FHA Insurance"
and "Lending Programs--The Home Improvement
Lending Program--FHA Loans" herein.
The Co-Trustee's Reserve Amount.. Each of the FHA Loans will be insured by the
FHA, to the extent described herein, under
each Originator's FHA contract of insurance.
In connection with the transfer of the FHA
Loans from the Originators to the Co-Trustee,
the Originators also will file with the FHA
all documents necessary to effect the
transfer of the FHA insurance reserves
applicable to the FHA Loans to the
Co-Trustee's FHA contract of insurance.
Based upon information provided by the FHA,
The Money Store Inc. believes that upon the
transfer referred to above and after the
Funding Period, the FHA insurance available
to the Co-Trustee will be equal to at least
(A) 10% of the principal balance of the FHA
Loans as of the Cut-Off Date or Subsequent
Cut-Off Date, as the case may be; or (B)
thereafter, 10% of the principal balance of
all Title I loans originated or purchased and
currently reported for FHA insurance by the
Co-Trustee, less amounts for annual
reductions as described below and for
insurance claims previously paid to the
Co-Trustee by the FHA, including payments in
respect of loans other than the FHA Loans,
and increased by an amount equal to 10% of
the lesser of the original principal balance
or the purchase price paid for Title I loans
subsequently originated or purchased of
record by the Co-Trustee (in the case of
clause (A) or (B), the "Reserve Amount"). See
"The Trusts--FHA Insurance" in the Prospectus
and "Risk Factors--Limitations on FHA
Insurance" herein.
FHA Claims paid to the Co-Trustee by the FHA
with respect to Title I loans other than the
FHA Loans may affect the total amount of the
Reserve Amount.
Since the adequacy of the Co-Trustee's
Reserve Amount is dependent upon future
events, including the annual reductions in
the Reserve Amount and the reductions for the
payment of claims, no assurance can be given
that the Reserve Amount is or will be
adequate to cover 90% of all potential losses
on the FHA Loans. See "Risk
Factors--Limitations on FHA Insurance"
herein.
Obligation of the Claims
Administrator................. If any FHA Loan becomes a 90 Day Delinquent
FHA Loan (as defined below), and if
sufficient coverage is available in the
Reserve Amount to make an FHA Payment with
respect to such FHA Loan, the Claims
Administrator may, in its sole discretion,
during any subsequent Due Period, determine
to file a Claim with the FHA with respect to
such 90 Day Delinquent FHA Loan. If the
Claims Administrator determines to file such
a Claim, the Claims Administrator will so
notify the Co-Trustee and the Custodian no
later than the Determination Date following
such determination and shall request delivery
of the related loan file (the "Trustee's Loan
File"). Upon receipt of such certification
and request, the Custodian shall, no later
than the related Remittance Date, release to
the Claims Administrator the related
Trustee's Loan File and the Co-Trustee and
the Custodian shall execute and deliver such
instruments necessary to enable the Claims
Administrator to file a Claim with the FHA on
behalf of the Co-Trustee. Within 120 days of
its receipt of the related Trustee's Loan
File, the Claims Administrator shall, in its
sole discretion, either file a Claim with the
FHA for an FHA Payment with respect to such
90 Day Delinquent FHA Loan or, if the Claims
Administrator determines not to file such a
Claim, return to the Co-Trustee the related
Trustee's Loan File.
With respect to any 90 Day Delinquent FHA
Loan transferred to the Claims Administrator
as described above, the Claims Administrator
shall deposit (or, if the Claims
Administrator is not also the Servicer, the
Claims Administrator shall instruct the
Servicer to deposit) in the Principal and
Interest Account within 24 hours of receipt
or determination thereof the following
amounts (such amounts to be net of certain
amounts that would be reimbursable to the
Servicer under the Agreement with respect to
amounts in the Principal and Interest
Account): (i) any FHA Payments; (ii) the
amount, if any, by which the FHA Payment was
reduced in accordance with FHA Regulations
due to the Claims Administrator enforcing a
lien on the related Mortgaged Property prior
to the lien of the related 90 Day Delinquent
FHA Loan; and (iii) any principal and
interest payments received with respect to a
90 Day Delinquent FHA Loan after the Due
Period in which the FHA Loan is transferred
to the Claims Administrator and before either
the related FHA Payment is paid or the
related Trustee's Loan File is returned to
the Co-Trustee, as the case may be (the
amounts referred to in (ii) and (iii) above
are referred to herein as "Related
Payments").
If an FHA Loan becomes a 90 Day Delinquent
FHA Loan when there is insufficient coverage
in the Reserve Amount or if the Claims
Administrator determines not to file a Claim
with the FHA with respect to such 90 Day
Delinquent FHA Loan, the Co-Trustee will not
transfer such FHA Loan to the Claims
Administrator, no Claim will be made to the
FHA and the Servicer may take other action,
including the commencement of foreclosure
proceedings, on the related Mortgaged
Property. The Servicer will continue to make
Monthly Advances with respect to interest on
90 Day Delinquent FHA Loans as described
under "Monthly Advances" herein.
The Certificateholders will not have any
direct right to receive the FHA Payments from
the FHA. See "Risk Factors--Dependence on
Claims Administrator, Representative and
Servicer for Making FHA Claims, Paying the
FHA Payments or Repurchasing the Loans"
herein.
A "90 Day Delinquent FHA Loan" is a Loan with
respect to which four consecutive Monthly
Payments have not been received by the
Servicer as of the last day of the related
Due Period unless, on or prior to the last
day of the Due Period in which the fourth
Monthly Payment is due, the Servicer has
received from the related Mortgagor an amount
at least equal to one unpaid Monthly Payment.
An "FHA Payment" is any amount paid by the
FHA pursuant to a Claim with respect to a 90
Day Delinquent FHA Loan.
FHA Premium Account.............. The Trustee will establish with itself a
separate account (an "FHA Premium Account")
to reimburse the Claims Administrator or
Certificate Guaranty Insurer for the payment
to the FHA of the annual insurance premium
(the "FHA Insurance Premium") on each FHA
Loan. The FHA Insurance Premium is an annual
premium equal to 0.5% of the original
principal balance of each FHA Loan. If the
related Mortgagor pays the FHA Insurance
Premium in addition to the Monthly Payment,
any payment of the FHA Insurance Premium
received during a Due Period will be
deposited in the FHA Premium Account on the
related Remittance Date by the Trustee from
the related Certificate Account. In certain
states, the Servicer is prohibited from
directly collecting the FHA Insurance Premium
from the Mortgagor. With respect to FHA Loans
secured by Mortgaged Properties located in
such states, the Servicer will cause to be
deposited in the FHA Premium Account a
specified percentage of each scheduled
interest payment. Since a Mortgagor pays
interest on the declining principal balance
of the related FHA Loan and the FHA Insurance
Premium is based upon the original principal
balance of the FHA Loan, the amount of
interest allocated to the FHA Premium Account
may be more or less than the amount of the
related FHA Insurance Premium. The Servicer
has agreed to satisfy any resulting shortfall
from its own funds.
The Pools
GENERAL ........................ Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
concerning the Loans are measured by the
aggregate principal balances of the related
Pool of Loans described herein at the close
of business on the Cut-Off Date and all
dollar amounts are based on the principal
balances of such Loans at the close of
business on the Cut-Off Date. The Loans that
will comprise Pool I and Pool II as of the
Closing Date are referred to herein as the
"Initial Pool I Home Equity Loans" and the
"Initial Pool II Home Equity Loans,"
respectively, and collectively, as the
"Initial Home Equity Loans." The Loans that
will comprise Pool III as of the Closing Date
are referred to herein as the "Initial Home
Improvement Loans." The Loans that will
comprise Pool IV as of the Closing Date are
referred to herein as the "Initial
Multifamily Loans" and, together with the
Initial Home Equity Loans and the Initial
Home Improvement Loans, the "Initial Loans."
POOL I AND POOL II............... The Pool I and Pool II Home Equity Loans will
consist of mortgages, deeds of trust or other
SECURITY instruments (the "Home Equity
Mortgages" or "Mortgages"), and the related
promissory notes (the "Home Equity Mortgage
Notes" or "Mortgage Notes") primarily secured
by one- to four-family residences, units in
planned unit developments ("PUDs") and units
in condominium developments (the "Home Equity
Mortgaged Properties" or "Mortgaged
Properties").
As stated above, the Agreement will provide
that Subsequent Home Equity Loans may be
purchased by the Trust from the Originators
from time to time on or before the close of
business on _______, 1998 from funds on
deposit in the Pre-Funding Account allocated
to Pools I and II. Any Subsequent Home Equity
Loan so acquired will have been originated
and underwritten, or purchased and
re-underwritten, by one of the Originators,
substantially in accordance with the
Originators' underwriting criteria described
in the Prospectus under the caption "The
Single Family Loan Lending
Program--Underwriting Criteria." Each
Subsequent Home Equity Loan will be assigned
to either Pool I or Pool II, depending upon
whether it bears interest at a fixed rate or
an adjustable rate. The purchase price for
each Subsequent Home Equity Loan will be no
greater than its unpaid principal balance as
of the last day of the month preceding the
month in which it is purchased by the Trust
(each such date, a "Subsequent Cut-Off
Date"). The Agreement will provide that the
Pool I and Pool II Home Equity Loans,
following the conveyance of any Subsequent
Home Equity Loans to the appropriate Pool,
must, in the aggregate, conform to certain
specified characteristics. See "The
Agreement--Representations and Warranties"
in the Prospectus.
No more than approximately __% of the Initial
Pool I Home Equity Loans will be secured by
Home Equity Mortgaged Properties located in
__________. Approximately __% of the Initial
Pool II Home Equity Loans will be secured by
Home Equity Mortgaged Properties located in
________. No more than approximately __% of
the Initial Pool I Home Equity Loans and __%
of the Initial Pool II Home Equity Loans will
be secured by Home Equity Mortgaged
Properties located in any other state. Based
on representations made by the obligor on a
Home Equity Mortgage Note (the "Home Equity
Mortgagor" or the "Mortgagor"), all of the
Initial Home Equity Loans will be secured by
one- to four-family residences, approximately
__% and __% of the Initial Pool I and Initial
Pool II Home Equity Loans, respectively, will
be secured by vacation homes, secondary
residences, or investment properties, less
than __% and less than __% of the Initial
Pool I and Initial Pool II Home Equity Loans,
respectively, will be secured by individual
units in low rise condominiums, approximately
__% and __% of the Initial Pool I and Initial
Pool II Home Equity Loans, respectively, will
be secured by two-, three- or four-family
houses, and no Initial Home Equity Loan will
be secured by individual units of other types
including high rise condominiums and
mixed-use buildings. No Initial Home Equity
Loan will be secured by a mobile home or a
cooperative residence.
No less than approximately __% and __% of the
Initial Pool I and Initial Pool II Home
Equity Loans, respectively, will constitute
first mortgage liens on the related Home
Equity Mortgaged Property and the remainder
of the Initial Pool I and Initial Pool II
Home Equity Loans will constitute second
mortgage liens on the related Home Equity
Mortgaged Property.
The "Combined Loan-to-Value Ratio" of a Home
Equity Loan is the ratio, expressed as a
percentage, determined by dividing (x) the
sum of the original principal balance of the
Home Equity Loan (less the amount, if any, of
the premium for credit life insurance) plus
the then-current principal balance of the
related first lien, if any, by (y) the value
of the Home Equity Mortgaged Property, based
upon the appraisal or valuation made at the
time of origination of the Home Equity Loan.
Based upon the original principal balances of
the Initial Home Equity Loans, no more than
approximately __% and __% of the Initial Pool
I and Initial Pool II Home Equity Loans,
respectively, will have a Combined
Loan-to-Value Ratio exceeding [100%]. The
weighted average Combined Loan-to-Value
Ratio, based upon appraisals or valuations
made at the times of origination of the
Initial Pool I and Initial Pool II Home
Equity Loans, will be no more than
approximately __% and __%, respectively. The
Initial Home Equity Loans are not insured or
guaranteed by any governmental entity.
The Home Equity Loans, other than Balloon
Home Equity Loans discussed below, will
provide for a schedule of payments which will
be, if timely paid, sufficient to amortize
fully the principal balance of the Initial
Home Equity Loan on or before its maturity
date. The Initial Home Equity Loans will be
either (i) "simple interest" loans, which
means that payments are applied as they are
received first to accrued interest, then to
principal or (ii) "actuarial" loans, which
means that payments received either earlier
or later (other than delinquent) than the
scheduled due dates of such Initial Home
Equity Loans will not affect the amortization
schedule or the relative application of such
payments to principal and interest. The Pool
I Home Equity Loans will bear interest at
fixed rates (each, a "Pool I Mortgage
Interest Rate").
The Pool I Home Equity Loans will bear
interest at fixed rates which, as of the
Cut-off Date, ranged from approximately __%
to __% per annum. The Pool II Home Equity
Loans will bear interest at adjustable rates
which, as of the Cut-Off Date, range from
____% to _____% per annum (each, a "Pool II
Mortgage Interest Rate") which will adjust on
the date set forth in the related Mortgage
Note. For each Pool II Home Equity Loan, the
related Pool II Mortgage Interest Rate will
change initially after the period set forth
in the related Mortgage Note and periodically
thereafter. Each date on which a Pool II
Mortgage Interest Rate changes is referred to
as the "Change Date" for the related Pool II
Home Equity Loan. No more than approximately
___% of the Pool II Home Equity Loans will
have their first Change Date occurring
approximately 24 months after origination and
no more than approximately _____% of the Pool
II Home Equity Loans will have their first
Change Date occurring approximately 36 months
after origination. No more than ___% of the
Pool II Home Equity Loans will have their
first Change Date occurring approximately 48
months after origination. The remainder of
the Pool II Home Equity Loans will have their
first Change Date occurring no later than 12
months after origination.
The Pool II Mortgage Interest Rate relating
to at least ____% of the Pool II Home Equity
Loans will adjust on each applicable Change
Date to equal the sum of (i) the applicable
London Interbank Offered Rate for U.S. dollar
deposits (the "LIBOR Index") and (ii) the
number of basis points set forth in the
related Mortgage Note (the "Gross Margin"),
subject to rounding and to the effects of the
Periodic Rate Cap, the applicable Lifetime
Cap and the applicable Lifetime Floor. The
Pool II Mortgage Interest Rate relating to
the remainder of the Pool II Home Equity
Loans will adjust on each Change Date to
equal the sum of (i) the applicable One-Year
Constant Maturity Treasury Index ("CMT" or
the "Treasury Index") as published by the
Federal Reserve Board Statistical Release No.
H.15, and (ii) the related Gross Margin,
subject to rounding and to the effects of the
Periodic Rate Cap, the applicable Lifetime
Cap and the applicable Lifetime Floor.
The Gross Margins for the Pool II Home Equity
Loans will range from ____% to ____%. The
weighted average Gross Margin of the Pool II
Home Equity Loans will be approximately __%.
The "Periodic Rate Cap" limits changes in the
Pool II Mortgage Interest Rate for each Pool
II Home Equity Loan on each Change Date to
the Periodic Rate Cap as set forth in the
related Mortgage Note. The Lifetime Caps of
the Pool II Home Equity Loans will range from
approximately ___% to ___%. The weighted
average Lifetime Cap of the Pool II Home
Equity Loans will be approximately ___%. The
Lifetime Floors of the Pool II Home Equity
Loans will range from approximately __% to
__%. The weighted average Lifetime Floor of
the Pool II Home Equity Loans will be
approximately ---%.
The weighted average Pool I Mortgage Interest
Rate of the Initial Pool I Home Equity Loans
will be approximately _____%. The weighted
average current Pool II Mortgage Interest
Rate of the Initial Pool II Home Equity Loans
will be approximately _____%. The lowest
principal balances of any Initial Pool I and
Initial Pool II Home Equity Loan as of the
Cut-Off Date will be approximately $_____ and
$______, respectively, and the highest will
be approximately $_______ and $_______,
respectively. As of the Cut-Off Date, the
average principal balances of the Initial
Pool I and Initial Pool II Home Equity Loans
will be approximately $______ and $______,
respectively. Initial Home Equity Loans not
originated by an Originator or having
original principal balances less than or
equal to $______ may not be covered by title
insurance policies. As of the Cut-Off Date,
the weighted average remaining terms to
stated maturity of the Initial Pool I and
Initial Pool II Home Equity Loans will be
approximately ___ months and ___ months,
respectively. The weighted average terms to
stated maturity of the Initial Pool I and
Initial Pool II Home Equity Loans at
origination will be approximately ___ months
and ___ months, respectively.
Less than approximately __% and __% of the
Initial Pool I and Initial Pool II Home
Equity Loans, respectively, will provide for
a stated maturity of less than the period of
time of the corresponding amortization
schedule ("Balloon Loans). As a result, upon
the maturity of a Balloon Loan, the Home
Equity Mortgagor will be required to make a
final payment which will be substantially
larger than such Home Equity Mortgagor's
previous monthly payments. See "Risk
Factors--Nature of the Security" in the
Prospectus.
POOL III........................ The Home Improvement Loans will consist of
fixed rate home improvement mortgages (the
"Home Improvement Mortgages") and the related
promissory notes, retail installment
contracts or obligations, or sales agreements
(the "Home Improvement Mortgage Notes" or
"Mortgage Notes") primarily secured by one-
to four-family residences, units in planned
unit developments ("PUDs") and units in
condominium developments (the "Home
Improvement Mortgaged Properties" or
"Mortgaged Properties").
As stated above, the Agreement will provide
that Subsequent Home Improvement Loans may be
purchased by the Trust from the Originators
from time to time on or before the close of
business on _______, 1998 from funds on
deposit in the Pre-Funding Account allocated
to Pool III. Any Subsequent Home Improvement
Loan so acquired (including Dealer Loans, as
defined herein under "Lending Programs--The
Home Improvement Lending Program--Dealer
Loans") will have been originated and
underwritten, or purchased and re-
underwritten, by one of the Originators,
substantially in accordance with the
Originators' underwriting criteria described
herein under the caption "Lending
Programs--The Home Improvement Lending
Program--FHA Loans--Title I Underwriting
Requirements," in connection with Subsequent
Home Improvement Loans that are FHA Loans,
and "Lending Programs--The Home Improvement
Lending Program--Conventional Home
Improvement Loans--Underwriting Criteria,"
in connection with Subsequent Home
Improvement Loans that are Conventional Home
Improvement Loans. The purchase price for
each Subsequent Home Improvement Loan will be
no greater than its unpaid principal balance
as of the related Subsequent Cut-Off Date.
The Agreement will provide that the Home
Improvement Loans, following the conveyance
of any Subsequent Home Improvement Loans to
Pool III, must, in the aggregate, conform to
certain specified characteristics. See "The
Agreement--Representations and Warranties"
in the Prospectus.
Approximately __% and __% of the Initial Home
Improvement Loans will be FHA Loans and
Conventional Home Improvement Loans,
respectively. The Initial Home Improvement
Loans will have been originated and
underwritten, or purchased and
re-underwritten by one of the Originators
substantially in accordance with the
Originators' underwriting criteria described
herein under the caption "Lending
Programs--The Home Improvement Lending
Program--FHA Loans--Title I Underwriting
Requirements," in connection with FHA Loans,
and "Lending Programs--The Home Improvement
Lending Program--Conventional Home
Improvement Loans--Underwriting Criteria,"
in connection with Conventional Home
Improvement Loans.
Approximately __% of the Initial Home
Improvement Loans will be secured by Home
Improvement Mortgaged Properties located in
__________. No more than approximately __% of
the Initial Home Improvement Loans will be
secured by Home Improvement Mortgaged
Properties located in any other state. Based
on representations made by the mortgagor on a
Home Improvement Mortgage Note (the "Home
Improvement Mortgagor" or "Mortgagor"), all
of the Initial Home Improvement Loans will be
secured by one- to four-family residences,
approximately __% of the Initial Home
Improvement Loans will be secured by vacation
homes, secondary residences, or investment
properties, less than __% of the Initial Home
Improvement Loans will be secured by
individual units in low rise condominiums,
approximately __% of the Initial Home
Improvement Loans will be secured by two-,
three- or four-family houses, and no Initial
Home Improvement Loan will be secured by
individual units of other types including
high rise condominiums and mixed-use
buildings. No Initial Home Improvement Loan
will be secured by a mobile home or a
cooperative residence.
Approximately __% of the Initial Home
Improvement Loans will be secured by first
mortgage liens on the related Home
Improvement Mortgaged Property, no more than
approximately __% of the Initial Home
Improvement Loans will be secured by second
mortgage liens on the related Home
Improvement Mortgaged Property and the
remainder of the Initial Home Improvement
Loans will be secured by more junior mortgage
liens on the related Home Improvement
Mortgaged Property.
The FHA Loans are insured by the FHA to the
extent described herein. The Conventional
Home Improvement Loans are not insured by any
governmental entity.
The Initial Home Improvement Loans will
provide for a schedule of payments which will
be, if timely paid, sufficient to amortize
fully the principal balance of the Initial
Home Improvement Loan on or before its
maturity date. The Initial Home Improvement
Loans will be "simple interest" loans.
However, with respect to FHA Loans secured by
Mortgaged Properties located in states where
the Servicer collects the FHA Insurance
Premium directly from the related Mortgagor,
payments are applied to the FHA Insurance
Premium prior to accrued interest. The Home
Improvement Loans will bear interest at fixed
rates (each, a "Pool III Home Improvement
Interest Rate").
GENERAL.......................... Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
concerning the Loans are measured by the
aggregate principal balances of the related
Pool of Loans described herein at the close
of business on the Cut-Off Date and all
dollar amounts are based on the principal
balances of such Loans at the close of
business on the Cut-Off Date. The Loans that
will comprise Pool I and Pool II as of the
Closing Date are referred to herein as the
"Initial Pool I Home Equity Loans" and the
"Initial Pool II Home Equity Loans,"
respectively, and collectively, as the
"Initial Home Equity Loans." The Loans that
will comprise Pool III as of the Closing Date
are referred to herein as the "Initial Home
Improvement Loans." The Loans that will
comprise Pool IV as of the Closing Date are
referred to herein as the "Initial
Multifamily Loans" and, together with the
Initial Home Equity Loans and the Initial
Home Improvement Loans, the "Initial Loans."
POOL IV......................... The Multifamily Loans will consist of
mortgages, deeds of trust or other security
instruments (the "Multifamily Mortgages"),
and the related promissory notes (the
"Multifamily Mortgage Notes") primarily
secured by five or more unit residential or
mixed-use residential and commercial
properties (the "Multifamily Mortgaged
Properties" or "Mortgaged Properties").
As stated above, the Agreement will provide
that Subsequent Multifamily Loans may be
purchased by the Trust from the Originators
from time to time on or before the close of
business on _______, 1998 from funds on
deposit in the Pre-Funding Account allocated
to Pool IV. Any Subsequent Multifamily Loan
so acquired will have been originated and
underwritten, or purchased and
re-underwritten, by one of the Originators,
substantially in accordance with the
Originators' underwriting criteria described
under "Lending Programs--The Multifamily
Lending Program" herein. The purchase price
for each Subsequent Multifamily Loan will be
no greater than its unpaid principal balance
as of the related Subsequent Cut-Off Date.
The Agreement will provide that the
Multifamily Loans, following the conveyance
of any Subsequent Multifamily Loans to Pool
IV, must, in the aggregate, conform to
certain specified characteristics. See "The
Agreement--Representations and Warranties" in
the Prospectus.
The Initial Multifamily Loans were originated
and underwritten, or purchased and
re-underwritten, by one of the Originators,
substantially in accordance with the
Originators' underwriting criteria described
under "Lending Programs--The Multifamily
Lending Program" herein.
No more than approximately __% of the Initial
Multifamily Loans will be secured by
Multifamily Mortgaged Properties located in
__________. No more than approximately __% of
the Initial Multifamily Loans will be secured
by Multifamily Mortgaged Properties located
in any other state. Based on representations
made by the obligor on a Multifamily Mortgage
Note (the "Multifamily Mortgagor" or
"Mortgagor"), all of the Initial Multifamily
Loans will be secured by five or more unit
residential or mixed-use residential and
commercial properties.
All of the Initial Multifamily Loans will
constitute first mortgage liens on the
related Multifamily Mortgaged Property.
No Initial Multifamily Loan will have a
Combined Loan-to-Value Ratio exceeding
approximately __%. The Initial Multifamily
Loans will not be insured or guaranteed by
any governmental entity.
The Initial Multifamily Loans will provide
for a schedule of payments which will be, if
timely paid, sufficient to amortize fully the
principal balance of the Initial Multifamily
Loan on or before its maturity date. The
Initial Multifamily Loans will be "simple
interest" loans. The Initial Multifamily
Loans will bear interest at fixed rates
(each, a "Multifamily Mortgage Interest
Rate").
The weighted average Multifamily Mortgage
Interest Rate of the Initial Multifamily
Loans will be approximately _____%. The
lowest principal balance of any Initial
Multifamily Loan as of the Cut-Off Date will
be approximately $______, and the highest
will be approximately $_______. The average
principal balance of the Initial Multifamily
Loans will be approximately $_______. All
Initial Multifamily Loans will be covered by
title insurance policies. The weighted
average remaining term to stated maturity of
the Initial Multifamily Loans will be
approximately ___ months. The weighted
average term to stated maturity of the
Initial Multifamily Loans at origination will
be approximately ___ months.
Each Multifamily Loan contains provisions
requiring the related Mortgagor to pay a
penalty in connection with certain
prepayments made within three or five years,
depending on the terms of such Multifamily
Loan, of its origination.
Servicing of the Loans .......... The Servicer will serve as master servicer
for the Loans in accordance with the
Agreement. The Servicer may act through
subservicers, including the Originators or
other affiliates of the Servicer.
Monthly Advances ................ The Servicer is required to remit to the
Trustee no later than the day of each month
which is at least three business days prior
to the Remittance Date and is in no case
earlier than the seventh business day of such
month (the "Determination Date") the amount
(a "Monthly Advance"), if any, by which (a)
the sum of (x) 30 days' interest (or, with
respect to the Class A-7 Certificates, the
actual number of days since the last
Remittance Date up to but not including the
upcoming Remittance Date) at (i) the weighted
average Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Adjusted
Mortgage Loan Remittance Rates on the
outstanding Principal Balance of the Pool I
Certificates, (ii) the Class A-7 Adjusted
Mortgage Loan Remittance Rate on the
outstanding principal balance of the Pool II
Certificates, (iii) the Class A-8 Adjusted
Mortgage Loan Remittance Rate on the
outstanding principal balance of the Pool III
Certificates and (iv) Class A-9 Adjusted
Mortgage Loan Remittance Rates on the
outstanding principal balance of the Pool IV
Certificates, in each case, immediately prior
to the related Remittance Date and (y) the
Monthly Excess Spread (as defined herein
under "Description of the
Certificates--Spread Amount"), if any, for
the related Remittance Date relating to the
Pool I, Pool II, Pool III and Pool IV Loans,
respectively, exceeds (b) the amount received
by the Servicer in respect of interest on the
Pool I, Pool II, Pool III and Pool IV Loans,
respectively, as of the related Record Date
(and with respect to the Remittance Dates in
_______, _______ and _______, 1998, the sum
of (i) all funds to be transferred to the
applicable Certificate Account from the
Capitalized Interest Account for such
Remittance Date and (ii) certain investment
earnings on amounts in the Pre-Funding
Account for the applicable Remittance Date).
Such advances by the Servicer are
reimbursable in the first instance from late
collections of interest including amounts
received in connection with the liquidation
of defaulted Loans ("Liquidation Proceeds"),
amounts paid by any insurer pursuant to any
insurance policy covering a Loan, Mortgaged
Property or REO Property ("Insurance
Proceeds"), FHA Payments and proceeds
received by the Servicer in connection with
condemnation, eminent domain or a release of
lien ("Released Mortgaged Property Proceeds")
collected with respect to the related Loan as
to which the advances were made, and any
other amount that otherwise would be
distributed on the Class R Certificates.
Monthly Advances will not cover any
Certificateholders' LIBOR Interest Carryover
allocated to the Class A-7 Certificates. The
Servicer is not required to make Monthly
Advances which it determines, in good faith,
would be nonrecoverable from amounts received
in respect of the Loans.
The "Class A-1 Adjusted Mortgage Loan
Remittance Rate," the "Class A-2 Adjusted
Mortgage Loan Remittance Rate," the "Class
A-3 Adjusted Mortgage Loan Remittance Rate,"
the "Class A-4 Adjusted Mortgage Loan
Remittance Rate," the "Class A-5 Adjusted
Mortgage Loan Remittance Rate," the "Class
A-6 Adjusted Mortgage Loan Remittance Rate,"
the "Class A-7 Adjusted Mortgage Loan
Remittance Rate," the "Class A-8 Adjusted
Mortgage Loan Remittance Rate" and the "Class
A-9 Adjusted Mortgage Loan Remittance Rate"
will equal the sum of the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5, Class
A-6, Class A-7, Class A-8 or Class A-9
Pass-Through Rate, as the case may be, and a
rate used to determine certain expenses of
the Trust. Certain of the Loans in each Pool
may bear interest at a rate below the
Adjusted Mortgage Loan Remittance Rate for
the related Class. Any such Loan will be sold
to the Trust at a discount so as to create,
for each such Loan, a mortgage interest rate
that, when applied to the purchase price paid
by the Trust for such Loan, will at least
equal the related Adjusted Mortgage Loan
Remittance Rate.
Compensating Interest............ Not later than each Determination Date, with
respect to each Loan to which the Servicer
received a principal payment in full in
advance of the final scheduled due date (a
"Principal Prepayment") or received a
principal payment that is in excess of five
times the scheduled monthly payment due, but
which was not intended by the Mortgagor to
satisfy the Loan in full or to cure a
delinquency (a "Curtailment") during the
related Due Period, the Servicer is required
to remit to the Trustee from amounts
otherwise payable to the Servicer as
servicing compensation (including the
Contingency Fee), an amount ("Compensating
Interest") equal to any excess of (a) 30
days' interest (or, with respect to the Class
A-7 Certificates, the actual number of days
since the last Remittance Date up to but not
including the upcoming Remittance Date) on
the principal balance of each such Loan as of
the beginning of the related Due Period, at
the weighted average Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6
Adjusted Mortgage Loan Remittance Rates in
the case of a Pool I Home Equity Loan, the
Class A-7 Adjusted Mortgage Loan Remittance
Rate in the case of a Pool II Home Equity
Loan, the Class A-8 Adjusted Mortgage Loan
Remittance Rate in the case of a Pool III
Home Improvement Loan and the Class A-9
Adjusted Mortgage Loan Remittance Rates, in
the case of a Pool IV Multifamily Loan, as
the case may be, applicable to the Remittance
Date on which the Compensating Interest will
be distributed over (b) the amount of
interest actually received on the related
Loan during such Due Period.
Optional Repurchase.............. The Servicer has the right, but not the
obligation, to repurchase any Defaulted Loan
for the purchase price and in the manner
described under "The
Agreement--Representations and Warranties."
In no event, however, may the aggregate
principal balance of Defaulted Loans
purchased pursuant to this provision exceed
5% of the sum of the Original Pool Balance
and the original Pre-Funded Amount. A
"Defaulted Loan" is any Mortgage Loan as to
which the related Obligor has failed to pay
in full three or more consecutive monthly
payments.
Servicing and Contingency Fees .. The Servicer is entitled to a servicing fee
of _____% per annum of the principal balance
of each Loan (the "Servicing Fee"), and a
contingency fee of _____% per annum of the
principal balance of each Loan (the
"Contingency Fee"), each calculated and
payable monthly from the interest portion of
scheduled monthly payments, Liquidation
Proceeds and certain other Proceeds
collected.
Rating........................... It is a condition to the issuance of the
Class A Certificates that each Class be rated
"AAA" by [Standard & Poor's Ratings Services,
a division of The McGraw Hill Companies, Inc.
("S&P")] and "Aaa" by [Moody's Investors
Service, Inc. ("Moody's")]. The ratings
assigned by S&P and Moody's to the Class A
Certificates are based, in large part, on the
creditworthiness of Certificate Guaranty
Insurer and the Certificate Guaranty
Insurance Policies. A security rating is not
a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time. No person is
obligated to maintain the rating on any Class
of Class A Certificates. The ratings of the
Class A-7 Certificates by S&P and Moody's do
not address the likelihood of the payment of
the amount of any Certificateholders' LIBOR
Interest Carryover. See "Rating of the Class
A Certificates" herein.
Optional Termination by the
Servicer....................... On any Remittance Date from and after the
Remittance Date on which the aggregate
principal balances of the Loans are less than
5% of the sum of (i) the aggregate principal
balances of the Initial Home Equity Loans,
the Initial Home Improvement Loans and the
Initial Multifamily Loans (collectively, the
"Initial Loans") as of the Cut-Off Date (the
"Original Pool Principal Balance") and (ii)
the original Pre-Funded Amount (such date,
the "Optional Servicer Termination Date"),
the Servicer may, at its option, and in the
absence of the exercise thereof by the
Servicer, the Certificate Guaranty Insurer
may, at its option, purchase, on the next
succeeding Remittance Date, all of the Loans
and any related Mortgaged Property title to
which has been acquired in foreclosure or by
deed in lieu of foreclosure (an "REO
Property") at a price set forth in the
Agreement (the "Termination Price") at least
equal to the sum of (x) 100% of the Principal
Balances of the Loans, including those
evidenced by REO Properties, and including
the portion of the principal balance of each
90 Day Delinquent FHA Loan for which the
Certificateholders have not received payment
and for which a Claim was submitted to the
FHA, and (y) 30 days' interest (or, with
respect to the Class A-7 Certificates, the
actual number of days from the last
Remittance Date to but not including the
upcoming Remittance Date) thereon at the then
applicable weighted average Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Pass-Through Rates in the case of
the Pool I Home Equity Loans, the Class A-7
Pass-Through Rate in the case of the Pool II
Home Equity Loans, the Class A-8 Pass-Through
Rate in the case of the Pool III Home
Improvement Loans and the Class A-9
Pass-Through Rates in the case of the Pool IV
Multifamily Loans, plus an amount equal to
the interest portion of any unreimbursed
Insured Payments made by the Certificate
Guaranty Insurer with respect to the
applicable Pool of Loans. See "The Agreement"
herein and in the Prospectus. As described
above, after the Optional Service Termination
Date, the margin used in calculating the
Class A-7 Pass-Through Rate will increase
____%. See "Summary of Terms--Securities
Offered."
Optional Termination by
Certificate Guaranty Insurer... On and after the date on which the Maximum
Subordinated Amount is zero (the "Cross-Over
Date"), on any Remittance Date on which Loans
with aggregate principal balances as of the
Cut-Off Date equal to or exceeding 25% or
more of the sum of (i) the Original Pool
Principal Balance and (ii) the original
Pre-Funded Amount, if any, have become
Liquidated Loans, Certificate Guaranty
Insurer may purchase all of the Loans and any
related REO Properties in respect thereof at
a price equal to the sum of the Termination
Prices for all Pools and the outstanding and
unpaid fees and expenses of the Trustee and
the Servicer. See "The Agreement" herein and
in the Prospectus.
REMIC Election and Tax Status ... For Federal income tax purposes, an election
will be made to treat certain assets of the
Trust as a real estate mortgage investment
conduit ("REMIC"). Each Class of Class A
Certificates will constitute regular
interests in the REMIC and the Class R
Certificates will constitute the residual
interest in the REMIC. See "Federal Income
Tax Considerations" herein and "Federal
Income Tax Consequences" in the Prospectus.
ERISA Considerations............. [As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by a pension or other employee
benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or by individual
retirement accounts or Keogh plans covering
only a sole proprietor or partner which are
not subject to ERISA but are subject to
Section 4975 of the Code ("Plans"), pursuant
to certain exemptions from potential
prohibited transaction rules of ERISA which
prohibit a broad range of transactions
involving Plan assets and persons having
certain specified
relationships to a Plan and related excise
tax provisions of Section 4975 of the Code.
One such exemption is Prohibited Transaction
Exemption 96-22, 61 Fed. Reg. 14827 (April 3,
1996) (the "Exemption"), which provides an
exemption for transactions involving the
purchase, holding or transfer of certain
asset backed certificates by Plans. See
"ERISA Considerations" herein and in the
Prospectus.]
[Legal Investment Considerations. No Class of Class A Certificates will
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Investors
should consult their own legal advisers in
determining whether and the extent to which a
Class of Class A Certificates constitutes
legal investments for such investors. See
"Legal Investment Considerations" herein.]
Registration of the Certificates.. The Class A Certificates will be represented
by global certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of The
Depository Trust Company ("DTC"). No Class A
Certificateholder will be entitled to receive
definitive certificates ("Definitive Class A
Certificates") representing such person's
interest, except in the event that Definitive
Class A Certificates are issued under the
limited circumstances described herein. All
references herein to "Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6,
Class A-7, Class A-8 and Class A-9
Certificateholders" or "Holders" will reflect
the rights of the beneficial owners of Class
A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8 and
Class A-9 Certificates, as such rights may be
exercised through DTC and Participants except
as otherwise specified herein. See "Risk
Factors--Book-Entry Registration" in the
Prospectus and "Description of the
Certificates--Book-Entry Registration of
Class A Certificates" herein.
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
As in the case with most companies using computers in their operations, the
Servicer and the Originators are faced with the task of completing their
compliance goals in connection with the year 2000 issue during the next year and
a half. The year 2000 issue is the result of prior computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any of the Servicer's or the Originators' computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could result in a major computer system
failure or miscalculations. The Servicer and the Originators are presently
engaged in various procedures to ensure that their computer systems and software
will be year 2000 complaint.
However, in the event that the Servicer and the Originators or any of their
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the Servicer or the
Originators under the Agreement could be materially adversely affected.
DEPENDENCE ON CLAIMS ADMINISTRATOR, REPRESENTATIVE, AND SERVICER FOR MAKING
FHA CLAIMS AND PAYING THE FHA PAYMENTS
The Trustee, the Co-Trustee and the Certificateholders are dependent on the
Claims Administrator to (1) assure that the FHA Loans will be insured by the
FHA, (2) make Claims on 90 Day Delinquent FHA Loans and (3) remit all FHA
Payments received from the FHA to the Trustee in accordance with the terms of
the Agreement. See "Description of the Certificates--Obligations of The Claims
Administrator" herein.
LIMITATIONS ON FHA INSURANCE
The FHA Loans are covered by FHA insurance to the extent described herein. The
Agreement provides that if an FHA Loan becomes a 90 Day Delinquent FHA Loan and
if sufficient coverage is available in the related Reserve Amount, the Claims
Administrator may, in its sole option, file a Claim with the FHA with respect to
such 90 Day Delinquent FHA Loan. If such a Claim is submitted and assuming the
Representative, the Originators and the Claims Administrator comply with the
provisions described herein, the FHA will pay with respect to such 90 Day
Delinquent FHA Loan the amount set forth under "The Title I Loan
Program--Insurance Claims Procedures for Title I Loans" herein regardless of
whether, in the case of FHA Loans, the related Mortgaged Property has available
equity over and above all liens on such property.
The availability of FHA insurance following a default on an FHA Loan is subject
to a number of conditions, including strict compliance with FHA regulations in
originating and servicing the FHA Loan and limits on the aggregate insurance
coverage available with respect to all FHA Title I loans then owned and reported
for FHA insurance by the Co-Trustee. Although the Claims Administrator is an
FHA-approved lender and believes, and represents and warrants in the Agreement,
that it has complied with FHA regulations, such regulations are susceptible to
substantial interpretation. The Claims Administrator is not required to obtain,
and has not obtained, approval from the FHA of its origination and servicing
practices. Failure to comply with FHA regulations may result in a denial of FHA
insurance claims, and there can be no assurance that the FHA's enforcement of
its regulations will not change in the future. In addition, any Claim paid by
the FHA will cover only 90% of the sum of the unpaid principal (determined on
the actuarial basis) on the FHA Loan, a portion of the unpaid interest and
certain other liquidation costs.
Prior to the transfer of the FHA Loans to the Co-Trustee, the FHA Loans will be
insured by the FHA, to the extent described herein, under the related
Originator's FHA contract of insurance. In connection with the transfer of the
FHA Loans from the Originators to the Co-Trustee, the Originators also will file
with the FHA all documents necessary to effect the transfer of the FHA insurance
reserves applicable to the FHA Loans to the Co-Trustee's FHA contract of
insurance.
Based upon information provided by the FHA, The Money Store Inc. believes that
upon the transfer referred to above and after the Funding Period, the FHA
insurance available to the Co-Trustee will be equal to at least (A) 10% of the
principal balance of the FHA Loans as of the Cut-Off Date or Subsequent Cut-Off
Date, as the case may be; or (B) thereafter, 10% of the principal balance of all
Title I loans originated or purchased and currently reported for FHA insurance
by the Co-Trustee, less amounts for annual reductions as described below and for
insurance claims previously paid to the Co-Trustee by the FHA, including
payments in respect of loans other than the FHA Loans, and increased by an
amount equal to 10% of the lesser of the original principal balance or the
purchase price paid for Title I loans subsequently originated or purchased of
record by the Co-Trustee.
FHA Claims paid to the Co-Trustee by the FHA with respect to Title I loans other
than the FHA Loans may affect the total amount of the Reserve Amount.
Since the adequacy of the Co-Trustee's Reserve Amount is dependent upon future
events, including the annual reductions in the Reserve Amount and the reductions
for the payment of claims, no assurance can be given that the Reserve Amount is
or will be adequate to cover 90% of all potential losses on the FHA Loans.
In connection with the FHA Loans, pursuant to FHA underwriting criteria in
effect at the time substantially all the FHA Loans were originated, there was no
requirement that the Mortgaged Property have any available equity over and above
the total of all liens on such property, including the Title I loan. However,
loans originated between November 18, 1991 and August 15, 1994 that exceeded
$15,000 were limited to a maximum encumbrance of 100% loan to value of all liens
on such property, including the Title I loan, and non-owner occupied property
loans originated after November 18, 1991 were limited to a maximum encumbrance
of 100% loan to value of all liens on such property, including the Title I loan.
See "The Trusts--FHA Loans" in the Prospectus and "Lending Programs--The Home
Improvement Lending Program--FHA Loans--The Title I Loan Program" herein.
MULTIFAMILY LOANS
Multifamily lending is generally viewed as exposing the lender to a greater risk
of loss than single family residential lending. Owners of multifamily
residential properties rely on monthly lease payments from tenants to pay for
maintenance and other operating expenses of such properties, to fund capital
improvements and to service any mortgage loan and any other debt that may be
secured by such properties. Various factors, many of which are beyond the
control of the owner or operator of such a property, may affect the economic
viability of that property.
Changes in payment patterns by tenants may result from a variety of social,
legal and economic factors. Economic factors including the rate of inflation,
unemployment levels and relative rates offered for various types of housing may
be reflected in changes in payment patterns including increased risks of
defaults by tenants and higher vacancy rates. Adverse economic conditions,
either local or national, may limit the amount of rent that can be charged and
may result in a reduction in timely lease payments or a reduction in occupancy
levels. Occupancy and rent levels may also be affected by construction of
additional housing units, competition and local politics, including rent
stabilization or rent control laws and policies. In addition, the level of
mortgage interest rates may encourage tenants to purchase single family housing.
The Money Store Inc. is unable to determine and has no basis to predict whether,
or to what extent, economic, legal or social factors will affect future rental
or payment patterns.
The location and construction quality of a particular building may affect the
occupancy level as well as the rents that may be charged for individual units.
The characteristics of a neighborhood may change over time or in relation to
newer developments. The effects of poor construction quality will increase over
time in the form of increased maintenance and capital improvements. Even good
construction will deteriorate over time if adequate maintenance is not performed
in a timely fashion.
Many of the foregoing conditions may not have been present or significant on the
Closing Date, and certain of those conditions may change.
[ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE LOANS
No more than approximately ____% and ___% of the Initial Pool I and Initial Pool
II Home Equity Loans, respectively, will have a Combined Loan-to-Value Ratio
exceeding 100%. The Mortgaged Properties are unlikely to provide adequate
security for the Loans in those Pools with Combined Loan-to-Value Ratios in
excess of 100%. Even assuming that a Mortgaged Property provides adequate
security for the related Loan, substantial delays could be encountered in
connection with the liquidation of a Loan that would result in current
shortfalls in payments to Certificateholders to the extent such shortfalls are
not covered by the credit enhancement described herein. In addition, liquidation
expenses relating to any liquidated Loan (such as legal fees, real estate taxes,
and maintenance and preservation expenses) will reduce the liquidation proceeds
otherwise available for payment to Certificateholders. In the event that any
Mortgaged Property fails to provide adequate security for the related Loan, any
losses in connection with such Loan will be borne by Certificateholders as
described herein to the extent that the applicable credit enhancement described
herein is insufficient to absorb all such losses.]
[UNDERWRITING GUIDELINES
Pursuant to the underwriting guidelines of the Originators, the assessment of
the creditworthiness of the related borrower is the primary consideration in
underwriting a Loan. The evaluation of the adequacy of the value of the related
Mortgaged Property in relation to the Loan, together with the amount of all
liens senior to the lien of the Loan (i.e., the related "Combined Loan-to-Value
Ratio") is given less consideration in underwriting the Loans. Loans with higher
Combined Loan-to-Value Ratios may experience higher rates of losses than those
of similar Loans with lower Combined Loan-to-Value Ratios.]
CERTIFICATEHOLDERS' LIBOR INTEREST CARRYOVER
The Pass-Through Rate for the Class A-7 Certificates is based generally on
LIBOR. As a result, if in respect of any Remittance Date there does not exist a
positive spread between (a) the Net Funds Cap allocated to each such Class of
Certificates and (b) the amount of interest accrued on each such Class at LIBOR
plus the applicable margin, the Pass-Through Rate for such Class on such
Remittance Date will be based upon the Net Funds Cap (but in no event exceeding
___% per annum). Any Certificateholders' LIBOR Interest Carryover arising as a
result of the applicable Class A-7 Pass-Through Rate being determined based upon
the Net Funds Cap, together with interest thereon at the then applicable
Pass-Through Rate (without giving effect to the Net Funds Cap), will be paid on
the following Remittance Date or on any succeeding Remittance Date to the extent
funds are allocated and available therefor after making all required prior
distributions and deposits with respect to such Remittance Date. See "The
Agreement--Flow of Funds." The ratings of the Class A-7 Certificates do not
address the likelihood of the payment of any Certificateholders' LIBOR Interest
Carryover and the Certificate Guaranty Insurance Policies do not guaranty
payment of any such amount.
GEOGRAPHIC CONCENTRATION
Approximately ___%, ___%, ___% and ___% of the Pool I Home Equity Loans will
consist of Home Equity Loans that are secured by Mortgaged Properties located in
the states of _________, __________, __________ and __________, respectively.
Approximately ___%, ___%, ___% and ___% of the Pool II Home Equity Loans will
consist of Home Equity Loans that are secured by Mortgaged Properties located in
the states of _________, __________, __________ and __________, respectively.
Approximately ___%, ___%, ___% and ___% of the Pool III Home Improvement Loans
will consist of Home Improvement Loans that are secured by Mortgaged Properties
located in the Home Equity states of _________, __________, __________ and
__________, respectively. Approximately ___%, ___%, ___% and ___% of the Pool IV
Loans will consist of Multifamily Loans that are secured by Mortgaged Properties
located in the states of _________, __________, __________ and __________,
respectively. Because of the relative geographic concentration of the Loans with
respect to each Pool within these states, delinquencies and losses on the Loans
within each Pool may be higher than would be the case if the Loans comprising
each Pool were more geographically diversified. With respect to the Loans in
these states, certain of the Mortgaged Properties may be more susceptible to
certain types of special hazards that are not covered by any casualty insurance,
such as earthquakes, floods and other natural disasters and major civil
disturbances, than residential properties located in other parts of the country.
RISK OF BANKRUPTCY OR INSOLVENCY OF THE ORIGINATORS; THE CUSTODIAN.
The Originators believe that the transfer of the Loans to the Trust constitutes
a sale by the Originators to the Trust and, accordingly, that such Loans will
not be part of the assets of the Originators in the event of the bankruptcy of
an Originator and will not be available to the creditors of the Originators. The
terms of the Agreement provide that the Originators will deliver all of the
Mortgages, the Notes and the other documents in the Trustee's Loan File to the
Custodian which shall maintain possession of Trustee's Loan Files, and no
assignment of any Mortgage is required to be recorded, in either case unless an
Assignment Event as defined in the Agreement (an "Assignment Event") has
occurred, e.g., the long-term unsecured debt rating of First Union National Bank
is reduced below A by S&P or below A2 by Moody's. Upon any such downgrade or
occurrence of another Assignment Event, the Custodian is required to deliver the
Mortgages, Notes and the other documents in the Trustee's Loan Files in its
possession to the Trustee and to either cause proper assignments of each
Mortgage to be recorded in the relevant real property recording office for each
such Mortgage or to deliver assignments of the Mortgages, in recordable form, to
the Trustee, together with an opinion of counsel to the effect that recordation
of such assignments is not necessary in order to perfect the interest of the
Trustee in such Mortgages. Prior to such delivery and recording, the interest of
the Trustee in the Mortgages, the Mortgage Notes and the proceeds thereof may be
subject to claims of the Originators' creditors or to sale to a third party, as
well as to a trustee in bankruptcy appointed in the event of the bankruptcy of
the Originators. In the event of a bankruptcy filing of an Originator, it is
possible that a trustee in bankruptcy for, or a creditor of, an Originator, may
argue that the transaction between the Originators and the Trust was a pledge of
such Loans in connection with a borrowing by such Originator rather than a true
sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Class A Certificates.
If the transfer of the Loans by the Originators to the Trust is deemed, contrary
to the intent of the parties, to be a grant to the Trust of a security interest
in the Loans, the Trust should have an enforceable first priority perfected
security interest in the Loans upon delivery to the Trustee of the Notes
(properly endorsed to the Trustee or in blank) and of the Mortgages and upon the
recordation of a proper assignment to the Trustee of each Mortgage in the real
property recording office for each such Mortgage, or an opinion of counsel to
the effect that recordation of such assignments is not necessary. Prior to such
action, the Trustee will not have a perfected security interest in the
Mortgages, the Mortgage Notes or the proceeds thereof and, accordingly,
creditors of an Originator may take priority over the interests of the Trustee.
If a trustee in bankruptcy were appointed for an Originator, certain
administrative expenses of the trustee in bankruptcy may have priority over the
Trust's interest in the Mortgages, the Notes and the proceeds thereof. For so
long as (i) the Servicer remains an affiliate of First Union National Bank, (ii)
no Event of Default under the Agreement shall have occurred and be continuing
and (iii) First Union National Bank maintains a short-term rating of at least
A-1 by Standard & Poor's and P-1 by Moody's, and for five Business Days
following any reduction in either such rating, the Principal and Interest
Account may be held with First Union National Bank and First Union National Bank
and its affiliates, including the Originators, may commingle such cash with its
funds for certain periods. In insolvency proceeding or receivership or
conservatorship of First Union National Bank or of an Originator, the Trust may
not have a perfected interest in such commingled collections.
In a bankruptcy proceeding of an Originator, if the Mortgage Notes have not been
delivered to the Trustee, and the Mortgages have not been assigned of record in
the real property recording office for each Mortgage, the Trust may be a general
unsecured creditor of the related Originator. If the Trust were determined to be
a general unsecured creditor of an Originator, the Mortgages, the Mortgage Notes
and the proceeds thereof would not be available to make payments on Class A
Certificates.
LENDING PROGRAMS
Prospective Certificateholders should consider, in addition to the information
described under "The Single Family Loan Lending Program" in the Prospectus, the
following with respect to the Home Improvement Loans, the Multifamily Loans and
a new lending program applicable to the Home Equity and Home Improvement Loans.
THE HOME IMPROVEMENT LENDING PROGRAM
There are two different types of Home Improvement Loans: (1) direct loans
("Direct Loans") and (2) dealer or dealer-contractor loans ("Dealer Loans"). On
a Direct Loan, the proceeds of the loan are disbursed directly to the borrower,
and there is no participation in the loan application process by a
dealer-contractor. On a Dealer Loan the dealer-contractor participates in
completing the loan application with the borrower and submits it to the lender
for approval prior to commencing work. On Dealer Loans, before it may disburse
funds, the lender must have in its possession a properly signed and dated
completion certificate, a copy of the dealer-contractor's contract or sales
agreement, and a borrower's authorization certificate, if the loan proceeds are
to be disbursed to the dealer-contractor.
DEALER/CONTRACTOR ORIGINATION
The Originators originate loans through and purchase contracts from home
improvement contractors located in various states throughout the United States.
An Originator employs account executives who contact home improvement
contractors and explain the merits and features of the Originator's available
financing plans. Account executives review contractor needs and discuss the
Originator's prevailing home improvement loan rates, terms, credit standards and
policies. If a contractor desires to utilize the Originator's financing
programs, it must make application to the Originator for contractor approval.
The Originator has a contractor approval process pursuant to which the financial
condition, business experience, and qualifications of the contractor are
reviewed prior to its approval to sell or refer loans to the Originator. An
approved contractor's qualifications are reviewed annually in order to determine
whether such approval will be continued. The annual re-approval process includes
the updating of financial and business reference information. Contractors are
also monitored as to default levels, delinquency trends and customer complaint
resolution.
All contractor loans are written on an Originator's approved documents and are
either executed by the borrower in the presence (i) of the Originator's
employees or designated agents or (ii) of the contractor. All contracts which
are purchased are written on forms provided or approved by the Originator. Each
loan or contract is individually approved in accordance with the Originator's
guidelines. The contractor submits the customer credit application and
construction contract to the appropriate Originator office where the customer's
credit worthiness is determined. Credit analysis includes a review of the
customer's previous credit experience, paying habits, length and likelihood of
continued employment, ability to repay the debt, and other factors. The credit
analysis also includes the determination of the ratio of a customer's long-term
debt payments in relation to their gross monthly income.
The Originators require that all secured home improvement loans and contracts be
secured by a recorded lien on the property to be improved. Liens may be in
first, second or more junior position. Certain other criteria for FHA insured
loans and contracts are described under the caption "--FHA Loans." If an
Originator determines that the application meets the Originator's underwriting
guidelines (and FHA regulations where applicable) and the credit is approved,
the Originator originates the loan or purchases the contract. Unless a customer
has specifically requested staged funding of a contract, contracts are not
purchased until the customer has verified satisfactory completion of the home
improvement project. Where staged funding is used, the Originator requests a
completion certificate from the customer within 60 days of funding.
Property values are generally determined by either a drive-by "as-is" appraisal
or an alternative valuation technique with some or all of the cost of the
improvement added to the appraisal to reflect the "after improvement" value of
the property. Title insurance is required on some FHA Loans where the mortgage
is in first position.
FHA LOANS
THE TITLE I LOAN PROGRAM-GENERAL
The National Housing Act of 1934 (the "NHA Act"), in Sections 1 and 2(a)
thereof, authorized the creation of the FHA and the Title I credit insurance
program (the "Title I Loan Program"). Several types of loans may be made under
the Title I Loan Program, including, among others, property improvement loans
(the "Title I Property Improvement Loans") which may be made by approved lenders
to finance alterations, repair or improvement of existing single family,
multifamily and nonresidential structures. See "The Trusts--FHA Loans" in the
Prospectus for a general description of the Title I Loan Program.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS
The following is a description of the requirements for Title I Property
Improvement Loans currently in effect.
A Title I Property Improvement Loan cannot be used to purchase property. The
loan proceeds may only be used to finance property improvements which
substantially protect or improve the basic livability or utility of the property
to be improved. The loan amount may include the cost of the proposed
improvements and (i) fees for architectural and engineering services; (ii)
building permit costs; (iii) fees for determining whether the property is in a
special flood hazard area; (iv) credit report costs; (v) a fee for an actual
inspection of the property by the lender or its agent, not to exceed $75, but
only where the total principal obligation is $7,500 or more; (vi) title
examination costs; (vii) for loans originated prior to June 6, 1996, appraisal
fees in connection with a loan or combination of loans on the same property with
a total principal balance in excess of $15,000; (viii) recording fees, recording
taxes, filing fees and documentary stamp taxes; and (ix) an originator fee not
to exceed 5% of the loan amount on any new property improvement loan.
One borrower may have multiple loans on multiple properties. In addition, a
borrower may obtain more than one loan to improve one property as long as the
total balance does not exceed the maximum permitted for the particular type of
loan involved.
The following maximum dollar limits applied to Title I property improvement
loans when the FHA Loans were originated:
TYPE OF PROPERTY LOAN LIMIT
Single Family $25,000 per property (non-manufactured home)
$17,500 per property (manufactured home)
Multifamily $60,000 per property or an average of
$12,000 per unit
Nonresidential $25,000 per property
Unsecured $ 7,500 per property
Title I loans bear fixed rates of interest and are fully amortizing with equal
installment payments (except for the first or last payments, which may not
exceed 150% of the regular installment payment). Weekly, biweekly, semi-monthly
or monthly payments are permitted at the lender's option. Where the borrower has
an irregular flow of income, the loan may be repaid in quarterly or semi-annual
installments which correspond with the borrower's flow of income. The loan
maturity may not be less than six months nor greater than 20 years plus 32 days.
The interest rate is established by each lender. For applications taken after
June 3, 1996, lenders may not charge any prepayment penalty.
The lender is entitled to recover the following fees and charges from the
borrower, but these costs may not be financed: (i) discount points paid by the
borrower to the lender; (ii) a fee for the services of a qualified closing
agent; (iii) Title I loan insurance charges assessed by the lender; (iv) title
insurance costs; (v) a handling charge to refinance an existing Title I loan,
not to exceed 1% of the new loan amount; and (vi) with respect to loans for
which the credit application was received prior to July 5, 1995, an origination
fee.
An eligible borrower of a secured Title I loan must have at least a one-half
interest in one of the following: (i) fee simple title to the related mortgaged
property; (ii) a lease on the mortgaged property which runs at least six months
longer than the loan term; or (iii) a recorded land installment contract on the
mortgaged property.
TITLE I UNDERWRITING REQUIREMENTS
Specified loan underwriting requirements must be satisfied prior to loan
approval and disbursement of funds. The lender must verify that the borrower has
at least a one-half interest in the mortgaged property. Additionally, the
Originator requires that all owners in fee simple have signed the lien
instrument. A copy of the cost estimated on a direct loan or a contract signed
by the contractor and borrower must be reviewed with the nature of the work to
be done specifically described in the contract. In addition, the loan file must
contain the promissory note, lien instrument and other documents required by
regulation.
The borrower's current paying habits and previous credit history must be
ascertained by obtaining a consumer credit report and by other credit
investigation. Written verification of income and employment is also required.
This may include any one of the following: (i) recent payroll stubs
(year-to-date plus current); (ii) verification of employment forms; (iii) signed
tax returns (self-employed); or (iv) financial statements (self-employed).
Generally, any Title I loan originated after August 1994 in excess of $7,500
must be secured by a recorded lien on the improved property which is evidenced
by a mortgage or deed of trust executed by the borrower and all other owners in
fee simple. Prior to August 1994, any Title I loan in excess of $5,000 was
required to be secured by such a recorded lien. In order to facilitate the
financing of small home improvement projects, the FHA does not require loans of
$7,500 or less, in the case of Title I loans originated after August 1994, and
$5,000 or less, in the case of Title I loans originated prior to August 1994, to
be secured by the property being improved. Notwithstanding the preceding
sentence, such loans must be secured by a recorded lien on the improved
property, if, including such loan, the total amount of all Title I loans
obtained by the borrower exceeds $7,500, or $5,000, as the case may be.
Effective November 18, 1991, for any loan or combination of loans on the same
property with a total unpaid principal balance in excess of $15,000, the
borrower is required to have equity in the property being improved in an amount
at least equal to the loan amount, except for certain loans originated by a
governmental institution.
Effective August 15, 1994, the requirement that the borrower have equity in the
property was eliminated for owner-occupied properties if the structure being
improved has been completed and occupied at least six months prior to the date
of the related application. For non-owner occupied properties, or owner occupied
properties not meeting this requirement, the borrower is required to have equity
in the property being improved in an amount at least equal to the loan amount
and all existing liens on such property.
Effective June 3, 1996, for secured Title I Loans the requirement that the
borrower have equity in the property was eliminated for both owner-occupied and
non owner-occupied properties.
INSURANCE CLAIMS PROCEDURES FOR TITLE I LOANS
The FHA has specific requirements for servicing of loans in default and filing
of claims. The FHA requires the lender to make a reasonable effort to contact
the borrower and have a face-to-face meeting prior to accelerating the maturity
of the note and filing an insurance claim.
If the lender's efforts to have the loan brought current are unsuccessful, the
lender is required to notify credit reporting agencies, file a claim with the
FHA for insurance and assign the loan to the United States government, unless
the lender chooses to proceed against the mortgaged property under its Title I
security instrument. If the lender chooses so to proceed, it may not, without
the approval of FHA, also file an insurance claim. However, if the lender holds
an obligation secured by the mortgaged property which is senior to the Title I
loan, it may both proceed against the mortgaged property under the senior lien
instrument and file an insurance claim for the Title I loan. When a lender files
an insurance claim with the FHA, the FHA reviews the claim, the submitted loan
documents relating to the loan and the lender's servicing practices in order to
verify compliance with FHA Title I requirements. Based upon this review, the
loan is either accepted or rejected for insurance claims.
Subject to the then remaining reserve amount, the amount of the insurance claim
payment, when made, is equal to 90% of the sum of the following amounts:
(1) The unpaid amount of the loan obligation (net of unpaid principal and
the uncollected interest earned to the date of default calculated according to
the actuarial method).
(2) The unpaid amount of interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days, calculated at the rate of 7% per
annum. (However, interest will not be paid for any period greater than nine
months from the date of default).
(3) The amount of uncollected court costs including fees paid for issuing,
serving and filing a summons.
(4) The amount of attorneys' fees on an hourly or other basis for time
actually expended and billed, not to exceed $500.
(5) The amount of expenses for recording the assignment of the loan to the
United States.
Because Certificateholders do not hold a contract of insurance, the FHA will not
recognize the Certificateholders as owners of the FHA Loans, or any portion
thereof, who are entitled to submit Claims to the FHA. Certificateholders will
have no direct right to receive insurance payments from the FHA.
CONVENTIONAL HOME IMPROVEMENT LOANS
Proceeds from Conventional Home Improvement Loans, which are loans not insured
or guaranteed by any governmental agency, cannot be used to purchase property.
The proceeds from Conventional Home Improvement Loans can be used to finance
various property improvements, including projects which would not qualify for an
FHA Loan. The loan amount may include the cost of the proposed improvements and
(i) an origination fee not to exceed 10% of the loan amount, (ii) credit report
costs, (iii) title costs, (iv) flood certification fee, (v) recording fees and
documentary stamps, and (vi) document preparation fees and a property valuation
fee. Certain loan programs allow for debt consolidation and cash proceeds to the
borrower.
CONVENTIONAL HOME IMPROVEMENT LOANS--UNDERWRITING CRITERIA
For secured Conventional Home Improvement Loans, the Originator verifies
ownership and existing liens against the related property through public
records. A copy of the cost estimate (on a Direct Loan) or a contract signed by
the contractor and borrowers (on a Dealer Loan) is obtained and reviewed.
Several of the loan programs permit some or all of the proposed costs of
improvements to be added to "as is" property valuation to arrive at an after
completion property value.
The borrower's current paying habits and previous credit history are ascertained
by obtaining a consumer credit report and by other credit investigation. Written
verification of income and employment also may be required. This may include any
one of the following: (i) recent payroll stubs (year-to-date plus current); (ii)
verification of employment forms; (iii) signed tax returns (self-employed); (iv)
financial statements (self-employed); or (v) alternative methods.
To facilitate the financing of small home improvement projects, Conventional
Home Improvement Loans of less than $12,500 may be made on an unsecured basis to
borrowers deemed creditworthy. Any Conventional Home Improvement Loan equal to
or in excess of $12,500 will be secured by a mortgage, deed of trust or
participation therein relating to the real estate being improved.
Conventional Home Improvement Loans bear fixed interest rates and are fully
amortizing with equal installment payments (except for the first or last
payments, which may not exceed 150% of the regular installment). Prepayments in
whole or in part are generally permitted at any time. Loans with mixed purposes,
other than solely for home improvement, may provide for a prepayment penalty if
state law permits. The maximum term for a Conventional Home Improvement Loan is
360 months.
THE MULTIFAMILY LENDING PROGRAM
The Originators originate Multifamily Loans in several states. Typically,
Multifamily Loans are 25 to 30 year term fully amortizing loans consisting of 5
or more units (some of which may be non-residential units) for non-purchase
money loans. All of the Multifamily Loans are first liens with a minimum loan
amount of $50,000 and a maximum loan amount of $1,000,000, a maximum
Loan-to-Value ratio of approximately 65% and minimum debt service of 1.25 to 1,
although these guidelines can be varied with the approval of senior management.
All Multifamily Loans are underwritten centrally in Sacramento, California.
Appraisals, field inspections and environmental inspections (performed by
outside and certified inspectors) are required for each Multifamily Loan. Title
insurance is obtained for all Multifamily Loans. Substantially all of the mixed
used properties securing Multifamily Loans will be properties with no less than
approximately 90%, measured by square footage, number of units and projected
rent, being allocated to residential units.
90-DAY DEFERRED PROGRAM
With respect to Home Equity and Home Improvement Loans, a borrower is offered
the opportunity to defer two scheduled payments of principal and interest on his
loan. The interest that accrues for that period is accounted for separately and
is collected either from monthly payments made which are in excess of the
borrower's scheduled monthly payment or when the loan is paid in full. Payment
of principal during the period is similarly deferred. No principal reduction
occurs until the first payment is made. The term to maturity and other loan
terms are no different than those for loan products without this feature and are
not changed due to the deferral.
THE REPRESENTATIVE AND THE ORIGINATORS
The Money Store Inc. will act as the Servicer of the Loans. Except for certain
representations and warranties relating to the Loans and certain other matters,
The Money Store Inc.'s obligations with respect to the Loans are limited to its
contractual servicing obligations.
The Money Store Inc. is a New Jersey corporation and the parent company of the
Originators and their affiliates. The Money Store Inc. is headquartered in
Sacramento, California and Union, New Jersey. On June 30, 1998, The Money Store
Inc. became a wholly-owned subsidiary of First Union National Bank, a national
banking subsidiary of First Union Corporation. First Union Corporation is the
parent of First Union Capital Markets. First Union National Bank also serves as
custodian with respect to the Loans. See "Risk Factors --Risk of Bankruptcy or
Insolvency of the Originators -- the Custodian."
The Money Store Inc. is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store Inc.
and its subsidiaries primarily consist of home equity loans, loans (the "SBA
Loans") guaranteed in part by the United States Small Business Administration
(the "SBA") and government guaranteed student loans ("Student Loans").
Since 1967, The Money Store Inc. and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States. Based upon industry sources, the Representative believes that during
1996 The Money Store Inc. and its subsidiaries were among the largest
originators, by principal amount, of home equity loans in the United States. In
1979, The Money Store Inc. and its subsidiaries began to originate SBA Loans
and, based upon statistics compiled by the SBA, the Representative believes that
during each of the last 14 SBA fiscal years it originated a greater principal
amount of SBA Loans than any other originator of such loans in the United
States. In 1984, The Money Store Inc. and its subsidiaries entered into the
government guaranteed student loan origination market.
For the year ended December 31, 1997, The Money Store Inc. and its subsidiaries
originated or purchased approximately $_____________ of loans. Of those loans,
approximately __% by principal amount were home equity loans, approximately __%
by principal amount were SBA Loans, approximately __% by principal amount were
Student Loans and approximately __% by principal amount were auto loans. The
business strategy of The Money Store Inc. has been to identify and pursue niche
lending opportunities which management believes have had widespread unsatisfied
demand.
At June 30, 1998, The Money Store Inc. and its subsidiaries operated out of ___
locations and were doing business in __ states and the District of Columbia, the
Commonwealth of Puerto Rico and the United Kingdom.
First Union Corporation is a North Carolina-based, multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended, and the rules
and regulations promulgated thereunder (the "BHCA"). Through its full-service
banking offices, First Union Corporation provides a wide range of commercial and
retail banking services and trust services in Connecticut, Delaware, Florida,
Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia and Washington, D.C. Such offices are operated by
First Union National Bank, headquartered in Charlotte, North Carolina, except
the Delaware offices, which are operated by First Union Bank of Delaware. First
Union Corporation also provides various other financial services, including
mortgage banking, home equity lending, credit cards, leasing, investment
banking, insurance and securities brokerage services, through other
subsidiaries. As of and for the three months ended March 31, 1998, First Union
Corporation had on a restated basis taking into consideration the acquisition by
First Union Corporation of CoreStates Financial Corp. on April 28, 1998, assets
of $220 billion. First Union Corporation is the sixth largest bank holding
company in the United States, based on assets at March 31, 1998.
First Union National Bank, a national banking association with its headquarters
in Charlotte, North Carolina, provides a wide range of commercial and retail
banking services and trust services in all of the states listed above, except
Delaware. On February 28, 1998, First Union National Bank merged with an
affiliated national bank. As of and for the three months ended March 31, 1998,
First Union Corporation reported (on a historical basis) assets of $160 billion.
The following table shows the originations and portfolio balances of The Money
Store Inc. and its subsidiaries for the periods indicated:
ORIGINATIONS AND SERVICED LOAN PORTFOLIO BY LOAN TYPE
YEAR ENDED DECEMBER 31,
1995
ORIGINATIONS Serviced
AMOUNT Number of Loans Loan Portfolio
Home Equity $ $
Loans........................
% of Total................... % %
SBA Loans....................
of Total.................... % %
Student Loans................
% of Total................... % %
Total....................... $ $
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997
ORIGINATIONS ORIGINATIONS
SERVICED SERVICED
NUMBER OF LOAN NUMBER OF LOAN
AMOUNT LOANS PORTFOLIO AMOUNT LOANS PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
Home Equity Loans....... $ $ $ $
% of Total.............. % % % %
SBA Loans...............
% of Total.............. % % % %
Student Loans...........
% of Total.............. % % % %
Auto Loans.............. % % % %
% of Total.............. % % % %
Total.................. $ $ $ $
</TABLE>
Although the Originators have no maximum dollar amount for home equity loans,
the actual maximum amount that the Originators will lend is determined by the
applicant's ability to repay the loan, the value of the borrower's equity in the
real estate and the ratio of such equity to the home's appraised value. For home
equity loans originated in 1995, 1996 and 1997, the average loan size was
approximately $________, $_______ and $________, respectively.
The following table illustrates The Money Store Inc.'s delinquency and
charge-off experience with respect to home equity loans in its servicing
portfolio:
HOME EQUITY LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------------------------
1995 1996 1997
---- ---- ----
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% %
30-59 days past due(1).............. %
- --------------------------------------------------------------------------------------------------
% %
60-89 days past due(1).............. %
- --------------------------------------------------------------------------------------------------
% %
90+ days past due(1)................ %
- --------------------------------------------------------------------------------------------------
$ $ $
Loans charged-off, net..............
- --------------------------------------------------------------------------------------------------
Loans charged-off, net, as a % % %
percentage of the home equity
loan portfolio.
- --------------------------------------------------------------------------------------------------
$ $ %
- --------------------------------------------------------------------------------------------------
(1) The percentage of Home Equity Loan charge-offs is calculated based upon
the dollar amount of charge-offs divided by the dollar amount of Home
Equity Loans contained in the Serviced Loan Portfolio.
</TABLE>
While the above delinquency and charge-off experience represents the Servicer's
recent experience, there can be no assurance that the future delinquency and
charge-off experience on the Home Equity Loans included in Pools I and II will
be similar. The Servicer can neither quantify the impact of any recent property
value declines on the Home Equity Loans nor predict whether, to what extent or
how long such declines may continue. In a period of such decline, the rates of
delinquencies, foreclosures and losses on the Home Equity Loans could be higher
than those heretofore experienced in the mortgage lending industry in general.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Home Equity Loans and, accordingly,
the actual rates of delinquencies, foreclosures and losses. See "Description of
the Certificates--The Pool I, Pool II, Pool III and Pool IV Distribution
Amounts" herein for a discussion of the effect to Certificateholders of
delinquencies in payments on The Home Equity Loans.
The Money Store Inc. does not report the delinquency and charge-off experience
of its Home Improvement Loans and Multifamily Loans and there can be no
assurance, and no representation is made, that the delinquency and charge-off
experience with respect to the Home Improvement Loans and the Multifamily Loans
will be similar to that reflected in the table above.
LEGAL PROCEEDINGS
Because the nature of the business of The Money Store Inc. involves the
collection of numerous accounts, the validity of liens and compliance with state
and federal lending laws, The Money Store Inc. is subject to claims and legal
actions in the ordinary course of its business. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect
to such claims and actions, The Money Store Inc. believes that the aggregate
amount of such liabilities will not result in monetary damage which would have a
material adverse effect on the financial condition of The Money Store Inc.
THE LOAN POOLS
GENERAL
Certain data with respect to the Initial Loans expected to be included in the
Trust is set forth below. References in this Prospectus Supplement to the
characteristics of the Pool I, Pool II, Pool III and Pool IV Loans as of the
Cut-Off Date are deemed to include the characteristics, as of the date of their
origination, of those Loans in such Pools originated after the Cut-Off Date and
up to the Closing Date. A Current Report on Form 8-K containing a detailed
description (the "Detailed Description") of the Initial Loans will be available
to purchasers of the Class A Certificates upon request at or before the initial
issuance of the Class A Certificates and will be filed with the Securities and
Exchange Commission within 15 days after such issuance. The Detailed Description
will specify the principal balance of the Initial Pool I and Initial Pool II
Home Equity Loans, the Initial Pool III Home Improvement Loans and the Initial
Pool IV Multifamily Loans as of the Cut-Off Date, the initial principal balance
of each Class of the Class A Certificates and will also include the following
information regarding such Initial Pool I and Initial Pool II Home Equity Loans,
Initial Pool III Home Improvement Loans and Initial Pool IV Multifamily Loans
(in each case, presented by (i) principal balance of the applicable Pool as of
the Cut-Off Date; (ii) percentage of the applicable Pool by principal balance
and (iii) number of Initial Loans for the applicable Pool): geographical
distribution of the Mortgaged Properties, Combined Loan-to-Value Ratios,
Mortgage Interest Rates, original principal balances, number of months since
origination, months remaining to stated maturity, Gross Margins with respect to
the Initial Pool II Home Equity Loans, Lifetime Caps with respect to the Initial
Pool II Home Equity Loans, Lifetime Floors with respect to the Initial Pool II
Home Equity Loans and the months to next Change Date with respect to the Initial
Pool II Home Equity Loans.
The statistical information presented in this Prospectus Supplement concerning
the Pool I, Pool II, Pool III and Pool IV Loans is based on preliminary Pools
expected to be delivered to the Trustee and the Co-Trustee on the Closing Date.
The Representative expects that loans (including the Subsequent Loans) that were
not contained in the preliminary Pools will be added to the final Pools. While
the statistical distribution of the characteristics for the final Pools of Loans
will vary somewhat from the statistical distribution of such characteristics for
the preliminary Pools of Loans presented in this Prospectus Supplement, the
Representative does not believe that the characteristics of the final Pools will
differ materially.
The Agreement will provide that Subsequent Loans may be purchased by the Trust
from the Originators from time to time on or before the close of business on
_______, 1998 from funds on deposit in the Pre-Funding Account. Any Subsequent
Pool I or Pool II Loan so acquired will have been originated and underwritten,
or purchased and re-underwritten, by one of the Originators, substantially in
accordance with the Originator's underwriting criteria described in the
Prospectus under the caption "The Home Equity Lending Program--Underwriting
Criteria." Any Subsequent Pool III Loan so acquired will have been originated
and underwritten, or purchased and re-underwritten, by one of the Originators,
substantially in accordance with the Originator's underwriting criteria
described herein under the caption "Lending Programs--The Home Improvement
Lending Program--FHA Loans--Title I Underwriting Requirements," in the case of
FHA Loans, or "Lending Programs--The Home Improvement Lending Program--
Conventional Home Improvement Loans--Underwriting Criteria," in the case of
Conventional Home Improvement Loans. Any Subsequent Pool IV Loan so acquired
will have been originated and underwritten, or purchased and re-underwritten,
by one of the Originators, substantially in accordance with the Originator's
underwriting criteria described herein under the caption "Lending Program--The
Multifamily Lending Program." The purchase price for each Subsequent Loan will
be no greater than its unpaid principal balance as of the related Subsequent
Cut-Off Date. The Agreement will provide that each Pool of Loans, following the
conveyance of any Subsequent Loans to the appropriate Pool, must, in the
aggregate, conform to certain specified characteristics. See "The Agreement--
Representations and Warranties" in the Prospectus.
HOME EQUITY LOANS
The Initial Home Equity Loans consist of mortgages, deeds of trust or other
security instruments (the "Home Equity Mortgages" or "Mortgages"), and the
related promissory notes (the "Home Equity Mortgage Notes" or "Mortgage Notes")
primarily secured by one- to four-family residences, units in planned unit
developments and units in condominium developments (the "Home Equity Mortgaged
Properties" or "Mortgaged Properties"). The aggregate principal balance of the
Initial Pool I Home Equity Loans as of the Cut-Off Date will be approximately
$___________ and the aggregate principal balance of the Initial Pool II Home
Equity Loans as of the Cut-Off Date will be approximately $_____________. The
Initial Home Equity Loans will be originated and underwritten, or purchased and
re-underwritten, by one of the Originators, substantially in accordance with the
underwriting criteria described in the Prospectus under the heading "The Home
Equity Lending Program--Underwriting Criteria." Unless otherwise noted, all
percentages in this general discussion are measured by the expected principal
balance of the Initial Home Equity Loans described herein on the Cut-Off Date,
and the statistics are given as of the Cut-Off Date.
The Pool I Home Equity Loans will bear interest at fixed rates which, as of the
Cut-Off Date, ranged from approximately ___% to ___% per annum. The Pool II Home
Equity Loans will bear interest at adjustable rates which, as of the Cut-Off
Date, ranged from ___% to ___% per annum (each, a "Pool II Mortgage Interest
Rate"), which will adjust on the date set forth in the related Mortgage Note.
For each Pool II Home Equity Loan, the related Pool II Mortgage Interest Rate
will change initially after the period set forth in the related Mortgage Note
and periodically thereafter. Each date on which a Pool II Mortgage Interest Rate
changes is referred to as the "Change Date" for the related Pool II Home Equity
Loan. No more than approximately ___% of the Pool II Home Equity Loans will have
their first Change Date occurring approximately 24 months after origination and
no more than approximately ___% of the Pool II Home Equity Loans will have their
first Change Date occurring approximately 36 months after origination. No more
than ___% of the Pool II Home Equity Loans will have their first Change Date
occurring approximately 48 months after origination. The remainder of the Pool
II Home Equity Loans will have their first Change Date occurring no later than
12 months after origination.
The Pool II Mortgage Interest Rate relating to at least ___% of the Pool II Home
Equity Loans will adjust on each applicable Change Date to equal the sum of (i)
the applicable London Interbank Offered rate for U.S. dollar deposits (the
"LIBOR Index") and (ii) the number of basis points set forth in the related
Mortgage Note (the "Gross Margin"), subject to rounding and to the effects of
the Periodic Rate Cap, the applicable Lifetime Cap and the applicable Lifetime
Floor. The Pool II Mortgage Interest Rate relating to the remainder of the Pool
II Home Equity Loans will adjust on each Change Date to equal the sum of (i) the
applicable One-Year Constant Maturity Treasury Index ("CMT" or the "Treasury
Index") as published by the Federal Reserve Board in the applicable Federal
Reserve Board Statistical Release No. H.15, and (ii) the related Gross Margin,
subject to rounding and to the effects of the Periodic Rate Cap, the applicable
Lifetime Cap and the applicable Lifetime Floor.
The Gross Margins for the Pool II Home Equity Loans will range from ____% to
____%. The weighted average Gross Margin of the Pool II Home Equity Loans will
be approximately ____%. The "Periodic Rate Cap" limits changes in the Pool II
Mortgage Interest Rate for each Pool II Home Equity Loan on each Change Date to
the Periodic Rate Cap as set forth in the related Mortgage Note. The Lifetime
Caps of the Pool II Home Equity Loans will range from approximately ___% to
___%. The weighted average Lifetime Cap of the Pool II Home Equity Loans will be
approximately ___%. The Lifetime Floors of the Pool II Home Equity Loans will
range from approximately __% to __%. The weighted average Lifetime Floor of the
Pool II Home Equity Loans will be approximately ___%. The months to the next
Change Date of the Pool II Home Equity Loans will range from __ month to __
months. The weighted average months to next Change Date will be approximately __
months. The Pool II Home Equity Loans do not provide for negative amortization.
No less than approximately __% and __% of the Initial Pool I Home Equity Loans
and Initial Pool II Home Equity Loans, respectively, will be secured by first
mortgage liens and the remainder of the Initial Pool I Home Equity Loans and
Initial Pool II Home Equity Loans will be secured by second mortgage liens.
Based on representations made by the Mortgagors, all of the Initial Home Equity
Loans will be secured by one-to four-family residences, approximately __% and
__% of the Initial Pool I and Initial Pool II Home Equity Loans, respectively,
are secured by vacation homes, secondary residences, or investment properties,
less than ___% and less than __% of the Initial Pool I and Initial Pool II Home
Equity Loans, respectively, will be secured by individual units in low-rise
condominiums, approximately __% and __% of the Initial Pool I and Initial Pool
II Home Equity Loans, respectively, will be secured by two-, three- or
four-family houses, and no Home Equity Loan will be secured by individual units
of other types including high-rise condominiums and mixed-use buildings. No
Initial Home Equity Loan will be secured by a mobile home or a cooperative
residence.
Approximately __% and __% of the Initial Pool I and Initial Pool II Home Equity
Loans, respectively, will be secured by Mortgaged Properties located in
California. Improvements on Mortgaged Properties located in California may be
more susceptible to certain types of special hazards not covered by insurance
(such as earthquakes) than properties located in other parts of the country. In
addition, the economy of the State of California may be adversely affected to a
greater degree than that of other areas of the country by certain developments
affecting industries concentrated in such state. Moreover in recent periods,
California has experienced significant downturns in the market value of real
estate.
Approximately __% of the Initial Pool I Home Equity Loans are secured by
Mortgaged Properties located in _________. Approximately __% of the Initial Pool
II Home Equity Loans will be secured by Mortgaged Properties located in
________. No more than approximately __% of the Initial Pool I Home Equity Loans
and __% of the Initial Pool II Home Equity Loans will be secured by Mortgaged
Properties located in any other state.
Based upon the original principal balances of the Initial Home Equity Loans, no
more than approximately __% and __%, respectively, of the Initial Pool I and
Initial Pool II Home Equity Loans will have a Combined Loan-to-Value Ratio
exceeding __%. The weighted average Combined Loan-to-Value Ratios of the Initial
Pool I and Initial Pool II Home Equity Loans will be no more than approximately
__% and __%, respectively. The Initial Home Equity Loans will not be insured or
guaranteed by any governmental entity.
The Initial Pool I Home Equity Loans will bear interest at fixed rates which
range from ___% to ____% per annum. The Initial Pool II Home Equity Loans will
bear interest at adjustable rates which initially range from ____% to ____% per
annum. The weighted average Pool I Mortgage Interest Rate on the Initial Pool I
Home Equity Loans will be approximately ____% per annum. The weighted average
current Pool II Mortgage Interest Rate on the Initial Pool II Home Equity Loans
will be approximately ____% per annum. The lowest principal balances of any
Initial Pool I and Initial Pool II Home Equity Loans will be approximately
$______ and $______, respectively, and the highest will be approximately
$_________ and $___________, respectively. The average principal balances of the
Initial Pool I and Initial Pool II Home Equity Loans will be approximately
$________ and $_________, respectively. Initial Home Equity Loans not originated
by an Originator or Initial Home Equity Loans having original principal balances
less than or equal to $__________ may not be covered by title insurance
policies. The weighted average remaining terms to stated maturity of the Initial
Pool I and Initial Pool II Home Equity Loans will be approximately ____ months
and ____ months, respectively. The weighted average terms to stated maturity of
the Initial Pool I and Initial Pool II Home Equity Loans at origination will be
approximately ___ months and ___ months, respectively. Less than approximately
__% and __% of the Initial Pool I and Initial Pool II Home Equity Loans,
respectively, will be Balloon Loans. No Initial Pool II Home Equity Loan will be
a Balloon Loan.
HOME IMPROVEMENT LOANS
The Initial Home Improvement Loans consist of fixed-rate, residential home
improvement mortgages, deeds of trust or other security instruments (the "Home
Improvement Mortgages" or "Mortgages"), and the related promissory notes, retail
installment contracts or obligations, or sales agreements (the "Home Improvement
Mortgage Notes" or "Mortgage Notes") primarily secured by one- to four-family
residences, units in planned unit developments and units in condominium
developments (the "Home Improvement Mortgaged Properties" or "Mortgaged
Properties"). The aggregate principal balances of the Initial Home Improvement
Loans as of the Cut-Off Date will be approximately $________________.
Approximately ___% and ___% of the Initial Home Improvement Loans will be FHA
Loans and Conventional Home Improvement Loans, respectively. The Initial Home
Improvement Loans will have been originated and underwritten, or purchased and
re-underwritten, by one of the Originators, substantially in accordance with the
Originators' underwriting criteria described herein under the caption "Lending
Programs--The Home Improvement Lending Program--Title I Underwriting
Requirements," in the case of FHA Loans, or "Lending Programs--The Home
Improvement Lending Programs--Conventional Home Improvement Loans--Underwriting
Criteria," in the case of Conventional Home Improvement Loans. Unless otherwise
noted, all percentages in this general discussion are measured by the expected
principal balance of the Initial Home Improvement Loans described herein on the
Cut-Off Date and the statistics are given as of the Cut-Off Date.
Approximately ___% of the Initial Home Improvement Loans will be secured by
first mortgage liens, no more than approximately ___% of the Initial Home
Improvement Loans will be secured by second mortgage liens and the remainder of
the Initial Home Improvement Loans will be secured by more junior mortgage
liens. Based on representations made by the Mortgagors, all of the Initial Home
Improvement Loans will be secured by one- to four-family residences,
approximately ___% of the Initial Home Improvement Loans are secured by vacation
homes, secondary residences, or investment properties, less than ___% of the
Initial Home Improvement Loans will be secured by individual units in low-rise
condominiums, approximately ___% of the Initial Home Improvement Loans will be
secured by two-, three- or four-family houses, and no Initial Home Improvement
Loan will be secured by individual units of other types including high-rise
condominiums and mixed-use buildings. No Initial Home Improvement Loan will be
secured by a mobile home or a cooperative residence.
Approximately ___% of the Initial Home Improvement Loans are secured by
Mortgaged Properties located in _________________________. No more than
approximately ____% of the Initial Home Improvement Loans will be secured by
Mortgaged Properties located in any other state.
The FHA Loans are insured by the FHA to the extent described herein. The
Conventional Home Improvement Loans are not insured or guaranteed by any
governmental entity.
The Initial Home Improvement Loans will bear interest at fixed rates which range
from _____% to ____% per annum. The weighted average Mortgage Interest Rate on
the Initial Home Improvement Loans will be approximately ____% per annum. The
lowest principal balances of any Initial Home Improvement Loans will be
approximately $________ and the highest will be approximately $________. The
average principal balances of the Initial Home Improvement Loans will be
approximately $________. The weighted average remaining terms to stated maturity
of the Initial Home Improvement Loans will be approximately ____ months. The
weighted average terms to stated maturity of the Initial Home Improvement Loans
at origination will be approximately ____ months. None of the Initial Home
Improvement Loans will be Balloon Loans.
MULTIFAMILY LOANS
The Initial Multifamily Loans consist of home improvement mortgages, deeds of
trust or other security instruments (the "Multifamily Mortgages" or
"Mortgages"), and the related promissory notes (the "Multifamily Mortgage Notes"
or "Mortgage Notes") primarily secured by five or more unit residential or
mixed-use residential and commercial properties (the "Multifamily Mortgaged
Properties" or "Mortgaged Properties"). The aggregate principal balances of the
Initial Multifamily Loans as of the Cut-Off Date will be approximately
$___________. The Initial Multifamily Loans will have been originated and
underwritten, or purchased and re-underwritten, by one of the Originators,
substantially in accordance with the underwriting criteria described herein
under the heading "Lending Programs--The Multifamily Lending
Program--Underwriting Criteria."
Approximately ___% of the Initial Multifamily Loans will be secured by Mortgaged
Properties located in __________________________. No more than approximately
___% of the Initial Multifamily Loans will be secured by Mortgaged Properties
located in any other state. No Mortgaged Properties relating to the Subsequent
Multifamily Loans will be located in _______. All the Initial Multifamily Loans
will be secured by first mortgage liens.
Based upon the original principal balances of the Initial Multifamily Loans,
none of the Initial Multifamily Loans will have a Combined Loan-to-Value Ratio
exceeding approximately ___%. The weighted average Combined Loan-to-Value
Ratios of the Initial Multifamily Loans will be approximately ____%. The Initial
Multifamily Loans will not be insured or guaranteed by any governmental entity.
The Initial Multifamily Loans will bear interest at fixed rates which range from
____% to ____% per annum. The weighted average Mortgage Interest Rate on the
Initial Multifamily Loans will be approximately _____% per annum. The lowest
principal balance of any Initial Multifamily Loans will be approximately
$________ and the highest will be approximately $________. The average principal
balance of the Initial Multifamily Loans will be approximately $________. All
Initial Multifamily Loans will be covered by title insurance policies. The
weighted average remaining term to stated maturity of the Initial Multifamily
Loans will be approximately ____ months. The weighted average term to stated
maturity of the Initial Multifamily Loans at origination will be approximately
____ months.
PAYMENTS ON THE LOANS
The Initial Loans, other than Balloon Loans, will generally provide for a
schedule of payments which will be, if timely paid, sufficient to amortize fully
the principal balance of the related Initial Loan on or before its maturity
date. Interest with respect to the Initial Loans will accrue on either an
actuarial interest method or a simple interest method.
The actuarial interest method provides that interest is charged and payments are
due as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments on such Loans received either earlier or
later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest. With respect to the Pool II Home Equity Loans, on each
Change Date, the Mortgagor's monthly payment will be adjusted prospectively to
fully amortize such Pool II Home Equity Loans at the then current Pool II
Mortgage Interest Rate over its stated remaining term to maturity.
The simple interest method provides for the amortization of the amount of each
loan over a series of equal monthly payments. However, unlike the monthly
payment under the actuarial interest method, each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance at the stated interest rate and based upon the period elapsed
since the preceding payment of principal was made, using the method permitted by
applicable law. As payments are received under the loan, the amount received is
applied first to interest accrued to the date of payment and the balance, if
any, is applied to reduce the unpaid principal balance; provided, however, that
with respect to FHA Loans secured by Mortgaged Properties located in states
where the Servicer collects the FHA Insurance Premium directly from the related
Mortgagor, payments are applied first to the FHA Insurance Premium. Accordingly,
if a borrower pays a fixed monthly installment on such a loan before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment on the loan after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would be had
the payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly reduced. In
addition, a late charge may be imposed with respect to the past due amount.
The amount of interest payable to the Class A Certificateholders on each
Remittance Date will not be affected by interest accruing on the Loans based on
the simple interest method. On each Remittance Date, the Class A
Certificateholders are entitled to receive 30 days' interest (or, with respect
to the Class A-7 Certificate, the actual number of days from the last Remittance
Date to but not including the upcoming Remittance Date) at the applicable
Pass-Through Rate on the outstanding principal balances of the applicable Class
of Certificates. The Servicer is required to remit to the Trustee the excess, if
any, of the amount of interest the Class A Certificateholders are entitled to
receive on each Remittance Date over the interest collected on the Loans during
the related Due Period and available to pay interest on the Class A
Certificates. See "The Agreement--Monthly Advances and Compensating Interest"
herein.
Similarly, the compensation payable to the Servicer will not be affected by
interest accruing on the Loans based on the simple interest method. The Servicer
is entitled to receive a fee based on the principal balance of the Loans, not
upon the portion of a monthly payment allocable to interest. See "The
Agreement--Servicing and Other Compensation" herein.
If a payment is received on a Loan before its due date, more of such payment
will be used on the related Remittance Date to pay principal on the Class A
Certificates than if such payment was received on such due date. Conversely, if
a payment is received on a Loan after its scheduled due date, less of such
payment will be used on the related Remittance Date to pay principal on the
Class A Certificates than if such payment was received on its due date. This
will not affect the total amount of principal to be received by the Class A
Certificateholders over the life of the transaction, but it may affect the
weighted average lives of the Class A Certificates.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The effective yield to the Pool I, Pool III and Pool IV Certificateholders will
be slightly lower than the yield otherwise produced by the applicable
Pass-Through Rate because, while interest will accrue on the Pool I, Pool III
and Pool IV Certificates from the first day of each month, the distribution of
such interest will not be made until the 15th day (or if such 15th day is not a
business day, the next succeeding business day) of the month following the month
of accrual. For the Class A-7 Certificates, interest will accrue from the 15th
day of each month until the 14th day of the next month (or the Closing Date in
the case of _________, 1998 Remittance Date).
In general, because the Pool I, Pool III and Pool IV Loans will bear fixed
interest rates, when the level of prevailing interest rates for similar loans
significantly declines, the rate of prepayment of the Pool I, Pool III and Pool
IV Loans is likely to increase, although the prepayment rate is influenced by a
number of other factors, including general economic conditions and homeowner
mobility. Similarly, when the level of interest rates for similar loans
significantly rises, the rate of prepayment of the Pool I, Pool III and Pool IV
Loans may decrease. No prediction can be made as to the prepayment rate that the
Loans will actually experience.
All of the Pool II Loans bear adjustable rates. However, the Pool II Loans still
may be subject to increased principal prepayments in a low interest rate
environment. For example, if prevailing interest rates were to fall, Mortgagors
with Pool II Loans may be inclined to refinance their Pool II Loans with a fixed
rate loan to "lock in" a lower interest rate. The existence of the Periodic Rate
Cap, Lifetime Cap and Lifetime Floor also may affect the likelihood of
prepayments resulting from refinancings. In addition, the delinquency and loss
experience on the Pool II Loans may differ from that on the Loans in the other
Pools because the amount of the monthly payments on the Pool II Loans are
subject to adjustment on each Change Date. If such different experience were to
occur, the prepayment experience on the Class A-7 Certificates may differ from
that on the other Classes of Certificates.
Generally, second priority mortgage loans have smaller average principal
balances than first priority mortgage loans and are not viewed by borrowers as
permanent financing. Accordingly, the Loans included in the Trust that are
secured by second liens may experience a higher rate of prepayment than
traditional first priority mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on mortgage loans for
Federal income tax purposes may result in a higher rate of prepayment of the
Loans. The obligation of the Servicer to enforce the "due-on-sale" provisions of
the Loans may also increase prepayments. The prepayment experience of the Pools
may be affected by a wide variety of factors, including general and local
economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Money Store Inc. is unaware of
any reliable studies that would project the prepayment risks associated with the
Loans based upon current interest rates and economic conditions and the
historical prepayment experience of The Money Store Inc.'s portfolio of home
equity loans.
Unscheduled payments, delinquencies, repurchases of defective Loans, defaults on
the Loans and distributions from the Pre-Funding Account, if any, on the
Remittance Dates in ______, ________, ________, and 1998 and the Special
Remittance Date will affect the amount of funds available to make distributions
on each Remittance Date. In addition, the Servicer may, at its option, and in
the absence of the exercise thereof by the Servicer, Certificate Guaranty
Insurer may, at its option, on any Remittance Date on and after the Optional
Servicer Termination Date, purchase from the Trust all of the Loans and any
related REO Properties at the Termination Prices for all Pools. Certificate
Guaranty Insurer may, at its option, similarly purchase all the Loans and REO
Properties on any Remittance Date, on or after the Cross-Over Date, on which the
aggregate principal balances as of the Cut-Off Date of the Loans that have been
liquidated (each, a "Liquidated Loan") is equal to or exceeds 25% of the sum of
(i) the Original Pool Principal Balance and (ii) the original Pre-Funded Amount,
if any. The Cross-Over Date is defined in the Agreement as the date on which the
Maximum Subordinated Amount is reduced to zero. See "The Certificate Guaranty
Insurance Policies and Certificate Guaranty Insurance" herein.
If prepayments of principal are received on the Loans at a rate greater than
that assumed by an investor (including distributions from the Pre-Funding
Account, if any, and receipt of Subordination Increase Amounts), the yield will
be increased on Class A Certificates purchased by such investor at a price less
than par (i.e., the principal balance of a Class A Certificate at the time of
its purchase). Similarly, if prepayments of principal are received on the Loans
at a rate greater than that assumed by an investor, the yield will be decreased
on Class A Certificates purchased at a price greater than par. The effect on an
investor's yield of principal prepayments on the Loans occurring at a rate that
is faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the applicable Class of Class A
Certificates may not be offset by a subsequent like reduction (or increase) in
the rate of principal payments. The weighted average lives of the Pool I, Pool
II, Pool III and Pool IV Certificates will also be affected by the amount and
timing of delinquencies and defaults on the Pool I, Pool II, Pool III and Pool
IV Loans and the liquidations of defaulted Pool I, Pool II, Pool III and Pool IV
Loans, respectively. Delinquencies and defaults will generally slow the rate of
payment of principal to the Class A Certificateholders since (i) neither the
Servicer nor Certificate Guaranty Insurer is obligated to advance for delinquent
payments of principal and (ii) Insured Payments with respect to principal
generally are not required until the occurrence of a Subordination Deficit (as
defined herein under "Description of the Certificates--Spread Amount"). However,
this effect will be offset to the extent that lump sum recoveries on defaulted
Loans and foreclosed Mortgaged Properties result in principal payments on the
Loans faster than otherwise scheduled. Additionally, the holders of the Pool III
Certificates will be entitled to any FHA Payments received by the Claims
Administrator.
As described herein, certain Classes of Pool I Certificates will be entitled to
receive payments of principal prior to other Classes of Pool I Certificates. As
a result, the Classes of Pool I Certificates receiving payments of principal
first will immediately be affected by the prepayment rate on the Pool I Home
Equity Loans. However, the timing of commencement of principal distributions and
the weighted average lives of each Class of Class A Certificates will be
affected by the prepayment rate experienced both before and after the
commencement of principal distributions on any such Class.
If during the Funding Period the entire original Pre-Funded Amount has not been
used to purchase Subsequent Loans, on the Special Remittance Date, the related
Pool I, Pool II, Pool III and Pool IV Certificates will be prepaid in part from
and to the extent of such remaining amounts. Although no assurances can be
given, it is anticipated by the Representative that the principal amount of
Subsequent Loans sold to the Trust will require the application of substantially
all the amounts on deposit in the Pre-Funding Account, and that there should be
no material principal prepaid on the Class A Certificates from such amounts.
The Loans are either (i) "simple interest" or "date-of-payment loans" or (ii)
"actuarial method" loans. If a payment is received on a Loan which is a "simple
interest" loan later than scheduled, a smaller portion of such payment will be
applied to principal and a greater portion will be applied to interest than
would have been the case had the payment been received on the scheduled due
date, resulting in such Loan having a longer weighted average life than would
have been the case had the payment been made as scheduled. Conversely, if a
payment on a Loan is received earlier than scheduled, more of such payment will
be applied to principal and less to interest than would have been the case had
the payment been received on its scheduled due date, resulting in such Loan
having a shorter weighted average life than would have been the case had the
payment been made as scheduled.
In the event that less than 30 days' interest is collected on a Loan during a
Due Period, whether due to prepayment in full or a Curtailment, the Servicer is
obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of Compensating
Interest that the Servicer is obligated to pay, and are not otherwise covered by
Net Monthly Excess Spread (as defined herein under "Description of the
Certificates--Spread Amount") or Insured Payments, the yield on the Pool I, Pool
II, Pool III or Pool IV Certificates, as the case may be, will be adversely
affected. Any shortfall in collections of interest resulting from the early
receipt of a scheduled payment will not be covered by Compensating Interest, but
will be covered by Monthly Advances.
The Class A-7 Pass-Through Rate will be adjusted by reference to changes in the
level of one-month LIBOR, subject to the effects of the Net Funds Cap. Although
the Pool II Mortgage Interest Rates also are subject to adjustment, the Pool II
Mortgage Interest Rates with respect to most of the Pool II Loans adjust less
frequently than the Class A-7 Pass-Through Rate and adjust by reference to
either the London Interbank Offered Rate, which will be calculated differently
for the Pool II Loans and the Class A-7 Certificates, or the Treasury Index
which will not necessarily correspond to changes in one-month LIBOR. Changes in
one-month LIBOR or changes in the LIBOR Index or the Treasury Index may not
correlate to each other or to changes in prevailing interest rates. It is
possible that an increased level of one-month LIBOR could occur simultaneously
with a lower level of prevailing interest rates, which would be expected to
result in faster prepayments, thereby reducing the weighted average life of the
Class A-7 Certificates.
Certain of the Pool II Loans were originated with initial Pool II Mortgage
Interest Rates that were based on competitive conditions and did not equal the
sum of the applicable Index and the related Gross Margin. As a result, the Pool
II Mortgage Interest Rates on such Pool II Loans are more likely to adjust on
their first, and possibly subsequent, Change Dates, subject to the effects of
the Periodic Rate Cap and the Lifetime Cap. Because the Class A-7 Pass-Through
Rate is limited by the Net Funds Cap on each Remittance Date, limits on changes
in the Pool II Mortgage Interest Rates of the Pool II Loans may limit changes in
the Class A-7 Pass-Through Rate.
The Net Funds Cap on a Remittance Date will depend, in part, on the weighted
average of the then-current Pool I and Pool II Mortgage Interest Rates. If the
Pool I or Pool II Loans bearing higher Mortgage Interest Rates were to prepay,
the weighted average Mortgage Interest Rate of the Pool I or Pool II Loans, as
the case may be, and consequently the Net Funds Cap, would be lower than
otherwise would be the case. As of the Cut-Off Date, the weighted average
maximum Net Funds Cap is approximately _____%.
The projected last Remittance Dates for the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 and Class A-9 Certificates
are ____________, _____________, ___________, ____________, ____________,
_____________, _____________, ___________ and ____________, respectively. The
projected last Remittance Date for the Class A-6, Class A-7, Class A-8 and Class
A-9 Certificates is the Remittance Date following the latest date upon which a
Loan in the related Pool matures. The projected last Remittance Date for the
Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates is the
date on which the Principal Balance of the respective Class would be reduced to
zero, assuming that no prepayments are received on the Pool I Loans, that
payment of principal of and interest on each of the Pool I Loans is timely
received, each Class of Pool I Certificates receives payments of principal as
described herein and the Spread Amount is equal to zero. The weighted average
lives of the Class A Certificates are likely to be shorter than would be the
case if payments actually made on the Loans conformed to the foregoing
assumptions, and the final Remittance Dates with respect to each Class of Class
A Certificates could occur significantly earlier than the last projected
Remittance Dates because (i) Net Monthly Excess Spread will be used to make
accelerated payments of principal (i.e., Subordination Increase Amounts), (ii)
prepayments are likely to occur and (iii) the Servicer or Certificate Guaranty
Insurance may purchase all of the Loans under the limited circumstances
described herein.
"Weighted average life" refers to the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Class
A Certificates will be influenced by the priorities established in the
Agreement, and by the rate at which principal payments on the Loans in the
related Pool are paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes Principal
Prepayments, Curtailments, FHA Payments and liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement (the "Constant
Prepayment Rate" or "CPR") represents an assumed annualized rate of prepayment
relative to the then outstanding principal balance on a pool of new mortgage
loans.
<PAGE>
The following tables have been prepared assuming that Pools I, II, III and IV
are comprised of loan groups having the following characteristics:
<TABLE>
<CAPTION>
POOL I
Mortgage Assumed Aggregate Original Remaining Assumed
Interest Rate Outstanding Term to Term to Delivery
Principal Balance Maturity Maturity of
as of the Subsequent
Cut-off Date Loans
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.
2.
3.
4.
5.
6.
7.
8.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POOL II
Index Assumed
Aggregate
Outstanding
Principal
Balance Number Assumed
Mortgage as of the Original Remmaining Gross Gross of Months to Change Delivery of
Interest Cut-off Term to Term to Gross Life Life Next Interest Date Subsequent
Rate Date Maturity Maturity Margin Cap Floor Change Date Frequency Loans
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
POOL III
Mortgage Assumed Aggregate Original Remaining Assumed
Interest Rate Outstanding Term to Term to Delivery
Principal Balance Maturity Maturity of
as of the Subsequent
Cut-off Date Loans
- -------------------------------------------------------------------------------------------------------------------------------
1.
2.
3.
4.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Mortgage Assumed Aggregate Original Remaining Assumed
Interest Rate Outstanding Term to Term to Delivery
Principal Balance Maturity Maturity of
as of the Subsequent
Cut-off Date Loans
- -------------------------------------------------------------------------------------------------------------------------------
1.
2.
3.
</TABLE>
The following tables also have been prepared assuming (i) all distributions with
respect to the Certificates will be made at the scheduled times as described
below under "Description of the Certificates--Distributions on the Class A
Certificates," (ii) distributions on the Class A Certificates are received in
cash on the 15th day of each month, commencing ______, 1998, (iii) prepayments
represent payment in full of individual Loans and are received on the last day
of each month (commencing in _______, 1998) and include 30 days' interest
thereon at the applicable Mortgage Interest Rate, (iv) the Servicing Fee and
Contingency Fee for each Loan will be 0.25% and 0.25% per annum, respectively,
of the principal balance thereof, (v) no delinquencies or defaults in payments
by Mortgagors of principal and interest on the Loans are experienced, (vi) no
right of optional termination is exercised except as noted below, (vii) the
Class A Certificates are purchased on ________, 1998, and (viii) the Specified
Subordinated Amount (as defined herein under "Description of the
Certificates--Spread Amount") with respect to Pool I, Pool II, Pool III and Pool
IV initially is set at the highest level specified by the Agreement and
thereafter decreases in accordance with the provisions of the Agreement.
For each Class of Class A Certificates, the scenario presented below assumes
that the Representative exercises its option to establish the Pre-Funding
Account and that the Pre-Funded Amount equals its maximum permitted amount. The
scenario also assumes that the entire Pre-Funded Amount is used to purchase
Subsequent Loans by ______, 1998.
Based upon the foregoing assumptions, some or all of which are unlikely to
reflect actual experience, the following table indicates the projected weighted
average life of each Class of Class A Certificates under the following
scenarios.
SCENARIO POOL POOL II POOL III POOL IV
HEP% .CPR% CPR% CPR%
I
II
III
IV
V
The Pool I Certificates are priced at various Home Equity Prepayment ("HEP")
assumptions. HEP assumes that a pool of loans prepays in the first month at a
constant prepayment rate that corresponds in CPR to one-tenth the given HEP
percentage and increases by an additional one-tenth each month thereafter until
the tenth month, where it remains at a CPR equal to the given HEP percentage.
The Pool IV Certificates are priced at various CPR assumptions that occur
beginning in ___________, 199__, due to the prepayment lockout features of the
Multifamily Loans. Pools II and III are priced at various CPR assumptions that
occur beginning in __________, 199__.
CLASS A-1 CERTIFICATES
WEIGHTED EARLIEST
SCENARIO AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-2 CERTIFICATES
WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
SCENARIO (YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-3 CERTIFICATES
SCENARIO WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-4 CERTIFICATES
SCENARIO Weighted EARLIEST
Average RETIREMENT
Life AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-5 CERTIFICATES
SCENARIO WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-6 CERTIFICATES
SCENARIO WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-7 CERTIFICATES
SCENARIO WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-8 CERTIFICATES
SCENARIO WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
CLASS A-9 CERTIFICATES
SCENARIO WEIGHTED EARLIEST
AVERAGE RETIREMENT
LIFE AT
(YEARS) SERVICER'S
OPTION(1)
I
II
III(2)
IV
V
- ------------------------
(1) Assuming early termination of the related Pool of Loans when the
aggregate principal balance thereof declines to a level equal to 10% of
the sum of (i) the Original Pool Principal Balance and (ii) the
original Pre-Funded Amount.
(2) Pricing Assumptions
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Class A Certificates will be issued pursuant to the Agreement, a copy of
which will be included as an exhibit to a Current Report on Form 8-K to be filed
by the Representative on behalf of the Trust. The following summaries describe
material provisions of the Certificates and the Agreement, but do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement. Terms used herein and not otherwise
defined will have the meanings set forth in the Agreement.
GENERAL
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates generally will represent the right to receive payments measured by
amounts distributable on or with respect to the Home Equity Loans in Pool I. The
Class A-7 Certificates generally will represent the right to receive payments
measured by amounts distributable on or with respect to the Home Equity Loans in
Pool II (provided, however, that such Certificates will be entitled to receive
certain interest payments received on the Pool I Home Equity Loans as described
below under "The Agreement--Payments on the Loans"). The Class A-8 Certificates
generally will represent the right to receive payments measured by amounts
distributable on or with respect to the Home Improvement Loans in Pool III. The
Class A-9 Certificates generally will represent the right to receive payments
measured by amounts distributable on or with respect to the Multifamily Loans in
Pool IV. The Trust also will issue the Class R Certificates. Only the Class A
Certificates are offered hereby.
However, as a result of the cross-support provisions described herein, the
holders of each Class of Certificates may receive cash from any Loan, either by
direct allocation or credit support from another Pool. See "--Cross Support
Provisions." Also, amounts, if any, on deposit in the Spread Account will be
available to cover shortfalls in amounts otherwise distributable to
Certificateholders, regardless of Pool.
The Certificates will not represent obligations of the Representative, the
Originators or any of their respective affiliates. The Class A Certificates will
be issued in book-entry form in minimum denominations of $1,000 original
principal amount and integral multiples of $1,000 in excess thereof.
Definitive Class A Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, at the office of a Certificate Registrar appointed by the Trustee.
No service charge will be made for any registration of exchange or transfer, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The assets of the Trust will consist of (a) the Home Equity Loans, Home
Improvement Loans and, Multifamily Loans that from time to time are subject to
the Agreement; (b) amounts that from time to time are required by the Agreement
to be deposited in the Certificate Account, the Principal and Interest Account,
the Expense Account, the Insurance Account, the FHA Premium Account, the Spread
Account, the Pre-Funding Account and the Capitalized Interest Account, if any,
or to be invested in Permitted Investments; (c) all rights under any insurance
policy covering a Loan or the related Mortgaged Property; (d) property and any
proceeds thereof acquired by foreclosure of a Loan, deed in lieu of foreclosure
or a comparable conversion; and (e) the Certificate Guaranty Insurance Policies
and any proceeds thereof.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
On the 15th day of each month or, if such 15th day is not a Business Day, the
first Business Day immediately following, commencing in _______, 1998 (each such
day being a "Remittance Date," provided, however, that in no event shall the
Remittance Date occur less than three business days following the Determination
Date), until the Principal Balance of each Class of Class A Certificates has
been reduced to zero, the Trustee or Paying Agent will be required to distribute
to the persons in whose name a Class A Certificate is registered at the close of
business on the last day of the month immediately preceding the month of the
related Remittance Date (the "Record Date"), such Holder's Percentage Interest
multiplied by that portion of the Pool I, Pool II, Pool III and Pool IV
Distribution Amount, as the case may be, allocable to the respective Class of
Class A Certificates for such Remittance Date. Any Pre-Funded Amount remaining
at the close of business on _________, 1998 will be distributed by or on behalf
of the Trustee on the Special Remittance Date (together with __ days' accrued
interest (or, in the case of the Class A-7 Certificates, __ days' accrued
interest) at the applicable Pass-Through Rates on the amount of such prepayment)
to the Classes of Class A Certificates then entitled to receive payments of
principal as described herein under "--The Pool I, Pool II, Pool III and Pool IV
Distribution Amounts." Such distribution will be made to each person in whose
name a Class A Certificate of any such Class is registered on _________, 1998.
For so long as the Class A Certificates are in book-entry form with DTC, the
only "Holder" of the Class A Certificates will be Cede. See "--Book-Entry
Registration of Class A Certificates."
The "Class Principal Balance" of a Class of Certificates as of any date of
determination is the original principal balance of such Class of Certificates,
less (i) the sum of all amounts (including the principal portion of any related
Insured Payments and, with respect to the Pool III Certificates, FHA Payments)
previously distributed to the Trustee as principal on the applicable Class of
Certificates, and (ii) any actual loss of principal suffered by the related
Class A Certificateholders due to the failure of the Certificate Guaranty
Insurer to perform its obligations under the related Certificate Guaranty
Insurance Policy. Any such loss with respect to a Loan will be allocated among
all then outstanding Classes of Class A Certificates pro rata based upon the
then outstanding Principal Balances of such Classes.
A Class A Certificateholder's "Percentage Interest" is that fraction, expressed
as a percentage, the numerator of which is the original denomination of such
Class A Certificateholder's Class A Certificate and the denominator of which is
the original aggregate Principal Balance of the respective Class of Class A
Certificate.
A "Business Day" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the States of New York, New Jersey or
__________________ are authorized or obligated by law or executive order to be
closed.
THE POOL I, POOL II, POOL III AND POOL IV DISTRIBUTION AMOUNTS
The "Pool I Distribution Amount," "Pool II Distribution Amount," "Pool III
Distribution Amount," and "Pool IV Distribution Amount," for any Remittance Date
will be equal to the sum of (i) the Pool I, Pool II, Pool III or Pool IV Current
Interest Requirement, as the case may be, (ii) the Pool I, Pool II, Pool III or
Pool IV Principal Distribution Amount, as the case may be, (iii) the Pool I,
Pool II, Pool III or Pool IV Carry-Forward Amount, if any, as the case may be,
and (iv) any amount received by the Trustee from the Servicer that constitutes a
Monthly Advance with respect to a Pool I, Pool II, Pool III and Pool IV Loan, as
the case may be, and that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the Bankruptcy Code
in accordance with a final, nonappealable order of a court having competent
jurisdiction. The Pool II Distribution Amount does not include any
Certificateholders' LIBOR Interest Carryover.
On any Remittance Date the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8 and Class A-9 Current Interest Requirements
will equal 30 days' interest (or, in the case of the Class A-7 Certificates,
____ days' interest for the ________, 1998 Remittance Date and the actual number
of days since the preceding Remittance Date for each Remittance Date
thereafter), at the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class
A-6, Class A-7, Class A-8 and Class A-9 Pass-Through Rate on the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 and
Class A-9 Principal Balance, as the case may be, immediately prior to the
related Remittance Date (calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the Class A-7 Certificates, the actual
number of days elapsed since interest was last paid). On any Remittance Date,
(i) the "Pool I Current Interest Requirement" will equal the sum of the related
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Current
Interest Requirements, (ii) the "Pool II Current Interest Requirement" will
equal the Class A-7 Current Interest Requirement, (iii) the "Pool III Current
Interest Requirement" will equal the Class A-8 Current Interest Requirement, and
(iv) the Pool IV Current Interest Requirement will equal the Class A-9 Current
Interest Requirement. Notwithstanding the foregoing, if a principal prepayment
is made to a Class of Class A Certificates on the Special Remittance Date, each
such Class also will receive on such date __ days' interest (or, in the case of
the Class A-7 Certificates, __days' interest) at the applicable Pass-Through
Rate on the amount of such prepayment. Further, the Current Interest Requirement
for each such Class for the _______, 1998 Remittance Date will be based on 30
days' interest (or, in the case of the Class A-7 Certificates, the actual number
of days elapsed since the last Remittance Date) on the related Principal Balance
on ________, 1998 after giving effect to such principal prepayment.
For each Remittance Date, the Class A-7 Pass-Through Rate will equal, subject to
a maximum rate equal to the Net Funds Cap, a per annum rate equal to the sum of
LIBOR and ____% (or ____% for each Remittance Date occurring after the Optional
Servicer Termination Date). In no event, however, will the Class A-7
Pass-Through Rates exceed ____% per annum.
If on any Remittance Date, the Pass-Through Rate for the Class A-7 Certificates
is based upon the Net Funds Cap, the excess of (i) the amount of interest the
Class A-7 Certificates would be entitled to receive on such Remittance Date at a
rate equal to LIBOR plus the applicable margin (but in no event greater than
___%) over (ii) the amount of interest such Class will receive on such
Remittance Date at the Net Funds Cap, together with the unpaid portion of any
such excess from prior Remittance Dates (and interest accrued thereon at the
then applicable Pass-Through Rate, without giving effect to the Net Funds Cap)
is referred to herein as the "Certificateholders' LIBOR Interest Carryover." Any
Certificateholders' LIBOR Interest Carryover will be paid on future Remittance
Dates only as set forth herein under "The Agreement--Flow of Funds." The ratings
of the Class A-7 Certificates do not address the likelihood of the payment of
the amount of any Certificateholder's LIBOR Interest Carryover. Certificate
Guaranty Insurance does not insure payment of Certificateholder's LIBOR Interest
Carryover.
On any Remittance Date, the "Pool I Carry-Forward Amount," the "Pool II
Carry-Forward Amount," the "Pool III Carry-Forward Amount" and the "Pool IV
Carry-Forward Amount" will equal the sum of (i) the amount, if any, by which (x)
the Pool I, Pool II, Pool III or Pool IV Distribution Amount, as the case may
be, for the immediately preceding Remittance Date exceeded (y) the amount of the
actual distribution to the Holders of the Pool I, Pool II, Pool III and Pool IV
Certificates on such Remittance Date (less the amount of Insured Payments, if
any, on such date), and (ii) interest on the amount, if any, described in clause
(i) at one-twelfth the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 or
Class A-6 Pass-Through Rate, as the case may be, with respect to the Pool I
Certificates, the Class A-7 Pass-Through Rate, with respect to the Pool II
Certificates, the Class A-8 Pass-Through Rate, with respect to the Pool III
Certificates, and the Class A-9 Pass-Through Rate, with respect to the Pool IV
Certificates.
The Pool I, Pool II, Pool III and Pool IV Carry-Forward Amounts are primarily
intended to measure the amount of money for which the Certificate Guaranty
Insurer is entitled to reimbursement. As set forth herein, the Certificate
Guaranty Insurer is subrogated to the rights of Class A Certificateholders to
receive payments under the Class A Certificates to the extent of any Insured
Payments made under the applicable Certificate Guaranty Insurance Policy. See
"The Certificate Guaranty Insurance Policies and The Certificate Guaranty
Insurer." This right of subrogation, however, is subordinate to the right of the
Class A Certificateholders to receive the entire Pool I, Pool II, Pool III and
Pool IV Distribution Amount, as the case may be, on each Remittance Date.
On any Remittance Date, the "Pool I Principal Distribution Amount," the "Pool II
Principal Distribution Amount," the "Pool III Principal Distribution Amount" and
the "Pool IV Principal Distribution Amount" will equal the excess of:
(X) the sum, without duplication, of the following:
(i) each payment of principal received by the Servicer or any Subservicer
(exclusive of Curtailments, Principal Prepayments and amounts described in
clause (iii) hereof) during the related Due Period with respect to the Pool
I, Pool II, Pool III or Pool IV Loans, as the case may be,
(ii) all Curtailments and all Principal Prepayments received by the
Servicer or any Subservicer during the related Due Period with respect to
the Pool I, Pool II, Pool III or Pool IV Loans, as the case may be,
(iii) the principal portion of all Insurance Proceeds, Released Mortgaged
Property Proceeds and Liquidation Proceeds net of certain reimbursements to
the Servicer and amounts required by law to be released to the related
Mortgagor ("Net Liquidation Proceeds") received by the Servicer or any
Subservicer during the related Due Period with respect to the Pool I, Pool
II, Pool III or Pool IV Loans, as the case may be (and, with respect to
Pool III, the principal portion of all FHA Payments received by the Claims
Administrator with respect to a 90 Day Delinquent FHA Loan),
(iv) that portion of the purchase price for any Pool I, Pool II, Pool III
or Pool IV Loan, as the case may be, repurchased pursuant to the Agreement
which represents principal and any Substitution Adjustments, in either case
to the extent received by the Trustee as of the related Determination Date,
(v) any proceeds representing principal received by the Trustee in
connection with the liquidation of Pool I, Pool II, Pool III or Pool IV or
the termination of the Trust,
(vi) the amount of any Subordination Deficit (as defined below under
"--Spread Amount") with respect to Pool I, Pool II, Pool III or Pool IV, as
the case may be, for such Remittance Date,
(vii) any moneys released from the Pre-Funding Account, if any, on the
_____, _____, and _______, 1998 Remittance Date as a prepayment of the Pool
I, Pool II, Pool III or Pool IV Certificates, as the case may be and
(viii) the amount of any Subordination Increase Amount (as defined below
under "--Spread Amount") with respect to Pool I, Pool II, Pool III or Pool
IV, as the case may be, for such Remittance Date, OVER
(Y)the amount of any Subordination Reduction Amount (as defined below
under "--Spread Amount") with respect to Pool I, Pool II, Pool III or Pool
IV, as the case may be, for such Remittance Date.
In the event any amounts referenced in clause (iv) of the definition of Pool I,
Pool II, Pool III or Pool IV Distribution Amount or clause (iv) of the
definition of Pool I, Pool II, Pool III or Pool IV Principal Distribution Amount
are covered by Insured Payments or any portion thereof, payment of such amounts
will be disbursed to the trustee in bankruptcy named in the final order of the
court exercising jurisdiction and not to any Class A Certificateholder directly
unless such Class A Certificateholder has returned principal or interest paid on
a Class A Certificate to such trustee in bankruptcy, in which case such payment
will be disbursed to such Class A Certificateholder.
The definitions of the Pool I, Pool II, Pool III and Pool IV Principal
Distribution Amounts are determined with regard to actual amounts received on
the Pool I, Pool II, Pool III and Pool IV Loans, respectively, and without any
regard to a schedule for the recovery of principal.
Pursuant to the Certificate Guaranty Insurance Policies, the Certificate
Guaranty Insurer has agreed to make Insured Payments on each Remittance Date.
See "The Certificate Guaranty Insurance Policies and The Certificate Guaranty
Insurer." THE CERTIFICATE GUARANTY INSURER DOES NOT INSURE PAYMENT OF
CERTIFICATEHOLDERS' LIBOR INTEREST CARRYOVER.
The Agreement provides that the Trustee or Paying Agent will (i) receive as
attorney-in-fact of each Holder of the Class A Certificates any Insured Payment
from the Certificate Guaranty Insurer and (ii) disburse such payment pursuant to
the Agreement. The Agreement provides that to the extent the Certificate
Guaranty Insurer makes Insured Payments, either directly or indirectly (as by
paying through the Trustee), to the Holders of the Class A Certificates, the
Certificate Guaranty Insurer will be subrogated to the rights of such Holders
with respect to such Insured Payments, will be deemed, to the extent of the
payments so made, to be a registered Holder of Class A Certificates and will
receive reimbursement for such Insured Payments as provided in the Agreement,
but only from the sources (other than Insured Payments) and in the manner
provided in the Agreement.
Each Holder of a Class A Certificate is required by the Agreement to notify the
Trustee promptly upon the receipt of a court order to the effect that amounts
previously received by such Class A Certificateholder and described in clause
(iv) of the definition of Pool I, Pool II, Pool III or Pool IV Principal
Distribution Amount, as the case may be, or clause (iv) of the definition of
Pool I, Pool II, Pool III or Pool IV Distribution Amount, as the case may be,
constitute voidable preferences and to provide a copy of such order with such
notice.
As set forth above, clause (i) of the definition of Pool I, Pool II, Pool III
and Pool IV Principal Distribution Amounts includes only payments of principal
actually received by the Servicer or any Subservicer. Neither the Servicer nor
the Certificate Guaranty Insurer is required to advance any delinquent payments
of principal. Accordingly, the Certificateholders will not receive delinquent
payments of principal until such time as the delinquency is cured or, if such
delinquency is not cured, following the time such Loan becomes a Liquidated Loan
or, with respect to 90 Day Delinquent FHA Loans, following the time the related
FHA Payment is received.
CROSS-SUPPORT PROVISIONS AND SPREAD AMOUNT
As a result of the cross-support provisions described below, on each Remittance
Date the "Monthly Excess Spread" for each Pool of Loans (I.E., an amount
generally equal to the interest received on the Loans remaining after each Class
of Certificates in the related Pool has been allocated its interest for such
Remittance Date and certain expenses of the Trust have been paid) and certain
other amounts will be available to fund any shortfalls in amounts required to be
distributed to Certificates of the related Pool and for Certificates of any
other Pool. Any remaining Monthly Excess Spread and such other amounts, net of
certain amounts used to reimburse the Certificate Guaranty Insurer, will be
applied in the following order of priority on such Remittance Date:
(i) first, to make accelerated payments of principal to the Class A
Certificates of the related Pool until the Subordinated Amount (as defined
below) of such Pool equals its Specified Subordinated Amount (as defined
below);
(ii) second, to make accelerated payments of principal to the Certificates
of the other Pools until the Subordinated Amount of each such Pool equals
its related Specified Subordinated Amount; and
(iii) third, to reimburse the Servicer for certain amounts owing to it, to
pay the holders of the Class A-7 Certificates any Certificateholders' LIBOR
Interest Carryover owing for such Remittance Date and all prior Remittance
Dates, and to pay any remainder to the holders of the Class R Certificates.
Notwithstanding the foregoing, if the level of delinquencies for the Pool III
Loans exceeds certain specified levels, any Monthly Excess Spread relating to
the Pool III Loans remaining after the application described in clause (i) above
will be deposited into the Spread Account, until the Spread Account reaches
certain specified levels. The amounts so deposited will be available to fund any
Insured Payments relating to the Class A Certificates otherwise required to be
made on a Remittance Date, without distinction as to Pool.
The acceleration feature described above is intended to create, with respect to
each Pool of Loans, an amount (the "Spread Amount"), resulting from, and
generally equal to, the excess of the aggregate principal balances of the Loans
of the related Pool, over the principal balances of the Certificates of the
related Pool. Applying Monthly Excess Spread to payment of principal on the
Class A Certificates has the effect of accelerating the amortization of the
Class A Certificates relative to the amortization of the Loans. As a result of
the foregoing, the holders of each Class of Certificates may receive cash from
any Loan, either by direct allocation or credit support from another Pool.
For any Remittance Date and for each Pool, the difference, if any, between (x)
the sum of (i) the aggregate principal balances of the Loans of the related Pool
as of the close of business on the last day of the related Due Period and (ii)
any amount on deposit in the Pre-Funding Account at such time and allocated to
the related Pool and (y) the aggregate principal balances of the Certificates of
the related Pool after making all distributions on such Remittance Date is the
"Subordinated Amount" with respect to such Pool as of such Remittance Date.
Pursuant to the Agreement and an insurance agreement relating to the
Certificates among the Certificate Guaranty Insurer, The Money Store Inc., the
Originators and the Trustee (the "Insurance Agreement"), Monthly Excess Spread
will be applied as accelerated payments of principal on the Class A Certificates
until the Subordinated Amount for each Pool has increased to the level required
by the Agreement. The required level of the Subordinated Amount with respect to
a Pool of Loans and Remittance Date is the "Specified Subordinated Amount" with
respect to such Pool of Loans and Remittance Date. The Agreement generally
provides that the Specified Subordinated Amount may, over time, decrease, or
increase, subject to certain floors, caps and triggers. In addition, the level
of the Specified Subordinated Amount with respect to each Pool of Loans may be
increased to a limited extent in connection with the delivery of Subsequent
Loans to the related Pool. Following the Funding Period, cash up to the amount
of any such increase may be deposited in the Spread Account.
The Agreement also provides that, except in limited circumstances, if the
aggregate amount of Monthly Excess Spread applied to payments of principal on
the Certificates exceeds the amount specified therein (such amount the "Maximum
Subordinated Amount") no further Monthly Excess Spread will be applied to
payment of principal on the Certificates and the Specified Subordinated Amount
will thereafter be zero.
If with respect to any Pool of Loans and any Remittance Date, the Subordinated
Amount exceeds the related Specified Subordinated Amount (the amount of such
excess being referred to as the "Excess Subordinated Amount" with respect to
such Pool of Loans and Remittance Date), then any amounts relating to principal
which would otherwise be distributed to the Class A Certificates of the related
Pool on such Remittance Date will instead be distributed to Certificates of
other Pools in an amount up to such Excess Subordinated Amount. The amount of
principal received on a Pool of Loans and transferred to the other Pools
pursuant to this provision is referred to as the "Subordination Reduction
Amount" with respect to the Pool from which such amounts are being transferred.
The Subordinated Amount for a Pool constitutes the first level of credit support
for the related Certificates. If any Loan becomes a Liquidated Loan, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the principal balance of the related Loan. The amount of any such insufficiency
is an "Unrecovered Portion." The occurrence of an Unrecovered Portion will
reduce the Subordinated Amount with respect to the related Pool of Loans.
However, Certificateholders of the related Pool will be entitled to receive
Monthly Excess Spread, either from the related Pool of Loans or the other Pools,
in an amount equal to the Unrecovered Portion, subject to the limits described
above. Therefore, so long as sufficient Monthly Excess Spread is available
(either on the current Remittance Date or on future Remittance Dates),
Certificateholders will not realize a loss with respect to an Unrecovered
Portion.
If insufficient Monthly Excess Spread is available to pay Unrecovered Portions,
the related Pool may experience a Subordination Deficit. The Agreement defines a
"Subordination Deficit" with respect to a Pool of Loans and Remittance Date to
be the amount, if any, by which (x) the Principal Balances of the Class A
Certificates of the related Pool, after taking into account all distributions to
be made on such Remittance Date (other than amounts payable with respect to
principal under the applicable Certificate Guaranty Insurance Policy) exceeds
(y) the aggregate principal balances of the related Pool of Loans as of the
close of business on the last day of the prior Due Period plus the amount, if
any, on deposit in the Pre-Funding Account on such date and allocated to such
Pool of Loans. The Trustee is required to make a claim for an Insured Payment
under the related Certificate Guaranty Insurance Policy with respect to any
Remittance Date as to which the Trustee has determined that a Subordination
Deficit will occur for the purpose of applying the proceeds of such Insured
Payment as a payment of principal to the Certificateholders of the related Pool
on such Remittance Date. The Certificate Guaranty Insurance Policies are thus
similar to the provisions described above insofar as the Certificate Guaranty
Insurance Policies guarantee ultimate, rather than current, payment of the
amounts of any Unrecovered Portions.
Investors in the Class A Certificates should realize that, under extreme loss or
delinquency scenarios applicable to the related Pool of Loans, so long as a
Subordination Deficit has not resulted, they may temporarily receive no
distributions of principal.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT AND CERTAIN
OTHER RISKS
In general, the protection afforded by the subordination provisions and by the
Certificate Guaranty Insurance Policies is protection for credit risk and not
for prepayment risk and does not apply to the Certificateholders' LIBOR Interest
Carryover. The subordination provisions may not be adjusted, nor may a claim be
made under the Certificate Guaranty Insurance Policies to guarantee or insure
that any particular rate of prepayment is experienced by the Trust.
REPORTS TO CLASS A CERTIFICATEHOLDERS
On each Remittance Date, the Trustee will be required to forward to each Class A
Certificateholder (which will be Cede, as registered Holder of the Class A
Certificates and the nominee of DTC, unless and until Definitive Certificates
are issued), a statement which will set forth, among other things:
(a) the Pool I, Pool II, Pool III and Pool IV Distribution Amounts on such
Remittance Date, in the aggregate and by component and listed separately
for the portions relating to each Class of Class A Certificates;
(b) the Pool I, Pool II, Pool III and Pool IV Principal Distribution
Amounts for such Remittance Date, in the aggregate and listed separately
for the portion relating to each Class of Class A Certificates;
(c) the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class A-7, Class A-8 and Class A-9 Current Interest Requirements for such
Remittance Date;
(d) the total amount of any Insured Payments included in the Pool I, Pool
II, Pool III and Pool IV Distribution Amount on such Remittance Date,
listed separately for each Class of Class A Certificates;
(e) the Subordinated Amount and Specified Subordinated Amount for such
Remittance Date, listed separately for each Pool;
(f) the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class A-7, Class A-8 and Class A-9 Principal Balances and the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8
and Class A-9 Principal Factors after giving effect to the distribution of
the Pool I, Pool II, Pool III and Pool IV Principal Distribution Amounts on
such Remittance Date;
(g) the number and aggregate Principal Balances of Pool I, Pool II, Pool
III and Pool IV Loans delinquent (i) 31 to 59 days, (ii) 60 days to 89 days
and (iii) 90 days or more as of the end of the related Due Period;
(h) the number and aggregate Principal Balances of all Pool I, Pool II,
Pool III and Pool IV Loans in foreclosure or other similar proceedings and
the number and aggregate Principal Balance of all Pool I, Pool II, Pool III
and Pool IV Loans relating to any REO Properties;
(i) the applicable rate of LIBOR for such Remittance Date;
(j) the Class A-7 Pass-Through Rate for such Remittance Date and if such
Pass-Through Rate was based on the Net Funds Cap, what it would be if based
on LIBOR plus the applicable margin;
(k) the Net Funds Cap for such Remittance Date;
(l) if the Class A-7 Pass-Through Rate for such Remittance Date is based on
the Net Funds Cap, the amount of any Certificateholders' LIBOR Interest
Carryover for such Remittance Date;
(m) the amount of the distribution, if any, allocable to
Certificateholders' LIBOR Interest Carryover and the amount of any unpaid
Certificateholders' LIBOR Interest Carryover for all prior Remittance Dates
after giving effect to such distribution; and
(n) with respect to the FHA Loans, the dollar amounts of Claims filed, paid
and denied during the related Due Period.
As to any Remittance Date, the "Class A-1 Principal Factor," the "Class A-2
Principal Factor," the "Class A-3 Principal Factor," the "Class A-4 Principal
Factor," the "Class A-5 Principal Factor," the "Class A-6 Principal Factor," the
"Class A-7 Principal Factor," the "Class A-8 Principal Factor" and the "Class
A-9 Principal Factor" will be a fraction, expressed as a percentage, the
numerator of which is the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7, Class A-8 and Class A-9 Principal Balance, as the case may
be (after giving effect to the distribution of the Pool I, Pool II, Pool III and
Pool IV Principal Distribution Amount, as the case may be, on such Remittance
Date), and the denominator of which is the original Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 or Class A-9
Principal Balance, as the case may be.
In the case of information furnished pursuant to clauses (a) through (c) above,
the amounts will be expressed as a dollar amount per Certificate with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Trustee will be required
to mail to each person who at any time was a Class A Certificateholder during
such year, a statement containing the information set forth in clauses (a)-(c)
above aggregated for such calendar year, or, in the case of each person who was
a Class A Certificateholder for a portion of such calendar year, setting forth
such information for each month thereof.
All reports prepared by the Trustee will be based upon statements supplied to
the Trustee by the Servicer and the Claims Administrator.
BOOK-ENTRY REGISTRATION OF CLASS A CERTIFICATES
The Class A Certificates will initially 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 New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("Participants") and facilitates the
clearance and settlement of securities transactions between Participants in such
securities through electronic book-entry changes in accounts of Participants,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Class A Certificateholders who are not Participants but desire to purchase, sell
or otherwise transfer ownership of the Class A Certificates may do so only
through Participants (unless and until Definitive Class A Certificates are
issued). In addition, Class A Certificateholders will receive all distributions
of principal of, and interest on, the Class A Certificates from the Trustee
through the Participants. Class A Certificateholders will not receive or be
entitled to receive certificates representing their respective interests in the
Class A Certificates, except under the limited circumstances described below.
Unless and until Definitive Class A Certificates are issued, it is anticipated
that the only direct owner of the Class A Certificates will be Cede, as nominee
of DTC. Class A Certificateholders will not be "Holders" as that term is used in
the Agreement. Class A Certificateholders are only permitted to exercise the
rights of Holders indirectly through Participants, who in turn will exercise
rights through DTC.
While the Class A Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Class A Certificates and is required to receive and transmit distributions
of principal of, and interest on, the Class A Certificates. Participants with
whom Class A Certificateholders have accounts with respect to Class A
Certificates are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Class A
Certificateholders. Accordingly, although Class A Certificateholders will not
possess certificates, the rules provide a mechanism by which Class A
Certificateholders will receive distributions and will be able to transfer their
interests.
Unless and until Definitive Class A Certificates are issued, Class A
Certificateholders who are not Participants may transfer ownership of Class A
Certificates only through Participants by instructing such Participants to
transfer Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Class A Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Class A 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 Class A Certificateholders.
Class A Certificates will be issued in registered form to Class A
Certificateholders, or their nominees, rather than to DTC (such Class A
Certificates being referred to herein as "Definitive Class A Certificates"),
only if (i) DTC or the Representative advises the Trustee in writing that DTC is
no longer willing or able to discharge properly its responsibilities as nominee
and depository with respect to the Class A Certificates and the Representative
or the Trustee is unable to locate a qualified successor or (ii) the
Representative, at its sole option, elects to terminate the book-entry system
through DTC. Upon issuance of Definitive Class A Certificates to Class A
Certificateholders, such Class A Certificates will be transferable directly (and
not exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions.
DTC has advised the Representative and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a Class A Certificateholder under the Agreement only at the
direction of one or more Participants to whose DTC accounts the Class A
Certificates are credited. DTC has advised the Representative and the Trustee
that DTC will take such action with respect to any Percentage Interests of the
Class A Certificates. DTC may take actions, at the direction of the related
Participants, with respect to some Class A Certificates which conflict with
actions taken with respect to other Class A Certificates.
[THE CERTIFICATE GUARANTY INSURANCE POLICIES AND CERTIFICATE GUARANTY INSURER
The following information has been furnished by Certificate Guaranty Insurer for
use herein.
The Certificate Guaranty Insurance Policies unconditionally and irrevocably
guarantee to any Owner (as described below) that an amount equal to each full
and complete Insured Payment will be received by the Trustee, on behalf of the
Owners, for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. Certificate Guaranty Insurer 's
obligations under the Certificate Guaranty Insurance Policies with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Certificate Guaranty Insurance Policies and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Certificates, unless such acceleration is at the sole option of
Certificate Guaranty Insurer. See "The Agreement--Termination; Purchase of
Loans" herein.
Notwithstanding the foregoing paragraph, the Certificate Guaranty Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). Further, the Certificate Guaranty
Insurance Policies do not guaranty payment of any Certificateholders' LIBOR
Interest Carryover.
The Certificate Guaranty Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day (as described below) following receipt on
a Business Day by the Fiscal Agent (as defined below) of (i) a certified copy of
such order, (ii) an opinion of counsel satisfactory to the Certificate Guaranty
Insurer that such order is final and not subject to appeal, (iii) an assignment
in such form as is reasonably required by the Certificate Guaranty Insurer ,
irrevocably assigning to the Certificate Guaranty Insurer all rights and claims
of the Owner relating to or arising under the applicable Class of Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Guaranty Insurer as agent for such
Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Certificate Guaranty Insurer ,
provided that if such documents are received after 12:00 noon New York City time
on such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the applicable Class of Class A Certificate to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Guaranty Insurer will pay any other amount payable under the
Certificate Guaranty Insurance Policies no later than 12:00 noon New York City
time on the later of the Remittance Date on which the Distribution Amount is due
or the Business Day following receipt in New York, New York on a Business Day by
State Street Bank and Trust Company, N.A., as Fiscal Agent for the Certificate
Guaranty Insurer or any successor fiscal agent appointed by the Certificate
Guaranty Insurer (the "Fiscal Agent") of a Notice (as described below); provided
that if such Notice is received after 12:00 noon New York City time on such
Business Day, it will be deemed to be received on the following Business Day. If
any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim under the Certificate
Guaranty Insurance Policies, such Notice shall be deemed not to have been
received by the Fiscal Agent for purposes of this paragraph, and the Certificate
Guaranty Insurer or the Fiscal Agent, as the case may be, shall promptly so
advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Guaranty Insurance Policies unless
otherwise stated in the Certificate Guaranty Insurance Policies will be
disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Guaranty Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Guaranty Insurer to deposit, or cause to
be deposited, sufficient funds to make payments due under the Certificate
Guaranty Insurance Policies.
As used in the Certificate Guaranty Insurance Policies, the following terms
shall have the following meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day on which
banking institutions in New York City or in the city in which the corporate
trust office of the Trustee under the Agreement is located are authorized or
obligated by law or executive order to close.
"Deficiency Amount" means with respect to any Remittance Date, (i) the excess,
if any, of (a) the Pool I, Pool II, Pool III or Pool IV Current Interest
Requirement, as the case may be, over (b) the sum of the Pool I, Pool II, Pool
III or Pool IV Available Remittance Amount, as the case may be (minus amounts
withdrawn to pay required premiums to the Certificate Guaranty Insurer ), and
the Monthly Excess Spread and the Subordination Reduction Amount applicable to
such Pool, plus (ii) the Pool I, Pool II, Pool III or Pool IV Subordination
Deficit, if any, with respect to such Remittance Date.
"Insured Payment" means (i) as of any Remittance Date, any Deficiency Amount and
(ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
related Certificate Guaranty Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the Trustee
specifying the Insured Payment which shall be due and owing on the applicable
Remittance Date.
"Owner" means each Class A Certificateholder (other than the Trust) who, on the
applicable Remittance Date, is entitled under the terms of the applicable Class
of Class A Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on the
Certificates that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Guaranty Insurance Policies and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Guaranty Insurance
Policies, without giving effect to any subsequent amendment or modification to
the Agreement.
The Certificate Guaranty Insurance Policies were issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Guaranty Insurance Policies are not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Guaranty Insurance Policies are not cancelable for any reason.
The premiums on the Certificate Guaranty Insurance Policies are not refundable
for any reason including payment, or provision being made for payment, prior to
maturity of the Class A Certificates.
The table below presents selected financial information of the Certificate
Guaranty Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
199_ 199_ 199_ 199_
(AUDITED) (AUDITED) (AUDITED) (AUDITED)
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
Admitted Assets $ $ Assets $ $
Liabilities Liabilities
Capital and Surplus Shareholder's Equity
</TABLE>
The consolidated financial statements of the Certificate Guaranty Insurer , as
of December 31, 199_ and 199_ and for the three years ended December 31, 199_,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of the Certificate Guaranty Insurer for the
year ended December 31, 199_ and the consolidated financial statements of the
Certificate Guaranty Insurer and its subsidiaries for the [nine]-months ended
[September 30], 199_ and for the periods ending [September 30], 199_ and
[September 30], 199_ included in the Quarterly Report on Form 10-Q for the
Certificate Guaranty Insurer for the period ending [September 30], 199_, are
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
by reference herein shall be modified or superseded for purposes of this
Prospectus Supplement to the extent that a statement contained herein or in any
other subsequently filed document which is also incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Certificate Guaranty Insurer and its
subsidiaries included in documents filed by the Certificate Guaranty Insurer]
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Class A Certificates shall be deemed
to be incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
Copies of the financial statements of the Certificate Guaranty Insurer
incorporated by reference herein and copies of the Certificate Guaranty Insurer
's 199_ year-end audited financial statements prepared in accordance with
statutory accounting practices are available, without charge, from the
Certificate Guaranty Insurer. The address of the Certificate Guaranty Insurer is
________________________. The telephone number of the Certificate Guaranty
Insurer is (___) ________.
The Certificate Guaranty Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or the Prospectus or any
information or disclosure contained herein or therein, or omitted herefrom or
therefrom, other than with respect to the accuracy of the information regarding
the Certificate Guaranty Insurance Policies and the Certificate Guaranty Insurer
set forth under the heading "The Certificate Guaranty Insurance Policies and The
Certificate Guaranty Insurer " herein. Additionally, the Certificate Guaranty
Insurer makes no representation regarding the Class A Certificates or the
advisability of investing in the Class A Certificates.
[Moody's] rates the claims paying ability of the Certificate Guaranty Insurer
"Aaa." [S&P] rates the claims paying ability of the Certificate Guaranty Insurer
"AAA." [Fitch Investors Service, L.P.] rates the claims paying ability of the
Certificate Guaranty Insurer "AAA." Each rating of the Certificate Guaranty
Insurer should be evaluated independently. The ratings reflect the respective
rating agency's current assessment of the creditworthiness of the Certificate
Guaranty Insurer and its ability to pay claims on its policies of insurance. Any
further explanation as to the significance of the above ratings may be obtained
only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revisions or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Certificate Guaranty Insurer does not guaranty the market
price of the Class A Certificates nor does it guaranty that the ratings on the
Class A Certificates will not be revised or withdrawn.]
THE AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in this
Prospectus Supplement, set forth below is a summary of certain other provisions
thereof. Certain capitalized terms used in this section and not otherwise
defined, have the meanings set forth in the Prospectus.
[ASSIGNMENT OF LOANS
At the time of issuance of the Class A Certificates, the Originators will assign
to the Trustee all of their right, title and interest in and to the Loans,
including all payments of interest and principal, from whatever source derived,
which are received on or with respect to the Loans after the Cut-Off Date,
together with the other assets and related documents (collectively, the "Related
Documents") included in the Trust. [In addition, on or prior to the date the
Class A Certificates are initially issued by the Trust Fund, the Certificate
Guaranty Insurance Policies will be delivered to the Trustee. Concurrently with
such assignment, the Trustee will deliver the Certificates to the Originators.
Each Loan will be identified in a schedule delivered to the Trustee.
Under the terms of the Agreement, the Originators will deliver the Mortgages,
the Notes and the other Related Documents to First Union National Bank, Trust
Department, as Document Custodian, and, so long as the long-term unsecured debt
of First Union National Bank ("FUNB") is rated above A2 by Moody's and A by S&P
and no other Assignment Event shall have occurred and be continuing, FUNB as the
Document Custodian shall be entitled to maintain possession of the documentation
relating to each Loan (the "Mortgage Files"). In the event that FUNB's long-term
unsecured debt rating does not satisfy the above-described standards or another
Assignment Event has occurred and is continuing, the Originators will cause,
within 60 days after the occurrence of an Assignment Event, the Mortgage Files
pertaining to each such Loan to be delivered to the Trustee or the Trustee's
bailee. The Document Custodian will review such Mortgage Files within the period
specified in the Agreement and notify the Trustee of any material defect
discovered in such review. Notwithstanding the foregoing, the Document Custodian
shall perform the review required by the Agreement as to each Note within 60
days from the (i) the Closing Date with respect to Mortgage Notes delivered on
or before the Closing Date and (ii) the date a Note is delivered, if delivered
after the Closing Date. If any document required to be included in any Mortgage
file does not bear manual signatures, has not been received or is unrelated to
the applicable Loan, and such defect is not cured as provided in the Agreement
following receipt of notification thereof to the applicable Originator by the
Trustee, the applicable Originator will be required either to repurchase or to
replace the affected Mortgage Loan in the manner set forth below. In the
Agreement, the Trustee will acknowledge the assignment of the Loans to the Trust
and the Document Custodian will agree to hold the Mortgage Files of the Loans
for and on behalf of the Trust for so long as the Loans are owned by the Trust
or until the occurrence of an Assignment Event.]
REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties as to each Loan described
under the caption "The Agreements--Representations and Warranties" in the
Prospectus, (i) the Representative will represent in the Agreement that each FHA
Loan is an FHA Title I loan, underwritten in accordance with applicable FHA
requirements and submitted to the FHA for insurance; (ii) each Originator will
represent that, assuming sufficient coverage remains available in the Reserve
Amount, each Claim filed by the Claims Administrator with respect to a 90 Day
Delinquent FHA Loan will be honored by the FHA in accordance with the rules and
regulations of the FHA; (iii) substantially all the proceeds of each Pool III
Loan have been or will be used to acquire or to improve or protect an interest
in real property that, at the origination date of such Pool III Loan, was the
only security for such Pool III Loan; and (iv) for each Pool III Loan, after
giving effect to all improvements to be made on the related Mortgaged Property
with the proceeds of such Loan, and based upon representations of the related
Obligor, the value of the related Mortgaged Property will at least be equal to
the amount of such Pool III Loan and the outstanding amount of all other loans
secured by prior liens on such Mortgaged Property.
The Servicer will also covenant that it will: (a) comply with all FHA rules and
regulations and will maintain its status as an approved lender and will at all
times hold a valid contract of insurance (unless such contract is terminated so
as not to affect the obligation of FHA to provide insurance coverage with
respect to the FHA Loans); (b) promptly pay all insurance charges and take all
action necessary to maintain insurance on the FHA Loans; (c) immediately pay,
or, if the Servicer is no longer the Claims Administrator, cause the Claims
Administrator to pay, in full, any FHA Payment into the Principal and Interest
Account; and (d) with certain exceptions, not allow any modifications or
assumptions of the FHA Loans that would vary their terms.
OBLIGATION OF THE CLAIMS ADMINISTRATOR
If any FHA Loan becomes a 90 Day Delinquent FHA Loan, and if sufficient coverage
is available in the Reserve Amount to make an FHA Payment with respect to such
FHA Loan, the Claims Administrator may, in its sole discretion, during any
subsequent Due Period, determine to file a Claim with the FHA with respect to
such 90 Day Delinquent FHA Loan. If the Claims Administrator determines to file
such a Claim, the Claims Administrator will so notify the Co-Trustee and the
Custodian no later than the Determination Date following such determination and
shall request delivery of the related Trustee's Loan File. Upon receipt of such
certification and request, the Custodian shall, no later than the related
Remittance Date, release to the Claims Administrator the related Trustee's Loan
File and the Co-Trustee and the Custodian shall execute and deliver such
instruments necessary to enable the Claims Administrator to file a Claim with
the FHA on behalf of the Co-Trustee. Within 120 days of its receipt of the
related Trustee's Loan File, the Claims Administrator shall, in its sole
discretion, either file a Claim with the FHA for an FHA Payment with respect to
such 90 Day Delinquent FHA Loan or, if the Claims Administrator determines not
to file such a Claim, return to the Co-Trustee the related Trustee's Loan File.
With respect to any 90 Day Delinquent FHA Loan transferred to the Claims
Administrator as described above, the Claims Administrator shall deposit (or, if
the Claims Administrator is not also the Servicer, the Claims Administrator
shall instruct the Servicer to deposit) in the Principal and Interest Account
within 24 hours of receipt or determination thereof the following amounts (such
amounts to be net of certain amounts that would be reimbursable to the Servicer
under the Agreement with respect to amounts in the Principal and Interest
Account): (i) any FHA Payments; (ii) the amount, if any, by which the FHA
Payment was reduced in accordance with FHA Regulations due to the Claims
Administrator enforcing a lien on the FHA Property prior to the lien of the
related 90 Day Delinquent FHA Loan; and (iii) any principal and interest
payments received with respect to a 90 Day Delinquent FHA Loan after the Due
Period in which the FHA Loan is transferred to the Claims Administrator and
before either the related FHA Payment is paid or the related Trustee's Loan File
is returned to the Co-Trustee, as the case may be (the amounts referred to in
(ii) and (iii) above are referenced to herein as "Related Payments").
If an FHA Loan becomes a 90 Day Delinquent FHA Loan when there is insufficient
coverage in the Reserve Amount, or if the Claims Administrator determines not to
file a Claim with the FHA with respect to such 90 Day Delinquent FHA Loan, the
Co-Trustee will not transfer such FHA Loan to the Claims Administrator, no Claim
will be made to the FHA and the Servicer may take other action, including the
commencement of foreclosure proceedings, on the related Mortgaged Property.
FHA PREMIUM ACCOUNT
The FHA Premium Account will be established with the Trustee and will be
available to reimburse the Claims Administrator or the Certificate Guaranty
Insurer for the payment to the FHA of the FHA Insurance Premium on each FHA
Loan. The FHA Insurance Premium is an annual premium equal to 0.5% of the
original principal balance of the FHA Loan. If the related Mortgagor pays the
FHA Insurance Premium in addition to the Monthly Payment, any payment of the FHA
Insurance Premium received during a Due Period will be deposited in the FHA
Premium Account on the related Remittance Date. In certain states, the Servicer
is prohibited from directly collecting the FHA Insurance Premium from the
related Mortgagor. With respect to FHA Loans secured by Mortgaged Properties
located in such states, the Servicer will cause to be deposited in the FHA
Premium Account a specified percentage of each scheduled interest payment. Since
a Mortgagor pays interest on the declining principal balance of the related FHA
Loan and the FHA Insurance Premium is based upon the original principal balance
of the FHA Loan, the amount of interest allocated to the FHA Premium Account may
be more or less than the amount of the related FHA Insurance Premium. The
Servicer has agreed to satisfy any resulting shortfall from its own funds.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount") will be
deposited into the Pre-Funding Account in an amount not to exceed
$______________, in the case of Pool I, $___________, in the case of Pool II,
$_____________, in the case of Pool III and $____________, in the case of Pool
IV. Amounts allocated to Pool I, Pool II, Pool III and Pool IV, as the case may
be, may be used only (i) to acquire Subsequent Home Equity Loans for Pool I and
Pool II, Subsequent Home Improvement Loans for Pool III and Subsequent
Multifamily Loans for Pool IV, respectively, and (ii) to make accelerated
payments of principal on the Certificates of the related Pool. During the period
(the "Funding Period") from the Closing Date until the earliest of (i) the date
on which the amount on deposit in the Pre-Funding Account is less than $200,000,
(ii) the date on which an Event of Default occurs under the Agreement or (iii)
at the close of business on ________, 1998, amounts will, from time to time, be
withdrawn from the Pre-Funding Account to purchase Subsequent Loans in
accordance with the Agreement. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed as a principal prepayment on the next
Remittance Date to the Class A Certificates of the related Pool. However, any
Pre-Funded Amount remaining at the close of business on _______, 1998 will be
distributed as a principal prepayment on the Special Remittance Date to the
Class A Certificates of the related Pool. The Pre-Funding Account moneys funded
from the sale of Pool I, Pool II, Pool III or Pool IV Certificates,
respectively, may not be used to acquire Loans relating to the other Pool.
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 in an
account (the "Capitalized Interest Account") in the name of the Trustee on
behalf of the Trust. The amount, if any, deposited therein will be used by the
Trustee on the Remittance Dates occurring in _____, ______ and ______, 1998 to
fund the excess, if any, of (i) the amount of interest accrued for each such
Remittance Date at the weighted average Pass-Through Rate of the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Certificates with
respect to the Pool I Certificates, the Class A-7 Pass-Through Rate with respect
to the Pool II Certificates, the Class A-8 Pass-Through Rate with respect to the
Pool III Certificates and the Class A-9 Pass-Through Rate with respect to the
Pool IV Certificates on the portion of the Class A Certificates having principal
balances exceeding the principal balances of the Pool I, Pool II, Pool III or
Pool IV Loans, as the case may be, over (ii) the amount of any earnings on funds
in the Pre-Funding Account that are available to pay interest on the Class A
Certificates on each such Remittance Date. Additionally, if a principal
prepayment is made on the Special Remittance Date to the Class A Certificates,
such Class A Certificates also will receive on such date, from the Capitalized
Interest Account, an amount equal to __ days' interest (or, in the case of the
Class A-7 Certificates, __ days' interest) at the applicable Pass-Through Rates
on the amount of such principal prepayment. Any amounts remaining in the
Capitalized Interest Account on the Special Remittance Date and not used for
such purposes are required to be paid directly to the holders of the Class R
Certificates on such Special Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
PAYMENTS ON THE LOANS
The Agreement requires the Servicer to establish and maintain one or more
principal and interest accounts (each, a "Principal and Interest Account") at
one or more institutions designated as a "Designated Depository Institution" in
the Agreement.
All funds in the Principal and Interest Accounts are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds held in the Principal and Interest Accounts are for the account of the
Servicer.
The Servicer is required to deposit in the related Principal and Interest
Account (within 24 hours of receipt) all payments received after the Cut-Off
Date on account of principal and interest on the related Loans (but net of the
Servicing Fee and the Contingency Fee with respect to each Loan and other
servicing compensation payable to the Servicer as permitted by the Agreement).
Not later than the day of each month which is the later of (i) the third
Business Day prior to the 15th day of such month and (ii) the seventh Business
Day of such month (each such day a "Determination Date"), the Servicer is
required to wire transfer to the Trustee the Pool I, Pool II, Pool III and Pool
IV Available Remittance Amounts for deposit in the segregated trust accounts
maintained with the Trustee for such purpose (each a "Certificate Account").
The "Pool I Available Remittance Amount," the "Pool II Available Remittance
Amount," the "Pool III Available Remittance Amount" and the "Pool IV Available
Remittance Amount" are defined in the Agreement to include, with respect to any
Remittance Date, without duplication:
(i) the sum of all amounts received by the Servicer or any Subservicer on
the Pool I, Pool II, Pool III or Pool IV Loans, as the case may be
(including amounts paid by the Servicer and the Representative and
excluding (a) any Excess Spread and Subordination Reduction Amounts
included in such amounts, (b) amounts paid as reimbursement to the Servicer
of advances and (c) amounts recovered as voidable preferences), during the
immediately preceding calendar month (the "Due Period"); provided, however,
that certain amounts representing interest collected on the Pool I Loans
may be allocated to Pool II as described below, plus
(ii) the amount of any Monthly Advances and Compensating Interest payments
with respect to the Pool I, Pool II, Pool III or Pool IV Loans, as the case
may be, remitted by the Servicer for such Remittance Date, plus
(iii) amounts to be transferred to the Certificate Account from the
Pre-Funding Account and the Capitalized Interest Account with respect to
the Remittance Dates in ________, _________ and ________, 1998.
The terms Pool I, Pool II, Pool III and Pool IV Available Remittance Amounts do
not include Insured Payments.
For each Remittance Date through and including the Remittance Date occurring in
_____ 199_, if the amount of interest due on or with respect to the Pool II
Loans and available to pay interest on the Class A-7 and Certificates (and, for
the Remittance Dates in _____, __________ and ________ 1998, amounts to be
transferred to the Certificate Account from the Capitalized Interest Account
with respect to Pool II) is less than the amount needed to pay interest on the
Class A-7 Certificates at a rate equal to LIBOR plus the applicable margin, a
portion of the interest due on the Pool I Loans (and, for the Remittance Dates
in _______, _________ and ________, 1998, amounts in the Capitalized Interest
Account allocated to Pool I) equal to the lesser of such excess or ______ of
____% of the principal balance of the Pool I Loans immediately prior to the
related Due Period (and, for the Remittance Dates in ______, ________ and ______
1998, ______ of ____% of the amount in the Pre-Funding Account immediately prior
to such Remittance Date allocated to Pool I) will be applied to the payment of
interest on the Class A-7 Certificates (or such lesser amount as may be
available after paying interest on, and certain other costs relating to, the
Pool I Certificates).
MONTHLY ADVANCES AND COMPENSATING INTEREST
Not later than the close of business on each Determination Date, the Servicer is
required to remit to the Trustee for deposit in the applicable Certificate
Account an amount equal to the amount, if any, by which (a) the sum of (x) 30
days' interest (or, with respect to the Class A-7 Certificates, the number of
days from the last Remittance Date up to but not including the upcoming
Remittance Date) at (i) the weighted average Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Adjusted Mortgage Loan Remittance Rates on
the outstanding Principal Balance of the Pool I Certificates, (ii) the Class A-7
Adjusted Mortgage Loan Remittance Rate on the outstanding Principal Balance of
the Pool II Certificates, (iii) the Class A-8 Adjusted Mortgage Loan Remittance
Rates on the outstanding Principal Balance of the Pool III Certificates, and
(iv) the Class A-9 Adjusted Mortgage Loan Remittance Rates on the outstanding
Principal Balance of the Pool IV Certificates, in each case, immediately prior
to the related Remittance Date and (y) the Monthly Excess Spread, if any, for
the related Remittance Date relating to the Pool I, Pool II, Pool III and Pool
IV Loans, respectively, exceeds (b) the amount received by the Servicer in
respect of interest on the Pool I, Pool II, Pool III and Pool IV Loans,
respectively, as of the related Record Date (and, with respect to the Remittance
Dates in _____, ____ and ______, 1998, the sum of (i) all funds to be
transferred to the applicable Certificate Account from the Capitalized Interest
Account for such Remittance Date and (ii) certain investment earnings on amounts
in the Pre-Funding Account for the applicable Remittance Date). Such excess is
defined as the "Monthly Advance." Monthly Advances will not cover any
Certificateholders' LIBOR Interest Carryover allocated to the Class A-7
Certificates. The Servicer is not required to make any Monthly Advances which it
determines, in good faith, would be nonrecoverable from amounts in respect of
the Loans.
Not later than the close of business on each Determination Date, with respect to
each Loan for which a Principal Prepayment in full or Curtailment was received
during the related Due Period, the Servicer is required to remit to the Trustee
for deposit in the applicable Certificate Account from amounts otherwise payable
to it as servicing compensation, an amount equal to the excess of (a) 30 days'
interest (or, with respect to the Class A-7 Certificates, the number of days
from the last Remittance Date up to but not including the upcoming Remittance
Date) on the principal balance of each such Loan as of the beginning of the
related Due Period at the weighted average Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Adjusted Mortgage Loan Remittance Rates in
the case of the Pool I Loans, the Class A-7 Adjusted Mortgage Loan Remittance
Rate in the case of the Pool II Loans, the Class A-8 Adjusted Mortgage Loan
Remittance Rate in the case of the Pool III Loans or the Class A-9 Adjusted
Mortgage Loan Remittance Rates in the case of the Pool IV Loans, as the case may
be, applicable to the Remittance Date on which such amount will be distributed,
over (b) the amount of interest actually received on the related Loan for such
Due Period (such difference, "Compensating Interest").
FLOW OF FUNDS
The Agreement requires the Servicer to withdraw on each Determination Date that
portion of the Pool I, Pool II, Pool III and Pool IV Available Remittance
Amounts in the Principal and Interest Account and to remit such amounts together
with any Excess Spread, Subordination Reduction Amounts, Monthly Advances and
Compensating Interest for the related Remittance Date to the Trustee for deposit
in the applicable Certificate Account. Upon receipt on each Determination Date
of such amounts, the Trustee is required to deposit such amounts into the
applicable Certificate Account.
The Agreement provides that on each Remittance Date the Trustee is required to
withdraw from the Certificate Accounts the sum of (i) the Pool I, Pool II, Pool
III and Pool IV Available Remittance Amounts (minus the amounts withdrawn from
the Certificate Accounts to deposit amounts related to required premiums in the
Insurance Account and the FHA Premium Account), (ii) any amounts of Total
Monthly Excess Cashflow to be applied to the Certificates, (iii) amounts
transferred from the Spread Account, if any, to cover Insured Payments and
Insured Payments, if any, made by Certificate Guaranty Insurance with respect to
Pool I, Pool II, Pool III or Pool IV, as the case may be (such sums, the "Pool I
Available Amount," the "Pool II Available Amount," the "Pool III Available
Amount" and the "Pool IV Available Amount," respectively), and (iv) certain
excess Monthly Excess Spread for Pool I, Pool II, Pool III and Pool IV, as the
case may be, and make distributions thereof in the following order of priority:
(i) (a) to the Pool I Certificateholders, the lesser of the Pool I
Available Amount and the Pool I Distribution Amount, (b) to the Pool II
Certificateholders, the lesser of the Pool II Available Amount and the Pool
II Distribution Amount, (c) to the Pool III Certificateholders, the lesser
of the Pool III Available Amount and the Pool III Distribution Amount and
(d) to the Pool IV Certificateholders, the lesser of the Pool IV Available
Amount and the Pool IV Distribution Amount;
(ii) then to an expense account, an amount equal to one-twelfth of the
annual expenses of the Trust;
(iii) then to the Servicer and/or The Money Store Inc., an amount equal to
certain unreimbursed amounts with respect to the applicable Pool;
(iv) then to the Pool IV Certificates, any Certificateholders' LIBOR
Interest Carryover;
(v) then to the Class R Certificateholders, amounts then remaining with
respect to the applicable Pool.
On each Remittance Date, the amount to be distributed to the Pool I Certificates
pursuant to clause (i)(a) above will be allocated in the following order of
priority:
(A) first, concurrently to the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5 and Class A-6 Certificateholders, the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5 and Class A-6 Current Interest Requirements for such Remittance
Date, pro rata in accordance with such amounts;
(B) second, to the Class A-1 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool I Certificates on such Remittance Date over
the amount distributed pursuant to (A) above, until the Class A-1 Principal
Balance is reduced to zero and such Class A-1 Certificateholders have received
an amount equal to the amount described in clause (iv) of the definition of Pool
I Distribution Amount that is recovered from such Certificateholders;
(C) third, to the Class A-2 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool I Certificates on such Remittance Date over
the amount distributed pursuant to (A) and (B) above, until the Class A-2
Principal Balance is reduced to zero and such Class A-2 Certificateholders have
received an amount equal to the amount described in clause (iv) of the
definition of Pool I Distribution Amount that is recovered from such
Certificateholders;
(D) fourth, to the Class A-3 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool I Certificates on such Remittance Date over
the amount distributed pursuant to (A), (B) and (C) above, until the Class A-3
Principal Balance is reduced to zero and such Class A-3 Certificateholders have
received an amount equal to the amount described in clause (iv) of the
definition of Pool I Distribution Amount that is recovered from such
Certificateholders;
(E) fifth, to the Class A-4 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool I Certificates on such Remittance Date over
the amount distributed pursuant to (A), (B), (C) and (D) above, until the Class
A-4 Principal Balance is reduced to zero and such Class A-4 Certificateholders
have received an amount equal to the amount described in clause (iv) of the
definition of Pool I Distribution Amount that is recovered from such
Certificateholders;
(F) sixth, to the Class A-5 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool I Certificates on such Remittance Date over
the amount distributed pursuant to (A), (B), (C), (D) and (E) above, until the
Class A-5 Principal Balance is reduced to zero and such Class A-5
Certificateholders have received an amount equal to the amount described in
clause (iv) of the definition of Pool I Distribution Amount that is recovered
from such Certificateholders; and
(G) seventh, to the Class A-6 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool I Certificates on such Remittance Date over
the amount distributed pursuant to (A), (B), (C), (D), (E) and (F) above, until
the Class A-6 Principal Balance is reduced to zero and such Class A-6
Certificateholders have received an amount equal to the amount described in
clause (iv) of the definition of Pool I Distribution Amount that is recovered
from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool II
Certificates pursuant to clause (i)(b) above will be allocated in the following
order of priority:
(A) first, to the Class A-7 Certificateholders, the Class A-7 Current Interest
Requirement for such Remittance Date; and
(B) second, to the Class A-7 Certificateholders the excess, if any, of the
amount to be distributed to the Pool II Certificates on such Remittance Date
over the amount distributed pursuant to (A) above, until the Class A-7 Principal
Balance is reduced to zero and such Class A-7 Certificateholders have received
an amount equal to the amount described in clause (iv) of the definition of Pool
II Distribution Amount that is recovered from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool III
Certificates pursuant to clause (i)(c) above will be allocated in the following
order of priority:
(A) first, to the Class A-8 Certificateholders, the Class A-8 Current Interest
Requirement for such Remittance Date; and
(B) second, to the Class A-8 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool III Certificates on such Remittance Date
over the amount distributed pursuant to (A) above, until the Class A-8 Principal
Balance is reduced to zero and such Class A-8 Certificateholders have received
an amount equal to the amount described in clause (iv) of the definition of Pool
III Distribution Amount that is recovered from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool IV
Certificates pursuant to clause (i)(d) above will be allocated in the following
order of priority:
(A) first, to the Class A-9 Certificateholders, the Class A-9 Current Interest
Requirements for such Remittance Date; and
(B) second, to the Class A-9 Certificateholders, the excess, if any, of the
amount to be distributed to the Pool IV Certificates on such Remittance Date
over the amount distributed pursuant to (A) above, until the Class A-9 Principal
Balance is reduced to zero and such Class A-9 Certificateholders have received
an amount equal to the amount described in clause (iv) of the definition of Pool
IV Distribution Amount that is recovered from such Certificateholders.
Additionally, through and including the Remittance Date occurring in _______,
199_, the holders of the Class A-7-I Certificates will be entitled to receive
Supplemental Interest Payments.
The Trustee will have the right, on behalf of Class A Certificateholders, to sue
the Certificate Guaranty Insurer in the event any required Insured Payment is
not made in accordance with the terms of the applicable Certificate Guaranty
Insurance Policy.
CALCULATION OF LIBOR
For the first Remittance Date, the Class A-7 Pass-Through Rate will equal _____%
per annum. Thereafter, on the second business day preceding each Remittance Date
(each such date, an "Interest Determination Date"), the Trustee will determine
the London Interbank Offered Rate for one-month U.S. dollar deposits ("LIBOR")
on the basis of the offered rates of the Reference Banks for one-month U.S.
dollar deposits, as such rates appear on page 3750 of the Dow Jones Telerate
Service ("Telerate Page 3750") (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices), as of
11:00 a.m. (London time) on such Interest Determination Date. The rate of LIBOR
so determined on an Interest Determination Date will be the rate used in
determining the Class A-7 Pass-Through Rates for the Remittance Date in the
following month.
As used in this section, "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
Telerate Page 3750 on the Interest Determination Date in question, (iii) which
have been designated as such by the Trustee and (iv) not controlling, controlled
by, or under common control with, the Representative or the Originators.
If such LIBOR does not appear on Telerate Page 3750, LIBOR for that day will be
determined on the basis of the rates for one-month U.S. dollar deposits, in a
principal amount of not less than U.S. $1,000,000, which are offered at
approximately 11:00 a.m., London time, on that day to prime banks in the London
interbank market by the Reference Banks. The Trustee will request the principal
London office of each of the Reference Banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided,
the rate for that day will be the arithmetic mean of the rates quoted by major
banks in New York City, selected by the Trustee, at approximately 11:00 a.m.,
New York City time, on that day for loans in United States dollars to leading
European banks for one-month U.S. dollar deposits, in a principal amount of not
less than U.S. $1,000,000; provided that if the banks selected as aforesaid are
not quoting as mentioned in this sentence, LIBOR in effect with respect to such
Remittance Date will be LIBOR in effect for the previous Remittance Date.
The establishment of LIBOR on each Interest Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-7 Certificates for the related Remittance Date shall (in the absence of
manifest error) be final and binding. Each such rate of interest may be obtained
by telephoning the Trustee at (__) ________.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer is entitled to a servicing fee of ________% per annum of the
principal balance of each Loan (the "Servicing Fee") and a contingency fee of
_______% per annum of the principal balance of each Loan (the "Contingency
Fee"). The Contingency Fee is meant to provide additional servicing compensation
to a successor servicer if The Money Store Inc. is replaced as Servicer under
the Agreement. However, as long as The Money Store Inc. acts as Servicer, it is
entitled to receive the Contingency Fee, although such amount is not deemed
servicing compensation. The Servicing Fee and Contingency Fee are each
calculated and payable monthly from the interest portion of scheduled monthly
payments, liquidation proceeds and certain other collected proceeds. In
addition, the Servicer is entitled under the Agreement to retain additional
servicing compensation in the form of assumption and other administrative fees,
prepayment penalties and premiums, late payment charges, interest paid on funds
in the Principal and Interest Accounts, interest paid on earnings realized on
Permitted Instruments, and certain other excess amounts.
OPTIONAL REPURCHASE
The Servicer has the right, but not the obligation, to repurchase any Defaulted
Loan for the purchase price and in the manner described under "The Agreements -
Sale of Mortgage Loans" in the attached Prospectus. In no event, however, may
the aggregate principal balance of Defaulted Loans purchased pursuant to the
provision exceed 5% of the sum of the Original Pool Principal Balance and the
original Pre-Funded Amount.
TERMINATION; PURCHASE OF HOME EQUITY LOANS
The Trust will terminate upon distribution to the Certificateholders of amounts
due them following the earlier to occur of (i) the final payment or other
liquidation of the last Loan remaining in the Trust or the disposition of all
REO Property, (ii) the optional purchase of the assets of the Trust by the
Servicer or the Certificate Guaranty Insurer, as described below or (iii) the
occurrence of a "qualified liquidation" of the Trust, as permitted by the REMIC
provisions of the Code as described below; provided, however, that in no event
will the Trust terminate later than twenty-one years after the death of the last
survivor of the person named in the Agreement.
As set forth under "The Certificate Guaranty Insurance Policies and The
Certificate Guaranty Insurer " no accelerated Insured Payments will be made
regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Certificate Guaranty Insurer. This
will not affect the Class A Certificateholders since, as described below, as a
condition to any optional termination of the Trust the Certificateholders will
receive an amount equal to the outstanding Principal Balance of the related
Class, plus accrued interest.
Subject to provisions in the Agreement concerning adopting a plan of complete
liquidation, on any date on which the aggregate principal balances of the Loans
are less than 5% of the sum of (i) the Original Pool Principal Balance and (ii)
the original Pre-Funded Amount, if any, the Servicer may, at its option, and in
the absence of the exercise thereof by the Servicer, the Certificate Guaranty
Insurer may, at its option, purchase, on the next succeeding Remittance Date,
all of the Loans and any related REO Properties at a price equal to the
Termination Price relating to the Trust.
On any Remittance Date on or after the Cross-Over Date on which Loans with
aggregate principal balances as of the Cut-Off Date that equal or exceed 25% of
the sum of (i) the Original Pool Principal Balance and (ii) the original Pre-
Funded Amount, if any, have become Liquidated Loans, the Certificate Guaranty
Insurer may determine to purchase and may cause the purchase from the Trust of
all Loans and REO Properties in the Pools at a price equal to the sum of the
Termination Price for each Pool and the outstanding and unpaid fees and expenses
of the Trustee and the Servicer.
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 Holders of greater than 50 percent in Percentage Interest
in each Class of Class A Certificates (the "Applicable Majority
Certificateholders") may direct the Trustee on behalf of the Trust to adopt a
"plan of complete liquidation" (within the meaning of Section 860F(a)(4)(B)(i)
of the Code) with respect to such REMIC and (ii) the Certificate Guaranty
Insurer may notify the Trustee of Certificate Guaranty Insurer's determination
to purchase from the Trust all Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any Loan
then remaining in such REMIC at a price equal to the Termination Price. Upon
receipt of such direction by the Applicable 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 Trust
all the Loans and all property theretofore acquired by foreclosure, deed in lieu
of foreclosure, or otherwise in respect of any Loan then remaining in the REMIC
at a purchase price equal to the Termination Price of the Trust.
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
Applicable Majority Certificateholders have given the Trustee the direction
described in clause (i) above, the Trustee is required to sell the Loans and
such other property in the 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 Applicable 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 of an opinion
of nationally recognized tax counsel selected by the Holders of such Class R
Certificates, which opinion shall be reasonably satisfactory in form and
substance to the Applicable Majority Certificateholders and the Certificate
Guaranty Insurer , 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 Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Loan then remaining in the REMIC at a purchase price equal to
the Termination Price of the Trust. The foregoing opinion shall be deemed
satisfactory unless the Applicable Majority Certificateholders give the holders
of a majority of percentage interests in the Class R Certificates notice that
such opinion is not satisfactory within thirty days after receipt of such
opinion.
If the Trust were to lose its qualification as a REMIC, it might be taxable as a
grantor trust, a partnership, or an association taxable as a corporation. If the
Trust is treated as a grantor trust or a partnership, such Trust would not be
subject to a separate entity level tax, and it is not expected that the tax
treatment of the investors would be materially different from the tax treatment
if the REMIC election of such Trust had not been revoked. However, if the Trust
were treated as an association (or publicly traded partnership) taxable as a
corporation or taxable mortgage pool it would be subject to federal income taxes
at corporate rates on its net income. Moreover, distributions on the Class A
Certificates would probably not be deductible in computing the Trust's taxable
income, and all or part of the distributions to the holders of such Class A
Certificates would probably be treated as dividend income to the holders. Such
an entity level tax could result in reduced distributions to the Class A
Certificateholders and such Class A Certificateholders could also be liable for
a share of such a tax. Any such corporate level tax would be borne first by the
holders of the Class R Certificates from amounts otherwise distributable to such
holders. Any remaining corporate level tax would be borne by holders of all
Classes of Class A Certificates pro rata in proportion to the outstanding
principal balances of such Classes.
THE TRUSTEE
[Name of Trustee] will be the Trustee under the Agreement. The Agreement will
provide that the Trustee may resign at any time, in which event the
Representative will be obligated to appoint a successor Trustee. The
Representative may also remove the Trustee if the Trustee ceases to be eligible
to continue as such under the Agreement or if the Trustee becomes insolvent. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
THE CO-TRUSTEE
[Name of Co-Trustee] , a ________ banking association headquartered in
__________, ___________, will be the Co-Trustee with respect to the Home
Improvement Loans.
THE CUSTODIAN
[Name of Custodian], a _________ banking association headquartered in ________,
___________, will be the Custodian with respect to the Home Improvement Loans.
In such capacity, it will retain the files relating to the Home Improvement
Loans. [First Union National Bank, Trust Department, an affiliate of the
Representative, the Originators and First Union Capital Markets will maintain
possession of certain documents relating to the loans unless and until an
Assignment Event occurs.]
FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, an election will be made to treat certain
assets of the Trust as a REMIC. Each Class of Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will be
designated as the "residual interest" in the REMIC. See "Federal Income Tax
Consequences" in the Prospectus.
Because the Class A Certificates will be considered REMIC regular interests,
they generally will be taxable as debt obligations under the Code, and interest
paid or accrued on such Class A Certificates, including original issue discount
with respect to any such Class A Certificates issued with original issue
discount, will be taxable to Certificateholders in accordance with the accrual
method of accounting. See "Federal Income Tax Consequences--REMIC Regular
Certificates--Current Income on REMIC Regular Certificates."
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount with respect to the Class A Certificates is ________.
See "Maturity, Prepayment and Yield Considerations" herein. However, no
representation is made as to the rate at which prepayments actually will occur.
Potential purchasers of Class A Certificates are strongly urged to consult their
own tax advisors as to the suitability of an investment in the Class A
Certificates.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds and separate accounts in which such plans or arrangements are
invested to which it applies and on those persons who are fiduciaries with
respect to such benefit plans. Certain employee benefit plans, such as
governmental plans (as defined in Section 3(32) of ERISA) and certain church
plans (as defined in Section 3(33) of ERISA), are not subject to ERISA. In
accordance with ERISA's general fiduciary standards, before investing in a Class
A Certificate a benefit plan fiduciary should determine whether such investment
is permitted under the governing benefit plan instruments, is appropriate for
the benefit plan in view of its overall investment policy and the composition
and diversification of its portfolio and should consider the ERISA provisions
regarding the delegation of fiduciary responsibility with respect to plan
assets.
In addition, benefit plans subject to ERISA and individual retirement accounts
or certain types of Keogh plans not subject to ERISA but subject to Section 4975
of the Code (each a "Plan") are prohibited from engaging in a broad range of
transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" 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
Underwriters 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. Furthermore, if
an investing Plan's assets were deemed to include an interest in the Loans and
any other assets of the Trust and not merely an interest in the related Class A
Certificates, transactions occurring in the operation, management and servicing
of the Trust and its assets, including in the servicing of the Loans might
constitute prohibited transactions unless an administrative exemption applies.
One exemption which may be applicable to these potential prohibited transactions
is noted below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulations"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. Thus, a Plan fiduciary considering an investment in Class A
Certificates should also consider whether such an investment might constitute or
give rise to a prohibited transaction under ERISA or the Code.
DOL has granted to First Union Corporation, the ultimate parent of First Union
Capital Markets, an administrative exemption (Prohibited Transaction Exemption
96-22, 61 Fed. Reg. 14827 (April 3, 1996) (the "Exemption")) from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale in the secondary market by Plans of
pass-through certificates representing a beneficial undivided ownership interest
in the assets of a trust that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption which may
be applicable to the Class A Certificates if First Union Corporation or any of
its affiliates including First Union Capital Markets is either the sole
underwriter or the manager or co-manager of the underwriting syndicate, or a
selling or placement agent. The conditions which must be satisfied for the
Exemption to apply to the purchase, holding and transfer of the Class A
Certificates are the following:
(i) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with an
unrelated party.
(ii) The rights and interest evidenced by a Class of Class A Certificates
acquired by the Plan are not subordinated to the rights and interest evidenced
by any other Certificates of the Trust.
(iii) The Class A Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from any of Moody's, Duff & Phelps Credit Rating Co., S & P or
in one of the three highest generic rating categories from any of Moody's, Duff
& Phelps Credit Rating Co., S & P or Fitch IBCA, Inc. ("Authorized
Rating Agencies") and the investment pool consists only of assets of the type
enumerated in the Exemption, and which have been included in other investment
pools; certificates evidencing interest in such other investment pools have been
rated in one of the three highest generic rating categories by an Authorized
Rating Agency for at least one year prior to a Plan's acquisition of
certificates; and certificates evidencing interest in such other investment
pools have been purchased by investors other than Plans for at least one year
prior to a plan's acquisition of the Class A Certificates.
(iv) The sum of all payments made to the Underwriters in connection with
the distribution of the Class A Certificates represents not more than reasonable
compensation for distributing the Class A Certificates. The sum of all payments
made to and retained by the Representative and the Originators pursuant to the
sale of the Loans to the Trust represents not more than the fair market value of
such Loans. The sum of all payments made to and retained by the Servicer or any
other servicer represents not more than reasonable compensation for such
services under the Agreement and reimbursement of the servicer's reasonable
expenses in connection therewith.
(v) The Trustee and the Co-Trustee must not be an affiliate of any member
of the Restricted Group as defined below.
In addition, it is a condition that the Plan investing in the Class A
Certificates is an "accredited investor" as defined in Rule 50l(a)(1) of
Regulation D under the Securities Act. Any Plan purchasing Class A Certificates
will be deemed to have represented, by virtue of such purchase, that it is an
accredited investor.
The Exemption does not apply to Plans sponsored by the Originators, the
Representative, the Certificate Guaranty Insurer, the Underwriters, the Trustee,
the Co-Trustee, the Custodian, the Servicer, any other servicers or any obligor
with respect to Loans included in the Trust constituting more than 5% of the
aggregate unamortized principal balance of the assets in the Trust or any
affiliate of such parties (the "Restricted Group"). No exemption is provided
from the restrictions of ERISA for the acquisition or holding of a Class A
Certificate on behalf of an "Excluded Plan" by any person who is a fiduciary
with respect to the assets of such Excluded Plan. For purposes of the Class A
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. In addition, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
Plan fiduciary causes a Plan to acquire Class A Certificates and the fiduciary
(or its affiliate) is an obligor on any Loan held in the Trust provided that,
among other requirements, (i) such fiduciary (or its affiliate) is an obligor
with respect to 5% or less of the fair market value of the Loans contained in
the Trust, (ii) the Plan's investment in any Class of Class A Certificates does
not exceed 25% of all of the Certificates of such Class outstanding at the time
of the Plan's acquisition and after the Plan's acquisition of such Class of
Class A Certificates, no more than 25% of the assets over which the fiduciary
has investment authority are invested in securities of a trust containing assets
which are sold or serviced by the same entity, and (iii) in the case of initial
issuance (but not secondary market transactions), at least 50% of each Class of
Class A Certificates, and at least 50% of the aggregate interest in the Trust,
are acquired by persons independent of the Restricted Group.
On July 21, 1997, the DOL finalized and published in the Federal Register an
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the new Exemption provisions allow a portion of the Loans
supporting payments to Certificateholders and having a principal balance equal
to no more than 25% of the total principal amount of the Offered Certificates to
be transferred to the Trust within a 90-day or three-month period following the
Closing Date instead of requiring that all such Loans be either identified or
transferred on or before the Closing Date. The relief is effective for
transactions occurring on or after May 23, 1997, provided that the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Offered Certificates ("Pre-Funding Limit")
must not exceed (25%).
(2) All Subsequent Loans must meet the same terms and conditions for
eligibility as the original Loans used to create the Trust, which terms and
conditions have been approved by the Rating Agencies.
(3) The transfer of the Subsequent Loans to the Trust during the
Funding Period must not result in the Certificates receiving a lower credit
rating from the Rating Agencies upon termination of the Funding Period than the
rating that was obtained at the time of the initial issuance of the Certificates
by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust at the end of the Funding Period must not be more than 100
basis points lower than the average interest rate for the Loans which were
transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Subsequent Loans must be
monitored by an insurer or other credit support provider which is independent of
the Originator; or (ii) an independent accountant retained by the Originator
must provide the Originator with a letter (with copies provided to each of the
Rating Agencies, the Underwriters and the Trustee) stating whether or not the
characteristics of the Subsequent Loans conform to the characteristics described
in the Prospectus Supplement and/or Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were applicable
to the Loans which were transferred as of the Closing Date.
(6) The Funding Period must end no later than three months or 90 days
after the Closing Date or earlier, in certain circumstances, if the amount on
deposit in the Pre-Funding Account is reduced below the minimum level specified
in the Agreement or an event of default occurs under the Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested only in
Permitted Instruments which are permitted by the Rating Agencies and (i) are
direct obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by one of the Rating
Agencies ("Permitted Investments").
(8) The Prospectus or Prospectus Supplement must describe: (i) any
Pre-Funding Account and/or Capitalized Interest Account used in connection with
a Pre-Funding Account; (ii) the duration of the Funding Period; (iii) the
percentage and/or dollar amount of the Pre-Funding Limit for the Trust; and (iv)
that the amounts remaining in the Pre-Funding Account at the end of the Funding
Period will be remitted to Certificateholders as repayments of principal.
(9) The Agreement must describe the Permitted Investments for the
Pre-Funding Account and Capitalized Interest Account and, if not disclosed in
the Prospectus Supplement, the terms and conditions for eligibility of the
Subsequent Loans.
The Underwriter believes that all of the conditions for exemptive relief under
the Exemption (including those with respect to pre-funding) will be satisfied
with respect to the Class A Certificates, except for those which are dependent
on facts unknown to the Underwriter or which it cannot control, such as those
relating to the circumstances of the Plan investor or the Plan fiduciary in
making the investment decision.
However, before purchasing a Class A Certificate in reliance on the Exemption or
any other exemption, a fiduciary of a Plan should confirm that all applicable
requirements would be satisfied. Any Plan fiduciary considering the purchase of
a Class A Certificate should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment. Moreover, each
Plan fiduciary should determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Class A
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio. Special caution ought to be exercised before a Plan purchases a Class
A Certificate in such circumstances. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, each Class of Class A Certificates
will be rated in the highest rating category by each Rating Agency, the Class A
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans or deeds of trust may
not be legally authorized to invest in the Class A Certificates. No
representation is made herein as to whether the Class A Certificates constitute
legal investments for any entity under any applicable statute, law, rule,
regulation or order. Prospective purchasers are urged to consult with their
counsel concerning the status of the Class A Certificates as legal investments
for such purchasers prior to investing in any Class of Class A Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated ________, 199___ (the "Underwriting Agreement"), the Originators, have
agreed to sell and each Underwriter has agreed to purchase the principal amount
of each Class of Class A Certificates set forth opposite its name below.
[Name of Underwriter]
CLASS OF CERTIFICATE Class Principal Amount
A-1 $
A-2 $
A-3 $
A-4 $
A-5 $
A-6 $
A-7 $
A-8 $
A-9 $______________
Total $
The Class A Certificates will be offered by the Underwriters to the public.
After the Class A Certificates are released for sale to the public, the offering
price and other selling terms may be varied by the Underwriters. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters and
any commissions received by them and any profit on the resale of the Class A
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. [The distribution of the Class A
Certificates by the Underwriters may be effected from time to time in one or
more negotiated transactions, or otherwise, at varying prices to be determined,
in each case, at the time of sale. This Prospectus Supplement and the Prospectus
may be used by First Union Capital Markets in connection with offers and sales
related to market-making transactions in the Class A Certificates. First Union
Capital Markets may act as principal or agent in such transactions.]
[In connection with the offering, the Underwriter and the selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Class A Certificates. Such
transactions may include stabilization transactions in accordance with Rule 104
of Regulation M, pursuant to which such person may bid for or purchase the Class
A Certificates for the purpose of stabilizing their market price. The
Underwriter may also create a short position for the account of the Underwriter
by selling more the Class A Certificates in connection with the offering than it
is committed to purchase, and in such case may purchase the Class A Certificates
in the open market following completion of the offering to cover all or a
portion of such short position. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Class A Certificates
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and, if they are
undertaken, they may discontinue at any time.]
The Representative has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Representative, the Originators and the Document Custodian are affiliates of
First Union Capital Markets. The Underwriters or agents and their associates may
be customers of (including borrowers from), engage in transactions with, and/or
perform services for the Representative, its affiliates, and the Trustee in the
ordinary course of business.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Representative and the Originators by
Stroock & Stroock & Lavan LLP, New York, New York. Certain legal matters
relating to the validity of the issuance of the Certificates will be passed upon
for the Underwriters by Kilpatrick Stockton LLP, Charlotte, North Carolina.
Certain legal matters will be passed upon for the Certificate Guaranty Insurer
by ______________________.
RATING OF THE CLASS A CERTIFICATES
It is a condition to the issuance of the Class A Certificates that each Class be
rated "AAA" by [S&P] and "Aaa" by [Moody's] (collectively, the "Rating
Agencies"). Such ratings are the highest long-term ratings that such Rating
Agencies assign to securities. The ratings given to the Class A Certificates
will be based, among other things, upon the ratings assigned to the claims
paying ability of the Certificate Guaranty Insurer. Any reduction in such rating
of the Certificate Guaranty Insurer would most likely result in a reduction in
the ratings given to the Class A Certificates. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning Rating Agency. No person is obligated to
maintain the rating on any Class of Class A Certificates. The ratings of the
Class A-7 Certificates by [S & P] and [Moody's] do not reflect the likelihood of
payment of the Certificateholder's LIBOR Interest Carryover since the
Certificate Guaranty Insurer does not insure payment of such amounts.
FINANCIAL INFORMATION
The Trust has been formed to own the Loans and to issue the Certificates. The
Trust had no assets or obligations prior to the issuance of the Certificates and
will not engage in any activities other than those described herein.
Accordingly, no financial statements with respect to the Trust are included in
this Prospectus Supplement.
<PAGE>
INDEX OF PRINCIPAL TERMS
Accredited Investor..................................................... S-78
Agreement............................................................... S-8
Applicable Majority Certificateholders.................................. S-79
Authorized Rating Agencies.............................................. S-82
Balloon Loans........................................................... S-28
Business Day............................................................ S-63
Capitalized Interest Account............................................ S-10
Cede.................................................................... S-37
Certificates............................................................ S-1
Certificate Account..................................................... S-75
Certificateholders' LIBOR Interest Carryover............................ S-13
Change Date............................................................. S-27
Claims.................................................................. S-1
Claims Administrator.................................................... S-1
Class A Certificates.................................................... S-3
Class A Certificateholder or Holder..................................... S-3
Class A-1 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-1 Certificates.................................................. S-3
Class A-1 Current Interest Requirement.................................. S-12
Class A-1 Pass-Through Rate............................................. S-11
Class A-1 Principal Factor.............................................. S-68
Class A-2 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-2 Certificates.................................................. S-3
Class A-2 Current Interest Requirement.................................. S-12
Class A-2 Pass-Through Rate............................................. S-11
Class A-2 Principal Factor.............................................. S-68
Class A-3 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-3 Certificates.................................................. S-3
Class A-3 Current Interest Requirement.................................. S-12
Class A-3 Pass-Through Rate............................................. S-11
Class A-3 Principal Factor.............................................. S-68
Class A-4 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-4 Certificates.................................................. S-3
Class A-4 Current Interest Requirement.................................. S-12
Class A-4 Pass-Through Rate............................................. S-11
Class A-4 Principal Factor.............................................. S-68
Class A-5 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-5 Certificates.................................................. S-3
Class A-5 Current Interest Requirement.................................. S-12
Class A-5 Pass-Through Rate............................................. S-11
Class A-5 Principal Factor.............................................. S-68
Class A-6 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-6 Certificates.................................................. S-3
Class A-6 Current Interest Requirement.................................. S-12
Class A-6 Pass-Through Rate............................................. S-11
Class A-6 Principal Factor............................................. S-68
Class A-7 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-7 Certificates.................................................. S-3
Class A-7 Current Interest Requirement.................................. S-12
Class A-7 Principal Factor.............................................. S-68
Class A-8 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-8 Certificates.................................................. S-3
Class A-8 Current Interest Requirement.................................. S-12
Class A-8 Pass-Through Rate............................................. S-11
Class A-8 Principal Factor.............................................. S-68
Class A-9 Adjusted Mortgage Loan Remittance Rate........................ S-34
Class A-9 Certificates.................................................. S-3
Class A-9 Current Interest Requirement.................................. S-12
Class A-9 Pass-Through Rate............................................. S-11
Class A-9 Principal Factor.............................................. S-68
Class R Certificates.................................................... S-3
Closing Date............................................................ S-2
Combined Loan-to-Value Ratio............................................ S-26
Compensating Interest................................................... S-34
Constant Prepayment Rate or CPR......................................... S-55
Contingency Fee......................................................... S-35
Co-Trustee.............................................................. S-6
Cross-Over Date......................................................... S-36
Curtailment............................................................. S-34
Custodian............................................................... S-7
Cut-Off Date............................................................ S-6
Dealer Loans............................................................ S-43
Defaulted Loan.......................................................... S-36
Definitive Class A Certificates......................................... S-37
Designated Depository Institution....................................... S-74
Determination Date...................................................... S-33
Direct Loans............................................................ S-43
DTC..................................................................... S-37
Due Period.............................................................. S-17
ERISA................................................................... S-37
ERISA Considerations.................................................... S-37
Excess Subordinated Amount.............................................. S-66
Exemption............................................................... S-37
Equity Advantage Loans.................................................. S-47
FHA Insurance Premium................................................... S-23
FHA Loans............................................................... S-1
FHA Payment............................................................. S-23
FHA Premium Account..................................................... S-23
Fiscal Agent............................................................ S-70
Final Determination..................................................... S-79
First Union Capital Markets............................................. S-2
FUNB.................................................................... S-78
Funding Period.......................................................... S-10
Gross Margin............................................................ S-27
Home Equity Loans....................................................... S-1
Home Equity Mortgages................................................... S-24
Home Equity Mortgage Notes.............................................. S-24
Home Equity Mortgaged Properties....................................... S-24
Home Equity Mortgagor................................................... S-25
Home Improvement Loans.................................................. S-1
Home Improvement Mortgages.............................................. S-28
Home Improvement Mortgage Notes......................................... S-28
Home Improvement Mortgaged Properties................................... S-29
Home Improvement Mortgagor.............................................. S-30
HUD..................................................................... S-1
Indirect Participants................................................... S-69
Initial Home Equity Loans............................................... S-24
Initial Home Improvement Loans.......................................... S-24
Initial Loans........................................................... S-24
Initial Pool I Home Equity Loans........................................ S-24
Initial Pool II Home Equity Loans....................................... S-24
Insurance Agreement .................................................... S-66
Insurance Paying Agent.................................................. S-19
Insurance Proceeds...................................................... S-33
Insured Payment......................................................... S-19
Interest Determination Date............................................. S-78
LIBOR................................................................... S-78
LIBOR Index............................................................. S-27
Liquidated Loan......................................................... S-53
Liquidation Proceeds.................................................... S-33
Loans................................................................... S-1
Maximum Subordinated Amount............................................. S-66
Certificate Guaranty Insurer............................................ S-19
Certificate Guaranty Insurance Policies................................. S-19
Monthly Advances........................................................ S-23
Monthly Excess Spread................................................... S-65
Mortgages............................................................... S-24
Mortgage Notes.......................................................... S-24
Mortgaged Properties.................................................... S-24
Mortgagor............................................................... S-25
Multifamily Loans....................................................... S-1
Multifamily Mortgages................................................... S-31
Multifamily Mortgage Interest Rate...................................... S-32
Multifamily Mortgage Notes.............................................. S-31
Multifamily Mortgaged Properties........................................ S-31
Net Funds Cap........................................................... S-13
Net Liquidation Proceeds................................................ S-64
NHA Act................................................................. S-42
90 Day Delinquent FHA Loan.............................................. S-23
Notice.................................................................. S-71
Optional Servicer Termination Date...................................... S-35
Original Pool Principal Balance......................................... S-35
Originators............................................................. S-1
Owner................................................................... S-71
Participants ........................................................... S-69
Percentage Interest..................................................... S-63
Periodic Rate Cap....................................................... S-27
Permitted Instruments................................................... S-74
Plans................................................................... S-37
Pool I................................................................. S-1
Pool I Available Amount................................................. S-76
Pool I Available Remittance Amount...................................... S-75
Pool I Carry-Forward Amount............................................. S-17
Pool I Certificateholders............................................... S-9
Pool I Certificates..................................................... S-9
Pool I Current Interest Requirement..................................... S-12
Pool I Distribution Amount.............................................. S-16
Pool I Home Equity Loans................................................ S-8
Pool I Loans............................................................ S-8
Pool I Mortgage Interest Rate........................................... S-26
Pool I Principal Distribution Amount.................................... S-14
Pool II................................................................. S-1
Pool II Available Amount................................................ S-76
Pool II Available Remittance Amount..................................... S-75
Pool II Carry-Forward Amount............................................ S-17
Pool II Certificateholders.............................................. S-9
Pool II Certificates.................................................... S-9
Pool II Current Interest Requirement.................................... S-12
Pool II Distribution Amount............................................. S-16
Pool II Loans........................................................... S-8
Pool II Principal Distribution Amount................................... S-14
Pool III................................................................ S-1
Pool III Available Amount............................................... S-76
Pool III Available Remittance Amount.................................... S-75
Pool III Carry-Forward Amount........................................... S-17
Pool III Certificateholders............................................. S-9
Pool III Certificates................................................... S-9
Pool III Current Interest Requirement................................... S-12
Pool III Distribution Amount............................................ S-16
Pool III Home Improvement Interest Rate................................. S-31
Pool III Loans.......................................................... S-8
Pool III Principal Distribution Amount.................................. S-14
Pool IV................................................................. S-1
Pool IV Available Amount................................................ S-76
Pool IV Available Remittance Amount..................................... S-75
Pool IV Carry-Forward Amount............................................ S-17
Pool IV Certificateholders.............................................. S-9
Pool IV Certificates.................................................... S-9
Pool IV Current Interest Requirement.................................... S-12
Pool IV Distribution Amount............................................. S-16
Pool IV Loans........................................................... S-8
Pool IV Principal Distribution Amount................................... S-14
Pools................................................................... S-1
Pre-Funded Amount....................................................... S-9
Pre-Funding Account..................................................... S-1
Principal and Interest Account.......................................... S-74
Principal Prepayment.................................................... S-34
Record Date............................................................. S-11
Related Payments........................................................ S-23
Released Mortgaged Property Proceeds.................................... S-34
REMIC................................................................... S-3
Remittance Date........................................................ S-3
REO Property............................................................ S-36
Representative.......................................................... S-1
Reserve Amount.......................................................... S-21
Restricted Group........................................................ S-82
Rules................................................................... S-69
SBA..................................................................... S-45
SBA Loans............................................................... S-45
Servicer................................................................ S-1
Servicing Fee........................................................... S-35
SMMEA................................................................... S-37
Special Remittance Date................................................. S-10
Specified Subordinated Amount .......................................... S-66
Spread Account.......................................................... S-18
Spread Amount........................................................... S-18
Student Loans........................................................... S-45
Subordinated Amount..................................................... S-66
Subordination Deficit................................................... S-67
Subordination Reduction Amount.......................................... S-66
Subsequent Cut-Off Date................................................. S-25
Subsequent Loans........................................................ S-3
Supplemental Interest Payments.......................................... S-78
Termination Notice...................................................... S-78
Termination Price....................................................... S-36
Title I................................................................. S-1
Title I Loan Program.................................................... S-42
Title I Property Improvement Loans...................................... S-42
Total Monthly Excess Cashflow........................................... S-76
Treasury Index.......................................................... S-27
Trust................................................................... S-1
Trustee................................................................. S-7
Trustee's Loan File..................................................... S-22
Underwriter............................................................. S-1
Unrecovered Amounts..................................................... S-17
Weighted Average Life................................................... S-55
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE REPRESENTATIVE OR THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A CERTIFICATES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Incorporation of Certain
Documents by Reference........................ S-
Summary of Terms.............................. S-5
Risk Factors.................................. S-39
Lending Programs.............................. S-41
The Representative and the
Originators................................... S-45
The Loan Pools................................ S-48
Maturity, Prepayment and Yield
Considerations................................ S-53
Description of the Certificates
S-62
The Certificate Guaranty
Insurance Policies and
The Certificate Guaranty
Insurer....................................... S-70
The Agreement ................................ S-72
Federal Income Tax
Considerations................................ S-81
ERISA Considerations.......................... S-81
Legal Investment Considerations
S-84
Underwriting.................................. S-84
Experts....................................... S-85
Legal Matters................................. S-85
Rating of the Class A
Certificates.................................. S-85
Financial Information ........................ S-85
Index of Principal Terms...................... S-86
PROSPECTUS
Prospectus Supplement ........................ 4
Available Information ........................ 4
Reports to Certificateholders
5
Incorporation of Certain
Documents by Reference........................ 5
Summary of Terms ............................. 6
Risk Factors.................................. 23
The Trusts.................................... 28
Use of Proceeds .............................. 42
The Representative and the
Originators................................... 42
The Single Family Loan Lending
Program ...................................... 42
Description of the
Certificates ................................. 47
Credit Enhancement ........................... 54
Maturity, Prepayment and Yield
Considerations ............................... 59
The Agreements ............................... 61
Certain Legal Aspects of the
Mortgage Loans ............................... 72
Federal Income Tax Consequences
81
ERISA Considerations ......................... 107
Legal Investment
Considerations ............................... 109
Plan of Distribution ......................... 109
Legal Matters ................................ 109
Financial Information......................... 110
Rating........................................ 110
Index of Principal Terms...................... 111
Appendix I - Auction Procedures
Appendix II Settlement Procedures
--------------------------------------------------------
THE MONEY STORE TRUST
1998-____
$ __________ _____% Class A-1 Certificates
$ __________ _____% Class A-2 Certificates
$ __________ _____% Class A-3 Certificates
$ __________ _____% Class A-4 Certificates
$ __________ _____% Class A-5 Certificates
$ __________ _____% Class A-6 Certificates
$ _________ Adjustable Rate Class A-7 Certificates
$ __________ _____% Class A-8 Certificates
$ __________ _____% Class A-9 Certificates
THE MONEY STORE INC.
The Money Store
Asset Backed Certificates,
Series 1998-____
_____________________
PROSPECTUS SUPPLEMENT
_____________________
FIRST UNION CAPITAL MARKETS
[NAMES OF OTHER UNDERWRITERS]
_________________, 1998
--------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PROSPECTUS DATED ______________, 1998
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates (the
"Certificates") and The Money Store Asset Backed Notes (the "Notes" and
collectively with the Certificates, the "Securities") described herein, issuable
in one or more series (each a "Series"), which may be sold from time to time on
terms determined at the time of sale and described in the related Supplement to
this Prospectus (each a "Prospectus Supplement"), evidencing specified interests
in, or rights to receive payments from, one or more trust funds (each, a
"Trust"), the primary assets of which will consist of one or more pools (each, a
"Pool") of certain mortgage loans and certain other mortgage-related or other
similar assets more particularly described herein (the "Mortgage Assets"). The
Mortgage Assets and other assets of any Trust will be described in the
Prospectus Supplement for the related Series of Certificates and/or Notes.
Certain of the Mortgage Assets may have been originated by wholly-owned
subsidiaries (the "Originators") of The Money Store Inc. ("The Money Store" or
the "Representative") or other affiliates of the Representative. Certain other
of the Mortgage Assets may have been acquired by The Money Store, an Originator
or an affiliate thereof from other lenders or government agencies, or may
consist of mortgage pass-through or mortgage-backed securities issued by
government agencies or private lenders. In addition, if so specified in the
related Prospectus Supplement, the Trust will include monies on deposit in one
or more trust accounts to be established with a Trustee (as defined herein),
which may include a Pre-Funding Account (as defined herein) which would be used
to purchase additional Mortgage Assets for the related Trust from time to time
during the Funding Period (as defined herein) specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
certain of the related Securities may evidence a fractional undivided ownership
interest in a Trust which will hold a beneficial ownership interest in another
trust fund which will contain the Mortgage Assets. Securities may also be
entitled to the benefits of insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees,
supplemental interest payments or other forms of credit enhancement, maturity
protection or derivative instruments, to the extent described in the related
Prospectus Supplement. The Prospectus Supplement for each Series of Securities
will name the entities (which will include The Money Store or one of its
affiliates and may include other entities) which will act, directly or through
one or more sub-servicers, as master servicers (each, in such capacity, the
"Master Servicer") of such Mortgage Assets.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Each Class of Securities of any series will represent the right to
receive, or be secured by, a specified amount of payments of principal and/or
interest on the related Mortgage Assets in the manner described herein and in
the related Prospectus Supplement. The right of each Class of Securities to
receive payments may be senior or subordinate to the rights of one or more of
the other Classes of such Series. The right of the holders of any Class of Notes
("Noteholders") and the right of the holders of any Class of Certificates
("Certificateholders" and collectively with the Noteholders, "Securityholders"
or "Holders") to receive any distributions of principal and interest will be set
forth in the related Prospectus Supplement. A Series may include two or more
Classes of Certificates and/or Notes which differ as to the timing and priority
of payment, interest rate or amount of distributions in respect of principal or
interest or both. A Series may include one or more Classes of Certificates
and/or Notes entitled to distributions in respect of principal, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Distributions on Certificates of any Series will be subordinated to
prior payments due on the related Notes, if any, to the extent described herein
and in the related Prospectus Supplement. The Securities of each Series will
represent fractional undivided ownership interests in the related Trust.
SEE RISK FACTORS ON PAGE 23 HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
------------------------
The date of this Prospectus is _________-- __, 1998
<PAGE>
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.]
Distributions to Holders of Securities 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 at which any Class of Certificates (the
"Pass-Through Rate") or the rate at which any Class of Notes (the "Interest
Rate") bear interest or the method of calculating such Pass-Through Rate or
Interest Rate, which may be fixed or variable, will be set forth in the related
Prospectus Supplement. Distributions on the Certificates and/or Notes of a
Series will be made only from the assets of the related Trust and certain
related property. The Pass-Through Rate for a Class of Certificates or the
Interest Rate for a Class of Notes that bear interest based upon a floating rate
of interest, as specified in the related Prospectus Supplement, may base such
floating rate upon any of following: (i) the auction procedures described herein
(such Securities being referred to herein as "Auction Rate Securities"), (ii)
the London interbank offered rate for U.S. dollar deposits for a specified
period ("LIBOR") plus an amount set forth in the related Prospectus Supplement ,
(iii) the average bond equivalent rates of weekly auctions of Treasury bills for
a specified period (the "T-Bill Rate") plus an amount set forth in the related
Prospectus Supplement or (iv) any such other method or procedures used to
determine the floating rate of interest as may be described in the applicable
Prospectus Supplement.
The Securities will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as otherwise specified in the related Prospectus Supplement) by any
other person. Unless otherwise specified in the related Prospectus Supplement,
the only obligations of the Representative or the Originators with respect to a
Series of Securities will be pursuant to certain limited representations and
warranties. Except for certain representations and warranties relating to the
Mortgage Assets and certain other exceptions, the Master Servicer's obligations
with respect to the related Series of Certificates and/or Notes will be limited
to its contractual servicing obligations. If the amount available for
distribution to Holders 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 Holders, to the extent such deficiency is attributable to
delinquent payments of principal and/or interest during the immediately
preceding Due Period (as defined herein). See "Description of the Securities -
Monthly Advances and Compensating Interest."
The yield to Holders on each Class of Certificates and/or Notes of a Series
may be affected by the rate of payment of principal (including prepayments) of
the Mortgage Assets in the related Trust and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
each Trust as a "real estate mortgage investment conduit" ("REMIC") for federal
income tax purposes. See "Federal Income Tax Consequences."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS
NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, including First Union Capital Markets,
a division of Wheat First Securities, Inc., an affiliate of the Representative,
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 Securities will be set forth in the related Prospectus Supplement.
There can be no assurance that a secondary market for the Securities will
develop, or if it does develop, that it will continue. This Prospectus may not
be used to consummate sales of a Series of Securities unless accompanied by a
Prospectus Supplement.
First Union Capital Markets expects to enter into market making
transactions in the Securities and may act as principal or agent in any such
transactions. Any such purchases or sales will be made at prices related to
prevailing market prices at the time of sale. This Prospectus and the related
Prospectus Supplement may be used by First Union Capital Markets in connection
with such transactions.
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 and/or Notes
to be offered hereunder, among other things, will set forth with respect to such
Series of Certificates and/or Notes: (i) the aggregate principal amount, the
Pass-Through Rate, Interest 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 and/or Notes; (ii)
certain information concerning the Mortgage Assets and 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 or other derivative instruments, if any, relating to the
Pools or all or part of the related Certificates and/or Notes; (iii) the
specified interest of each Class of Certificates and/or Notes in, and manner and
priority of, the distributions on the Mortgage Assets; (iv) information as to
the nature and extent of subordination with respect to such Series of
Certificates and/or Notes, 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 and/or Notes.
AVAILABLE INFORMATION
The Representative and the Originators have filed a Registration Statement
under the Securities Act of 1933, as amended (the "1933 Act"), with the
Securities and Exchange Commission (the "Commission") with respect to the
Securities. The Registration Statement and amendments thereof and to the
exhibits thereto, as well as such reports and other information, are available
for inspection without charge at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade
Center, 13th Floor, New York, New York 10048; and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the
Registration Statement and amendments thereof and exhibits thereto may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the Securityholders as described in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, a Series of
Certificates and/or Notes may be issuable in book-entry form. In such event, the
related Certificates and/or Notes may be registered in the name of Cede & Co.
("Cede"), the nominee of The Depository Trust Company ("DTC") or another
nominee. All reports will be provided to Cede or such other nominee, which in
turn will provide such reports to Participants and Indirect Participants (as
defined herein) of DTC or such other entities as described in the related
Prospectus Supplement. Such Participants and Indirect Participants will then
forward such reports to the beneficial owners of Securities. See "Description of
the Securities - 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 Securities issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and the related
Prospectus Supplement and to be a part hereof from the date of the filing of
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or 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., 707 Third Street, West Sacramento, California 95605, Attention: Finance
Department, Telephone: (916) 617-2001.
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT. CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS PROSPECTUS SHALL HAVE
THE MEANINGS ASSIGNED TO SUCH TERMS ELSEWHERE IN THIS PROSPECTUS.
Securities
Offered.......................... The Money Store Asset Backed Certificates
(the "Certificates") and The Money Store
Asset Backed Notes (the "Notes"). Notes are
issuable from time to time in Series pursuant
to an Indenture (an "Indenture"), and
Certificates are issuable from time to time
in Series pursuant to either a Pooling and
Servicing Agreement (a "Pooling and Servicing
Agreement") or a Trust Agreement (a "Trust
Agreement"). As used herein, "Agreements"
means, collectively, with respect to a Series
of Certificates, the related Pooling and
Servicing Agreement or the related Trust
Agreement, with respect to a Series of Notes,
the related Indenture and the related Sale
and Servicing Agreement, as the context
requires, and with respect to a Series of
Securities, the relevant combination of
Agreements for such Series. Each Certificate
of a Series will evidence an interest in the
Trust Fund or Trust Funds for such Series, as
specified in the related Prospectus
Supplement. Each Series of Securities will
consist of one or more Classes, each Class
may differ in, among other things, the
amounts allocated to and the priority of
principal and interest payments. The
Securities of each Class will be issued in
fully registered form in the denominations
specified in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, the Securities or
certain Classes of such Securities offered
thereby may be available in book-entry form
only.
Issuers.......................... Certain trust funds (each, a "Trust")
represented by The Money Store or its
affiliates, the primary assets of which will
be one or more Pools of Mortgage Loans and
certain other Mortgage Assets.
Representative and
Master Servicer.................. The Money Store Inc. ("The Money Store"), a
New Jersey corporation, or certain of its
affiliates including First Union National
Bank or certain of its affiliates. The
Prospectus Supplement relating
to any Series of Certificates
and/or Notes 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"), on the terms and
conditions set forth in the related Pooling
and Servicing Agreement or Sale and
Servicing Agreement (a "Sale and Servicing
Agreement"). The principal offices of The
Money Store are located in Sacramento,
California and Union, New Jersey. The Money
Store is a wholly-owned subsidiary of First
Union National Bank, a national banking
subsidiary of First Union Corporation. See
"The Representative and the Originators."
The Mortgage
Assets........................... The Securities will evidence fractional
undivided ownership interests in certain
Trusts further described herein. The primary
assets of each Trust may consist of one or
more pools (each, a "Pool") of Mortgage Loans
and certain other mortgage-related assets
("Mortgage Assets") specified in the related
Prospectus Supplements, which may include (i)
first, second and more junior lien mortgage
loans, deeds of trust or participations
therein secured by one- to four-family
residential properties, including low-rise
condominiums, single family detached homes,
single-family attached homes, planned unit
developments and mixed use properties
(collectively, "Single Family Loans," which
Single Family Loans may be "Conventional
Loans" (I.E., loans that are ---- not insured
or guaranteed by any governmental agency) or
loans that are insured by the Federal Housing
Authority ("FHA") or partially guaranteed by
the Veterans' Administration ("VA") as
specified in the related Prospectus
Supplement), (ii) loans or participations
therein secured by security interests or
similar liens on shares in private,
non-profit cooperative housing corporations
("Cooperatives") and on the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings ("Cooperative Loans"), (iii) first,
second and more junior lien mortgage loans,
deeds of trust or participations therein
secured by multifamily residential or
mixed-use properties, such as rental
apartment buildings (including buildings
owned by Cooperatives) or projects containing
five or more residential units ("Multifamily
Loans"), (iv) conditional sales contracts and
installment sales or loan agreements or
participations therein secured by
manufactured housing ("Contracts"), (v)
mortgage-backed securities issued or
guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation
("FHLMC") (the "Agency Securities"), (vi)
privately issued mortgage-backed securities
not constituting Agency Securities ("Private
Mortgage-Backed Securities" or "PMBS"), (vii)
first, second and more junior home
improvement mortgage loans that are either
conventional loans ("Secured Conventional
Home Improvement Loans") or loans originated
under the Title I credit insurance program
created under the National Housing Act of
1934 by the Federal Housing Administration
("FHA Loans"), and (viii) unsecured home
improvement loans consisting of conventional
unsecured home improvement loans and FHA
insured home improvement loans (the
"Unsecured Home Improvement Loans"). The
Single Family Loans, Cooperative Loans,
Multifamily Loans, Secured Conventional Home
Improvement Loans, FHA Loans and Unsecured
Home Improvement Loans are sometimes referred
to herein collectively as the "Mortgage
Loans." The Mortgage Loans may be closed-end
or revolving as described in the related
Prospectus Supplement.
A. Mortgage
Loans....................... The payment terms of the Mortgage Loans to be
included in any Pool will be described in the
related Prospectus Supplement and may include
any of the following features, combinations
thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate (a
"Fixed Rate") or may be payable at a rate
that is adjustable from time to time in
relation to an index, that may be fixed for a
period of time or under certain circumstances
and is followed by an adjustable rate, a rate
that other-wise varies from time to time, or
a rate that is convertible from an adjustable
rate to a fixed rate (each, an "Adjustable
Rate"). The specified rate of interest on a
Mortgage Loan is its "Mortgage Interest
Rate." Changes to an Adjustable Rate may be
subject to periodic limitations, maximum
rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred
and added to the principal of a Mortgage Loan
for such periods and under such circumstances
as may be specified in the related Prospectus
Supplement. Mortgage Loans may permit the
payment of interest at a rate lower than the
Mortgage Interest Rate for a period of time
or for the life of the Mortgage Loan, and the
amount of any difference may be contributed
from funds supplied by the seller of the
properties securing the related Mortgage Loan
(the "Mortgaged Properties") or another
source or may be treated as accrued interest
and added to the principal of the Mortgage
Loan.
(b) Principal may be payable on a level basis to
fully amortize the Mortgage Loan over its
term, may be calculated on the basis of an
assumed amortization schedule that is
significantly longer than the original term
to maturity or on an interest rate that is
different from the Mortgage Interest Rate, or
may not be amortized during all or a portion
of the original term. Payment of all or a
substantial portion of the principal may be
due on maturity (a "balloon" payment). From
time to time, principal may include interest
that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest
may be fixed for the life of the Mortgage
Loan, may increase over a specified period of
time ("graduated payments"), or may change
from period to period. Mortgage Loans may
include limits on periodic increases or
decreases in the amount of monthly payments
and may include maximum or minimum amounts of
monthly payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the
life of the Mortgage Loan or may adjust or
decline over time, and may be prohibited for
the life of the Mortgage Loan or for certain
periods ("Lockout Periods"). Certain Mortgage
Loans may permit prepayments after expiration
of the applicable Lockout Period and may
require the payment of a prepayment fee in
connection with any such subsequent
prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless
the prepayment occurs during specified time
periods. The Mortgage Loans may include
due-on-sale clauses which permit the
mortgagee to demand payment of the entire
Mortgage Loan in connection with the sale or
certain other transfers of the related
Mortgaged Properties. Other Mortgage Loans
may be assumable by persons meeting the then
applicable underwriting standards of the
originator.
The Mortgaged Properties relating to Mortgage
Loans may be located in any one of the fifty
states, the District of Columbia, the
Commonwealth of Puerto Rico or any other
commonwealth, territory or possession of the
United States. The Mortgaged Properties
generally will be covered by standard hazard
insurance policies ("Standard Hazard
Insurance Policies") insuring against losses
due to fire and various other causes. The
Mortgage Loans may be covered by Primary
Mortgage Insurance Policies to the extent
provided in the related Prospectus
Supplement. As set forth in the related
Prospectus Supplement, certain of the
Mortgage Loans underlying a given Series of
Securities may have been originated by the
Representative, the Originators or affiliates
thereof and certain Mortgage Loans may have
been purchased by the Representative, an
Originator or an affiliate thereof in the
open market or in privately negotiated
transactions, including transactions with
entities affiliated with the Representative.
Certain of the Mortgage Loans may be
partially insured by the FHA, an agency of
the United States Department of Housing and
Urban Development ("HUD"), pursuant to the
Title I credit insurance program (the "Title
I Loan Program") of the National Housing Act
of 1934. Several types of loans may be made
under the Title I Loan Program, including (1)
property improvement loans; (2) manufactured
home purchase loans, (3) manufactured home
lot loans; and (4) combination loans (to
purchase a manufactured home and a lot). The
Title I Loan Program is a coinsurance
program. The lender initially is at risk for
10% of the principal balance of each loan.
The FHA will insure the remaining 90% of the
principal balance of each loan, subject to
certain limits. Such FHA insurance is
accorded the full faith and credit of the
United States of America.
The Prospectus Supplement for each Series of
Securities generally will specify with
respect to all Mortgage Loans expected to be
included in the related Pool as of the
related closing date, among other things, (i)
the expected aggregate outstanding principal
balance and the expected average outstanding
principal balance of the Mortgage Loans in
such Pool as of the date specified in the
Prospectus Supplement, (ii) the largest
expected principal balance and the smallest
expected principal balance of any of the
Mortgage Loans, (iii) the types of Mortgaged
Properties and/or other assets securing the
Mortgage Loans and the percentage, if any, of
Unsecured Home Improvement Loans expected to
be included in the related Pool, (iv) the
original terms to maturity of the Mortgage
Loans, (v) the expected weighted average term
to maturity of the Mortgage Loans as of the
date specified in the Prospectus Supplement
and the expected range of the terms to
maturity, (vi) the earliest origination date
and latest maturity date of any of the
Mortgage Loans, (vii) the expected weighted
average Combined Loan-to-Value Ratios at
origination (viii) the expected weighted
average Mortgage Rate or APR and ranges of
Mortgage Rates or APRs borne by the Mortgage
Loans or Contracts (as the case may be), (ix)
in the case of Mortgage Loans having
Adjustable Rates, the expected weighted
average of the Adjustable Rates as of the
date set forth in the Prospectus Supplement
and maximum permitted Adjustable Rates, if
any, (x) the expected aggregate outstanding
principal balance, if any, of "buydown"
mortgage loans (as hereinafter described) and
Mortgage Loans having graduated payment
provisions, as of the date set forth in the
Prospectus Supplement, (xi) the amount of any
Guaranty Insurance Policy, Mortgage Pool
Insurance Policy, Special Hazard Insurance
Policy or Bankruptcy Bond (each as defined
herein) to be maintained with respect to such
Pool, (xii) the amount, if any, and terms of
any other credit enhancement or other
derivative instruments to be provided with
respect to all or any Mortgage Loans or the
Pool and (xiii) the expected geographic
location of the Mortgaged Properties, if any.
B. Contracts.................... Contracts will consist of conditional sales
and installment sales or loan agreements
secured by new or used Manufactured Homes (as
defined herein). To the extent provided in
the related Prospectus Supplement, each
Contract will be fully amortizing and will
bear interest at a fixed annual percentage
rate ("APR").
C. Agency
Securities.................. The Agency Securities will consist of (i)
fully modified pass-through mortgage-backed
certificates guaranteed as to timely payment
of principal and interest by the Government
National Mortgage Association ("GNMA
Certificates"), (ii) guaranteed mortgage
pass-through certificates issued and
guaranteed as to timely payment of principal
and interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii)
Mortgage Participation Certificates issued
and guaranteed as to timely payment of
interest and, unless otherwise specified in
the related Prospectus Supplement, ultimate
payment of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC Certificates"),
(iv) stripped mortgage-backed securities
representing an undivided interest in all or
a part of either the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain GNMA, FNMA, FHLMC or other government
agency or government-sponsored agency
Certificates and, unless otherwise specified
in the Prospectus Supplement, guaranteed to
the same extent as the underlying securities,
(v) another type of guaranteed pass-through
certificate issued or guaranteed by GNMA,
FNMA, FHLMC or another government agency or
government-sponsored agency and described in
the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All
GNMA Certificates will be backed by the full
faith and credit of the United States. No
FNMA or FHLMC Certificates will be backed,
directly or indirectly, by the full faith and
credit of the United States. The Agency
Securities may consist of pass-through
securities issued under the GNMA I Program,
the GNMA II Program, FHLMC's Cash or
Guarantor Program or another program
specified in the Prospectus Supplement. The
payment characteristics of the Mortgage Loans
underlying the Agency Securities will be
described in the related Prospectus
Supplement. See "The Trusts--Agency
Securities."
D. Private Mortgage-Backed
Securities.................. Private Mortgage-Backed Securities may
include (i) mortgage participations or
pass-through certificates representing
beneficial interests in certain mortgage
loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such mortgage
loans. Although individual mortgage loans
underlying a Private Mortgage-Backed Security
(each an "Underlying Mortgage Loan") may be
insured or guaranteed by the United States or
an agency or instrumentality thereof, they
need not be, and the Private Mortgage-Backed
Securities themselves will not be, so insured
or guaranteed. Unless otherwise specified in
the Prospectus Supplement relating to a
Series of Securities, payments on the Private
Mortgage-Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private
Mortgage-Backed Securities. See "The
Trusts--Private Mortgage-Backed Securities."
The Prospectus Supplement for each Series of
Securities will specify, with respect to any
Private Mortgaged-Backed Securities owned by
the related Trust: (i) the aggregate
approximate principal amount and type of
Private Mortgage-Backed Securities; (ii)
certain characteristics of the mortgage loans
underlying the Private Mortgage-Backed
Securities, including (A) the payment
features of such mortgage loans, (B) the
approximate aggregate principal amount, if
known, of the underlying mortgage loans which
are insured or guaranteed by a governmental
entity, (C) the servicing fee or range of
servicing fees with respect to such mortgage
loans, and (D) the minimum and maximum stated
maturities of the mortgage loans at
origination; (iii) the maximum original
term-to-stated maturity of the Private
Mortgage-Backed Securities; (iv) the weighted
average term-to-stated maturity of the
Private Mortgage-Backed Securities; (v) the
pass-through or certificate rate or ranges
thereof for the Private Mortgage-Backed
Securities; (vi) the weighted average
pass-through or certificate rate of the
Private Mortgage-Backed Securities; (vii) the
issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the servicer
of the Private Mortgage-Backed Securities
(the "PMBS Servicer") and the trustee of the
Private Mortgage-Backed Securities (the "PMBS
Trustee"); (viii) certain characteristics of
credit support, if any, such as reserve
funds, insurance policies, letters of credit,
financial guaranty insurance policies or
third party guarantees, relating to the
mortgage loans underlying the Private
Mortgage-Backed Securities, or to such
Private Mortgage-Backed Securities
themselves; (ix) the terms on which
underlying mortgage loans for such Private
Mortgage-Backed Securities may, or are
required to, be repurchased prior to stated
maturity; and (x) the terms on which
substitute mortgage loans may be delivered to
replace those initially deposited with the
PMBS Trustee. See "The Trusts."
Pre-Funding
Account.......................... If provided in the related Prospectus
Supplement, the original principal amount of
a Series of Securities may exceed the
principal balance of the Mortgage Assets
initially being delivered to the Trustee.
Cash in an amount up to the amount of such
difference (such amount, the "Pre-Funded
Amount") will be deposited into a separate
trust account (the "Pre-Funding Account")
maintained with the Trustee for the benefit
of the Holders. During the period set forth
in the related Prospectus Supplement (the
"Funding Period"), the Pre-Funded Amount in
the Pre-Funding Account may be used to
purchase additional Mortgage Assets for the
related Trust subject to the satisfaction of
certain conditions specified under the
Agreements.
For a Trust that elects to be characterized
as either a REMIC or a grantor trust under
current 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 Securities and otherwise the maximum
length of the Funding Period will not exceed
the period set forth in the related
Prospectus Supplement. The amount of the
initial Pre-Funded Amount is intended not to
exceed the aggregate principal balance of
additional Mortgage Assets that the
Representative anticipates will be acquired
and conveyed to the Trust during the
applicable Funding Period.
Prior to the conveyance of any additional
Mortgage Assets to the Trust, the
Representative will be required to give
notice of the additional Mortgage Assets to
be conveyed to the Trust to the Trustee(s)
and any third-party credit enhancement
provider. Upon the satisfaction of the
conditions set forth in the Agreement, the
Trustee will release from the Pre-Funding
Account the necessary funds to purchase the
additional Mortgage Assets to be conveyed to
the Trust on such date. If any Pre-Funded
Amount remains on deposit in the Pre-Funding
Account at the end of the Funding Period,
such amount, in the amounts and in the manner
specified in the related Prospectus
Supplement, will be used to prepay some or
all Classes of the related Series of
Certificates and/or Notes.
Revolving Period and
Amortization Period;
Retained Interest................ If the related Prospectus Supplement so
provides, there may be a period commencing on
the date of issuance of a Class or Classes of
Notes and/or Certificates of a Series and
ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving
Period") during which limited or no principal
payments will be made to one or more Classes
of Notes and/or Certificates of the related
Series as are identified in such Prospectus
Supplement. Some or all collections of
principal otherwise allocated to such Classes
of Notes or Certificates may be (i) utilized
during the Revolving Period to acquire
additional Mortgage Assets which satisfy the
criteria described under "The Trusts--The
Mortgage Loans" and the criteria set forth in
the related Prospectus Supplement, (ii) held
in an account and invested in Permitted
Investments (as defined herein), for later
distribution to Securityholders, (iii)
applied to those Notes or Certificates for
such Series, if any, specified in the related
Prospectus Supplement as then are in
amortization, or (iv) otherwise applied as
specified in the related Prospectus
Supplement.
An "Amortization Period" is the period during
which an amount of principal is payable to
Holders of Securities which, during the
Revolving Period, were not otherwise entitled
to such payments. If so specified in the
related Prospectus Supplement, during an
Amortization Period all or a portion of
principal collections on the Mortgage Loans
may be applied as specified above for a
Revolving Period and, to the extent not so
applied, will be distributed to the Classes
of Notes and/or Certificates for such Series
specified in the related Prospectus
Supplement as then being entitled to payments
of principal. In addition, if so specified in
the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit
of one or more Classes of Notes or
Certificates for such Series may be released
from time to time or on a specified date and
applied as a payment of principal on such
Classes of Notes and/or Certificates. The
related Prospectus Supplement will set forth
the circumstances which will result in the
commencement of an Amortization Period.
Each Series which has a Revolving Period may
also issue to the Representative or one of
its affiliates a certificate evidencing an
undivided beneficial interest (a "Retained
Interest") in such Series not represented by
the other Securities issued by the related
Trusts. As further described in the related
Prospectus Supplement, the value of such
Retained Interest will fluctuate as the
amount of Notes and Certificates of the
related Series of Securities outstanding is
reduced.
Description of the
Certificates..................... Each Certificate will represent a fractional
undivided ownership interest in the Trust
created pursuant to the related Agreement.
The primary assets of such Trust will be a
Pool of Mortgage Loans and certain other
Mortgage Assets. The Certificates of any
Series may be issued in one or more Classes,
as specified in the related Prospectus
Supplement. A Series of Certificates may
include one or more Classes of senior
Certificates (collectively, "Senior
Certificates") which receive certain
preferential treatment specified in the
related Prospectus Supplement with respect to
one or more Classes of subordinate
Certificates (collectively, the "Subordinated
Certificates"). In addition, a Series may
include one or more Series entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments (such
Certificates, "Strip Certificates"). Certain
Series or Classes of Certificates may be
covered by a 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,
or derivative products 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 a floating 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 Pass-Through Rate for a Class
of Certificates that pay interest based upon
a floating rate of interest, as specified in
the related Prospectus Supplement, may base
such floating rate upon any of following: (i)
the auction procedures for Auction Rate
Securities described herein, (ii) LIBOR plus
an amount set forth in the related Prospectus
Supplement , (iii) the T-Bill Rate plus an
amount set forth in the related Prospectus
Supplement or (iv) any such other method or
procedures used to determine the floating
rate of interest as may be described in the
applicable 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 Securities."
With respect to any Series of Securities
including one or more Classes of Notes,
distributions in respect of the Certificates
may be subordinated in priority of payment to
payments on the Notes of such Series, to the
extent specified in the related Prospectus
Supplement.
Description of the Notes......... Any Series of Securities may include one or
more Classes of Notes, as specified in the
related Prospectus Supplement, each of which
will be issued pursuant to an Indenture and
will be treated as debt obligations of the
related Trust.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples of $1,000 (or
such other accounts as may be set forth in a
Prospectus Supplement), except that one Note
of each Class may be issued in a different
denomination, in book-entry form or in
definitive form, as specified in the related
Prospectus Supplement. See "Description of
the Securities."
Each Class of Notes will have a stated
principal amount and will bear interest at
the Interest Rate or Rates as specified in
the related Prospectus Supplement, which may
be different for each Class of Notes and may
be fixed, variable, adjustable, or any
combination of the foregoing. The related
Prospectus Supplement will specify the
Interest Rate for each Class of Notes or the
method for determining the Interest Rate. The
Interest Rate for a Class of Notes that pay
interest based upon a floating rate of
interest, as specified in the related
Prospectus Supplement, may base such floating
rate upon any of following: (i) the auction
procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount
set forth in the related Prospectus
Supplement , (iii) the T-Bill Rate plus an
amount set forth in the related Prospectus
Supplement or (iv) any such other method or
procedures used to determine the floating
rate of interest as may be described in the
applicable Prospectus Supplement. Each Note
may also represent a fractional undivided
interest in, or be entitled to receive
payments from, monies on deposit, if any, in
the Pre-Funding Account as specified in the
related Prospectus Supplement and any other
account established for the benefit of
Noteholders, as specified in the related
Prospectus Supplement.
A Series may include two or more Classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations
of loss, Interest Rate or amount of payments
of principal or interest, or as to which
payments of principal or interest may or may
not be made upon the occurrence of specified
events or on the basis of collections from
designated portions of the Mortgage Assets
for such Series. In addition, a Series may
include one or more Classes of Notes entitled
to (i) principal payments with
disproportionate, nominal or no interest
payments or (ii) interest payments with
disproportionate, nominal or no principal
payments (such Notes, "Strip Notes"). A
Series of Notes may include one or more
Classes of senior Notes (collectively,
"Senior Notes") which receive certain
preferential treatment specified in the
related Prospectus Supplement with respect to
one or more Classes of subordinate Notes
(collectively, the "Subordinated Notes").
Certain Series or Classes of Notes may be
covered by a 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
or derivative instruments, as described
herein and in the related Prospectus
Supplement.
Credit
Enhancement ..................... The Mortgage Assets in a Trust or the
Securities 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 all Certificateholders will be
subordinated to the rights of all Noteholders
of a Series to receive distributions to the
extent described in the related Prospectus
Supplement, with respect to the Mortgage
Assets and other assets in the related Trust.
The rights of the holders of Subordinated
Certificates and/or Subordinated Notes, as
the case may be (collectively, "Subordinated
Securities"), of a Series to receive
distributions will be subordinated to the
rights of the holders of the Senior
Certificates and/or Senior Notes, as the case
may be (collectively, "Senior Securities"),
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 Securities 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
Securities 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 Securities 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
Distribution Account (as defined herein) to
the extent described in the related
Prospectus Supplement. The protection
afforded to the holders of Senior Securities
through subordination also may be
accomplished by allocating certain types of
losses or delinquencies to the related
Subordinated Securities to the extent
described in the related Prospectus
Supplement.
If so specified in the related Prospectus
Supplement, the same Class of Securities may
constitute Senior Certificates and/or Senior
Notes, as the case may be, with respect to
certain types of payments or certain losses
or delinquencies and Subordinated
Certificates and/or Subordinated Notes, as
the case may be, 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 and/or Subordinated
Notes, as the case may be, 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 and/or Subordinated
Notes, as the case may be, 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 holders
of Senior Certificates and/or Senior Notes,
as the case may be, or released to holders of
Subordinated Certificates and/or Subordinated
Notes, as the case may be, from the related
Trust.
B. Guaranty Insurance
Policy...................... A certificate or note guaranty insurance
policy (each a "Guaranty Insurance Policy")
may be obtained and maintained for each Class
or Series of Certificates and/or Notes.
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 holders of the covered Securities.
Guaranty Insurance Policies may have certain
limitations set forth in the related
Prospectus Supplement, including (but not
limited to) limitations on the insurer's
obligation to guarantee the Master Servicer's
obligation to repurchase or substitute for
any Mortgage Loans, to guarantee any
specified rate of prepayments or to provide
funds to redeem Securities on any specified
date.
C. Spread Amount................ If so specified in the related Prospectus
Supplement, certain Classes of Certificates
and/or Notes may be entitled to receive
limited acceleration of principal relative to
the amortization of the related Mortgage
Assets. The accelerated amortization will be
achieved by applying certain excess interest
collected on the Mortgage Assets to the
payment of principal on such Classes of
Securities. This acceleration feature is
intended to create an amount (the "Spread
Amount"), resulting from, and generally equal
to, the excess of the aggregate principal
balances of the applicable Mortgage Assets
over the principal balances of the applicable
Classes of Securities. 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
may 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 Securities 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 Securities 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 Securities.
D. Mortgage Pool Insurance
Policy..................... A mortgage pool insurance policy or policies
("Mortgage Pool Insurance Policy") may be
obtained and maintained for each Series
pertaining to Mortgage Loans and Contracts,
limited in scope, covering defaults on the
related Mortgage Loans or Contracts in an
initial amount equal to a specified
percentage of the aggregate principal balance
of all Mortgage Loans or Contracts included
in the Pool as of the Cut-off Date or such
other date as is specified in the related
Prospectus Supplement.
E. Special Hazard Insurance
Policy...................... In the case of Mortgage Loans or Contracts,
certain physical risks that are not otherwise
insured against by Standard Hazard Insurance
Policies may be covered by a special hazard
insurance policy or policies (a "Special
Hazard Insurance Policy"). The level of
coverage of each Special Hazard Insurance
Policy will be specified in the related
Prospectus Supplement.
F. Bankruptcy
Bonds....................... A mortgagor bankruptcy bond or bonds
("Bankruptcy Bond") may be obtained to cover
certain losses resulting from a reduction by
a bankruptcy court of scheduled payments of
principal or interest on a Mortgage Loan or
Contract or a reduction by such court of the
principal amount of a Mortgage Loan or
Contract, and will cover certain unpaid
interest on the amount of such a principal
reduction. The level of coverage of each
Bankruptcy Bond will be specified in the
related Prospectus Supplement.
G. Cross Support................ If so specified in the Prospectus Supplement,
the ownership interests of separate Trusts or
separate groups of assets may be evidenced by
separate Classes of the related Series of
Certificates and/or Notes. In such case,
credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to certain
Certificates and/or Notes evidencing
interests in one or more Trusts or asset
groups prior to distributions to other
Certificates and/or Notes 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 and/or
Notes 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 Securities on a Remittance Date
and the interest that would be available to
pay such interest assuming no defaults or
delinquencies on the Mortgage Assets. Such
differences may result if the interest rates
on the applicable Classes of Securities are
based upon an index that differs from the
index used in determining the interest rates
on the Mortgage Assets. Except as otherwise
provided in a Prospectus Supplement,
supplemental interest payments will not be
available to fund shortfalls resulting from
delinquencies or defaults on the Mortgage
Assets.
I. Maturity Protection.......... If so specified in the Prospectus Supplement,
one or more Classes of Certificates and/or
Notes may be entitled to third-party payments
to help provide that the holders of such
Securities receive their unpaid principal on
or prior to a specified date.
J. Other Insurance,
Guarantees, Swaps,
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, 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 Securities has a floating
interest rate, or if any of the Mortgage
Assets has a floating interest rate, the
Trust may include an interest rate swap
contract, an interest rate cap agreement or
similar hedge contract providing limited
protection against interest rate risks. If
provided in the related Prospectus
Supplement, interest and/or principal on one
or more Classes of the Securities of a Series
may be paid to Holders thereof in a currency
other than U.S. dollars. If so provided, the
Trust may, in connection therewith, enter
into one or more currency rate swaps to
provide limited protection against foreign
currency rate fluctuation risks. One or more
Classes of Securities also may be issued in
conjunction with a put or call feature
entitling (in the case of a put) or
obligating (in the case of a call) the
applicable Securityholders to sell some or
all of its Securities to the party named in
the applicable Prospectus Supplement on the
date or dates set forth therein. Any such
arrangement must be acceptable to each
nationally recognized rating agency that
provides a rating for the related Series of
Securities (the "Rating Agency").
Additionally, to the extent a significant
portion of the Mortgage Loans underlying a
given Series of Securities consists of FHA
Loans, the related Prospectus Supplement will
describe the features of any related credit
support including, but not limited to, that
provided by the FHA, if any.
Monthly Advances................. If so specified in the related Prospectus
Supplement, the Master Servicer will be
required under each Agreement to remit to the
Trustee no later than the day of each month
which is at least three business days prior
to the Remittance Date and is in no case
earlier than the seventh business day of such
month (the "Determination Date") the amount
(a "Monthly Advance"), if any, by which (a)
the sum of (x) 30 days' interest at the
weighted average Adjusted Mortgage Loan
Remittance Rate (as defined herein under
"Description of the Securities--Monthly
Advances and Compensating Interest") on the
then outstanding principal balance of the
related Series of Certificates and/or Notes
and (y) the amount, if any, required to be
deposited into the related Reserve Account
(as specified in the related Prospectus
Supplement) for the related Remittance Date
exceeds (b) the amount received by the Master
Servicer in respect of interest on the
Mortgage Loans as of the related Record Date.
Such advances by the Master Servicer are
reimbursable in the first instance from late
collections of interest, including amounts
received in connection with the liquidation
of defaulted Mortgage Loans ("Liquidation
Proceeds"), amounts paid by any insurer
pursuant to any insurance policy covering a
Mortgage Loan, Mortgaged Property or REO
Property ("Insurance Proceeds"), and proceeds
received by the Master Servicer in connection
with condemnation, eminent domain or a
release of lien ("Released Mortgaged Property
Proceeds") collected with respect to the
related Mortgage Loans as to which the
advances were made, and any other amount that
would otherwise be distributed on the Class R
Certificates. The Master Servicer will not be
required to make any Monthly Advances which
it determines, in good faith, would be
nonrecoverable from amounts received in
respect of the Mortgage Loans. See
"Description of the Securities--Monthly
Advances and Compensating Interest."
Compensating Interest............ If so specified in the related Prospectus
Supplement, with respect to each Mortgage
Loan as to which the Master Servicer receives
a principal payment in full in advance of the
final scheduled due date (a "Principal
Prepayment") or receives a principal payment
that exceeds the scheduled payment by a
specified multiple, but which was not
intended by the Mortgagor to satisfy the
Mortgage Loan in full or to cure a
delinquency (a "Curtailment"), the Master
Servicer will be required to remit to the
Trustee, from amounts otherwise payable to
the Master Servicer as servicing
compensation, an amount ("Compensating
Interest") equal to any excess of (a) 30
days' interest on the principal balance of
each such Mortgage Loan as of the beginning
of the related Due Period at the applicable
weighted average Adjusted Mortgage Loan
Remittance Rate over (b) the amount of
interest actually received on the related
Mortgage Loan during such Due Period.
Optional
Termination...................... The Master Servicer, certain insurers, the
holders of certain classes of Certificates or
Notes, or certain other entities specified in
the related Prospectus Supplement may have
the option to effect early retirement of a
Series of Securities through the purchase of
the related Mortgage Assets and other assets
in the related Trust under the circumstances
and in the manner described in "The
Agreement--Termination; Purchase of Mortgage
Loans."
Mandatory
Termination...................... The Trustee, the Master Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a Series of
Securities under the circumstances and in the
manner specified in the related Prospectus
Supplement and herein under "The
Agreement--Termination; Purchase of Mortgage
Loans."
Trustee ......................... The trustee or trustees under any Agreement
relating to a Series of Securities (each, a
"Trustee") will be specified in the related
Prospectus Supplement. Additionally, any
Co-Trustees, Custodians or Co-Custodians will
be set forth 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"), and,
if such election is not made, whether the
Trust is structured and intended to be
treated as a grantor trust, a partnership or
otherwise.
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)(4)(A)
of the Code and assets described in Section
7701(a)(19)(C) of the Code, but generally
will not be considered "residential loans"
for purposes of Section 593(g)(4)(B) of the
Code.
In the opinion of Federal Tax Counsel, for
federal income tax purposes, REMIC Regular
Certificates generally will be treated as
debt obligations of the Trust with payment
terms equivalent to the terms of such
Certificates. Holders of REMIC Regular
Certificates will be required to report
income with respect to such Certificates
under an accrual method, regardless of their
normal tax accounting method. Original issue
discount, if any, on REMIC Regular
Certificates will be includible in the income
of the Holders thereof as it accrues, in
advance of receipt of the cash attributable
thereto, which rate of accrual will be
determined based on a reasonable assumed
prepayment rate. The REMIC Residual
Certificates generally will not be treated as
evidences of indebtedness for federal income
tax purposes, but instead as representing
rights to the taxable income or net loss of
the REMIC.
Each holder of a REMIC Residual Certificate
will be required to take into account
separately its pro rata portion of the
REMIC's taxable income or loss.
Certain income of a REMIC (referred to as
"excess inclusions") generally may not be
offset by such a holder's net operating loss
carryovers or other deductions, and in the
case of a tax-exempt holder of a REMIC
Residual Certificate will be treated as
"unrelated business taxable income." In
certain situations, particularly in the early
years of a REMIC, holders of a REMIC Residual
Certificate may have taxable income, and
possibly tax liabilities with respect to such
income, in excess of cash distributed to
them. "DISQUALIFIED ORGANIZATIONS," AS
DEFINED IN "FEDERAL INCOME TAX
CONSEQUENCES--REMIC RESIDUAL
CERTIFICATES--TAX ON DISPOSITION OF REMIC
RESIDUAL CERTIFICATES; RESTRICTION ON
TRANSFER; HOLDING BY PASS-THROUGH ENTITIES,"
ARE PROHIBITED FROM ACQUIRING OR HOLDING ANY
BENEFICIAL INTEREST IN THE REMIC RESIDUAL
CERTIFICATES.
GRANTOR TRUST. If no election is to be made
to treat the Trust for a series of
Certificates ("Non-REMIC Certificates") as a
REMIC, the Trust may be classified as a
grantor trust for federal income tax purposes
and not as an association taxable as a
corporation or a taxable mortgage pool. In
the opinion of Federal Tax Counsel, holders
of Non-REMIC Certificates will be treated for
such purposes, subject to the possible
application of the stripped bond rules, as
owners of undivided interests in the related
Mortgage Assets, generally will be required
to report as income their pro rata share of
the entire gross income (including amounts
paid as reasonable servicing compensation)
from the Mortgage Assets, and will be
entitled, subject to certain limitations, to
deduct their pro rata share of expenses of
the Trust.
To the extent provided in the related
Prospectus Supplement, Non-REMIC Certificates
generally will represent interests in "real
estate assets" for purposes of Section
856(c)(4)(A) of the Code and "Loans . . .
principally secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code, but should not
be considered "residential loans" for
purposes of Section 593(g)(4)(B) of the Code.
PARTNERSHIP. If no election is to be made to
treat the Trust for a Series as a REMIC and
it is so specified in the related Prospectus
Supplement, the Trust generally will be
treated as a partnership for federal income
tax purposes, and Federal Tax Counsel will
deliver its opinion generally to the effect
that the Trust will not be an association (or
publicly traded partnership) taxable as a
corporation, or a taxable mortgage pool, for
federal income tax purposes. Each Noteholder,
by the acceptance of a Note of such series,
will agree to treat such Note as
indebtedness, and each Certificateholder, by
the acceptance of a Certificate of such
series, will agree to treat the related Trust
as a partnership in which such
Certificateholder is a partner for federal
income and state tax purposes.
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 Section 4975 of the
Code should carefully review with their legal
advisors whether an investment in Securities
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
Securities 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
Securities 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
Securities....................... Securities may be represented by global
certificates and notes registered in the name
of Cede, as nominee of DTC or another
nominee. In such case, Securityholders will
not be entitled to receive definitive
certificates and/or notes representing such
Holders' interests, except in certain
circumstances described in the related
Prospectus Supplement. See "Description of
the Securities--Book-Entry Registration"
herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities will
develop or, if a secondary market does develop, that it will provide Holders of
the Securities with liquidity of investment or that it will continue for the
lives of the Securities.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates and/or Notes in book-entry form may reduce the
liquidity of such Securities in the secondary trading market since investors may
be unwilling to purchase Securities for which they cannot obtain physical
Securities.
Since transactions in Certificates and Notes will, in most cases, be able
to be effected only through DTC, Direct or Indirect Participants and certain
banks, the ability of a Securityholder to pledge a Certificate or Note to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such Securities, may be limited due to lack of a
physical certificate or note representing such Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such 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 Securityholders either directly or indirectly through Indirect
Participants or such other entities as described in the related Prospectus
Supplement. See "Description of the Securities--Book-Entry Registration."
NATURE OF SECURITY
Certain of the Mortgage Loans will be loans secured by junior liens
subordinate to the rights of the mortgagee under each related senior mortgage.
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a junior
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee are satisfied in full, including any related foreclosure costs. In
addition, a mortgagee may not foreclose on the mortgaged property unless it
forecloses subject to any related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder. In
servicing mortgage loans in their portfolios, it has been the Originators'
practice to satisfy each such senior mortgage at or prior to the foreclosure
sale only to the extent that they determine any amounts so paid will be
recoverable from future payments and collections on the mortgage loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the Mortgage Loans--Foreclosure/Repossession."
An overall decline in the market value of residential real estate, the
general condition of a Mortgaged Property, or other factors, could adversely
affect the values of the Mortgaged Properties such that the outstanding balances
of the Mortgage Loans which are junior mortgage loans, together with any senior
liens on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Property before having any effect on the interest of the related
senior mortgagee. The Representative will not be able to quantify the impact of
any property value declines on the Mortgage Loans or predict whether, to what
extent or how long such declines may continue. In periods of such declines, the
actual rates of delinquencies, foreclosures and losses on the Mortgage Loans
could be higher than those historically experienced in the mortgage lending
industry in general. See "The Single Family Lending Program--Servicing and
Collections."
Certain of the Mortgage Loans may constitute "Balloon Loans." Balloon Loans
are originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon" payment which will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the Mortgage Loan. The ability of
a Mortgagor to refinance such a Mortgage Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the value
of the related Mortgaged Property, the Mortgagor's equity in the related
Mortgaged Property, the financial condition of the Mortgagor and the tax laws
and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the
Representative, the Originators, the Master Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan.
General economic conditions have an impact on the ability of borrowers to
repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by borrowers. In the
event of bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by the Securityholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
liquidated Mortgage Loan and not yet repaid, including payments to prior
lienholders, legal fees and costs of legal action, real estate taxes, and
maintenance and preservation expenses. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans and
insufficient funds are available from applicable Credit Enhancement,
Certificateholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the smaller mortgage loan
than would be the case with a larger loan. Because the average outstanding
principal balances of the Mortgage Loans which are junior mortgage loans are
small relative to the size of the loans in a typical pool composed entirely of
first mortgages, realizations net of liquidation expenses on defaulted Mortgage
Loans which are junior mortgage loans may also be smaller as a percentage of the
principal amount of such junior mortgage loans than would be the case with a
typical pool of first mortgage loans.
Under environmental legislation and case law applicable in various states,
including California, a secured party that takes a deed in lieu of foreclosure,
acquires a mortgaged property at a foreclosure sale or which, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Considerations."
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Pool will not be secured by an interest in the related real estate
or otherwise, and the related Trust Fund, as the owner of such Unsecured Home
Improvement Loan, will be a general unsecured creditor as to such obligations.
As a consequence, in the event of a default under an Unsecured Home Improvement
Loan, the related Trust Fund will have recourse only against the borrower's
assets generally, along with all other general unsecured creditors of the
borrower. In a bankruptcy or insolvency proceeding relating to a borrower on an
Unsecured Home Improvement Loan, the obligations of the borrower under such
Unsecured Home Improvement Loan may be discharged in their entirety,
notwithstanding the fact that the portion of such borrower's assets made
available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
PRE-FUNDING ACCOUNTS
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Mortgage Loans delivered to the Trust Fund during the Pre-Funding
Period is less than the original Pre-Funded Amount, the Holders of the
Securities of the related Series will receive a prepayment of principal as and
to the extent described in the related Prospectus Supplement. Any such principal
prepayment may adversely affect the yield to maturity of the applicable
Securities.
The ability of a Trust Fund to obtain subsequent Mortgage Loans during the
related Pre-Funding Period will be dependent on the ability of the Originators
to originate or acquire Mortgage Loans that satisfy the requirements for
transfer to the Trust Fund. The ability of the Originators to originate or
acquire such Mortgage Loans will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perception of general economic conditions.
COMBINED LOAN-TO-VALUE RATIOS
The Originators' underwriting standards allow loans to be approved with
Combined Loan-to-Value Ratios (as defined below) that exceed 100%. Because the
original Combined Loan-to-Value Ratios of certain of the Mortgage Loans may be
high relative to that of other similar mortgage loans, recoveries on defaulted
Mortgage Loans may be lower than the level of recoveries experienced by such
other defaulted mortgage loans.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Originators and the
Master Servicer. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Mortgage Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Master Servicer
to collect all or part of the principal of or interest on the Mortgage Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and (iv)
the NHA Act (as defined herein) with respect to FHA Loans.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act") which amended the Federal
Truth in Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered in an action under the Home Ownership Act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the mortgage loan. Any Trust for which the Mortgage Assets
include Mortgage Loans subject to the Home Ownership Act would be subject to all
of the claims and defenses which the borrower could assert against the original
lender. Any violation of the Home Ownership Act which would result in such
liability would be a breach of the applicable Originator's representations and
warranties, and the Representative would be obligated to cure, repurchase or, if
permitted by the related Agreement, substitute for the Mortgage Loan in
question.
PREPAYMENT CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social, and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
A number of factors suggest that the prepayment behavior of a pool
including junior mortgage loans may be significantly different from that of a
pool composed entirely of first mortgage loans with equivalent interest rates
and maturities. One such factor is the smaller average principal balance of a
pool of junior mortgage loans which may result in a higher prepayment rate than
that of a pool of first mortgage loans with a larger average balance, regardless
of the interest rate environment. A small principal balance, however, also may
make refinancing a junior mortgage loan at a lower interest rate less attractive
to the borrower relative to refinancing a larger balance first mortgage loan, as
the perceived impact to the borrower of lower interest rates on the size of the
monthly payment for a junior mortgage loan may be less than for a first mortgage
loan with a larger balance. Other factors that might be expected to affect the
prepayment rate of a pool of junior mortgage loans include the amounts of, and
interest rates on, the underlying senior mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and junior mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity mortgage loans for federal income tax purposes
may further increase the rate of prepayments of such junior mortgage loans. See
"Maturity, Prepayment and Yield Considerations."
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies and, if so
specified in the related Prospectus Supplement, amounts on deposit in the Pre-
Funding Account at the end of the Funding Period being applied to the payment of
principal of the Securities. In addition, repurchases or purchases from a Trust
of Mortgage Loans required to be made by the Representative under the Agreement
will have the same effect on the affected Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the secured Mortgage Loans contain "due-on-sale" provisions,
and the Master Servicer will be required to enforce such provisions unless (i)
such enforcement would materially increase the risk of default or delinquency
on, or materially decrease the security for, such Mortgage Loan or (ii) such
enforcement is not permitted by applicable law, in which case the Master
Servicer is authorized to permit the purchaser of the related Mortgaged Property
to assume the Mortgage Loan. See "The Agreement" in the related Prospectus
Supplement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Certain of the Mortgage Loans may be "simple interest" or "date-of-payment
loans." If a payment is received on such a Mortgage Loan later than scheduled, a
smaller portion of such payment will be applied to principal and a greater
portion will be applied to interest than would have been the case had the
payment been received on the scheduled due date, resulting in such Mortgage Loan
having a longer average life than would have been the case had the payment been
made as scheduled. Conversely, if a payment on such a Mortgage Loan is received
earlier than scheduled, more of such payment will be applied to principal and
less to interest than would have been the case had the payment been received on
its scheduled due date, resulting in such Mortgage Loan having a shorter average
life than would have been the case had the payment been made as scheduled.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF
BANKRUPTCY OF THE REPRESENTATIVE OR AN ORIGINATOR
In the event of the bankruptcy of the Representative or an Originator at a
time when it or any affiliate thereof holds a subordinated interest in a Trust
Fund, a trustee in bankruptcy of the Representative or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Representative, the Originator or such affiliate with the
result, if such recharacterization is upheld, that the Securityholders would be
deemed to be creditors of the Representative, the Originator or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful, a
trustee in bankruptcy could elect to accelerate payment of the Securities and
liquidate the Mortgage Loans, with the Securityholders entitled to the then
outstanding principal amount thereof together with accrued interest. Thus, the
Securityholders could lose the right to future payments of interest, and might
suffer reinvestment loss in a lower interest rate environment.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), or similar state legislation, a
Mortgagor who enters military service after the origination of the related
Mortgage Loan (including a Mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such Mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could have an effect, for an indeterminate period
of time, on the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage Loans. In addition, the Relief Act imposes
limitations which would impair the ability of the Master Servicer to foreclose
on an affected Mortgage Loan during the Mortgagor's period of active duty
status. Thus, in the event that such a Mortgage Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
SECURITY RATING
If set forth in the related Prospectus Supplement, the rating of one or
more Classes of Securities may depend, to a large extent, on the
creditworthiness of a third party provider of credit enhancement. In such event,
any reduction in the rating assigned to the claims-paying ability of such
provider below the rating initially given to such Class of Securities would
likely result in a reduction in the rating of such Class of Securities. See
"Rating."
OTHER
To the extent a significant portion of the Mortgage Loans underlying a
given series of Securities consists of FHA Loans and/or Secured Conventional
Home Improvement Loans, the related Prospectus Supplement will describe any
additional Risk Factors related to such Mortgage Loans.
THE TRUSTS
A Trust for any Series of Securities will include the Mortgage Assets
consisting of (A) one or more Pools* comprised of (i) Single Family Loans, (ii)
Cooperative Loans, (iii) Multifamily Loans, (iv) Contracts, (v) FHA Loans, (vi)
Secured Conventional Home Improvement Loans, (vii) Unsecured Home Improvement
Loans, or (B) Agency Securities or Private Mortgage-Backed Securities, in each
case, as specified in the related Prospectus Supplement, together with payments
in respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement. The
Mortgage Loans may be closed-end or revolving as described in the related
Prospectus Supplement.
_________________
* Whenever the terms "Pool," "Certificates," "Notes," and "Securities" are
used in this Prospectus, such terms will be deemed to apply, unless the
context indicates otherwise, to one specific Pool, the Certificates
representing certain undivided fractional interests, as described below, in
a single Trust consisting primarily of the Mortgage Loans in such Pool, and
the Notes shall refer to debt obligations of such Trust secured by the
related Pool of Mortgage Loans. Similarly, the term "Pass-Through Rate"
will refer to the Pass-Through Rate borne by the Certificates of one
specific Series, the terms "Interest Rate will refer to the Interest Rate
borne by the Notes of one specific Series and the term "Trust" will refer
to one specific Trust.
The Notes of each Series will be secured by the pledge of the assets of the
related Trust, and the Certificates of each Series will represent interest in
the assets of the related Trust. The Securities will be entitled to payment only
from the assets of the related Trust and, to the extent specified in a
Prospectus Supplement, payments in respect of the assets of other trusts
established by the Representative, the Originators or any of their affiliates.
If specified in the related Prospectus Supplement, certain Securities will
evidence the entire fractional undivided ownership interest in a Trust which
will contain a beneficial ownership interest in another Trust which will contain
all or some of the Mortgage Assets.
Certain of the Mortgage Assets may have been originated by the Originators.
Other Mortgage Assets may have been acquired by the Representative, an
Originator or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative. See "Mortgage Loan Program--Underwriting Criteria."
The following is a brief description of the Mortgage Assets expected to be
included in the Trusts. If specific information respecting the Mortgage Assets
is not known at the time the related Series of Securities 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 Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the Form
8-K and will be available for inspection at the corporate trust office of the
Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series (the "Mortgage Asset Schedule") will be
attached to the Agreement delivered to the Trustee upon delivery of the
Securities.
THE MORTGAGE LOANS--GENERAL
The real property and Manufactured Homes, as the case may be, which secure
repayment of the Mortgage Loans and Contracts (the "Mortgaged Properties") may
be located in any one of the fifty states, the District of Columbia, the
Commonwealth of Puerto Rico or any other commonwealth, territory or possession
of the United States. It is expected that the Mortgage Loans or Contracts will
be Conventional Loans (I.E., loans that are not insured or guaranteed by any
governmental agency). However, if specified in the related Prospectus
Supplement, certain of the Single Family Loans may be insured by the FHA or
partially guaranteed by the VA. Mortgage Loans with Combined Loan-to-Value
Ratios and/or certain principal balances may be covered wholly or partially by
Primary Mortgage Insurance Policies. The Mortgage Loans may be covered by
Standard Hazard Insurance Policies.
All of the Mortgage Loans in a Pool will provide for payments to be made
monthly ("monthly pay"), bi-weekly or on such other terms as may be described
in a Prospectus Supplement. The payment terms of the Mortgage Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(I.E., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for a period of time or under certain circumstances
and is followed by an adjustable rate, a rate that otherwise varies from
time to time, or a rate that is convertible from an adjustable rate to a
fixed rate). The specified rate of interest on a Mortgage Loan is its
Mortgage Interest Rate. Changes to an Adjustable Rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of
a Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may provide
for the payment of interest at a rate lower than the Mortgage Interest Rate
for a period of time or for the life of the Mortgage Loan, and the amount
of any difference may be contributed from funds supplied by the seller of
the Mortgaged Property securing the related Mortgage Loan or another source
or may be treated as accrued interest added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level basis to fully amortize the
Mortgage Loan over its term, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the Mortgage
Interest Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ("balloon" payments). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
("graduated payments") or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments. Mortgage Loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred payment
of some or all of the payments due during a specified period, which may be
recouped as deferred interest through negative amortization or otherwise.
Other Mortgage Loans sometimes referred to as "growing equity" mortgage
loans may provide for periodic scheduled payment increases for a specified
period with the full amount of such increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage Loans may include due-on-sale clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with the sale
or certain transfers of the related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting the then applicable underwriting
standards of the Originator.
To the extent a significant portion of the Mortgage Loans underlying a
given Series of Securities consist of FHA Loans and/or Secured Conventional Home
Improvement Loans, the related Prospectus Supplement will describe the material
provisions of such Mortgage Loans and the programs under which they were
originated. The Prospectus Supplement for each Series of Securities will contain
information with respect to all the Mortgage Loans expected to be included in
the related Pools as of the related closing date, including (i) the expected
aggregate outstanding principal balance and the expected average outstanding
principal balance of the Mortgage Loans as of the date set forth in the
Prospectus Supplement, (ii) the largest expected principal balance and the
smallest expected, principal balance of any of the Mortgage Loans, (iii) the
types of Mortgaged Properties and/or other assets securing the Mortgage Loans
(E.G., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property) and the percentage, if
any, of Unsecured Home Improvement Loans expected to be included in the related
Pool, (iv) the original terms to maturity of the Mortgage Loans, (v) the
expected weighted average term to maturity of the Mortgage Loans as of the date
set forth in the Prospectus Supplement and the expected range of the terms to
maturity, (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the expected weighted average Combined Loan-to-Value
Ratios at origination (except with respect to home improvement loans), (viii)
the expected Mortgage Interest Rate or APR and ranges of Mortgage Interest Rates
or APRs borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the expected weighted average of the Adjustable Rates, if any,
(x) the expected aggregate outstanding principal balance, if any, of Buy-Down
Loans and Mortgage Loans having graduated payment provisions as of the date set
forth in the Prospectus Supplement, (xi) the amount of any Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to such Pool, (xii) the amount, if any, and terms of any
other credit enhancement or other derivative instruments to be provided with
respect to all or a material portion of the Mortgage Loans or the Pool and
(xiii) the expected geographic location of the Mortgaged Properties. If specific
information respecting the Mortgage Loans is not known to the Representative at
the time the related Securities are initially offered, more general information
of the nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The Combined "Loan-to-Value Ratio" of a Single Family Loan at any given
time is the ratio, expressed as a percentage, determined by dividing (x) the sum
of the original principal balance of the Single Family Loan (less the amount, if
any, of the premium for credit life insurance) plus the then-current principal
balance of the related first lien, if any, by (y) the value of the related
Mortgaged Property, based upon the appraisal or valuation made at the time of
origination of the Single Family Loan. To the extent a significant portion of
the Mortgage Loans underlying a given Series of Securities consists of FHA loans
and/or Secured Conventional Home Improvement Loans, the related Prospectus
Supplement may describe the method for calculating the Combined Loan-to-Value
Ratio, if deemed relevant by the Representative. In the case of Refinance Loans,
the value of the related Mortgaged Property generally will be based on an
appraisal or valuation obtained at the time of refinancing. For purposes of
calculating the Combined Loan-to-Value Ratio of a Contract relating to a new
Manufactured Home, the value of such Manufactured Home generally will be no
greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site) including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. The value of a used Manufactured
Home generally will be the least of the sales price, appraised value, and, if
applicable, National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
will be based upon the age and condition of the manufactured housing unit and
the quality and condition of the mobile home park in which it is situated, if
applicable.
The Mortgage Loans in any Trust may include Mortgage Loans whose Combined
Loan to Value Ratios exceed 100%. The related Mortgaged Properties are unlikely
to provide adequate security for such Mortgage Loans. Even assuming that a
Mortgaged Property provides adequate security for the related Mortgage Loan,
substantial delays could be encountered in connection with the liquidation of a
Mortgage Loan that would result in current shortfalls in payments to
Securityholders to the extent such shortfalls are not covered by any credit
enhancement as described in the related Prospectus Supplement. In addition,
liquidation expenses relating to any liquidated Mortgage Loan (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the liquidation proceeds otherwise available for payment to Securityholders. In
the event that any Mortgaged Property fails to provide adequate security for the
related Mortgage Loan, any losses in connection with such Mortgage Loan will be
borne by Securityholders as described in the related Prospectus Supplement to
the extent that the applicable credit enhancement described in the related
Prospectus Supplement is insufficient to absorb all such losses.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Mortgaged Properties), in a particular Pool become equal to or greater than the
value of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. An overall decline in the market value of real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the Mortgage Loans, together with any additional liens
on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Under such circumstances, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Certain of the residential mortgage loans to be included in a Trust are
expected to be residential mortgage loans secured by second, third or fourth
liens ("Home Equity Loans") subordinate to the rights of the mortgagee under
each related senior mortgage. The proceeds from any liquidation, insurance or
condemnation of Mortgaged Properties relating to Home Equity Loans in a Pool
will be available to satisfy the principal balance of such Home Equity Loans
only to the extent that the claims, if any, of the related senior mortgagee,
including any related foreclosure costs, are satisfied in full. In addition, the
Master Servicer may not foreclose on a Mortgaged Property relating to a Home
Equity Loan unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. Generally, in servicing Home Equity Loans in their loan
portfolios, it has been the Originators' practice to satisfy each senior
mortgage at or prior to a foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the Home Equity Loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the Mortgage Loans--
Foreclosure/Repossession."
In addition, general economic conditions and other factors (which may or
may not effect real property values) have an impact on the ability of mortgagors
to repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by mortgagors. In
the event of bankruptcy of a mortgagor, it is possible that a Trust could
experience a loss with respect to the related Mortgage Loan. In conjunction with
a mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments
of principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by such Trust with respect
thereto. Moreover, in the event a bankruptcy court prevents the transfer of the
related Mortgaged Property to the Trust, any remaining balance on such Mortgage
Loan may not be recoverable.
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the Securityholders of the related Series.
The Representative will cause the Mortgage Loans comprising each Pool to be
assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Agreement." With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Agreement as if the Master Servicer alone were
servicing such Mortgage Loans.
The only obligations of the Representative or the Originators with respect
to a Series of Securities will be to provide (or, where the Representative or an
Originator acquired a Mortgage Loan from another originator, obtain from such
originator) certain representations and warranties concerning the Mortgage Loans
and to assign to the Trustee for such Series of Securities the Representative's
or Originator's rights with respect to such representations and warranties. See
"The Agreements--Sale of Mortgage Loans." The obligations of the Master Servicer
with respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Agreement and its obligation to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Mortgage Loans in the amounts described herein under "Description
of the Securities--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 Securities may exceed the principal balance of the
Mortgage Assets initially being delivered to the Trustee. Cash in an amount
equal to such difference (the "Pre-Funded Amount") will be deposited into a
separate trust account (the "Pre-Funding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement (the "Funding
Period"), amounts on deposit in the Pre-Funding Account may be used to purchase
additional Mortgage Assets for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related Series of Securities at the time and in
the manner set forth in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Single Family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on one- to four-family residential properties. If so specified
in a Prospectus Supplement, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low-rise condominium buildings together with such condominium units'
appurtenant interests in the common elements of the condominium buildings.
Cooperative Loans generally will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' buildings.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in low-rise
condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties. A portion of a
dwelling unit may contain a commercial enterprise.
MULTIFAMILY LOANS
"Multifamily Loans" will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on rental apartment buildings, mixed-use properties or
projects containing five or more residential units.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. In such cases, the Cooperative
owns all the apartment units in the building and all common areas. The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Substantially all of the Multifamily Loans will be secured by mixed-use
properties, with no less than approximately 90% of such properties, measured by
square footage, number of units and projected rent, being allocated to
residential units.
CONTRACTS
Contracts will consist of manufactured housing conditional sales contracts
and installment sales or loan agreements each secured by a Manufactured Home.
Contracts may be conventional, insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans Administration ("VA"), as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Contract will be fully amortizing and
will bear interest at its APR.
The "Manufactured Homes" securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which, in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract loan-to-value ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust; and the original maturities of the
Contracts and the last maturity date of any Contract.
FHA LOANS
The FHA Loans will consist of home improvement loans originated under Title
I (the "Title I Loan Program") of the National Housing Act of 1934 (the "NHA
Act"). Under the NHA Act, the Federal Housing Administration (the "FHA"), an
agency of the United States Department of Housing and Urban Development ("HUD"),
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. Several types of loans may be made under the Title I
Loan Program, including (1) property improvement loans; (2) manufactured home
purchase loans; (3) manufactured home lot loans; and (4) combination loans (to
purchase a manufactured home and a lot). Property improvement loans (the "Title
I Property Improvement Loans") may be made by approved lenders to finance
alterations, repair or improvement of existing single family, multifamily,
manufactured housing and nonresidential structures.
Title I Property Improvement Loans, in addition to improvements to protect
the livability or utility of single family, multifamily or manufactured housing
or nonresidential property, also include loans for the renovation or
preservation of historic residential structures and loans to finance the
installation of fire safety equipment in existing health care facilities. Loan
processing and credit determinations are done by an approved financial
institution. Each lender is required to use prudent lending standards in
underwriting individual loans.
Under the Title I Loan Program, the FHA does not review individual loans at
the time of approval (as is typically the case with some other federal loan
programs), except when the amount of a Title I Property Improvement Loan would
result in any borrower having a total unpaid principal obligation on such loans
in excess of certain specified amounts, in which case HUD approval must be
obtained.
The Title I Loan Program is a coinsurance program. The lender initially is
at risk for 10% of the principal balance of each loan. The FHA will insure the
remaining 90% of the principal balance of each loan, subject to the limits of
the reserve amount discussed below. Such FHA insurance is accorded the full
faith and credit of the United States of America. Thus, a lender under the
program risks the loss of up to 10% of the principal balance on every loan
submitted to the FHA for an insurance claim (or a greater amount if the lender's
reserve amount is diminished or exhausted), plus a portion of the interest on
such loans.
At the time the FHA receives a new loan origination or transfer of note
report from an approved lender, the FHA adds to the balance in the reserve
amount established by the FHA for the lender originating or purchasing such loan
an amount equal to 10% of the amount disbursed, advanced or expended by the
lender in originating or purchasing the loan. The balance in the reserve amount
limits the amount of claims the FHA is required to pay.
The reserve amount established by the FHA for each lender will be reduced
by the amount of all insurance claims approved for payment in conjunction with
losses on such loans. The lender's reserve amount will be increased based upon
additions made pursuant to the origination or purchase of eligible loans
registered for insurance.
The FHA charges a fee of 0.50% per annum of the original balance for each
loan it insures, on a non-declining basis. The FHA bills the lender annually
(on the anniversary date of origination) for the insurance premium, unless the
loan has a maturity of 25 months or less, in which case the insurance charge is
payable in one lump sum. If a loan is prepaid during the year, the FHA will not
rebate the insurance premium nor reduce the balance in the lender's insurance
coverage reserve account. The unused insurance charge will, however, be rebated
when a Title I loan is refinanced.
SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
The Secured Conventional Home Improvement Loans will consist of secured
conventional loans, the proceeds of which generally will be used for purposes
similar to those described under the heading "--FHA Loans." To the extent set
forth in the related Prospectus Supplement, the Secured Conventional Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans will consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. To the
extent set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned corporate
instrumentality of the United States within the United Stated Department of
Housing and Urban Development HUD. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to, among
other things, guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"),
or partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which may be
a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will provide for
the payment by or on behalf of the GNMA Issuer to the registered holder of such
GNMA Certificate of scheduled monthly payments of principal and interest equal
to the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loans or VA Loans
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
loans are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Securities may be held in book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("FNMA Project
Issuers") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the Housing Act ("GNMA
Project Certificates"). The Prospectus Supplement for a Series of Securities
that includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES. FNMA Certificates are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each such pool
will consist of mortgage loans of one of the following types: (i) fixed-rate
level installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA; (iii)
adjustable rate conventional mortgage loans; or (iv) adjustable rate mortgage
loans that are insured by the FHA or partially guaranteed by the VA. Each
mortgage loan must meet the applicable standards set forth under the FNMA
purchase program. Each such mortgage loan will be secured by a first lien on a
one-family or two- to four-family residential property. Each such FNMA
Certificate will be issued pursuant to a trust indenture. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying a
FNMA Certificate are expected to be between either 8 to 15 years or 20 to 40
years. The original maturities of substantially all of the fixed rate level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate if a FNMA MBS, or the series
pass-through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute on a timely basis amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such FNMA Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of each
class in principal and interest distributions are not identical, but the classes
in the aggregate represent 100% of the principal distributions and interest
distributions (adjusted to the series pass-through rate) on the respective pool.
Because of such difference between the fractional interests in principal and
interest of each class, the effective rate of interest on the principal of each
class of FNMA SMBS may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing interests
in pools of mortgages formed on or after May 1, 1985 will be available in
book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home
Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the
Federal Home Loan Banks. FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate Group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate Group. Under the Guarantor Program, any
such FHLMC Certificate Group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Security rate on the registered holder's pro rata share of the unpaid
principal balance outstanding on the underlying mortgage loans in the FHLMC
Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate receipt by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not, except if and to the extent specified in the
Prospectus Supplement for a Series of Securities, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June 1,
1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). The Prospectus Supplement for a Series of
Securities issued by a Trust that included FHLMC Project Certificates will set
forth additional information regarding multi-family residential mortgage loans
that qualify for purchase by FHLMC.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as trustee,
or by another trustee named in the related Prospectus Supplement. FHLMC, FNMA,
GNMA or another government agency or government-sponsored agency will guarantee
each stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
participations or pass-through certificates representing beneficial interests in
certain mortgage loans or (b) CMOs secured by such mortgage loans. Private
Mortgage-Backed Securities will have been issued pursuant to a PMBS agreement
(the "PMBS Agreement"). The seller/servicer of the underlying mortgage loans
will have entered into the PMBS Agreement with the PMBS Trustee under the PMBS
Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
mortgage loans underlying such Private Mortgage-Backed Security. Mortgage loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be approved as a
servicer by FNMA or FHLMC and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by the Department of Housing and Urban Development ("HUD")
as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Representative. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING MORTGAGE LOANS. The Underlying Mortgage Loans underlying the
Private Mortgage-Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment mortgage loans, buydown loans,
adjustable rate mortgage loans, or loans having balloon or other special payment
features. Such Underlying Mortgage Loans may be Single Family Loans, Multifamily
Loans, Cooperative Loans or Contracts secured by Manufactured Homes. As
specified in the related Prospectus Supplement, (i) no Underlying Mortgage Loan
will have had a Combined Loan-to-Value Ratio at origination in excess of the
percentage set forth in the related Prospectus Supplement, (ii) each underlying
mortgage loan will have had an original term to stated maturity of not less than
5 years and not more than 40 years, (iii) each Underlying Mortgage Loan (other
than Cooperative Loans) will be required to be covered by a standard hazard
insurance policy (which may be a blanket policy), and (iv) each mortgage loan
(other than Cooperative Loans or Contracts secured by a Manufactured Home) will
be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Underlying Mortgage Loans or
with respect to the Private Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for which
the related Trust includes Private Mortgage-Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Underlying Mortgage Loans including (A) the payment
features of such Underlying Mortgage Loans, (B) the approximate aggregate
principal balance, if known, of Underlying Mortgage Loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Underlying Mortgage Loans, and (D) the minimum and maximum stated
maturities of the Underlying Mortgage Loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Underlying Mortgage Loans or to such
Private Mortgage-Backed Securities themselves, (ix) the terms on which the
Underlying Mortgage Loans for such Private Mortgage-Backed Securities may, or
are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Mortgage-Backed Securities and (x) the terms on which
other mortgage loans may be substituted for those originally underlying the
Private Mortgage-Backed Securities.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Securities of each Series for general corporate
purposes, including repayment of debt, including but not limited to warehouse
facilities, and the origination and acquisition of residential mortgage loans
and other loans. The Representative expects Securities to be sold in Series from
time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The Mortgage Loans will have been originated or acquired by the
Originators. The Money Store or certain of its affiliates, including First Union
National Bank or certain of its affiliates, may act as a Master Servicer of the
Mortgage Loans and other Mortgage Assets. Except for certain representations and
warranties relating to the Mortgage Loans and other Mortgage Assets and certain
other matters, the obligations of The Money Store with respect to the Mortgage
Loans and other Mortgage Assets will be limited to its contractual servicing
obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey. The Money Store is a wholly-owned
subsidiary of First Union National Bank, a national banking association
subsidiary of First Union Corporation.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, loans partially
guaranteed by the United States Small Business Administration and student loans.
Since 1967, The Money Store and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States.
THE SINGLE FAMILY LOAN LENDING PROGRAM
OVERVIEW
The Money Store's and the Originators' mortgage lending activities consist
primarily of originating, purchasing, selling and servicing mortgage loans that
are primarily secured by one- to four-family residential properties, including
low-rise condominiums, single-family detached homes, single-family attached
homes, planned unit developments and mixed use properties (collectively, "Single
Family Loans"). It has been the Originators' policy generally not to make
mortgage loans secured by high-rise condominiums, cooperative residences or
other categories of properties that management believes have demonstrated
relatively high levels of risk. The majority of Single Family Loans are to
borrowers owning a single-family detached home. Single Family Loans are made to
borrowers for, among other purposes, education, home improvements and debt
consolidation. The Money Store and its subsidiaries also originate, with the
intention of selling and servicing, Multifamily Loans, FHA Loans, Secured
Conventional Home Improvement Loans, Unsecured Home Improvement Loans and loans
partially guaranteed by the United States Small Business Administration. In
addition, The Money Store and its subsidiaries from time to time purchase
packages of loans from other lenders or government agencies.
The Originators originate and purchase Single Family Loans with original
terms of up to 40 years. The following is a description of the origination,
underwriting, servicing and other procedures used by The Money Store and the
Originators in connection with their Single Family Loan program. If a
significant portion of the Mortgage Loans underlying a given Series of
Securities consists of FHA Loans, Secured Conventional Home Improvement Loans
and/or Unsecured Home Improvement Loans, the related Prospectus Supplement will
contain a similar description of the program relating to such Mortgage Loans.
SINGLE FAMILY LOAN ORIGINATION
The Originators' Single Family Loan origination offices are generally
located in small and medium-sized suburban communities. All Single Family Loan
origination offices have a manager who reports to senior management. Each
regional office supervises the operations of a group of states. The supervision
of all of the Originator's underwriting and administrative functions is
conducted from the Sacramento, California headquarters.
The entire application and approval process for Single Family Loans is
generally conducted by telephone. The Originators attempt to grant approvals of
loans quickly to borrowers meeting their underwriting criteria. A loan officer
is responsible for completing, evaluating and processing the loan application of
a prospective borrower based on information obtained from the borrower and
verified with third parties. Depending on the size of the loan applied for, loan
applications must be approved by an underwriter located in the Sacramento,
California headquarters. Loan officers are trained to structure loans that meet
the applicant's needs, while satisfying the Originators' lending criteria. If an
applicant does not meet the lending criteria, the loan officer may offer to make
a smaller loan, if a smaller loan would meet the lending criteria, or suggest a
debt consolidation package that better suits the applicant's needs.
The Originators also acquire Single Family Loans through an indirect
lending program, from independent brokers. Such Single Family Loans are
underwritten by the Originators using the same criteria applied to loans
originated by such Originator. Brokers participating in this program must
satisfy certain requirements established by the Originators pertaining to
experience, size of business and various licenses and approvals. The Originators
also acquire, from time to time, portfolios of Single Family Loans from various
third parties. The Originators will not sell such acquired loans to a Trust
unless the Originators determine that such loans, when originated, were
underwritten using the same criteria applied to loans originated by the
Originators.
Starting in October 1995, the Originators began originating Single Family
Loans under a program that will result in lower interest rates for borrowers
that make timely payments during the early years of the related loan. Under this
program, if a borrower remits all scheduled payments during the first year of
the loan on a timely basis, the interest rate on the loan will be reduced 0.50%
per annum. If the borrower remits all scheduled payments during the second year
of the loan on a timely basis, the interest rate will be reduced an additional
0.50% per annum and, if all payments are made during the third year of the loan
on a timely basis, the interest rate will be reduced a final 0.50% per annum.
Once the interest rate on a loan is reduced, it will not be increased,
regardless of the borrowers future payment record.
UNDERWRITING CRITERIA
The following is a brief description of certain of the underwriting
standards used by the Originators to underwrite Single Family Loans. The
underwriting process is intended to assess both the prospective borrower's
ability to repay and the adequacy of the real property security as collateral
for the loan granted. To the extent that the relevant underwriting criteria
differ from those described herein, the related Prospectus Supplement for such
Series will specifically describe such criteria.
In certain cases deemed appropriate by an Originator's underwriters, loans
may be made outside of the Originator's guidelines with the prior approval of
pre-designated senior officials. No information is available with respect to the
portion of the Mortgage Loans which was originated outside of these guidelines.
The Originators' objective in originating Single Family Loans is to provide
loans to borrowers with satisfactory income and credit histories deemed
sufficient to demonstrate the ability to repay their loan. The primary and
initial origination policy is to analyze the applicant's creditworthiness (i.e.,
a determination of the applicant's ability to repay the loan). Creditworthiness
is assessed by examination of a number of factors, which may include calculating
a debt-to-income ratio obtained by dividing a borrower's fixed monthly debt by
the borrower's gross monthly income. Fixed monthly debt generally includes (i)
the monthly payment under the related prior mortgages (which generally includes
an escrow for real estate taxes) based, in the case of an adjustable-rate first
mortgage, on the assumption that the then-current rate is the rate at which
interest will accrue on such loan, (ii) the monthly payment on the loan applied
for and (iii) other installment debt, including, for revolving debt, the
required monthly payment thereon or if no such payment is specified, 5% of the
balance as of the date of calculation. Fixed monthly debt does not include any
debt (other than revolving credit debt) described above that matures within less
than 10 months of the date of calculation. Except as otherwise set forth in the
related Prospectus Supplement, the debt-to-income ratio of any borrower will not
have exceeded 50% as of origination of the related loan. Creditworthiness is
also assessed by examining the applicant's credit history through standard
credit reporting bureaus, and by checking the applicant's payment history with
respect to the first mortgage, if any, on the property.
The second origination policy for Single Family Loans is a determination of
the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio guidelines are
established depending on the type of loan. For each Single Family Loan, the
Originator confirms the value of the property to be mortgaged by appraisals
(which in certain cases may be drive-by appraisals) performed by independent
appraisers. Drive-by appraisals involve a visual observation of the exterior of
the characteristics and condition of the property and the neighborhood. Because
the interior dimensions, improvements and conditions are not inspected, a
drive-by appraisal produces only a general approximation of value for the
particular property. If the Originator has previously originated a loan to the
same borrower secured by the same property within one year, the Originator may
rely on the prior appraisal in conjunction with a new drive-by appraisal. If an
appraisal is not required to be obtained for a Single Family Loan, the value of
the related mortgaged property, as represented by the borrower, may be evaluated
through other methods such as a drive-by appraisal, a review of comparable sales
or tax assessments or reliance upon a recent sales price for such mortgaged
property. Such methods do not constitute an appraisal of the related mortgaged
property. All Combined Loan-to-Value Ratios are determined prior to approval of
the loans.
The Originators have several procedures which they use to verify
information obtained from an applicant. The applicant's outstanding balance and
payment history on any senior mortgage may be verified by calling the senior
mortgage lender. If the senior mortgage lender cannot be reached by telephone to
verify this information, the Originator may rely upon information provided by
the applicant, such as a recent statement from the senior lender and
verification of payment, such as canceled checks, or upon information provided
by national credit bureaus.
In order to verify an applicant's employment status, the Originators may
obtain from the applicant recent tax returns or other tax forms (e.g., W-2
forms) or current pay stubs or may telephone the applicant's employer or obtain
written verification from the employer. As in the case of the senior mortgage
lender verification procedures, if the employer will not verify employment
history over the telephone, the Originator may rely solely on the other
information provided by the applicant.
The Originators will not close a Single Family Loan prior to receiving
evidence that the property securing the loan is insured. In addition, at the
closing, the borrower is required to sign a letter addressed to his insurance
carrier naming the Originator as a loss payee under the insurance policy, which
the Originator will thereafter mail to the insurer. Accordingly, the Originator
normally will not be named as a loss payee with respect to the property securing
the Single Family Loan at the time the loan is closed.
A title search is ordered to verify the vesting of title to the Mortgaged
Property, along with the existence of any mortgages, tax or other liens that
have been levied on the property, to assure that the lien priority will be as
represented by the borrower.
Most Single Family Loans originated or purchased by the Originators
generally are scheduled to amortize over their terms and provide for equal
monthly payments over their terms. The Originators also offer a "balloon"
mortgage on a limited basis. The Originators collect nonrefundable points, late
charges and various fees in certain states in connection with their mortgage
loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees. From time-to-time, the Originators may originate or purchase
Single Family Loans containing other features. To the extent that a substantial
portion of a Trust Fund consists of such Single Family Loans such features will
be described in the related Prospectus Supplement.
Although the Originators have no maximum dollar amount for Single Family
Loans, the actual maximum amount that they will lend is determined by an
evaluation of the applicant's ability to repay the loan, the value of the
borrower's equity in the real estate and the ratio of such equity to the real
estate's appraised value.
Commencing in 1997, the Originators began originating Single Family Loans
with Combined Loan-to-Value Ratios exceeding 100%. Such Single Family Loans are
originated to borrowers believed by the Originators to have the income capacity
and credit history to offset the lack of equity in the related Mortgaged
Property. Such Single Family Loans generally bear a higher rate of interest than
Single Family Loans with lower Combined Loan-to-Value Ratios.
QUALITY CONTROL
Quality control is exercised in two areas: lending and documentation
standards. In the case of Single Family Loans, a centralized quality control
staff checks to confirm that lending and documentation standards are met. Every
month, at least one office is audited and every loan type originated during the
prior month by such office is reviewed for compliance with lending and
documentation standards. Five percent of all Single Family Loans originated by
the Originators are audited at random on a monthly basis for compliance with
lending and documentation standards. Additional offices receive audits on a
random, monthly basis. In order to confirm the validity of appraisals obtained
at the time loans are made, reappraisals are obtained for the property securing
the loans in approximately two percent to five percent of the transactions.
REFINANCING POLICY
Where the Originators believe that borrowers having existing loans with
them are likely to refinance such loans due to interest rate changes or other
reasons, the Originators actively attempt to retain such borrowers through
solicitations of such borrowers to refinance with the Originators. Such
refinancings generate fee and servicing income for the Originators. Since the
solicited borrowers may refinance their existing loans in any case, the
Representative believes that this practice will be unlikely to affect the
prepayment experience of the Single Family Loans in a material respect. The
Originators also have solicited their borrowers who are in good standing to
apply for additional loans, consistent with their origination standards, where
deemed appropriate.
SERVICING AND COLLECTIONS
The Money Store or one of its affiliates, as Master Servicer, will be
required under the related Agreement to master service the Mortgage Loans and
other Mortgage Assets underlying a particular Series of Securities with the same
degree of skill and care that it exercises with respect to all comparable loans
and assets that it master services for its own account. Servicing includes, but
is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations.
Borrowers are sent payment coupon books or monthly statements that specify
the fixed payment due and the late payment amount, if any. Due dates for
payments occur throughout the calendar month. If payment is not received within
fifteen working days of the due date, an initial collection effort is made by
telephone in an attempt to bring the delinquent account current. The various
stages of delinquency are monitored and evaluated on a monthly basis.
Means of contacting delinquent accounts include, but are not limited to,
telephone calls and collection letters. When an account is 30 days past due, the
collection supervisor analyzes the account to determine the appropriate course
of action. If a borrower is experiencing difficulty in making payments on time,
the Servicer may modify the payment schedule (as permitted by the Agreement) but
will not remove the loan from a delinquency status.
The course of action taken by the Servicer is dependent upon a number of
factors including the borrower's payment history, the amount of equity in the
related Mortgaged Property and the reason for the current inability to make
timely payments.
When a loan is 90 days past due, the related Mortgaged Property is required
to be reappraised and the results evaluated by the Company to determine a course
of action. Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received or (iii) the servicer discovers circumstances indicating
potential loss exposure. During the foreclosure process, any expenses incurred
by the Servicer may be added to the amount owed by the borrower, as permitted by
applicable law. Upon completion of the foreclosure, the property is sold to an
outside bidder, or passes to the mortgagee, in which case the Servicer proceeds
to liquidate the asset.
The Servicer may not foreclose on the property securing a junior mortgage
loan unless it forecloses subject to the related senior mortgages. In such
cases, the Servicer generally will pay the amount due on the senior mortgages to
the senior mortgagees, if the Servicer considers it to be in the best interest
of the related Securityholders to do so. In the event that foreclosure
proceedings have been instituted on a senior mortgage prior to the initiation of
the Servicer's foreclosure action, the Servicer will either satisfy such
mortgage at the time of the foreclosure sale or take other appropriate action.
The Servicer retains "in-house" counsel in part to help assist with problem
accounts. Such counsel may be utilized by all levels of management to help avoid
legal problems, including those associated with consumer lending.
Servicing and charge-off policies and collection practices may change over
time in accordance with the servicer's business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations, as well as other
items.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from state
to state. Only if a delinquency cannot otherwise be cured will the servicer
decide that liquidation is the appropriate course of action. If, after
determining that purchasing a property securing a mortgage loan will minimize
the loss associated with such defaulted loan, the servicer may bid at the
foreclosure sale for such property or accept a deed in lieu of foreclosure.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued, from time to time, pursuant to
either a Pooling and Servicing Agreement or a Trust Agreement, and each Series
of Notes will be issued, from time to time, pursuant to an Indenture, each to be
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/or certain affiliates thereof and the Trustee for the benefit of the related
Certificateholders or Noteholders, as the case may be, of such Series. A Series
may contain either Certificates or Notes or a combination thereof. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust. A form
of a Pooling and Servicing Agreement, Trust Agreement, Sale and Servicing
Agreement and an Indenture have each 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 Securities 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
Securities 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 Security of such Series
addressed to The Money Store Inc., 707 Third Street, West Sacramento, California
95605, Attention: Corporate Counsel.
GENERAL
The Securities of each Series will represent debt obligations of, in the
case of Notes, or fractional undivided ownership interests in, in the case of
Certificates, a Trust created pursuant to the related Agreement and/or such
other assets as may be described in the related Prospectus Supplement. The
Securities will be issued in fully registered form, in minimum denominations of
$1,000 and integral multiples of $1,000 in excess thereof (or such other amounts
do may be set forth in a Prospectus Supplement), except that one Certificate or
Note of each Class may be issued in a different denomination.
Definitive Securities, 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 Security 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 security administrator may
perform certain duties in connection with the administration of the Securities.
The Securities will not represent obligations of the Representative (except
with respect to a Guaranty issued in connection with a Series), the Originators
or any affiliate thereof. The assets of each Trust will consist of one or more
of the following, as set forth in the related Prospectus Supplement, (a) the
Mortgage Loans that from time to time are subject to the related Agreement and
which are held in the related Pool; (b) the assets for the Trust that from time
to time are required by the Agreement to be deposited in certain reserve
accounts, including the Distribution Account, the Principal and Interest
Account, the Expense Account, the Letter of Credit Fee Account and the Insurance
Account (each, as defined herein), or to be invested in Permitted Investments
(as defined herein); (c) property and any proceeds thereof acquired by
foreclosure of the Mortgage Loans in such Pool, deed in lieu of foreclosure or a
comparable conversion; (d) any Primary Mortgage Insurance Policies; (e) any
Mortgage Pool Insurance Policies; (f) any Special Hazard Insurance Policies; (g)
any Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit or
other credit enhancement or maturity protection or other derivative instrument
covering any Securities, any Mortgage Loan in the related Pool or any related
Mortgaged Property which is required to be maintained pursuant to the related
Agreement.
Each Series of Securities will be issued in one or more Classes. Each Class
of Securities 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 Securities may be divided into two or more Sub-Classes, as specified in
the related Prospectus Supplement.
A Series may include two or more Classes of Certificates, as specified in
the related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Pass-Through Rate or amount of payments
of principal or interest, or as to which payments of principal or interest may
or may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Mortgage Assets for such Series. A
Series of Certificates may include one or more Classes of Senior Certificates
that receive certain preferential treatment, specified in the related Prospectus
Supplement, with respect to one or more Classes of Subordinated Certificates of
such Series. Certain Series or Classes of Certificates within a Series may be
covered by a 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, or derivative products, in each case as described herein
and in the related Prospectus Supplement. The Pass-Through Rate for a Class of
Certificates that pay interest based upon a floating rate of interest, as
specified in the related Prospectus Supplement, may base such floating rate upon
any of the following: (i) the auction procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount set forth in the related Prospectus
Supplement , (iii) the T-Bill Rate plus an amount set forth in the related
Prospectus Supplement or (iv) any such other method or procedures used to
determine the floating rate of interest as may be described in the applicable
Prospectus Supplement. In addition, a Series may include one or more Classes of
Certificates entitled to (a) principal payments with disproportionate, nominal
or no interest payments or (b) interest payments with disproportionate, nominal
or no principal payments (Strip Certificates).
A Series may include two or more Classes of Notes, as specified in the
related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Interest Rate or amount of payments of
principal or interest, or as to which payments of principal or interest may or
may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Mortgage Assets for such Series. A
Series of Notes may include one or more Classes of Senior Notes which receive
certain preferential treatment specified in the related Prospectus Supplement
with respect to one or more Classes of Subordinated Notes of such Series.
Certain Series or Classes of Notes within a Series may be covered by a 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, or derivative products, in each case as described herein and in the
related Prospectus Supplement. The Interest Rate for a Class of Notes that pay
interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of following: (i)
the auction procedures for Auction Rate Securities described herein, (ii) LIBOR
plus an amount set forth in the related Prospectus Supplement , (iii) the T-Bill
Rate plus an amount set forth in the related Prospectus Supplement or (iv) any
such other method or procedures used to determine the floating rate of interest
as may be described in the applicable Prospectus Supplement. In addition, a
Series may include one or more Classes of Notes entitled to (a) principal
payments with disproportionate, nominal or no interest payments or (b) interest
payments with disproportionate, nominal or no principal payments (Strip Notes).
With respect to any Series of Securities that includes one or more Classes
of Notes, distributions in respect of the Certificates may be subordinated in
priority of payment to payments on the Notes of such Series, to the extent
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities 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 Securities are
registered at the close of business on the record dates specified in the
Prospectus Supplement unless Definitive Securities have been issued, the
registered holder of all Securities will be Cede or such other nominee specified
in the related Prospectus Supplement. Distributions will be made by check mailed
to the persons entitled thereto at the address appearing in the register
maintained for holders of Securities (the "Security 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 Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee or other person
specified in the final distribution notice to Securityholders.
DISTRIBUTIONS ON SECURITIES
Each Class of Securities 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 Securities 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 Securities of such Series
throughout the lives of the Securities 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 Securities entitled to distributions allocable to interest, the
right to receive interest at a Fixed Rate or an Adjustable Rate; and (vii)
include, as to Securities 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 Securities will be
made by the Trustee out of, and only to the extent of, funds available in the
related Distribution 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 Distribution Account and such other accounts as may be described in
the related Prospectus Supplement and distribute to the Securityholders 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 Distribution Account as of the
Determination Date, or, in the case of Classes which have been assigned an
aggregate principal balance and Pass-Through Rate or Interest Rate, payments of
interest and payments in reduction of such aggregate principal balance from all
amounts on deposit in the Distribution Account on the Determination Date, in the
priority and calculated in the manner set forth in the related Prospectus
Supplement, except, in each case, for (i) all payments on the Mortgage Loans
that were due on or before the Cut-off Date; (ii) all Principal Prepayments,
Liquidation Proceeds and Insurance Proceeds received after the period specified
in the related Prospectus Supplement (the "Principal Prepayment Period"); (iii)
all scheduled payments of principal and interest due on a date or dates
subsequent to the Determination Date; (iv) amounts representing reimbursement
for Advances, as specified in the related Prospectus Supplement; (v) amounts
representing reimbursement for any unpaid Servicing Fee or Contingency Fee and
expenses from Liquidation Proceeds, condemnation proceeds and proceeds of
insurance policies with respect to the related Mortgage Loans; (vi) all income
from any Permitted Investments held in the Distribution Account for the benefit
of the Master Servicer; and (vii) any Advances deposited in the Distribution
Account prior to the applicable Remittance Date.
The timing and amounts of distributions allocable to interest and principal
and, if applicable, Principal Prepayments and scheduled payments of principal,
to be made on any Remittance Date may vary among Classes, over time or otherwise
as specified in the Prospectus Supplement. Differing allocations of principal
and interest to different Classes of Securityholders will have the effect of
accelerating the amortization of Senior Notes or Senior Certificates, as the
case may be, while increasing the interests evidenced by the Subordinated Notes
or Senior Certificates, as the case may be, in the related Trust. Distributions
to any Class of Certificates or Notes will be made pro rata to all
Securityholders of that Class, or as otherwise described in a Prospectus
Supplement.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on any Notes or Certificates that are Auction
Rate Securities. Appendix I hereto contains a more detailed description of these
procedures. Prospective investors in the Auction Rate Securities should read
carefully the following summary, along with the more detailed description in
Appendix I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The
broker/dealers are notified by the auction agent of the interest rate for the
upcoming interest period and are provided with settlement instructions relating
to purchases and sales of Auction Rate Securities.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders - the minimum interest rate that a current investor is
willing to accept in order to continue to HOLD some or all of its
Auction Rate Securities for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL a specified
principal amount of Auction Rate Securities, regardless of the
upcoming interest rate; and
(iii) Potential Bid Orders - the minimum interest rate that a potential
investor (or a current investor wishing to purchase additional Auction
Rate Securities) is willing to accept in order to BUY a specified
principal amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
In connection with each auction, Auction Rate Securities will be purchased
and sold between investors and potential investors at a price equal to their
then outstanding principal balance (I.E., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 UNITS SELL 50 Units at 3.05%
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 UNITS AT 3.12% 50 Units at 3.11%
300 Units 50 Units at 3.14%
100 UNITS AT 3.15% 350 Units
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
ORDER NUMBER CUMULATIVE ORDER NUMBER CUMULATIVE TOTAL
NUMBER OF UNITS TOTAL (UNITS) % NUMBER OF UNITS (UNITS) %
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next period that interest will accrue (each an "Interest
Period"), when another auction will be held. Multiple orders at the winning rate
are allocated units on a pro rata basis. Notwithstanding the foregoing, in no
event will the interest rate exceed the lesser of the Net Loan Rate or the
Maximum Auction Rate (each as described in Appendix I).
The above example assumes that a successful auction has occurred (I.E., all
Sell Orders and all Bid/Hold Orders below the new interest rate were fulfilled).
In certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (I.E., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate (as
defined below).
As stated above, the foregoing is only a summary of the auction procedures.
A more detailed description of these procedures is contained in Appendix I.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Securityholders (rather than to guarantee or insure against losses) if provided
in the related Prospectus Supplement, the Master Servicer will be required to
advance to the Trustee, on or before each Remittance Date (from its own funds),
the amount, if any, by which (a) the sum of (x) 30 days' interest at the
applicable weighted average Adjusted Mortgage Loan Remittance Rate (as defined
below) on the then outstanding principal balance of the related Series of
Securities and (y) the amount, if any, required to be deposited into the related
Reserve Account (as specified in the Prospectus Supplement) for the related
Remittance Date exceeds (b) the amount received by the Master Servicer and any
Sub-Servicers in respect of interest on the Mortgage Loans as of the related
Record Date (such excess, the "Monthly Advance"). For each Class of Securities,
the "Adjusted Mortgage Loan Remittance Rate" will equal the sum of the related
Pass-Through Rate or Interest Rate and the rate used in determining certain
expenses payable by the related Trust, as more specifically set forth in the
related Prospectus Supplement. The Master Servicer will not be required to make
any Monthly Advances which it determines, in good faith, would be nonrecoverable
from amounts received in respect of the Mortgage Loans.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each Mortgage Loan
for which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Distribution Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such Mortgage Loan as of the beginning of the
related Due Period at the applicable weighted average Adjusted Mortgage Loan
Remittance Rate, over (b) the amount of interest actually received on the
related Mortgage Loan for such Due Period (such difference, "Compensating
Interest").
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Mortgage Assets which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Permitted Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of principal
is payable to Holders of a Series which, during the Revolving Period, were not
otherwise entitled to such payments. If so specified in the related Prospectus
Supplement, during an Amortization Period all or a portion of principal
collections on the Mortgage Loans may be applied as specified above for a
Revolving Period and, to the extent not so applied, will be distributed to the
Classes of Notes or Certificates for such Series specified in the related
Prospectus Supplement as then being entitled to payments of principal. In
addition, if so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or more Classes of Notes or
Certificates for such Series may be released from time to time or on a specified
date and applied as a payment of principal on such Classes of Notes or
Certificates. The related Prospectus Supplement will set forth the circumstances
which will result in the commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Notes and Certificates of the related Series of
Securities outstanding is reduced.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
and/or Notes of a Series 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 and/or Noteholders, as
applicable, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Certificates and/or Notes of a
Series registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Securityholders will
receive all distributions of principal of and interest on the Securities and
reports relating to the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
and reports relating to the Securities 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 Securityholders. Unless and until Definitive Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Agreement. The beneficial
holders of such Certificates and/or Notes of a Series will only be permitted to
exercise the rights of Certificateholders and/or Noteholders, as applicable,
under the applicable 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 Securities and is required to
receive and transmit reports and payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities similarly are required to make
book-entry transfers and receive and transmit such reports and payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the rules provide a mechanism by
which Securityholders will receive distributions and reports and will be able to
transfer their interests.
Unless and until Definitive Securities are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
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 Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a physical certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Securityholders only at the direction of and on
behalf of Participants whose holdings include current principal amounts of
outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Notes and/or Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Securityholders or their nominees ("Definitive Securities"), 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 Securities. Upon surrender by DTC of the certificates and/or notes
representing the Securities and instruction for re-registration, the Trustee
will issue the Notes and/or Certificates in the form of Definitive Securities,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders. Thereafter, payments of principal of and interest
on the Securities will be made by the Trustee directly to Securityholders in
accordance with the procedures set forth herein and in the related Agreement.
The final distribution of any Security (whether Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Remittance Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Securities or with respect to the Mortgage Assets in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Notes and/or Certificates of such Series, (ii) the use of a
Guaranty 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, third party guarantees or maturity protection, derivative instruments,
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
Securities 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 Securities will bear their allocable share of
deficiencies. If a form of credit enhancement applies to several Classes of
Securities, 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 Securities. 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
All Classes of Certificates are Subordinated in right of payment to any
Class of Notes in a given Series to the extent described in the related
Prospectus Supplement. To enhance the likelihood of regular receipt by holders
of Senior Certificates or Senior Notes, as the case may be, 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 or Subordinated Notes, as the case may be,
of a Series will instead be payable to holders of one or more Classes of Senior
Certificates or Senior Notes, as the case may be, under the circumstances and to
the extent specified in the Prospectus Supplement. If specified in the related
Prospectus Supplement, the holders of Senior Certificates or Senior Notes, as
the case may be, 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 Distribution Account, prior to any such distribution
being made to holders of the related Subordinated Certificates or Subordinated
Notes, a the case may be, 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 or Senior Notes, as the case may be,
through subordination also may be accomplished by first allocating certain types
of losses or delinquencies to the related Subordinated Certificates or
Subordinated Notes, as the case may be, to the extent described in the related
Prospectus Supplement. If aggregate losses and delinquencies in respect of such
Mortgage Loans were to exceed the total amounts payable and available for
distribution to holders of Subordinated Certificates or Subordinated Notes, as
the case may be, or, if applicable, were to exceed the specified maximum amount,
holders of Senior Certificates or Senior Notes, as the case may be, would
experience losses on the Securities.
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 or Subordinated Notes, as the case may be,
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 Senior Notes, as the case may be,
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
Securities 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
Securities may be Senior Certificates or Senior Notes, as the case may be, with
respect to certain types of payments or certain types of losses or delinquencies
and Subordinated Certificates or Subordinated Notes, as the case may be, 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 or Senior Notes, as the case may be, and Subordinated Certificates
or Subordinated Notes, as the case may be, may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates or Subordinated Notes, as the case may be,
respectively, through a cross support mechanism or otherwise. As between Classes
of Senior Certificates or Senior Notes, as the case may be, and as between
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
distributions may be allocated among such Classes (i) in the order of their
scheduled final Remittance 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 or Subordinated Notes, as the case may be,
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
Holders of Senior Certificates or Senior Notes, as the case may be, or released
to Holder of Subordinated Certificates or Subordinated Notes, as the case may
be, from the related Trust.
GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy may be obtained and maintained for any Class or Series of Certificates
and/or Notes. The issuer of any Guaranty Insurance Policy (a "Security Guaranty
Insurer") will be described in the related Prospectus Supplement. A copy of any
such Guaranty Insurance Policy will be attached as an exhibit to the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy will unconditionally and irrevocably guarantee to Securityholders 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 Securityholders,
for distribution by the Trustee to each Securityholder. The "Insured Payment"
will equal the full amount of the distributions of principal and interest to
which Securityholders are entitled under the related Agreement plus any other
amounts specified therein or in the related Prospectus Supplement.
The specific terms of any Guaranty Insurance Policy will be as set forth in
the related Prospectus Supplement. Guaranty Insurance Policies may have
limitations including (but not limited to) limitations on the insurer's
obligation to guarantee the Master Servicer's obligation to repurchase or
substitute for any Mortgage Loans, to guarantee any specified rate of
prepayments or to provide funds to redeem Securities on any specified date.
Subject to the terms of the related Agreement, the Security Guaranty
Insurer may be subrogated to the rights of each Securityholder to receive
payments under the Securities to the extent of any payments by such Security
Guaranty Insurer under the related Guaranty Insurance Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Securities may be entitled to receive limited acceleration of principal relative
to the amortization of the related Mortgage Assets. The accelerated amortization
will be achieved by applying certain excess interest collected on the Mortgage
Assets to the payment of principal on such Classes of Securities. This
acceleration feature is intended to create an amount (the "Spread Amount"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Mortgage Assets over the principal balances of the
applicable Classes of Securities. 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 Securities 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
Securities 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 Securities.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of Mortgage
Loans, a Mortgage Pool Insurance Policy issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement will be obtained and maintained
for each Series pertaining to Mortgage Loans. Each Mortgage Pool Insurance
Policy will, subject to the limitations described below or in the related
Prospectus Supplement, cover loss by reason of default in payment on the related
Mortgage Loans in the Pool in an amount initially equal to a specified
percentage of the aggregate principal balance of all Mortgage Loans included in
the Pool as of the Cut-off Date or such other date as is specified in such
Prospectus Supplement. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. The Mortgage Pool Insurance
Policies generally will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
Primary Mortgage Insurance Policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to the Mortgage Pool Insurance Policy, a bond or other credit
support may cover fraud in connection with the origination of Mortgage Loans. If
so specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted Mortgage Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted
Mortgage Loan occurring when the servicer of such Mortgage Loan, at the time of
default or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance
Policy reach the original policy limit, coverage under that Mortgage Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Securityholders.
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 Securities from (i) loss by reason of damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage) not insured against under
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreement--Hazard Insurance." No Special
Hazard Insurance Policy will cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, flood (if the Mortgaged
Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
Since each Special Hazard Insurance Policy will be designed to permit full
recovery under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Agreement will provide that, if the related Mortgage Pool
Insurance Policy shall have been terminated or been exhausted through payment of
claims, the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Securities of the related Series
in the Trust to provide protection in lieu of or in addition to that provided by
a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a combination
thereof in the aggregate amount specified in the Prospectus Supplement may be
deposited by the Master Servicer or Representative on the date specified in the
Prospectus Supplement in one or more Reserve Accounts established with the
Trustee. In addition to or in lieu of the foregoing, if so specified in such
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into such Reserve Accounts. Such deposits may be made on the date
specified in the Prospectus Supplement, which may include each Remittance Date,
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount. See "--Subordination" above.
The cash and other assets in the Reserve Accounts will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement. Any
cash in a Reserve Account and the proceeds upon maturity or liquidation of any
other asset or instrument therein will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Any asset or instrument deposited in
the Reserve Account generally will name the Trustee, in its capacity as trustee
for the Securityholders, 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 Securityholders 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
Securities 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 Securities on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Mortgage Assets.
Such differences may result if the interest rates on the applicable Classes of
Securities are based upon an index that differs from the index used in
determining the interest rates on the Mortgage Assets. Except as otherwise
provided in a Prospectus Supplement, supplemental interest payments will not be
available to fund shortfalls resulting from delinquencies or defaults on the
Mortgage Assets.
MATURITY PROTECTION
If so specified in the Prospectus Supplement, one or more Classes of
Securities may be entitled to third-party payments to help provide that the
holders of such Securities receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES, SWAPS, 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, 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 Securities has a floating interest rate, or if any of the
Mortgage Assets has a floating interest rate, the Trust may include an interest
rate swap contract, an interest rate cap agreement or similar hedge contract
providing limited protection against interest rate risks. If provided in the
related Prospectus Supplement, interest and/or principal on one or more Classes
of the Securities of a Series may be paid to Holders thereof in a currency other
than U.S. dollars. If so provided, the Trust may, in connection therewith, enter
into one or more currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more Classes of Securities also
may be issued in conjunction with a put or call feature entitling (in the case
of a put) or obligating (in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named in the applicable
Prospectus Supplement on the date or dates set forth therein. Any such
arrangements must be acceptable to each nationally recognized rating agency that
provides a rating for the related Series of Securities (the "Rating Agency").
Additionally, to the extent a significant portion of the Mortgage Loans
underlying a given Series of Securities consists of FHA Loans, the related
Prospectus Supplement will describe the features of any related credit support
including, but not limited to, that provided by the FHA, if any.
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 Securities. In such case, credit support may be
provided by a cross-support feature which requires that distributions be made
with respect to Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature. If specified in the related Prospectus
Supplement, the coverage provided by one or more forms of credit support may
apply concurrently to two or more separate Trusts. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and the
manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities will be affected by the amount and
timing of principal payments on or in respect of the Mortgage Assets included in
the related Trusts, the allocation of available funds to various Classes of
Securities, the Pass-Through Rate or Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
The original terms to maturity of the Mortgage Loans in a given Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Pool. Single Family Loans, Cooperative Loans
and Contracts generally may be prepaid without penalty in full or in part at any
time, although a prepayment fee or penalty may be imposed in connection
therewith. Multifamily Loans may prohibit prepayment for a specified period
after origination, may prohibit partial prepayments entirely, and may require
the payment of a prepayment fee or penalty upon prepayment in full or in part.
In general, prepayment of Mortgage Loans is likely to increase when the
level of prevailing interest rates declines significantly, although the
prepayment rate is influenced by a number of other factors, some of which are
described below. Similarly, when the level of prevailing interest rates rises,
prepayment rates may decrease. No prediction can be made as to the prepayment
rate that the Mortgage Loans will actually experience.
Generally, junior mortgage loans have smaller average principal balances
than senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than Mortgage Loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on Mortgage Loans for Federal income tax purposes may result
in a higher rate of prepayment of the Mortgage Loans. The obligation of the
Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. The prepayment experience of the
Pools may be affected by a wide variety of factors, including general and local
economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Representative is unaware of
any reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of The Money Store's and its affiliates'
portfolios of Mortgage Loans.
The secured conventional Mortgage Loans and Contracts generally will
contain due-on-sale provisions permitting the mortgagee or holder of the
Contract to accelerate the maturity of the Mortgage Loan or Contract upon sale
or certain transfers by the borrower of the underlying Mortgaged Property. The
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreement--Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
Greater than anticipated prepayments of principal will increase the yield
on Securities purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Securities
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the Mortgage Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Securities may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Securityholders. However,
this effect will be offset to the extent that lump sum recoveries on defaulted
Mortgage Loans and foreclosed Mortgaged Properties result in principal payments
on the Securities faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Mortgage Loan, the
Mortgagor will be charged interest on the principal amount of the Mortgage Loan
so prepaid only for the number of days in the month actually elapsed up to the
date of the prepayment rather than for a full month. Interest shortfalls also
could result from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), as described under "Certain Legal
Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act" herein.
If so specified in the related Prospectus Supplement, in the event that less
than 30 days' interest is collected on a Mortgage Loan during a Due Period,
whether due to prepayment in full or a Curtailment, the Master Servicer will be
obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of Compensating
Interest that the Master Servicer is obligated to pay, and are not otherwise
covered by Insured Payments, the yield on the Securities could be adversely
affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Securities. See "The Agreement--Termination; Purchase of
Mortgage Loans."
If so specified in the related Prospectus Supplement, the effective yield
to certain Securityholders 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 Securities 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 Securities.
The Prospectus Supplement relating to a Series of Securities 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 Securities. 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 Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
SALE OF MORTGAGE LOANS
Pursuant to each related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as the case may be, at the time of issuance of Securities
of a Series the Originators and/or The Money Store will sell to the related
Trust, without recourse, all interest of the Originators and/or The Money Store
in each of the Mortgage Assets comprising the assets of such Trust and all
interest in all actual payments collected after the Cut-off Date with respect to
such Mortgage Assets.
In addition, to the extent specified in the related Prospectus Supplement,
the net proceeds received from the sale of the Securities of a given Series will
be applied to the deposit of the Pre-Funded Amount into the Pre-Funding Account.
The aggregate principal balance of additional Mortgage Assets to be purchased
for the related Trust generally will be equal to the Pre-Funded Amount on the
date of the issuance of the related Series. On each applicable purchase date,
the Originators and/or The Money Store will sell to the related Trust, without
recourse, the entire interest of the Originators and/or The Money Store in the
additional Mortgage Assets identified in a schedule attached to a supplemental
conveyance relating to such additional Mortgage Assets executed on such date by
the Originators and/or The Money Store. In connection with each purchase of
additional Mortgage Assets, the related Trust will be required to pay to the
Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Mortgage Asset as of its
related Cut-off Date. The purchase price will be withdrawn from the Pre-Funding
Account and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in "--Representations and Warranties"
below apply to each additional Mortgage Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied. The
Originators and/or The Money Store will convey the additional Mortgage Assets to
the related Trust on the applicable purchase date pursuant to the Agreement.
Any conveyance of additional Mortgage Assets will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Mortgage Asset must satisfy the eligibility
criteria specified in the preceding paragraph as of its applicable Cut-off Date
and such additional criteria as may be specified in the related Prospectus
Supplement; (ii) if and to the extent specified in the related Prospectus
Supplement, the third-party credit enhancement provider, if any, shall have
approved the transfer of such additional Mortgage Assets to the related Trust;
(iii) neither the Originator nor The Money Store will have selected such
additional Mortgage Assets in a manner that either believes is adverse to the
interests of Securityholders; and (iv) the Originator and The Money Store will
deliver certain opinions of counsel to the Trustee(s) and the Rating Agencies
with respect to the validity of the conveyance of such additional Mortgage
Assets.
In connection with such sales of the Mortgage Loans, the Representative
will be required to deliver to the Trustee certain specified items (collectively
with respect to each Mortgage Loan, the "Trustee's Mortgage File") with respect
to each Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, each Trustee's Mortgage File will be required to include the
following, together with certain other specified items: (a) The original
Mortgage Note; (b) either: (i) the original Mortgage, with evidence of recording
thereon or (ii) a certified copy of the Mortgage where the original has been
transmitted for recording or has been lost; and (c) an assignment of the
Mortgage Loan from the applicable Originator to either the related Trustee or
Initial Co-Trustee under the Agreement with evidence of recording thereon
(unless opinions of counsel are delivered satisfactory to the Rating Agencies
and the Security Guaranty Insurer, if any, to the effect that recordation of
such assignments is not required in the relevant jurisdictions to protect the
interests of the Trustee in the Mortgage Loans).
The Trustee will be required to review each such Trustee's Mortgage File to
ascertain that all required documents have been executed and received. If the
Security Guaranty Insurer, if any, or the Trustee finds any document
constituting a part of a Trustee's Mortgage File which is not properly executed,
has not been received, is unrelated to the Mortgage Loans of the related Trust
or does not conform in a material respect to the description thereof provided on
behalf of the Representative, the Securities Guaranties Insurer, if any, or the
Trustee is required promptly to notify the Master Servicer, The Money Store, and
the Trustee or the Security Guaranty Insurer, if any, respectively. The Money
Store is required to use reasonable efforts to remedy a material defect in a
document constituting part of a Trustee's Mortgage File of which it is so
notified. If, however, within 60 days after the Trustee's notice to it
respecting such defect The Money Store has not remedied the defect and the
defect materially and adversely affects the interest of the Trust in the related
Mortgage Loan or the interests of the Security Guaranty Insurer, if any, The
Money Store is required to (i) substitute in lieu of such Mortgage Loan a
substitute Mortgage Loan which qualifies for substitution under the Agreement (a
"Qualified Substitute Mortgage Loan") and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution, deposit in
the related Principal and Interest Account (as defined herein under "--Payments
on the Mortgage Loans") the amount of such shortfall in principal balance
arising from such substitution (the "Substitution Adjustment") or (ii) purchase
such Mortgage Loan at a price equal to the principal balance of such Mortgage
Loan as of the date of purchase, plus 30 days' interest on such principal
balance, computed at the Adjusted Mortgage Loan Remittance Rate (as defined in
the related Prospectus Supplement) as of the next succeeding Determination Date,
plus any accrued unpaid Servicing Fees and Contingency Fees (each as defined
herein under "--Servicing and Other Compensation and Payment of Expenses") and
certain other amounts advanced by and reimbursable to the Master Servicer, plus
the interest portion of any unreimbursed Insured Payments made by the Security
Guaranty Insurer, if any, related to such Mortgage Loan, which purchase price
will be deposited in the Principal and Interest Account and delivered to the
Trustee on the next succeeding Determination Date, except for the amount
described above relating to unreimbursed Insured Payments, if any, which shall
be paid directly to the Security Guaranty Insurer; provided, however, that, if a
REMIC election has been made for the related Trust, The Money Store may not take
any such action unless it has theretofore caused to be delivered to the Trustee
an opinion of counsel knowledgeable in federal income tax matters (an "Opinion
of Counsel") which states that such a purchase or substitution would not
constitute a "prohibited transaction," as defined in Section 860F of the Code (a
"Prohibited Transaction").
REPRESENTATIONS AND WARRANTIES
The Representative will represent, among other things, that as of the
related Cut-off Date as to each Mortgage Loan sold to the related Trust, the
information provided with respect to such Mortgage Loan was true and correct;
all of the original or certified documentation constituting the Trustee's
Mortgage Files (including all material documents related thereto) has been or
will be delivered to the Trustee or a custodian on its behalf (the "Custodian");
each Mortgage was a valid and subsisting lien of record on the Mortgaged
Property; immediately prior to such transfer and assignment, the Originators
were the sole owners of each Mortgage Loan conveyed by them; and as of the
related Cut-off Date, no Mortgage Loan will be more than 59 days delinquent in
payment, no Mortgage Loan originated within 12 months of the related Cut-off
Date will be delinquent more than 59 days as measured at the end of any month
during the 12 months immediately preceding such Cut-off Date, and with respect
to Mortgage Loans originated more than 12 months before such Cut-off Date, no
more than the percentage of Mortgage Loans specified in the related Prospectus
Supplement (measured by outstanding principal balance as of such Cut-off Date)
will have been on up to two occasions more than 59 days delinquent as measured
at the end of any month since the inception of each such Mortgage Loan.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Servicer, any Subservicer, the Custodian, the Security Guaranty Insurer, if any,
or the Trustee that any of the representations and warranties contained in the
Agreement have been breached in any material respect as of the related Cut-off
Date, with the result that the interests of the related Trust in the related
Mortgage Loan or the interests of the Security Guaranty Insurer, if any, were
materially and adversely affected, notwithstanding that such representation and
warranty was made to The Money Store's best knowledge, the party discovering
such breach is required to give prompt written notice to the other parties.
Within 60 days of the earlier to occur of The Money Store's discovery or its
receipt of notice of any such breach, The Money Store will be required to cure
promptly such breach in all material respects, or (i) remove such Mortgage Loan
and substitute one or more Qualified Substitute Mortgage Loans or (ii) purchase
such Mortgage Loan, in each case on the same terms and on the same conditions as
described above under "Sale of Mortgage Loans." The obligation of The Money
Store to so substitute or purchase any Mortgage Loan will constitute the sole
remedy respecting a material breach of any such representation or warranty
available to the Securityholders or the Trustee.
PAYMENTS ON THE MORTGAGE LOANS
The Agreement will require the Master Servicer to establish and maintain
one or more principal and interest accounts (each a "Principal and Interest
Account") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer will be required to deposit or cause to be deposited in
the related Principal and Interest Account (within 24 hours of receipt) all
payments received after the related Cut-off Date on account of principal and
interest on the related Mortgage Loans (but net of the Servicing Fee and the
Contingency Fee with respect to each Mortgage Loan and other servicing
compensation payable to the Master Servicer as permitted by the Agreement).
Not later than the day of each month preceding a Remittance Deate that is
set forth in a Prospectus Supplement (each such day a "Determination Date"), the
Master Servicer will be required to wire transfer to the Trustee the Available
Remittance Amount for deposit in the segregated trust accounts to be maintained
with the Trustee for such purpose (each a "Distribution Account").
Unless otherwise specified in the related Prospectus Supplement, the
"Available Remittance Amount" will be defined in the Agreement to include, with
respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Master Servicer or
any Sub-Servicer on the Mortgage Loans (including amounts paid by the
Master Servicer and the Representative and excluding amounts required
to be deposited into any related Reserve Account, amounts paid as
reimbursement to the Master Servicer of advances and amounts recovered
as voidable preferences) during the immediately preceding calendar
month (the "Due Period"), PLUS
(ii) the amount of any Monthly Advance and Compensating
Interest payments with respect to the Mortgage Loans remitted by the
Master Servicer for such Remittance Date.
The term Available Remittance Amounts will not include Insured Payments, if
any.
GENERAL SERVICING STANDARDS
The Master Servicer will agree to master service the Mortgage Loans in
accordance with the related Agreement and, where applicable, prudent mortgage
servicing standards. "Prudent mortgage servicing standards" generally will
require the Master Servicer to exercise collection and foreclosure procedures
with respect to the Mortgage Loans with the same degree of care and skill that
it would use in master servicing mortgage loans for its own account. Pursuant to
each Agreement, the Master Servicer will be required to make reasonable efforts
to collect all payments called for under the terms of the related Mortgage Loan.
Nonetheless, the Master Servicer, in determining the type of action that is
reasonable to pursue may consider, among other things, the unpaid principal
balance of a Mortgage Loan against the estimated cost of collection or
foreclosure action, the unpaid balance of the related prior mortgage, if any,
the condition and estimated market value ("as is" and "if repaired"), the
estimated marketability of the related Mortgaged Property and the borrower's
ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "Servicing
Fee") and a contingency fee (the "Contingency Fee") equal to the percentage per
annum specified in the related Prospectus Supplement of the principal balance of
each Mortgage Loan. The Contingency Fee is meant to provide additional servicing
compensation to a successor servicer if The Money Store is replaced as Master
Servicer under the related Agreement. However, as long as The Money Store acts
as Master Servicer, it will be entitled to receive the Contingency Fee, although
such amount is not deemed servicing compensation. Unless otherwise specified in
the related Prospectus Supplement, the Servicing Fee and Contingency Fee will
each be calculated and payable monthly from the interest portion of scheduled
monthly payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, prepayment penalties and premiums, late payment charges,
interest paid on funds in the Principal and Interest Account, interest paid on
earnings realized on Permitted Instruments, and certain other excess amounts.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of the Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage Loan. Such expenditures may include costs of collection
efforts, reappraisals when a loan is 90 days past due, forced placement of
hazard insurance if a borrower allows his hazard policy to lapse, legal fees in
connection with foreclosure actions, advancing payments on the related senior
mortgage, if any, advances of delinquent property taxes, upkeep and maintenance
of the property if it is acquired through foreclosure and similar types of
expenses. Each such expenditure constitutes a "Servicing Advance." The Master
Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Master Servicer will be entitled
to recover Servicing Advances to the extent permitted by the Mortgage Loans or,
if not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan.
Servicing Advances will be reimbursable to the Servicer from the sources
described above out of the funds on deposit in the Principal and Interest
Account.
HAZARD INSURANCE
The Master Servicer will be required to cause to be maintained fire and
hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located, in an amount which is at least equal to the least
of (i) the outstanding principal balance owing on the Mortgage Loan and the
related senior mortgage, if any, (ii) the full insurable value of the premises
securing the Mortgage Loan, and (iii) the minimum amount required to compensate
for damage or loss on a replacement cost basis. If the Mortgaged Property is in
an area identified in the Federal Register by the Flood Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), the Master Servicer will be required to cause to be purchased a
flood insurance policy with a generally acceptable insurance carrier, in an
amount representing coverage not less than the least of (a) the outstanding
principal balance of the Mortgage Loan and the senior lien, if any, (b) the full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended.
The Master Servicer will also be required to maintain, to the extent such
insurance is available, on REO Property, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, flood insurance in an amount equal to that required above. Any amounts
collected by the Master Servicer or any Sub-Servicer under any such policies
(other than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary first
or second mortgage servicing procedures) are required to be deposited in the
Principal and Interest Account.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire and hazards of extended coverage on all of the
Mortgage Loans, then, to the extent such policy names the Trustee as loss payee
and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without individual fire and hazard insurance, and
otherwise complies with the requirements of the preceding paragraph, the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
ENFORCEMENT OF DUE ON SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer, on behalf of the Trustee, will, to the extent it
has knowledge of such conveyance or prospective conveyance, be required to
enforce the rights of the Trustee as the mortgagee of record to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Master
Servicer will not be required to exercise any such right if the "due-on-sale"
clause, in the reasonable belief of the Master Servicer, is not enforceable
under applicable law or if such enforcement would materially increase the risk
of default or delinquency on, or materially decrease the security for, such
Mortgage Loan. In such event, the Master Servicer will attempt to enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, unless prohibited by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Security Guaranty Insurer, if any,
to enter into a substitution of liability agreement with such person, pursuant
to which the original Mortgagor is released from liability and such person is
substituted as Mortgagor and becomes liable under the Mortgage Note.
Notwithstanding the foregoing, with respect to Mortgage Loans with Combined
Loan-to-Value Ratios exceeding 100%, the Master Servicer may, but will be under
no obligation to, permit a borrower who is selling his principal residence to
substitute the new mortgaged property as collateral for the related Mortgage
Loan. In such event, the Master Servicer may require the borrower to make a
partial prepayment in reduction of the principal balance of the Mortgage Loan.
REALIZATION UPON DEFAULTED MORTGAGE
The Master Servicer generally will foreclose upon or otherwise comparably
convert the ownership in the name of the Trustee of Mortgaged Properties
relating to defaulted Mortgage Loans as to which no satisfactory arrangements
can be made for collection of delinquent payments. However, the Master Servicer
will be required to take into account the existence of any hazardous substances,
hazardous wastes or solid wastes on a Mortgaged Property in determining whether
to foreclose upon or otherwise comparably convert the ownership of such
Mortgaged Property.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable efforts
to collect all payments called for under the terms and provisions of the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any late payment charge, prepayment charge, assumption fee or
any penalty interest in connection with the prepayment of a Mortgage Loan or any
other fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Mortgage
Loan or consent to the postponement of strict compliance with any such term or
in any matter grant indulgence to any Mortgagor, subject to the limitations set
forth in the Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will nonetheless make payment of any required Monthly Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to enter
into sub-servicing arrangements with sub-servicers meeting the requirements of
the related Agreement (each, a "Sub-Servicer"). Such sub-servicing arrangements
will not relieve the Master Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
REMOVAL AND RESIGNATION OF MASTER SERVICER
With respect to each Series of Securities, the Security Guaranty Insurer,
if any, or the Holders of not less than 50 percent of each Class of Securities
of the related Series, other than the holders of residual interests (the
"Majority Securityholders"), by notice in writing to the Master Servicer and
with the prior written consent of the Security Guaranty Insurer, if any, which
consent may not be unreasonably withheld, generally 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) if the
Series of Securities has the benefit of a Guaranty Insurance Policy;
(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 Security Guaranty Insurer, if any, or the
Securityholders; (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 Securityholder or the Security
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 Securityholder or the Security 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.
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 Security Guaranty Insurer, if any, the
Trustee and the Majority Securityholders, or upon the determination that the
Master Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Master Servicer. No such
resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the Majority
Securityholders or the Security 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 Security
Guaranty Insurer, if any, having a net worth of not less than $15,000,000 and
which is approved as a servicer by FNMA and FHLMC as the Successor Servicer in
the assumption of all or any part of the responsibilities, duties or liabilities
of the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee, the
Contingency Fee and such other compensation as is described under "--Servicing
and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The Trust established
under a Pooling and Servicing Agreement or a Trust Agreement will terminate upon
notice to the Trustee following the earlier to occur of (i) the final payment or
other liquidation of such last Mortgage Loan remaining in the related Trust or
the disposition of all REO Property, (ii) the optional purchase of the assets of
the Trust by the Master Servicer or the Security Guaranty Insurer, if any, as
described below, (iii) mutual consent of the Master Servicer, the Security
Guaranty Insurer, if any, and all Securityholders in writing, or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the Trust, as permitted by the REMIC provisions of the Code as
described below; provided, however, that in no event will any Trust terminate
later than twenty-one years after the death of the last survivor of the person
named in the related Agreement.
Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Mortgage Loans are less than 10% of the Original Pool Principal Balance (or
such other percentage as may be specified in the related Prospectus Supplement),
the Master Servicer may, at its option, and in the absence of the exercise
thereof by the Master Servicer, the Security Guaranty Insurer, if any, may, at
its option, purchase, on the next succeeding Remittance Date, all of the
Mortgage Loans and any related REO Properties at a price equal to the
Termination Price. If so provided in the related Prospectus Supplement, the
Master Servicer or another entity may purchase some or all of the Mortgage
Assets under the circumstances described in such Prospectus Supplement.
On any Remittance Date on or after the Cross-Over Date on which Mortgage
Loans with an aggregate principal balance as of the Cut-off Date that equals or
exceeds 25% of the Original Pool Principal Balance (or such other percentage as
may be specified in the related Prospectus Supplement) have become liquidated
Mortgage Loans, the Security Guaranty Insurer, if any, may determine to purchase
and may cause the purchase from the Trust of all Mortgage Loans and REO
Properties in the Pool at a price equal to the sum of the Termination Price and
the outstanding and unpaid fees and expenses of the Trustee and the Master
Servicer.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture may
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the final scheduled
Remittance Date for such Notes and any installment of interest on such Notes in
accordance with the terms of the Indenture and the Notes of such Series. In the
event of any such defeasance and discharge of Notes of such Series, holders of
Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
REMIC CONSIDERATIONS. If a REMIC election is made for a Series of
Securities, 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 Securityholders 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 Security Guaranty Insurer, if any, may notify the
Trustee of the Security Guaranty Insurer's determination to purchase from the
Trust all Mortgage Loans and all property theretofore acquired by foreclosure,
deed in lieu of foreclosure, or otherwise in respect of any Mortgage Loan, then
remaining in such REMIC at a price (the "Termination Price") equal to the sum of
(x) 100% of the aggregate principal balances of such Mortgage Loans as of the
day of purchase minus amounts remitted from the Principal and Interest Account
to the Distribution Account representing collections of principal on such
Mortgage Loans during the current Due Period, (y) 30 days' interest on such
amount computed at the applicable weighted average of the Adjusted Mortgage Loan
Remittance Rates, and (z) the interest portion of any unreimbursed insured
payment made by the Security Guaranty Insurer, if any. Upon receipt of such
direction by the Majority Securityholders or of such notice from the Security
Guaranty Insurer, the Trustee will notify the holders of the Class R
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "Termination Notice"). The Holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, within 60
days from the date of receipt of the Termination Notice (the "Purchase Option
Period"), at their option, purchase from the related Trust all Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the
REMIC at a purchase price equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Securityholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
Mortgage Loans and such other property in the REMIC and distribute the proceeds
of the liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Securityholders shall permit or
direct in writing, after the expiration of the Purchase Option Period and (ii)
in the event that the Security Guaranty Insurer has given the Trustee notice of
the Security Guaranty Insurer's determination to purchase the assets described
in clause (ii) preceding, the Security 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 Security 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 Securityholders and the Security Guaranty
Insurer, if any, that the effect of the Final Determination is to increase
substantially the probability that the gross income of the REMIC will be subject
to federal taxation, purchase from the Trust all Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the applicable REMIC at a
purchase price equal to the Termination Price. The foregoing opinion shall be
deemed satisfactory unless the Majority Securityholders 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 Securityholders may exercise
any trust or power conferred on the Trustee with respect to the Securities 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 Securities, only Holders of such Class or Classes may
exercise such trust or power.
EVENTS OF DEFAULT UNDER THE INDENTURE; RIGHTS OF NOTEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Indenture for each Series of Notes include: (i) a default for
thirty (30) days or more in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the
Representative or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Representative or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the
Representative or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount of all the Notes of such Series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Holders of a majority in aggregate outstanding
amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66B% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Note of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
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 Security
Guaranty Insurer, if any, without the notice to, or consent of, the
Securityholders, to cure any ambiguity, to correct or supplement any provisions
therein, to comply with any changes in the Code, or to make any other provisions
with respect to matters or questions arising under the Agreement which are not
inconsistent with the provisions of such Agreement, or any agreement for the
retention of each Trustee's Mortgage File; provided, however, that such action
shall not, as evidenced by an Opinion of Counsel delivered to the Trustee,
adversely affect the interest of any Securityholder 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 Security without the consent of the Holder of such Security, or change the
rights or obligations of any other party thereto without the consent of such
party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer and the Trustee with the consent of the Security Guaranty
Insurer, if any, and the Holders of the majority of the percentage interest in
each Class of Securities affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner any provisions thereof; provided,
however, that if a REMIC election is made for the applicable Trust, no such
amendment shall be made unless the Trustee receives an Opinion of Counsel, at
the expense of the party requesting the change, that such change will not
adversely affect the status of the Trust as a REMIC or cause a tax to be imposed
on the REMIC, and provided further, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, any amounts which are required to
be distributed on any Securities without the consent of the Holders of 100% of
each Class of Securities 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 Security Guaranty Insurer, if any, without the notice to or consent of
the Securityholders, 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, if the Trustee becomes
insolvent or, if the Trustee enters into certain business combinations. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Laws and practices
relating to the legal effects and enforcement of mortgages and deeds of trust
vary somewhat from state to state. In general, however, the most significant
applicable legal principles are similar in all states. The following discussion
addresses the more significant legal principles applicable to mortgages and
deeds of trust in all states. It should be noted that some of the Mortgage Loans
may relate to Mortgaged Properties located in California, which has enacted
various laws, not common to most other states, which impose special limitations
on the remedies available to the holders of mortgages and deeds of trust. These
laws, called "anti-deficiency laws," are discussed below.
NATURE OF THE MORTGAGE ASSETS
SINGLE FAMILY LOANS, FHA LOANS, SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
AND MULTIFAMILY LOANS. The Single Family Loans, FHA Loans, Secured Conventional
Home Improvement Loans and Multifamily Loans generally will be secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property subject to the
loan is located. A mortgage creates a lien upon the real property encumbered by
the mortgage, which lien is generally not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of recording with a state or county office. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. The mortgagor delivers
to the mortgagee a note or bond and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a security
deed or deed to secure debt are governed by law and, with respect to some deeds
of trust, the directions of the beneficiary.
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the Cooperative and/or
underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the UCC in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Unless otherwise specified
in the Prospectus Supplement, under the Agreement, the Representative will
transfer or cause the transfer of physical possession of the Contracts to the
Trustee or its custodian. In addition, the Representative will make or cause to
be made an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Representative.
The Representative will assign or cause to be assigned a security interest
in the Manufactured Homes to the Trustee, on behalf of the Securityholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Representative, the Master Servicer nor the Trustee will amend the certificates
of title to identify the Trustee, on behalf of the Securityholders, as the new
secured party and, accordingly, the Representative or the Seller will continue
to be named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
Certificate of title and the new secured party succeeds to the Representative's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Representative or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Representative and the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee, on behalf of the
Securityholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Representative will represent that it has no knowledge of any such liens with
respect to any Manufactured Home securing a Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Securityholders in the event such a lien arises.
FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS, FHA LOANS, SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
AND MULTIFAMILY LOANS. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sales take place, typically a notice of
sale must be posted in a public place and published during a specific period of
time in one or more newspapers, posted on the property, and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the mortgage is not reinstated, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
COOPERATIVE LOANS. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS, FHA LOANS, SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
AND MULTIFAMILY LOANS. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the Mortgage Assets (by
principal balance) will be secured by properties located in California.
Foreclosure of a deed of trust in California may be effected by a judicial or
nonjudicial foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. However, in the case of certain
purchase money mortgage loans, a lender may be prohibited by statute from
obtaining a deficiency judgment. California law also requires the deed of trust
beneficiary to exhaust all real property security in a single action (i.e. in a
judicial foreclosure) before a deficiency judgment may be sought against the
borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of the
real property sold at the foreclosure sale. As a result of these prohibitions,
it is anticipated that in many instances the Master Servicer will not seek
deficiency judgments against defaulting mortgagors. Under the laws applicable in
most states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws (including California law) affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon collateral and/or enforce a deficiency judgment. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the court determines
that the value of the Mortgaged Property is less than the principal balance of
the mortgage loan, for the reduction of the secured indebtedness to the value of
the Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Securities and possible reductions in the aggregate
amount of such payments. Some states also have homestead exemption laws which
would protect a principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the seller of such Contract had or should have had knowledge of
such claim or defense, the Master Servicer will have the right to require the
seller to repurchase the Contract because of a breach of such seller's
representation and warranty that no claims or defenses exist which would affect
the obligor's obligation to make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan may contain a due-on-sale clause which will generally provide that
if the mortgagor or obligor sells, transfers or conveys the Mortgaged Property,
the loan or contract may be accelerated by the mortgagor or secured party. The
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act"), subject to certain exceptions, preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses. As to loans
secured by an owner-occupied residence (which would include a Manufactured
Home), the Garn-St. Germain Act sets forth nine specific instances in which a
mortgagee covered by the Act may not exercise its rights under a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. The inability to enforce a due-on-sale clause may result in transfer
of the related Mortgaged Property to an uncreditworthy person, which could
increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of mortgage loans with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APR's,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts. Legal restrictions, if any, on prepayment of Multifamily
Loans will be described in the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Securities. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted alleging
personal injury or property damage from the existence of certain chemical
substances which may be present in building materials. For example, formaldehyde
and asbestos have been and in some cases are incorporated into many building
materials utilized in manufactured and other housing. As a consequence, lawsuits
may arise from time to time asserting claims against manufacturers or builders
of the housing, suppliers of component parts, and related persons in the
distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by a
Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Seller, and the Securityholders would suffer a
loss only to the extent that (i) the Seller breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Seller, the Representative or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde and certain other chemicals in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against a
Trust.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Securityholders if a Mortgaged Property securing a Mortgage
Loan became the property of such Trust in certain circumstances and if such
Cleanup Costs were incurred. Moreover, certain states by statute impose a lien
for any Cleanup Costs incurred by such state on the property that is the subject
of such Cleanup Costs (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens. In the latter states, the security interest
of the Trustee in a property that is subject to such a Superlien could be
adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special Federal tax
counsel, ("Federal Tax Counsel"), the following are the material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
or Notes offered hereby. The discussion, and the opinions referred to below, are
based on laws, regulations, rulings and decisions now in effect (or, in the case
of certain regulations, proposed), all of which are subject to change or
possibly differing interpretations. Because tax consequences may vary based on
the status or tax attributes of the owner of a Certificate, prospective
investors should consult their own tax advisors in determining the federal,
state, local and other tax consequences to them of the purchase, ownership and
disposition of Certificates or Notes. 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 to qualify such trust as a Financial Asset
Securitization Investment Trust ("FASIT") pursuant to recently effective
provisions of the Code. To the extent provided in the Prospectus Supplement for
a series, Certificateholders may also have the benefit of a Reserve Account and
of certain agreements (each, a "Yield Supplement Agreement") under which payment
will be made from the Reserve Account in the event that interest accrued on the
Mortgage Loans at their Mortgage Interest Rates is insufficient to pay interest
on the Certificates of such Series (a "Basis Risk Shortfall"). If a REMIC
election is to be made, the Prospectus Supplement will designate the
Certificates of such series as "regular interests" ("REMIC Regular
Certificates") in the REMIC (within the meaning of Section 860G(a)(1) of the
Code) or as the "residual interest" ("REMIC Residual Certificates") in the REMIC
(within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates of
a series with respect to which a REMIC election will, or will not, be made.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust or certain assets of such
Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations, the related Trust or
certain assets of such Trust will be a REMIC and the REMIC Certificates will be
considered to evidence ownership of "regular interests" or "residual interests"
within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Account
in the event of a Basis Risk Shortfall will be required to allocate their
purchase price between their beneficial ownership interests in the related REMIC
regular interests and Yield Supplement Agreements, and will be required to
report their income realized with respect to each, calculated taking into
account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. REMIC Regular Certificateholders
are advised to consult their own tax advisors concerning the determination of
such fair market values. Under the Agreement, holders of applicable classes of
REMIC Regular Certificates will agree that, for federal income tax purposes,
they will be treated as owners of the respective class of regular interests and
of the corresponding Yield Supplement Agreement.
STATUS OF REMIC CERTIFICATES. The REMIC Certificates will be "real estate
assets" for purposes of Section 856(c)(4)(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 (other than yield supplement
agreements). Similarly, income on the REMIC Certificates will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the limitations of the
preceding two sentences. In addition to Mortgage Assets, the REMIC's assets will
include payments on Mortgage Assets held pending distribution to holders of
REMIC Certificates, amounts in reserve accounts (if any), other credit
enhancements (if any) and possibly buydown funds ("Buydown Funds"). The Mortgage
Assets generally will be qualifying assets under the foregoing sections of the
Code except to the extent provided in the Prospectus Supplement. However,
Mortgage Assets that are not secured by residential real property or real
property used primarily for church purposes may not constitute qualifying assets
under Section 7701(a)(19)(C)(v) of the Code. In addition, to the extent that the
principal amount of a Mortgage Asset exceeds the value of the property securing
the Mortgage Asset, it is unclear and Federal Tax Counsel is unable to opine
whether the loans will be qualifying assets. The regulations under Sections 860A
through 860G of the Code (the "REMIC Regulations") treat credit enhancements as
part of the mortgage or pool of mortgages to which they relate, and therefore
credit enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid on Mortgage
Assets and held pending distribution to holders of Certificates ("cash flow
investments") will be treated as qualifying assets. It is unclear whether
amounts in a Reserve Account or Buydown Funds would also constitute qualifying
assets under any of those provisions. The Prospectus Supplement for each series
will indicate (if applicable) that it has Buydown Funds. The REMIC Certificates
will not be "residential loans" for the purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Federal Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
CURRENT INCOME ON REMIC REGULAR CERTIFICATES--GENERAL. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount---Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such as
a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Remittance Date (or in the case of the first such period, begins on
the Closing Date) and ends on the next succeeding Remittance Date. The original
issue discount accruing during each accrual period is then allocated ratably to
each day during such period to determine the daily portion of original issue
discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includible in the stated redemption price at maturity of
the REMIC Regular Certificate. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. Interest payments will not
qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Assets underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered. Accordingly, Federal Tax Counsel is unable to opine whether interest
payments on REMIC Regular Certificates that otherwise would not be treated as
having original issue discount would be considered to have original issue
discount because there are not reasonable remedies to compel timely payment of
interest or terms or conditions that would make the likelihood of late payment
or nonpayment remote.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Remittance
Dates but ends prior to each Remittance Date. Any interest that accrues prior to
the Closing Date may be treated under the OID Regulations either (i) as part of
the issue price and the stated redemption price at maturity of the REMIC Regular
Certificates or (ii) as not included in the issue price or the stated redemption
price. The OID Regulations provide a special application of the DE MINIMIS rule
for debt instruments with long first accrual periods where the interest payable
for the first period is at a rate which is effectively less than that which
applies in all other periods. In such cases, for the sole purpose of determining
whether original issue discount is DE MINIMIS, the OID Regulations provide that
the stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
VARIABLE RATE REMIC REGULAR CERTIFICATES. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "Variable Rate REMIC
Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified DE MINIMIS
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate REMIC
Regular Certificate will not constitute an objective rate if it is reasonably
expected that the average value of such rate during the first half of the
Variable Rate REMIC Regular Certificate's term will be either significantly less
than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates-Current Income
on REMIC Regular Certificates--Original Issue Discount" based on the following:
(i) stated interest on the Single Variable Rate REMIC Regular Certificate which
is unconditionally payable in cash or property (other than debt instruments of
the issuer) at least annually will constitute qualified stated interest; (ii) by
assuming that the variable rate on the Single Variable Rate REMIC Certificate is
a fixed rate equal to: (a) in the case of a Single Variable Rate REMIC Regular
Certificate with a qualified floating rate or a qualified inverse floating rate,
the value of, as of the issue date, of the qualified floating rate or the
qualified inverse floating rate or (b) in the case of a Single Variable Rate
REMIC Regular Certificate with an objective rate (other than a qualified inverse
floating rate), a fixed rate which reflects the reasonably expected yield for
such Single Variable Rate REMIC Regular Certificate; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted into
an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. Federal Tax Counsel is unable to opine how a Variable Rate REMIC
Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation, since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
INTEREST-ONLY REMIC REGULAR CERTIFICATES. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
MARKET DISCOUNT. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass Through Rate or Interest Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that all holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
SALES OF REMIC REGULAR CERTIFICATES. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate shortly following the REMIC's receipt
of the final payment in respect of the Mortgage Assets. The last distribution on
a REMIC Regular Certificate should be treated as a payment in full retirement of
a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Assets or as principal on the Mortgage Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS; EXCESS INCLUSIONS. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and discount income (or deductions for amortization of
premium) with respect to Mortgage Assets, on the one hand, and the timing of
deductions for interest (including original issue discount) on the REMIC Regular
Certificates, on the other. In the case of multiple classes of REMIC Regular
Certificates issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Assets may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Assets (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a Mortgage Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Mortgage Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would cause it to be subject to such tax. This provision will not affect the
REMIC's ability to accept substitute Mortgage Loans or to sell defective
Mortgage Loans in accordance with the Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust initially would be borne by the REMIC Residual Certificates in the
related REMIC rather than by the REMIC Regular Certificateholders, unless
otherwise specified in the Prospectus Supplement.
DEALERS' ABILITY TO MARK-TO-MARKET REMIC RESIDUAL CERTIFICATES. Treasury
regulations provide that all REMIC Residual Certificates acquired on or after
January 4, 1995, and similar interests or arrangements acquired on or after
January 4, 1995 that are determined by the Commissioner to have substantially
the same economic effect as a REMIC Residual Certificate, are not securities and
cannot be marked to market pursuant to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF A
REMIC RESIDUAL CERTIFICATE. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear and Federal Tax Counsel is unable to opine with
respect to this issue. The preamble to the REMIC Regulations indicates that the
Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity
cannot qualify as a REMIC absent reasonable arrangements designed to ensure that
(1) residual interests in such entity are not held by disqualified organizations
and (2) information necessary to calculate the tax due on transfers to
disqualified organizations (i.e., a computation of the present value of the
excess inclusions) is made available by the REMIC. The governing instruments of
a Trust will contain provisions designed to ensure the foregoing, and any
transferee of a REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC Residual Certificate is a disqualified
organization. In addition, as to the requirement that reasonable arrangements be
made to ensure that disqualified organizations do not hold a residual interest
in the REMIC, the REMIC Regulations require that notice of the prohibition be
provided either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below on pass-thru 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-thru entities" holding residual interests where a
disqualified organization is a record holder of an interest in the pass-thru
entity. "Pass-thru 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-thru
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.
For taxable years beginning after December 31, 1997, all partners of
certain electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "Foreign Investors"
below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trusts with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but
not including real estate investment trusts), the deductibility of such expenses
will be subject to the limitations described above. The reduction or
disallowance of these deductions may have a significant impact on the yield of
REMIC Regular Certificates to such a holder. In general terms, a single-class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single-class REMIC rules. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100 or
more partners and elects to be treated as an "electing large partnership," 70
percent of such partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners.
FOREIGN INVESTORS
REMIC REGULAR CERTIFICATES. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (a) a citizen or resident of the United States, (b) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (c) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (d) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (d), above, unless the trust elects to have its United
States status determined under the criteria set forth in (d) above for tax years
ending after August 20, 1996. Recently issued Treasury regulations (the "Final
Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
REMIC RESIDUAL CERTIFICATES. The Conference Report to the Tax Reform Act of
1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC Residual
Certificate will not be entitled to the portfolio interest exception from the
30% withholding tax (or to any treaty exemption or rate reduction) for that
portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Assets from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
GAIN ON TRANSFERS OF CERTIFICATES. A Certificateholder that is a
nonresident alien or foreign corporation will not be subject to United States
federal income tax on gain realized on the sale, exchange, or redemption of a
REMIC Certificate, provided that (i) such gain is not effectively connected with
a trade or business carried on by the Certificateholder in the United States,
(ii) in the case of a Certificateholder that is an individual, such
Certificateholder is not present in the United States for 183 days or more
during the taxable year in which such sale, exchange or redemption occurs and
(iii) in the case of gain representing accrued interest, the Certificateholder
complies to the extent necessary with certain identification requirements,
including timely delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such holder.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Representative or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES ISSUED BY A GRANTOR TRUST
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made and for which the Trust is
classified as a grantor trust for federal income tax purposes.
TAX STATUS OF THE TRUST. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel, will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Mortgage Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Mortgage Assets that is allocable to such
Non-REMIC Certificate and may deduct the portion of the expenses incurred by the
Trust that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Assets and received
directly its share of the payments on the Mortgage Assets and incurred directly
its share of expenses incurred by the Trust when those amounts are received or
incurred by the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the "applicable amount" ($100,000 (or
$50,000 in the case of a separate return by a married individual), adjusted for
changes in the cost of living subsequent to 1990) will be reduced by the lesser
of (i) 3 percent of the excess of adjusted gross income over the applicable
amount, or (ii) 80 percent of the amount of itemized deductions otherwise
allowable for such taxable year. Moreover, a holder of a Non-REMIC Certificate
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Loans. As
a result, individuals, estates, or trusts holding Non-REMIC Certificates may
have taxable income in excess of the cash received.
STATUS OF THE NON-REMIC CERTIFICATES. The Non-REMIC Certificates generally
will be "real estate assets" for purposes of Section 856(c)(4)(A) of the Code
and "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, and interest income on the Non-REMIC
Certificates generally will be "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code. However,
the Non-REMIC Certificates may not be qualifying assets under any of the
foregoing sections of the Code to the extent that the Trust's assets include
Buydown Funds, amounts in a Reserve Account, or payments on mortgages held
pending distribution to Certificateholders. Further, the Non-REMIC Certificates
may not be "real estate assets" to the extent loans held by the trust are not
secured by real property, and may not be "loans . . . secured by an interest in
real property" to the extent loans held by the trust are not secured by
residential real property or real property used primarily for church purposes.
In addition, to the extent that the principal amount of a loan exceeds the value
of the property securing the loan, it is unclear and Federal Tax Counsel is
unable to opine whether the loan will be a qualifying asset. The Non-REMIC
Certificates should not be "residential loans made by the taxpayer" for purposes
of the residential loan requirement of Section 593(g)(4)(B) of the Code.
TAXATION OF NON-REMIC CERTIFICATES UNDER STRIPPED BOND RULES. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Mortgage Loans and
should be characterized for federal income tax purposes as an ownership interest
in the Mortgage Loans. The Internal Revenue Service has taken the position in
Revenue Ruling 91-46 that retained interest in excess of reasonable compensation
for servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate (other than an interest treated as a "stripped coupon") as market
discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount DE MINIMIS rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates.
Section 1272(a)(6) of the Code provides for use of a prepayment assumption
in determining original issue discount for any pool of debt instruments the
yield on which may be affected by reason of prepayments. Therefore, if there is
original issue discount, the holder of a Non-REMIC Certificate (whether a cash
or accrual method taxpayer) will be required to report interest income from the
Non-REMIC Certificate in each taxable year equal to the income that accrues on
the Non-REMIC Certificate in that year calculated under a constant yield method
based on the yield of the Non-REMIC Certificate (or, possibly, the yield of each
Mortgage Asset underlying such Non-REMIC Certificate) to such holder. Such yield
would be computed at the rate that, if used in discounting the holder's share of
the payments on the Mortgage Assets, would cause the present value of those
payments to equal the price at which the holder purchased the Non-REMIC
Certificate. If required to report interest income on the Non-REMIC Certificates
to the Internal Revenue Service under the stripped bond rules, it is anticipated
that the Trustee will calculate the yield of the Non-REMIC Certificates based on
a representative initial offering price of the Non-REMIC Certificates and a
reasonable assumed rate of prepayment of the Mortgage Assets (although such
yield may differ from the yield to any particular holder that would be used in
calculating the interest income of such holder). The Prospectus Supplement for
each series of Non-REMIC Certificates will describe the prepayment assumption
that will be used for this purpose, but no representation is made that the
Mortgage Assets will prepay at that rate or at any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption would not have any significant
effect on the yield used in calculating accruals of interest income. In the
case, however, of a Non-REMIC Certificate acquired at a discount or premium
(that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "Sales of Non-REMIC Certificates" below) that is allocable to the Mortgage
Loan. The method of allocating such basis among the Mortgage Loans may differ
depending on whether a reasonable prepayment assumption is used in calculating
the yield of the Non-REMIC Certificates for purposes of accruing original issue
discount. It is not clear whether any other adjustments would be required to
reflect differences between the prepayment rate that was assumed in calculating
yield and the actual rate of prepayments.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Assets held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-REMIC
Certificate that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
TAXATION OF NON-REMIC CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY. If
the stripped bond rules do not apply to a Non-REMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Assets in accordance with its tax accounting method. In addition, if
the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below. The treatment of any discount will depend on whether the
discount is original issue discount as defined in the Code and, in the case of
discount other than original issue discount, whether such other discount exceeds
a DE MINIMIS amount. In the case of original issue discount, the holder (whether
a cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Mortgage Assets. However, original issue discount could arise with respect
to a Mortgage Loan ("ARM") that provides for interest at a rate equal to the sum
of an index of market interest rates and a fixed number. The original issue
discount for ARMs generally will be determined under the principles discussed in
"REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates."
If discount other than original issue discount exceeds a DE MINIMIS amount
(described below), the holder will also generally be required to include in
income in each month the amount of such discount accrued through such month and
not previously included in income, but limited, with respect to the portion of
such discount allocable to any Mortgage Asset, to the amount of principal on
such Mortgage Asset received by the Trust in that month. Because the Mortgage
Assets will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues (and therefore at a rate not
significantly slower than the rate at which such discount would be included in
income if it were original issue discount). The holder may elect to accrue such
discount under a constant yield method based on the yield of the Non-REMIC
Certificate to such holder. In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method. Under
the DE MINIMIS rule, market discount with respect to a Non-REMIC Certificate
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate
and (ii) the weighted average life (in complete years) of the Mortgage Assets
remaining at the time of purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Mortgage Loan under a constant yield method based on the yield
of the Mortgage Loan to such holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage Loan and allowed as an ordinary deduction as principal
payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan. The
method of allocating such basis among the Mortgage Loans may differ depending on
whether a reasonable prepayment assumption is used in calculating the yield of
the Non-REMIC Certificates for purposes of accruing original issue discount.
Other adjustments might be required to reflect differences between the
prepayment rate that was assumed in accounting for discount or premium and the
actual rate of prepayments.
SALES OF NON-REMIC CERTIFICATES. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a DE
MINIMIS amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
FOREIGN INVESTORS. A holder of a Non-REMIC Certificate who is not a "United
States person" (as defined below) and is not subject to federal income tax as a
result of any direct or indirect connection to the United States other than its
ownership of a Non-REMIC Certificate generally will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-REMIC Certificate to the extent attributable to Mortgage
Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Treasury Regulations (the "Final Withholding Regulations"), which are generally
effective with respect to payments made after December 31, 1999, consolidate and
modify the current certification requirements and means by which a holder may
claim exemption from United States federal income tax withholding and provide
certain presumptions regarding the status of holders when payments to the
holders cannot be reliably associated with appropriate documentation provided to
the payor. All holders should consult their tax advisors regarding the
application of the final Withholding Regulations. Interest or original issue
discount on a Non-REMIC Certificate attributable to Mortgage Loans that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). For
these purposes, the term "United States person" means a citizen or a resident of
the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, and a trust for which one or
more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "United States person" shall include a trust whose income is
includible in gross income for United States federal income taxation regardless
of source, in lieu of trusts just described, unless the trust elects to have its
United States status determined under the criteria described in the previous
sentence for tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "taxable
mortgage pool" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC (or, after September 1, 1997, a
FASIT) (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.
NON-REMIC CERTIFICATES AND NOTES OF A TRUST INTENDED TO BE CHARACTERIZED AS A
PARTNERSHIP OR DIVISION
The discussion under this heading applies only to a series of Certificates
and Notes with respect to which a REMIC election is not made and for which the
Trust is intended to be classified as a partnership or a division for federal
income tax purposes.
Federal Tax Counsel will deliver its opinion for a Trust which is intended
to be a partnership for federal income tax purposes, as specified in the related
Prospectus Supplement, generally to the effect that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Agreements and related documents will be complied with, such
that an election has not been and will not be made to treat the Trust as an
association taxable as a corporation, and on counsel's conclusion that the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or such rule is
otherwise inapplicable to the Trust, so that the Trust will not be characterized
as a publicly traded partnership taxable as a corporation, assuming that no
action will be taken that is inconsistent with the treatment of the Trust as a
partnership (such as an election to treat the Trust as a corporation for federal
income tax purposes ("Corporation Election")). If, however, the Trust has a
single owner for federal income tax purposes, it will be treated as a division
of its owner and as such will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming that no Corporate Election is
made.
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 (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists 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 the Trust were treated as a taxable mortgage pool, it 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. Federal Tax Counsel will
deliver its opinion for a Trust which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust will not be a taxable mortgage pool. This
opinion will be based on the assumption that the terms of the Agreements and
related documents will be complied with, and on counsel's conclusion that either
the number of classes of debt obligations issued be the Trust, or the nature of
the assets held by the Trust, will exempt the Trust from treatment as a taxable
mortgage pool.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income, possibly reduced by its
interest expense on the Notes. Any such corporate income tax could materially
reduce cash available to make payments on the Notes and distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust. In additions, all distributions to the Certificateholders
would be taxable as dividends.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Representative that
in its opinion the Notes will be classified as debt for federal income tax
purposes.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of counsel, the IRS successfully asserted that one or more of the Notes did not
represent debt for federal income tax purposes, the Notes might be treated as
equity interests in the Trust. If so treated, the Trust might be taxable as a
corporation with the adverse consequences described above (and the taxable
corporation would not be able to reduce its taxable income by deductions for
interest expense on Notes recharacterized as equity). Alternatively, the Trust
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
foreign holders generally would be subject to United States federal income tax
and United States federal income tax return filing and withholding requirements,
and individual holders might be subject to certain limitations on their ability
to deduct their share of the Trust's expenses.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with original issue discount within
the meaning of Section 1273 of the Code. A subsequent holder who purchases a
Note at a discount that exceeds a statutorily defined de minimis amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any original issue discount (if any), market
discount and gain previously included by such Noteholder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
Noteholder with respect to such Note. Subject to the rules of the Code
concerning market discount on the Notes, any such gain or loss generally will be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be deducted only to the extent the Noteholder has capital gains
for the taxable year, although under certain circumstances non-corporate
Noteholders can deduct losses in excess of available capital gains.
FOREIGN HOLDERS. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Representative (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Representative is a "related person" within the meaning of the Code and (ii)
provides the person otherwise required to withhold United States tax with an
appropriate statement, signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the withholding agent. However, in
that case, the signed statement must be accompanies by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest in not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-United States holder may
claim exemption from United States federal income tax withholding. All
Non-United States holders should consult their tax advisors regarding the
application of the Final Withholding Regulations, which are generally effective
with respect to payments made after December 31, 1999.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Trust will be required to
report annually to the IRS, and to each Noteholder of record, the amount of
interest paid on the Notes (and the amount of interest withheld for federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, tax-exempt organizations, qualified
pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS, as a credit against the holder's federal income tax liability.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE ISSUER AS A PARTNERSHIP. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Representative will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
United States federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Generally, provided the
Certificates are issued at or close to face value, any such characterization
should not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity in
a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, original issue discount
and bond premium) and any gain upon collection or disposition of Mortgage Loans.
The Trust's deductions will consist primarily of interest and original issue
discount accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Mortgage Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Mortgage Loans that corresponds to any excess of the issue price
of Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Representative. Based on the economic arrangement
of the parties, this approach for allocating Trust income should be permissible
under applicable Treasury regulations, although no assurance can be given that
the IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Mortgage Loans were not
issued with original issue discount and, therefore, the Trust should not have
original issue discount income. However, the purchase price paid by the Trust
for the Mortgage Loans may be greater or less than the remaining principal
balance of the Mortgage Loans at the time of purchase. If so, the Mortgage Loan
will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust will make this calculation on an aggregate basis, but
might be required to recompute it on a Mortgage Loan by Mortgage Loan basis.)
If the Trust acquires the Mortgage Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage Loans. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership, which it would then be treated
as transferring to its partners. The Trust will not comply with certain
technical requirements that might apply when such a constructive termination
occurs. As a result, the Trust may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN REPRESENTATIVE AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Trust might be
reallocated among the Certificateholders. The Trust's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Representative will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear and federal
tax counsel is unable to opine whether the Trust would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-United States persons because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust would be
engaged in a trade or business in the United States for such purposes, the Trust
will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a United States trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If the trust is engaged in a United States trade or business, each foreign
holder might be required to file a United States individual or corporate income
tax return (including, in the case of a corporation, the branch profits tax) on
its share of the Trust's income. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the Trust
taking the position that no taxes were due because the Trust was not engaged in
a United States trade or business. However, interest payments made (or accrued)
to a Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust, and for that reason or because of the nature of the
assets of the Trust probably will not be considered "portfolio interest." As a
result, even if the Trust was not considered to be engaged in a United States
trade or business, Certificateholders will be subject to United States federal
income tax which must be withheld at a rate of 30%, unless reduced or eliminated
pursuant to an applicable treaty. A foreign holder would be entitled to claim a
refund for such withheld tax, taking the position that the interest was
portfolio interest and therefore not subject to United States tax. However, the
IRS may disagree and no assurance can be given as to the appropriate amount of
tax liability. As a result, each potential foreign Certificateholder should
consult its tax advisor as to whether an interest in a Certificate is an
unsuitable investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
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 Security 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 Security 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 Securities 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
U.S. Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulations"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the Mortgage Loans and any other assets of the Trust and not merely
an interest in the Securities, 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 Security 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 Securities or to the servicing
of the Mortgage Loans are noted below.
Regardless of whether the Securities are treated as debt or equity for
purposes of ERISA, the acquisition or holding of Securities which are Notes by
or behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Trust is or becomes a party in interest or disqualified
person with respect to such Plan or in the event that a subsequent transfer of a
Note is made between a Plan and such party in interest or disqualified person.
However, one or more Investor Based Exemptions referred to below may be
applicable to exempt such prohibited transaction.
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts
from the application of the prohibited transaction rules of ERISA and the excise
tax provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass-through certificates." A "mortgage pool" is
defined as an investment pool, consisting solely of interest bearing obligations
secured by first or second mortgages or deeds of trust on single-family
residential property, property acquired in foreclosure and undistributed cash. A
"mortgage pool pass-through certificate" is defined as a certificate which
represents a beneficial undivided interest in a mortgage pool which entitles the
holder to pass-through payments of principal and interest from the mortgage
loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Representative
and the Trustee maintain a system of insurance or other protection for the
Mortgage Loans and the property securing such Mortgage Loans, and for
indemnifying Certificateholders (except holders of the Class R Certificates)
against reductions in pass-through payments due to defaults in loan payments or
property damage in an amount at least equal to the greater of 1% of the
aggregate principal balance of the Mortgage Loans, or 1% of the principal
balance of the largest covered pooled Mortgage Loan; (ii) the Trustee may not be
an affiliate of the Representative; and (iii) the payments made to and retained
by the Representative in connection with the Trust, together with all funds
inuring to its benefit for administering the Trust, represent no more than
"adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Securities to a Plan
with respect to which the Representative, the Security 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 Securities and the rights and interests
evidenced by such Securities are not subordinated to the rights and interests
evidenced by other Securities 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 Security 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 Securities is expressly approved by an independent
fiduciary who has authority to manage and control those plan assets being
invested in Securities; (ii) the Plan pays no more for the Securities 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 Securities to
the Plan; (iv) the total value of the Securities purchased by such Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Securities is acquired by persons independent of the Representative, the
Trustee, the Servicer, and the Security Guaranty Insurer.
Before purchasing Securities, a fiduciary of a Plan should confirm that the
Trust is a "mortgage pool," that the Securities 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 Securities on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions (each an "Underwriter
Exemption") 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 Underwriter
Exemption which may be applicable to the Securities. The conditions of
Underwriter Exemption, if applicable, will be set forth in "ERISA
Considerations" in the Prospectus Supplement.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Securities, depending in part upon the type
of Plan fiduciary making the decision to acquire a Security 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, PTCE
84-14, regarding investments effectuated by "qualified plan asset managers",
PTCE 96-23, regarding investments effectuated by "in-house asset managers" and
PTCE 95-60, regarding investments by insurance company general accounts
("Investor Based Exemptions"). However, even if the conditions specified in an
Underwriter 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 Security 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 Securities 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 Securities offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Securities 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 Securities
as legal investments for such purchasers prior to investing in any Class of
Securities.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets, a division of Wheat First Securities, Inc.
("First Union Capital Markets"), an affiliate of the Representative, acting as
underwriter with other underwriters, if any, named therein. In such event, the
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Representative. In connection
with the sale of the Securities, underwriters may receive compensation from the
Representative or from purchasers of the Securities in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Representative.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by First Union Capital Markets acting as agent or in some
cases as principal with respect to the Securities that it has previously
purchased or agreed to purchase. If First Union Capital Markets acts as agent in
the sale of Securities, First Union Capital Markets will receive a selling
commission with respect to each Series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
Securities sold hereunder as of the Cut-off Date. The exact percentage for each
Series of Securities will be disclosed in the related Prospectus Supplement. To
the extent that First Union Capital Markets elects to purchase Securities as
principal, First Union Capital Markets may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Representative and purchasers of
Securities of each Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets, an affiliate of the Representative, in connection with
offers and sales related to market-making transactions in the Securities. First
Union Capital Markets may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
The Representative shall indemnify First Union Capital Markets and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets and any underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets and the
Representative may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the
Representative's Mortgage Loans pending the sale of such Mortgage Loans or
interests therein, including the Securities.
The Representative anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisers in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, the
Representative, its affiliates and the Trustee in the ordinary course of
business.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Securities of each Series will be passed upon for the Representative by Stroock
& Stroock & Lavan LLP, New York, New York and certain legal matters relating to
the validity of the issuance of the Securities of each Series will be passed
upon for the Underwriters of the Securities of each Series by Kilpatrick
Stockton LLP, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new Trust will be formed to own the Mortgage Assets and to issue each
Series of Securities. Each such Trust will have no assets or obligations prior
to the issuance of the Securities 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 Securities 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 securities address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities 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, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through securities in extreme cases might fail to recoup their underlying
investments.
A rating of a security is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
Adjustable Rate..................................................... 7
Adjusted Mortgage Loan Remittance Rate.............................. 53
Agency Securities................................................... 7
Agreement........................................................... 6
APR................................................................. 10
ARM................................................................. 101
Auction Rate Securities............................................. 3
Available Remittance Amount......................................... 65
Balloon Loans....................................................... 25
Bankruptcy Bond..................................................... 17
Basis Risk Shortfall................................................ 83
Buydown Funds....................................................... 84
Cede................................................................ 5
Certificate......................................................... 1
Certificateholders.................................................. 1
Class............................................................... 1
Cleanup Costs....................................................... 83
CMOs................................................................ 10
Code................................................................ 21
Commission.......................................................... 4
Compensating Interest............................................... 20
Contingency Fees.................................................... 64
Contracts........................................................... 7
Conventional Loans.................................................. 7
Cooperative Loans................................................... 7
Cooperatives........................................................ 7
Curtailment......................................................... 20
Custodian........................................................... 64
Cut-off Date........................................................ 48
Designated Depository Institution................................... 65
Detailed Description................................................ 30
Determination Date.................................................. 20
Distribution Account................................................ 65
DTC................................................................. 5
Due Period.......................................................... 65
ERISA............................................................... 23
Event of Nonpayment................................................. 69
Federal Tax Counsel................................................. 21
FHA................................................................. 7
FHA Loans........................................................... 7
FHLMC............................................................... 10
Final Determination................................................. 70
Fixed Rate.......................................................... 7
FNMA................................................................ 7
FTC Rule............................................................ 80
Funding Period...................................................... 11
Garn-St. Germain Act................................................ 81
GNMA................................................................ 7
Guaranty Insurance Policy........................................... 16
Home Equity Loans................................................... 32
HUD................................................................. 9
Indirect Participant................................................ 54
Insurance Proceeds.................................................. 20
Insurance Paying Agent.............................................. 57
Insured Payment..................................................... 57
Interest Period..................................................... 53
Interest Rate....................................................... 3
IRS................................................................. 70
LIBOR............................................................... 3
Liquidation Proceeds................................................ 20
Loan-to-Value Ratio................................................. 32
Lockout Periods..................................................... 8
Lower Tier REMIC.................................................... 93
Majority Securityholders............................................ 68
Manufactured Homes.................................................. 35
Manufacturer's Invoice Price........................................ 32
Master Servicer..................................................... 1
Monthly Advance..................................................... 20
Mortgage Asset Schedule............................................. 30
Mortgage Assets..................................................... 1
Mortgage Interest Rate.............................................. 7
Mortgage Loans...................................................... 7
Mortgage Pool Insurance Policy...................................... 17
Mortgaged Properties................................................ 8
Multifamily Loans................................................... 7
NHA Act............................................................. 35
1933 Act............................................................ 4
Non-REMIC Certificates.............................................. 22
Noteholders......................................................... 1
Notes............................................................... 1
Opinion of Counsel.................................................. 64
Originators......................................................... 1
Participants........................................................ 54
Pass-Through Rate................................................... 3
Permitted Instruments............................................... 65
Permitted Investments............................................... 60
Plan................................................................ 109
PMBS................................................................ 7
PMBS Agreement...................................................... 42
PMBS Issuer......................................................... 11
PMBS Servicer....................................................... 11
PMBS Trustee........................................................ 11
Pool................................................................ 1
Pool Insurer........................................................ 58
Pre-Funding Account................................................. 11
Prepayment Assumption............................................... 86
Principal and Interest Account...................................... 65
Principal Prepayment Period........................................ 51
Principal Prepayment................................................ 20
Qualified Substitute Mortgage Loan.................................. 64
Rating Agency....................................................... 18
REIT ............................................................... 94
Relief Act.......................................................... 29
REMIC............................................................... 3
REMIC Certificates.................................................. 83
REMIC Regular Certificates.......................................... 21
REMIC Residual Certificates......................................... 21
REMIC Regulations................................................... 84
Remittance Date..................................................... 3
Representative...................................................... 1
Reserve Account..................................................... 16
Secured Conventional Home Improvement Loans......................... 7
Security Guaranty Insurer........................................... 57
Security Register................................................... 50
Senior Certificates................................................. 13
Senior Notes........................................................ 15
Servicing Advance................................................... 66
Servicing Fees...................................................... 64
Single Family Loans................................................. 7
SMMEA............................................................... 23
Special Hazard Insurance Policy..................................... 17
Special Hazard Insurer.............................................. 59
Spread Amount....................................................... 17
Standard Hazard Insurance Policies.................................. 8
Subordinated Certificates........................................... 13
Subordinated Notes.................................................. 15
Sub-Servicer........................................................ 68
Substitution Adjustment............................................. 64
Successor Servicer.................................................. 69
Superlien........................................................... 83
Supplemental Interest Payments...................................... 60
T-Bill Rate......................................................... 3
Termination Notice.................................................. 70
Termination Price................................................... 70
Tiered REMICs....................................................... 84
Title I Loan Program................................................ 9
Title I Property Improvement Loans.................................. 35
Title V............................................................. 81
Trust .............................................................. 1
Trustee............................................................. 21
Trustee's Mortgage File............................................. 64
UCC................................................................. 54
Underwriters........................................................ 111
United States person................................................ 97
Unsecured Home Improvement Loans.................................... 7
VA.................................................................. 7
Variable Rate Non-REMIC Certificates................................ 101
Variable Rate REMIC Regular Certificates............................ 85
Yield Supplement Agreement.....L.................................... 83
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each Class
of Auction Rate Securities (and may be different if otherwise set forth in a
related Prospectus Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Securities that are either Notes or
Certificates and the term "Securityholder" refers to Holders of Auction Rate
Securities.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR or such other
rate as may be set forth in the related Prospectus Supplement.
"Auction" means the implementation of the Auction Procedures on an Auction
Date.
"Auction Agent" means the initial auction agent under the initial Auction
Agent Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement unless
and until a substitute Auction Agent Agreement is entered into, after which
"Auction Agent Agreement" shall mean such substitute Auction Agent Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Auction Date" means, with respect to the Initial Period for each Class of
Securities, the date set forth in the related Prospectus Supplement and
thereafter, the Business Day immediately preceding the first day of each Auction
Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the
Securities is no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance
of an Event of Default; or
(C) each Auction Period commencing less than two Business Days
after the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the related Agreement and the related Terms
Supplement, as described herein.
"Auction Period" means, with respect to each Security, the Interest Period
applicable to such Security during which time the applicable Security Interest
Rate is determined pursuant to the related Agreement and the related Terms
Supplement, which Auction Period (after the Initial Period for such Security)
initially shall consist of between 7 days and one year (as set forth in the
related Prospectus Supplement), as the same may be adjusted pursuant to such
related Agreement and the related Terms Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the related Terms Supplement, as described herein.
"Auction Procedures" means the procedures set forth in the related Terms
Supplement and described herein by which the Auction Rate applicable to a
Security is determined.
"Auction Rate" means, with respect to any Security, the rate of interest
per annum that results from the implementation of the Auction Procedures and is
determined as described in the related Agreement and the related Terms
Supplement and this Appendix I.
"Authorized Denominations" means, the dollar amount set forth in the
related Prospectus Supplement and any integral multiple in excess thereof.
"Broker-Dealer" means the initial broker-dealer under the initial
Broker-Dealer Agreement or any other broker or dealer (each as defined in the
Securities Exchange Act of 1934, as amended), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set forth
in the Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Representative and the
Trustee pursuant to the related Agreement and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction Agent
and a Broker-Dealer, and approved by Representative and the Trust, pursuant to
which the Broker-Dealer agrees to participate in Auctions as set forth in the
Auction Procedures, as from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Effective Interest Rate" means, for any Mortgage Loan and any collection
period, the per annum rate at which such Mortgage Loan accrues interest during
such collection period.
"Existing Securityholder" means (i) with respect to and for the purpose of
dealing with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Securityholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Security.
"Existing Securityholder Registry" means the registry of Persons who are
owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal
funds (effective) rate as published on page 118 of the Dow Jones Telerate
Service (or such other page as may replace that page on that service for the
purpose of displaying comparable rates or prices) on the immediately preceding
Business Day. If no such rate is published on such page on such date, "Federal
Funds Rate" shall mean for any date of determination, the Federal funds
(effective) rate as published by the Federal Reserve Board in the most recent
edition of Federal Reserve Statistical Release No. H.15 (519) that is available
on the Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on the
Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial Period for
such Security and each period commencing on the Rate Adjustment Date for such
Security and ending on the day before (i) the next Rate Adjustment Date for such
Security or (ii) the final maturity date of such Security, as applicable.
"Market Agent" means the entity named as market agent under the related
Agreement, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34 days
or less, either (A) the greater of (1) One-Month LIBOR plus 0.60% or (2) the
Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating Agencies
to the applicable Security are "Aa3" or "AA-" or better) or (B) One-Month LIBOR
plus 1.50% (if any one of the ratings assigned by the Rating Agencies to the
Security is less than "Aa3" or "AA-") or (ii) for Auction Periods of greater
than or equal to 35 days, either (A) the greater of One-Month LIBOR or
Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings assigned
by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or better)
or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in either case,
1.50% (if any one of the ratings assigned by the Rating Agencies to the
applicable Security is less than "Aa3" or "AA-") or such other rate as may be
set forth in the related Prospectus Supplement. For purposes of the Auction
Agent and the Auction Procedures, the ratings referred to in this definition
shall be the last ratings of which the Auction Agent has been given notice
pursuant to the Auction Agent Agreement.
"Net Loan Rate" for any Interest Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Period less the amount set forth in the related Prospectus Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may be
adjusted pursuant to a Terms Supplement or such other rate as may be set forth
in the related Prospectus Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date on
which the applicable Security Interest Rate is effective and means, with respect
to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the Auction
Date, or if no Auction Date is applicable to such Series, the Business Day
immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, with respect to any Class of Notes or
Certificates, the rate identified as such in the related Prospectus Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any Class of
Notes, the date identified as such in the related Prospectus Supplement and,
with respect to any Class of Certificates, the date set forth in the related
Agreement or the related Terms Supplement.
"Three-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three-Month Index Maturity") which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the Three Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Three Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable Interest Period will be Three-Month LIBOR in
effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing Securityholders,"
which shall mean any Securityholder according to the records of the Auction
Agent at the close of business on the Business Day preceding each Auction Date;
and (ii) "Potential Securityholders," which shall mean any person, including any
Existing Securityholder or a Broker/Dealer, who may be interested in acquiring
Securities (or, in the case of an Existing Securityholder, an additional
principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be subject to
probation procedures on the Auction Date. Each purchase or sale of Securities on
the Auction Date will be made for settlement on the first day of the Interest
Period immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
AUCTION AGENT
The entity named in the related Prospectus Supplement, will be appointed as
Auction Agent to serve as agent for a Trust in connection with Auctions. The
Trustee and the Representative will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Trustee and the Market Agent in writing and having a
combined capital stock or surplus of at least $50,000,000, or (ii) a member of
the National Association of Securities Dealers, Inc. having a capitalization of
at least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed upon it under the related Agreement and under the Auction Agent
Agreement. The Auction Agent may at any time resign and be discharged of the
duties and obligations created by the related Agreement by giving at least 90
days notice to the Trustee, the Trust, the Representative and the Market Agent.
The Auction Agent may be removed at any time by the Trustee upon the written
direction of the Security Guaranty Insurer, if applicable, or, with the consent
of the Security Guaranty Insurer, if applicable, the Securityholders of 66B% of
the aggregate principal amount of the Securities then outstanding, by an
instrument signed by the Security Guaranty Insurer, if applicable, or such
Securityholders or their attorneys and filed with the Auction Agent, the
Representative, the Trustee and the Market Agent upon at least 90 days' notice.
Neither resignation nor removal of the Auction Agent pursuant to the preceding
two sentences will be effective until and unless a Substitute Auction Agent has
been appointed and has accepted such appointment. If required by the Trust or
the Representative or by the Market Agent, with the Trust's and the
Representative's consent, a Substitute Auction Agent Agreement shall be entered
into with a Substitute Auction Agent. Notwithstanding the foregoing, the Auction
Agent may terminate the Auction Agent Agreement if, within 25 days after
notifying the Trustee, the Trust, the Representative, the Security Guaranty
Insurer, if applicable, and the Market Agent in writing that it has not received
payment of any Auction Agent Fee due it in accordance with the terms of the
Auction Agent Agreement, the Auction Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Representative (after receipt of a certificate from the Market Agent confirming
that any proposed Substitute Auction Agent meets the requirements described in
the immediately preceding paragraph above), shall use its best efforts to
appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on the Note
Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement, and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). The Trust will indemnify
and hold harmless the Auction Agent for and against any loss, liability or
expense incurred without negligence or bad faith on the Auction Agent's part,
arising out of or in connection with the acceptance or administration of its
agency under the Auction Agent Agreement and the Broker-Dealer Agreements
including the reasonable costs and expenses (including the reasonable fees and
expenses of its counsel) of defending itself against any such claim or liability
in connection with its exercise or performance of any of its respective duties
thereunder and of enforcing this indemnification provision; provided that the
Trust will not indemnify the Auction Agent as described in this paragraph for
any fees and expenses incurred by the Auction Agent in the normal course of
performing its duties under the Auction Agent Agreement and under the
Broker-Dealer Agreements, such fees and expenses being payable as described
above.
BROKER-DEALER
Existing Securityholders and Potential Securityholders may participate in
Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by
the Auction Agent from monies received from the Trustee, on the Note Remittance
Date or Certificate Remittance Date set forth in the related Prospectus
Supplement.
MARKET AGENT
In connection with each Series of Notes and the Certificates, the "Market
Agent," will act solely as agent of the Trust and will not assume any obligation
or relationship of agency or trust for or with any of the Securityholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Agreement and the related Terms Supplement,
Auctions to establish the Auction Rate for each Security issued by the Trust
will be held on each applicable Auction Date, except as described below, by
application of the Auction Procedures described herein. Such procedures are to
be applicable separately to each Class of Notes and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each
Auction Date. The Administrator will calculate and, no later than the Business
Day preceding each Auction Date, will report to the Auction Agent in writing,
the Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, and
Administrator will report to the Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If an Event of Default has occurred,
under the Indenture or the Pooling and Servicing Agreement, as applicable, the
Trustee will calculate the Non-Payment Rate on the Rate Determination Date for
(i) each Interest Period commencing after the occurrence and during the
continuance of such Payment Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Event of Default. The Auction Agent
will determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Period other than the Initial Period for a Security; provided, that if
the ownership of the Securities is no longer maintained in Book-Entry Form, or
if an Event of Default has occurred, then the Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Period. The determination by the Trustee or the Auction Agent, as the case may
be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the
absence of manifest error) be final and binding upon the Securityholders and all
other parties. If calculated or determined by the Auction Agent, the Auction
Agent will promptly advise the Trustee of the One-Month LIBOR or the
Three-Month LIBOR, as applicable.
SUBMISSION OF ORDERS
So long as the ownership of the Securities is maintained in Book-Entry
Form, an Existing Securityholder may sell, transfer or otherwise dispose of
Securities only pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction or through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Securityholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Notes and each Class of Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner (such procedures to be applicable
separately to each Class of Notes and each Class of Certificates).
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time) on each Auction Date relating to a Security:
(a) each Existing Securityholder of the applicable Security may submit to a
Broker-Dealer by telephone or otherwise information as to: (i) the principal
amount and Class of outstanding Securities, if any, held by such Existing
Securityholder which such Existing Securityholder desires to continue to hold
without regard to the Security Interest Rate for such Securities for the next
succeeding Auction Period (a "Hold Order"); (ii) the principal amount and Class
of outstanding Securities, if any, which such Existing Securityholder offers to
sell if the Security Interest Rate for such Securities for the next succeeding
Auction Period will be less than the rate per annum specified by such Existing
Securityholder (a "Bid"); and/or (iii) the principal amount and Class of
outstanding Securities, if any, held by such Existing Securityholder which such
Existing Securityholder offers to sell without regard to the Security Interest
Rate for such Securities for the next succeeding Auction Period (a "Sell
Order"); and
(b) one or more Broker-Dealers may contact Potential Securityholders to
determine the principal amount and Class of Securities which each such Potential
Securityholder offers to purchase, if the Security Interest Rate for such
Securities for the next succeeding Auction Period will not be less than the rate
per annum specified by such Potential Securityholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Securityholder will constitute an irrevocable offer to sell: (i)
the principal amount and Class of the outstanding Securities specified in such
Bid if the Security Interest Rate for such Securities will be less than the rate
specified in such Bid, (ii) such principal amount or a lesser principal amount
and Class of the outstanding Securities to be determined as described below in
"Acceptance and Rejection of Orders," if the Security Interest Rate for such
Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Security specified in such Sell Order or
(ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security as described below under "Acceptance and
Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Securityholder will constitute an irrevocable offer to purchase:
(i) the principal amount of the Security specified in such Bid if the Security
Interest Rate for such Securities will be higher than the rate specified in such
Bid or (ii) such principal amount or a lesser principal amount of such
Securities as described below in "Acceptance and Rejection of Orders," if the
Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and Class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and Class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and Class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and Class of Securities, if any,
subject to any Sell Order placed by such Existing Securityholder, and (iv) to
the extent such Bidder is a Potential Securityholder, the rate specified in such
Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable Class held
by any Existing Securityholder are not submitted to the Auction Agent prior to
the Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Representative, the Trustee nor the Auction Agent
will be responsible for any failure of a Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Securityholder or Potential
Securityholder.
An Existing Securityholder may submit multiple Orders, of different types
and specifying different rates, in an Auction with respect to Securities then
held by such Existing Securityholder. An Existing Securityholder that offers to
purchase additional Securities is, for purposes of such offer, treated as a
Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Securityholder and (ii) not
be accepted if submitted by a Potential Securityholder.
VALIDITY OF ORDERS
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the Class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the Class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the Class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the Class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the Class of Securities held by such Existing Securityholder.
BIDS. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount equal
to the excess of the principal amount of Securities of the Class held by such
Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a Class of Security is submitted on behalf of any
Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total principal amount
of such Securities over the sum of the aggregate principal amount of such
Securities subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal amount of
Securities of such Class subject to Submitted Bids by Potential Securityholders
specifying one or more rates equal to or lower than the Maximum Auction Rate
exceeds or is equal to the sum of (i) the aggregate principal amount of
Securities of such Class subject to Submitted Bids by Existing Securityholders
specifying one or more rates higher than the Maximum Auction Rate and (ii) the
aggregate principal amount of Securities of such Class subject to Submitted Sell
Orders (in the event such excess or such equality exists other than because all
of the Securities are subject to Submitted Hold Orders, such Submitted Bids by
Potential Securityholders above will be hereinafter referred to collectively as
"Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be the
lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Existing Securityholders of
such Security specifying lower rates were rejected (thus
entitling such Existing Securityholders to continue to hold the
principal amount of Securities subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Potential Securityholders
specifying lower rates, were accepted, the result would be that
such Existing Securityholders described in subparagraph (c)(i)
above would continue to hold an aggregate principal amount of
Securities which, when added to the aggregate principal amount
of Securities to be purchased by such Potential Securityholders
described in this subparagraph (ii) would equal not less than
the Available Securities.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Interest Period for the applicable Security as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next succeeding
Interest Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Securities of the applicable Security are subject to Submitted Hold Orders),
that the Auction Rate for the next succeeding Interest Period will be equal to
the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to Submitted
Hold Orders, that the Auction Rate for the next succeeding Interest Period will
be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Security Interest
Rate for each applicable Security, which rate will be the lesser of (a) the
Auction Rate for each such Security and (b) the Net Loan Rate. In no event shall
a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Securityholders of the applicable Security will continue to hold
the principal amount of Securities of such Class that are subject to Submitted
Hold Orders. If, with respect to a Security, the Net Loan Rate is equal to or
greater than the Bid Auction Rate and if Sufficient Bids, as described above
under "Determination of Sufficient Bids and Bid Auction Rate," have been
received by the Auction Agent, the Bid Auction Rate will be the Security
Interest Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in the
related Agreement and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security Interest
Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are
both greater than the Security Interest Rate Limitation, the Security Interest
Rate for each series shall be equal to the Security Interest Rate Limitation. If
the Auction Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because all
of the Securities are subject to Submitted Holds Orders), the Security Interest
Rate will be the lesser of the Maximum Auction Rate or the Net Loan Rate. In any
of the cases described above in this paragraph, Submitted Orders will be
accepted or rejected and the Auction Agent will take such other action as
described below under "Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that is
higher than the Security Interest Rate will be accepted, thus requiring each
such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate that is
lower than the Security Interest Rate will be rejected, thus entitling each such
Existing Securityholder to continue to hold the aggregate principal amount of
Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate that is
lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a rate that is
equal to the Security Interest Rate will be rejected, thus entitling such
Existing Securityholder to continue to hold the aggregate principal amount of
Securities subject to such Submitted Bid, unless the aggregate principal amount
of Securities subject to such Submitted Bids will be greater than the principal
amount of Securities (the "remaining principal amount") equal to the excess of
the Available Securities over the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraphs (b) and (c) above, in which
event such Submitted Bid of such Existing Securityholder will be rejected in
part and such Existing Securityholder will be entitled to continue to hold the
principal amount of Securities subject to such Submitted Bid, but only in an
amount equal to the aggregate principal amount of Securities obtained by
multiplying the remaining principal amount by a fraction, the numerator of which
will be the principal amount of Securities held by such Existing Securityholder
subject to such Submitted Bid and the denominator of which will be the sum of
the principal amount of Securities subject to such Submitted Bids made by all
such Existing Securityholders that specified a rate equal to the Security
Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a rate that is
equal to the Security Interest Rate will be accepted, but only in an amount
equal to the principal amount of Securities obtained by multiplying the excess
of the aggregate principal amount of Available Securities over the aggregate
principal amount of Securities subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Securities subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Securities subject to Submitted Bids made by all such Potential Securityholders
that specified a rate equal to the Security Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect to a
Security (other than because all of the Securities of such Class are subject to
Submitted Hold Orders) or if the Net Loan Rate is less than the Bid Auction Rate
(in which case the Security Interest Rate shall be the Net Loan Rate) or if the
Security Interest Rate Limitation applies, subject to the denomination
requirements described below, Submitted Orders will be accepted or rejected as
follows in the following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that is
equal to or lower than the Security Interest Rate will be rejected, thus
entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any rate that is
equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) each Existing Securityholder's Submitted Bid specifying any rate that
is higher than the Security Interest Rate and the Submitted Sell Order of each
Existing Securityholder will be accepted, thus entitling each Existing
Securityholder that submitted any such Submitted Bid or Submitted Sell Order to
sell the Securities subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Securities obtained by multiplying the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of Securities held by
such Existing Securityholder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Securities of a Class are subject to Submitted Hold
Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Securities of each Class to be purchased and the
aggregate principal amount of Securities of each Class to be sold by Potential
Securityholders and Existing Securityholders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate principal amount of Securities to be sold differs
from such aggregate principal amount of Securities to be purchased, determine to
which other Broker-Dealer or Broker-Dealers acting for one or more purchasers
such Broker-Dealer will deliver, or from which Broker-Dealers acting for one or
more sellers such Broker-Dealer will receive, as the case may be, Securities.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Security Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum Auction
Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate will, in the
absence of manifest error, be binding on all other parties.
Notwithstanding anything in any related Agreement or, a related Terms
Supplement to the contrary, no Auction is to be held on any Auction Date on
which there are insufficient moneys held by the Trustee under the related
Agreement and available to pay the principal of and interest due on the
applicable Security on the Note Remittance Date or Certificate Remittance Date
immediately following such Auction Date.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise each Broker-Dealer that submitted
an Order in an Auction of the Security Interest Rate for a Security for the next
Interest Period and, if such Order was a Bid or Sell Order, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, by telephone not later
than 3:00 p.m., eastern time, on the Auction Date if the Interest Rate is the
Auction Rate and not later than 4:00 p.m. eastern time on the Auction Date if
the Interest Rate is the Net Loan Rate. Each Broker-Dealer that submitted an
Order on behalf of a Bidder is required to then advise such Bidder of the
applicable Security Interest Rate for the next Interest Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, confirm purchases and sales with each Bidder
purchasing or selling Securities as a result of the Auction and advise each
Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the depository, and the accounts of the respective Participants
at DTC will be debited and credited and Securities delivered as necessary to
effect the purchases and sales of Securities as determined in the Auction.
Purchasers are required to make payment through their Participants in same-day
funds to DTC against delivery through their Participants. DTC will make payment
in accordance with its normal procedures, which now provide for payment against
delivery by its Participants in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails to
deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Securityholder, Existing Securityholder or their respective Broker-Dealer or
Participant to deliver the principal amount of Securities or to pay for the
Securities purchased or sold pursuant to an Auction or otherwise. For a further
description of the settlement procedures, see "SETTLEMENT PROCEDURES."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
related Agreement, the related Terms Supplement or under the Auction Agent
Agreement, the Market Agent Agreement or any Broker-Dealer Agreement. The
Trustee may conclusively rely upon any information required to be furnished by
the Auction Agent, the Market Agent or any Broker-Dealer without undertaking any
independent review or investigation of the truth or accuracy of such
information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Securities are outstanding, the Administrator, may, from
time to time, change the length of the one or more Auction Periods in order to
conform with then current market practice with respect to similar securities or
to accommodate economic and financial factors that may affect or be relevant to
the length of the Auction Period and the interest rate borne by the Securities
(an "Auction Period Adjustment"). The Administrator will not initiate such
change in the length of the Auction Period unless it shall have received the
written consent from the Market Agent, which consent will not be unreasonably
withheld, not less than three days nor more than 20 days prior to the effective
date of an Auction Period Adjustment. The Administrator will initiate an Auction
Period Adjustment by giving written notice to the Trustee, the Auction Agent,
the Market Agent, the Security Guaranty Insurer and DTC in substantially the
form of, or containing substantially the information contained in, the related
Agreement at least 10 days prior to the Auction Date for such Auction Period.
Any such Auction Period Adjustment shall not result in an Auction Period of
less than 7 days nor more than 91 days. If any such Auction Period Adjustment
will result in an Auction Period of less than the number of days in the then
current Auction Period, the notice described above will be effective only if it
is accompanied by a written statement of the Trustee, the Auction Agent and DTC
to the effect that they are capable of performing their duties, if any, under
the related Agreement, the Auction Agent Agreement and any Broker-Dealer
Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (A) the Trustee and
the Auction Agent receive, by 11:00 a.m., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Representative authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Trustee, the Auction Agent DTC described above and (B)
Sufficient Bids exist at the Auction on the Auction Date for such first Auction
Period. If the condition referred to in (A) is not met, the Security Interest
Rate applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (A) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Representative, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Securities. The Representative will not
consent to such change in the Auction Date unless the Representative will have
received from the Market Agent not less than three days nor more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Trust, the Representative, and DTC.
The changes in Auction terms described above may be made with respect to
any Class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Class of Securities and may
be different if specified in the related Prospectus Supplement.
(e) Not later than (i) 3:00 p.m. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted
Bids or Sell Orders on behalf of an Existing Securityholder, whether such
Bid or Sell Order was accepted or rejected, in whole or in part, and the
principal amount of Securities, if any, to be sold by such Existing
Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Securityholder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of Securities, if
any, to be purchased by such Potential Securityholder;
(v) if the aggregate amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted Bids
or Sell Orders exceeds the aggregate principal amount of Securities to be
purchased by all Potential Securityholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if any, of each such
Buyer's Broker-Dealer (a "Participant") acting for one or more purchasers
of such excess principal amount of Securities and the principal amount of
Securities to be purchased from one or more Existing Securityholders on
whose behalf such Seller's Broker-Dealer acted by one or more Potential
Securityholders on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Securities to be purchased by all
Potential Securityholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted a Bid
or a Sell Order, the name or names of one or more Seller's Broker-Dealers
(and the name of the Participant, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess principal
amount of Securities and the principal amount of Securities to be sold to
one or more Potential Securityholders on whose behalf such Buyer's
Broker-Dealer acted by one or more Existing Securityholder on whose behalf
each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(f) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential Securityholder
on whose behalf such Broker-Dealer submitted a Bid or Sell Order in the
Auction on such Auction Date whether such Bid or Sell Order was accepted or
rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
advise each Potential Securityholder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Securityholder's Participant to pay to such Buyer's
Broker-Dealer (or its Participant) through DTC the amount necessary to
purchase the principal amount of the Securities to be purchased pursuant to
such Bid against receipt of such Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Securityholder on whose behalf such Seller's
Broker-Dealer submitted a Sell Order that was accepted, in whole or in
part, or a Bid that was accepted, in whole or in part, to instruct such
Existing Securityholder's Participant to deliver to such Seller's
Broker-Dealer (or its Participant) through DTC the principal amount of the
Securities to be sold pursuant to such Order against payment therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on whose
behalf such Broker-Dealer submitted a Bid of the Security Interest Rate for
the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the next Auction Date.
(g) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction
is required to allocate any funds received by it in connection with such Auction
pursuant to paragraph (b)(ii) above, and any Securities received by it in
connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Securityholders, if any, on whose behalf such Broker-Dealer submitted
Bids, the Existing Securityholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any Broker-Dealers identified
to it by the Auction Agent following such Auction pursuant to paragraph (a)(v)
or (a)(vi) above.
(h) On each Auction Date:
(i) each Potential Securityholder and Existing Securityholder with an
Order in the Auction on such Auction Date will instruct its Participant as
provided in (b)(ii) or (b)(iii) above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant in DTC's
system will instruct its Participant to deliver such Securities through DTC
to a Buyer's Broker-Dealer (or its Participant) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in DTC's
system will instruct its Participant to pay through DTC to Seller's
Broker-Dealer (or its Participant) identified following such Auction
pursuant to (a)(vi) above the amount necessary to purchase the Securities
to be purchased pursuant to (b)(ii) above against receipt of such
Securities.
(i) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction Date
referred to in (d)(i) above will instruct DTC to execute the transactions
described under (b)(ii) or (b)(iii) above for such Auction, and DTC will
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct DTC
to execute the transactions described in (d)(ii) above for such Auction,
and DTC will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct DTC
to execute the transactions described in (d)(iii) above for such Auction,
and DTC will execute such transactions.
(j) If an Existing Securityholder selling Securities in an Auction fails to
deliver such Securities (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Securityholder on behalf of which it submitted a Bid that was
accepted a principal amount of Securities that is less than the principal amount
of Securities that otherwise was to be purchased by such Potential
Securityholder. In such event, the principal amount of Securities to be so
delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Securities will constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or nondelivery of Securities which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will have
been notified of such delivery or nondelivery in accordance with the provisions
of the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Trustee nor the Auction Agent will have any responsibility or liability with
respect to the failure of a Potential Securityholder, Existing Securityholder or
their Respective Broker-Dealer or Participant to take delivery of or deliver, as
the case may be, the principal amount of the Securities purchased or sold
pursuant to an Auction or otherwise.
<PAGE>
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE REPRESENTATIVE OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY NOR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR OTHER
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms..........................................................S-4
Risk Factors..............................................................S-39
Lending Programs..........................................................S-41
The Representative and the Originators....................................S-45
The Loan Pools............................................................S-48
Maturity, Prepayment and Yield Considerations.............................S-53
Description of the Certificates...........................................S-62
The Certificate Guaranty Insurance Policies and the Certificate
Guaranty Insurer..........................................................S-70
The Agreement ............................................................S-72
Federal Income Tax Considerations.........................................S-81
ERISA Considerations......................................................S-81
Legal Investment Considerations...........................................S-84
Underwriting..............................................................S-84
Experts...................................................................S-85
Legal Matters.............................................................S-85
Rating of the Class A Certificates........................................S-85
Financial Information ....................................................S-85
Index of Principal Terms..................................................S-86
(Back cover continued
on next page)
<PAGE>
PROSPECTUS
Prospectus Supplement ................................................... 4
Available Information ................................................... 4
Reports to Securityholders............................................... 5
Incorporation of Certain Documents by Reference.......................... 5
Summary of Terms ........................................................ 6
Risk Factors............................................................. 23
The Trusts............................................................... 28
Use of Proceeds ......................................................... 42
The Representative and the Originators................................... 42
The Single Family Loan Lending Program................................... 42
Description of the Securities............................................ 47
Credit Enhancement ...................................................... 54
Maturity, Prepayment and Yield Considerations ........................... 59
The Agreements .......................................................... 61
Certain Legal Aspects of the
Mortgage Loans ........................................................ 72
Federal Income Tax Consequences ......................................... 81
ERISA Considerations .................................................... 107
Legal Investment Considerations ......................................... 109
Plan of Distribution .................................................... 109
Legal Matters ........................................................... 109
Financial Information.................................................... 110
Experts.................................................................. 110
Rating................................................................... 110
Index of Principal Terms................................................. 111
Appendix I - Auction Procedures.......................................... I-1
Appendix II - Settlement Procedures...................................... II-1
(Back cover continued
on next page)
<PAGE>
$--------------
(APPROXIMATE)
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
PROSPECTUS SUPPLEMENT
<PAGE>
SUBJECT TO COMPLETION, DATED _____________, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated ____________, 199_)
THE MONEY STORE SBA LOAN TRUST 1998--___
$______________ Class A Certificates
$______________ Class B Certificates
(Approximate)
THE MONEY STORE SBA LOAN-BACKED ADJUSTABLE RATE
CERTIFICATES, SERIES 1998-___,
(EXCEPT FOR THE EXCESS SPREAD (AS DEFINED HEREIN), WHICH CONSTITUTES PART OF THE
TRUST FUND, THE UNITED STATES SMALL BUSINESS ADMINISTRATION (THE "SBA") NEITHER
GUARANTEES THE CERTIFICATES OFFERED HEREBY, THE BENEFICIAL OWNERSHIP INTEREST IN
THE TRUST FUND REPRESENTED THEREBY OR THE UNGUARANTEED INTEREST IN THE SBA LOANS
THAT CONSTITUTE THE ASSETS OF SUCH TRUST FUND NOR DOES THE SBA HAVE ANY DIRECT
OR INDIRECT OBLIGATION TO THE TRUST FUND OR THE CERTIFICATEHOLDERS).
THE MONEY STORE INVESTMENT CORPORATION
THE MONEY STORE COMMERCIAL MORTGAGE INC.
AND
THE MONEY STORE OF NEW YORK, INC.,
Sellers
The Money Store SBA Loan-Backed Adjustable Rate Certificates, Series 199_-_ (the
"Certificates"), evidence the entire beneficial ownership interest in a trust
fund (the "Trust Fund") created by The Money Store Investment Corporation
("TMSIC"), The Money Store Commercial Mortgage Inc. ("TMSCMI") and The Money
Store of New York, Inc. ("MSNY" and, together with TMSIC and TMSCMI, the
"Sellers"). The Trust Fund consists primarily of the right to receive payments
and other recoveries attributable to certain unguaranteed interests (the
"Unguaranteed Interests") in a pool of loans partially guaranteed by the U.S.
Small Business Administration and, as described herein, may also include certain
loans originated in connection with such loans (collectively, the "SBA Loans").
See "The SBA Loan Program -- Loan Parameters" herein. The Certificates will be
issued pursuant to a Pooling and Servicing Agreement, among the Sellers, TMSIC,
as servicer (in such capacity, the "Servicer"), The Money Store Inc., as
Representative (the "Representative") and [Name of Trustee], as trustee. (COVER
CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" ON PAGE S-22 HEREIN AND ON PAGE 19 IN THE PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE CERTIFICATES OFFERED HEREBY.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF TMSIC, TMSCMI, MSNY OR ANY OF THEIR RESPECTIVE
AFFILIATES OR SUBSIDIARIES. EXCEPT FOR THE EXCESS SPREAD, NEITHER THE
CERTIFICATES NOR THE UNDERLYING UNGUARANTEED INTERESTS OF THE SBA LOANS ARE
INSURED OR GUARANTEED BY THE UNITED STATES SMALL BUSINESS ADMINISTRATION OR ANY
OTHER GOVERNMENTAL AGENCY, AND NO GOVERNMENTAL AGENCY HAS PASSED UPON THE
ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
First Union Capital Markets, a division of Wheat First Securities, Inc.
("First Union Capital Markets") an affiliate of the Sellers and the Originators,
and [Name of Underwriters] (together with First Union Capital Markets, the
"Underwriter") has agreed to purchase the Class A and Class B Certificates from
the Sellers at _____% of the principal amounts thereof, subject to the terms and
conditions set forth in the Underwriting Agreement referred to herein under
"Underwriting". Aggregate proceeds to the Sellers from the sale of the
Certificates offered hereby (before deducting expenses payable by the Sellers
estimated at $_______) will be approximately $-----------.
The Underwriter proposes to offer the Certificates from time to time for
sale in negotiated transactions or otherwise, at prices determined at the time
of sale. For further information with respect to the plan of distribution and
any discounts, commissions or profits that may be deemed underwriting discounts
or commissions, see "Underwriting".
First Union Capital Markets expects to enter into market making
transactions in the Class A and Class B Certificates and may act as principal or
agent in any such transactions. Any such purchases or sales will be made at
prices related to prevailing market prices at the time of sale. This Prospectus
Supplement and the Prospectus may be used by First Union Capital Markets in
connection with such transactions.
The Certificates are offered by the Underwriter subject to prior sale,
when, as and if issued to and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the Class A Certificates
will be made in book-entry form only through the Same Day Funds Settlement
System of The Depository Trust Company in the United States, or CEDEL, societe
anonyme ("CEDEL") or the Euroclear System ("Euroclear") in Europe, and that
delivery of the Class B Certificates will be made, at the option of the Sellers,
either (i) in book-entry form only through the Same Day Funds Settlement System
of The Depository Trust Company or (ii) in physical form, at the office of [Name
and address of underwriter], in each case on or about __________, 199_.
FIRST UNION CAPITAL MARKETS
[NAMES OF OTHER UNDERWRITERS]
__________, 199_
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
Additional SBA Loans (the "Subsequent SBA Loans") may be purchased by the
Trust from the Sellers from time to time on or before the close of business on
____________, 199_ from funds, if any, on deposit in the Pre-Funding Account.
As described herein, any Subsequent SBA Loans acquired by the Trust will be
either (i) SBA Section 7(a) Loans or (ii) Section 7(a) Companion Loans and SBA
504 Loans, each as defined herein. See "The SBA Loan Pool--General." On the
Closing Date (as defined herein), an aggregate cash amount not to exceed
approximately $_________ may be deposited into the Pre-Funding Account.
Each SBA Loan was, and each Subsequent SBA Loan will have been, originated
or acquired by the Sellers in accordance with the Sellers' underwriting criteria
described in the attached Prospectus under "The SBA Loan Lending Program --
Underwriting Criteria for SBA Section 7(a) Loans." The SBA Loans will be master
serviced by the Servicer, although MSNY will service the SBA Loans sold by it to
the Trust Fund and TMSIC will service the SBA Loans sold by it and TMSCMI to the
Trust Fund.
The Certificates will consist of two classes of certificates (the "Class A
Certificates" and the "Class B Certificates"). The Class B Certificates are
subordinate to the Class A Certificates in the right to receive payment of
interest and, after interest has been paid with respect to both Classes of
Certificates, the Class B Certificates are subordinate to the Class A
Certificates in the right to receive payments of principal. See "Description of
the Agreement and the Certificates--Flow of Funds" herein.
Distributions of principal and interest on the Certificates will be made on
the 15th day of each month or, if the 15th day is not a business day, the first
business day thereafter, commencing __________, 199_. To the extent of Available
Funds (as defined herein), and prior to payments of principal on the
Certificates, holders of Class A and Class B Certificates, in that order, will
be entitled to receive interest accrued at an adjustable rate, as described
herein. To the extent of the Available Funds remaining after payment of interest
on the Certificates, holders of Class A and Class B Certificates, in that order,
will be entitled to receive distributions of principal, as described herein. See
"Description of the Agreement and the Certificates -- Flow of Funds" herein.
Additionally, any Pre-Funded Amount (as defined herein) remaining in the
Pre-Funding Account at the close of business on ____________, 199_ will be
distributed as a principal payment on ____________, 199_ (together with __ days'
accrued interest at the applicable Remittance Rate on the amount of such
prepayment) to the Class A and Class B Certificates. The interest due the
Certificates on the _______ 199_ Remittance Date will be adjusted to take
account of such distribution.
There is currently no secondary market for the Certificates. [Name of
Underwriter] (the "Underwriter") intends to make a secondary market for the
Certificates, but has no obligation to do so. There can be no assurance that a
secondary market for the Certificates will develop or, if one does develop, that
it will continue.
No election will be made to treat the Trust Fund as a real estate mortgage
investment conduit. See "Federal Income Tax Consequences" herein.
The Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by the Sellers and the
Representative pursuant to the Prospectus dated ____________, 199_ (the
"Prospectus"), of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
-----------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
-----------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
-----------------------
[CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS WHICH
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE
COVERING TRANSACTIONS. FOR A DETAILED DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."]
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
STATE.]
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by or on
behalf of the Trust with the Commission pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), on or
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A and Class B Certificates made by this
Prospectus Supplement. The Representative will provide without charge to each
person to whom this Prospectus Supplement and Prospectus are delivered, on
request of such person, a copy of any or all of the documents incorporated
herein by reference other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
should be directed to The Money Store Inc., 707 Third Street, West Sacramento,
California 95605 Attention: Finance Department, Telephone: (916) 617-2001.
<PAGE>
SUMMARY OF TERMS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED BUT NOT DEFINED ELSEWHERE IN
THIS PROSPECTUS SUPPLEMENT HAVE THE MEANINGS ASSIGNED TO SUCH TERMS UNDER
"CERTAIN DEFINITIONS". UNLESS OTHERWISE NOTED, ALL STATISTICAL PERCENTAGES AND
ALL DOLLAR AMOUNTS IN THIS PROSPECTUS SUPPLEMENT ARE MEASURED BY THE AGGREGATE
PRINCIPAL BALANCES OF THE SBA LOANS, THE UNGUARANTEED INTERESTS OR THE
GUARANTEED INTERESTS (EACH AS DEFINED BELOW UNDER "--TRUST FUND ASSETS"), AS THE
CASE MAY BE, AT THE CLOSE OF BUSINESS ON THE CUT-OFF DATE (AS DEFINED BELOW
UNDER "--TRUST FUND ASSETS").
Securities Offered............... The Money Store SBA Loan-Backed Adjustable
Rate Certificates, Series 1997-___, Class A
and Class B (the "Class A Certificates" and
the "Class B Certificates", respectively, and
collectively, the "Certificates"). The Class
A Certificates will be issued in an aggregate
initial principal amount (the "Initial Class
A Certificate Principal Amount") of
approximately $______________. The Class B
Certificates will be issued in an aggregate
initial principal amount (the "Initial Class
B Certificate Principal Amount") of
approximately $____________.
The Class B Certificates are subordinate to
the Class A Certificates in the right to
receive payments of interest and, after
interest has been paid to both Classes of
Certificates, the Class B Certificates are
subordinate to the Class A Certificates in
the right to receive payments of principal,
in each case to the extent described herein.
See "Description of the Agreement and the
Certificates--Flow of Funds" herein.
The Certificates represent the entire
beneficial ownership interest in a trust fund
(the "Trust Fund") formed pursuant to a
Pooling and Servicing Agreement (the
"Agreement") by and among The Money Store
Investment Corporation ("TMSIC"), The Money
Store Commercial Mortgage Inc. ("TMSCMI"),
The Money Store of New York, Inc. ("MSNY" and
together with TMSIC and TMSCMI, the
"Sellers"), TMSIC, as servicer (in such
capacity, the "Servicer"), The Money Store
Inc., as representative (the
"Representative"), and [Name of Trustee], as
trustee (the "Trustee").
Denominations.................... The Class A Certificates will be issued in
book-entry form and the Class B Certificates
will be issued either in book-entry or
physical form, as determined by the Sellers
prior to issuance of the Certificates. Each
Class of Certificates will be issued in
minimum denominations of $1,000 original
principal amount and integral multiples of
$1,000 in excess thereof, except that one
Certificate of each Class may be issued in a
different denomination and, if so issued,
will be held in physical form. See
"Description of the Agreement and the
Certificates -- Registration of Certificates"
herein.
Trust Fund Assets................ The Trust Fund will consist primarily of the
right to receive all payments and other
recoveries attributable to the Unguaranteed
Interests (as defined below) in a pool of
loans (the "SBA Loan Pool") made to small
business concerns pursuant to Section 7(a) of
the Small Business Act, as amended, and Title
13 of the Code of Federal Regulations, as
amended (the "SBA Section 7(a) Loans"). The
SBA Loan Pool also may consist of loans made
to small businesses in connection with the
origination of an SBA Section 7(a) Loan,
which related SBA Section 7(a) Loan may or
may not be part of the Trust Fund (the
"Section 7(a) Companion Loans") and pursuant
to the SBA 504 Loan Program described herein
(the "SBA 504 Loans"). The SBA Section 7(a)
Loans, the Section 7(a) Companion Loans and
the SBA 504 Loans are referred to herein
collectively as the "SBA Loans". The SBA
Section 7(a) Loans are partially guaranteed
by the U.S. Small Business Administration
(the "SBA") pursuant to a Small Business
Administration Loan Guaranty Agreement
(Deferred Participation) (SBA Form 750),
dated August 13, 1980, by and between TMSIC
and the SBA, and pertinent SBA regulations
found at 13 C.F.R. Part 120. None of the
Section 7(a) Companion Loans or the SBA 504
Loans are guaranteed by the SBA.
The Sellers reserve the right to include in
the Trust Fund an aggregate principal amount
of up to approximately $_________ of Section
7(a) Companion Loans and SBA 504 Loans.
Section 7(a) Companion Loans and SBA 504
Loans, if any, will have the characteristics
described herein under "The SBA Loan
Pool--Section 7(a) Companion Loans and SBA
504 Loans." If Section 7(a) Companion Loans
and SBA 504 Loans are not included in the
Trust Fund on the Closing Date, an amount
equal to approximately $__________ will be
deposited into the Pre-Funding Account.
Amounts in the Pre-Funding Account will be
used to purchase either Section 7(a)
Companion Loans and SBA 504 Loans or SBA
Section 7(a) Loans similar to the SBA Section
7(a) Loans delivered on the Closing Date.
As to any SBA Section 7(a) Loan, the right to
receive the guaranteed portion of the
principal balance thereof together with
interest thereon at a per annum rate in
effect from time to time (which rate is less
than the rate paid by the obligor on the
related SBA Section 7(a) Loan (the
"Obligor")) and the fee (the "FTA's Fee")
payable to the SBA's fiscal and transfer
agent (the "FTA") is referred to herein as
the "Guaranteed Interest". With respect to
SBA Section 7(a) Loans for which the
Guaranteed Interest was sold in the secondary
market on or after September 1, 1993 (unless
the related SBA Section 7(a) Loan was
approved by the SBA on or after October 12,
1995) and SBA Section 7(a) Loans approved by
the SBA on or after October 12, 1995
regardless of whether they were sold in the
secondary market (the "Additional Fee SBA
Loans"), a fee equal to 40 basis points and
50 basis points, respectively, per annum on
the outstanding balance of the Guaranteed
Interest of such Additional Fee SBA Loans
(the "Additional Fee") is required to be paid
by the related Seller to the SBA. Although
such Additional Fee is the responsibility of
the related Seller, the Additional Fee will
be funded from the interest received by the
related Obligor on the SBA Section 7(a)
Loans. Accordingly, any such Additional Fee
will reduce the Excess Spread (as defined
herein) on the related SBA Loan. The
Guaranteed Interest varies from SBA Section
7(a) Loan to SBA Section 7(a) Loan, is not
included in the Trust Fund and
Certificateholders have no right or interest
therein. As described herein, the portion of
the principal guaranteed by the SBA for each
SBA Section 7(a) Loan varies depending upon
the program under which such SBA Section 7(a)
Loan was originated. However, the SBA imposes
a maximum per borrower guaranty of $750,000.
See "The SBA Loan Program -- Section 7(a)
Loan Parameters."
Pursuant to policies of the SBA, the Servicer
is required to retain for each SBA Section
7(a) Loan an amount equal to 0.60% per annum
on the outstanding balance of the related
Guaranteed Interest (such amount is referred
to herein as the "Premium Protection Fee" for
the related SBA Section 7(a) Loan). The
Premium Protection Fee is not included in the
Trust Fund and Certificateholders have no
right or interest therein.
The "Unguaranteed Interest" will equal (i) as
to any SBA Section 7(a) Loan, all payments
and other recoveries on such SBA ss. 7(a)
Loan not constituting the Guaranteed Interest
or Premium Protection Fee therein and (ii) as
to any Section 7(a) Companion Loan or SBA 504
Loan, all payments and other recoveries on
such Section 7(a) Companion Loan or SBA 504
Loan. As stated above, the interest accrued
on the guaranteed portion of the principal
balance of each SBA Section 7(a) Loan exceeds
the sum of the interest payable to the holder
of the Guaranteed Interest, the FTA's Fee,
the Premium Protection Fee and, with respect
to the Additional Fee SBA Loans, the
Additional Fee. Such excess (the "Excess
Spread"), which is guaranteed by the SBA for
up to 120 days of accrued interest, is
included in the Unguaranteed Interest and
will be available to pay interest and
principal on the Certificates, the Servicing
Fee to the Servicer and fund the Spread
Account (as defined under "--Spread Account"
herein) as described under "--Spread Account"
herein.
The "Unguaranteed Percentage" will equal, (i)
as to any SBA Section 7(a) Loan, the
fraction, expressed as a percentage, the
numerator of which is the principal portion
of the Unguaranteed Interest as of the
Cut-Off Date and the denominator of which is
the outstanding principal balance of such SBA
Section 7(a) Loan as of the Cut-Off Date and
(ii) as to any Section 7(a) Companion Loan or
SBA 504 Loan, 100%. The Unguaranteed
Percentage for any given loan will not change
over time.
The "Cut-Off Date is _______, 199_; provided,
however, that for any SBA Loan originated
after such date, the Cut-Off Date shall be
the date of origination of such SBA Loans.
As of the close of business on the Cut-Off
Date, the aggregate principal amount of the
Unguaranteed Interests of the SBA Section
7(a) Loans expected to be delivered to the
Trustee on the Closing Date equaled
approximately $_______________ the "Original
Pool Principal Balance").
Sellers.......................... TMSIC and TMSCMI are New
Jersey corporations, and MSNY is a New York
corporation. TMSIC and TMSCMI are
wholly-owned subsidiaries of The Money Store
Inc., a New Jersey corporation, and MSNY is
a wholly-owned subsidiary of TMSIC. On June
30, 1998, The Money Store Inc. became a
wholly-owned subsidiary of First Union
National Bank, a national banking
association, which is the principal banking
subsidiary of First Union Corporation. First
Union Corporation also is the parent of
First Union Capital Markets.
All of the SBA Section 7(a) Loans were, and
all of the Subsequent SBA Loans consisting of
SBA Section 7(a) Loans will have been,
originated or acquired by TMSIC or MSNY. All
of the Section 7(a) Companion Loans and SBA
504 Loans will have been originated by
TMSCMI. Each Seller will deposit into the
Trust Fund the right to receive the
Unguaranteed Interests in the SBA Loans
originated or acquired by it and will make
representations and warranties with respect
to such SBA Loans.
Servicers........................ MSNY will service the SBA Loans sold by it to
the Trust Fund and TMSIC will service the SBA
Loans sold by it and TMSCMI to the Trust
Fund, in each case in accordance with the
terms of the Agreement and, with respect to
the SBA Section 7(a) Loans, the SBA Rules and
Regulations and the Multi-Party Agreement (as
defined below under "--Multi-Party
Agreement"). TMSIC will be liable to the
Trustee for the servicing of all the SBA
Loans.
Trustee.......................... [_______________, a ________ company
headquartered in _____________] will be the
Trustee. In the Agreement, the Trustee will
agree to act as successor Servicer if TMSIC
can no longer serve in such capacity.
Document Custodians.............. The promissory notes evidencing the SBA
Section 7(a) Loans (the "Notes") will be held
by the FTA pursuant to the Multi-Party
Agreement. The FTA will be liable solely to
the SBA for the FTA's gross negligence or
malfeasance. The SBA will be liable to the
Trustee, the Sellers and the Servicer for the
SBA's and the FTA's gross negligence or
malfeasance.
All other documents to be delivered by the
Sellers with respect to the SBA Loans will be
delivered to and held by the Trustee pursuant
to the Agreement. See "Description of the
Agreement and the Certificates" herein.
Interest Accrual Period.......... With respect to each Remittance Date (as
defined below under "--Remittance Date"), the
"Interest Accrual Period" will be the period
commencing on the 15th day of the month
preceding such Remittance Date and ending on
the 14th day of the month of such Remittance
Date. However, for the Remittance Date
occurring in ____________, 199_, the Interest
Accrual Period will be the period commencing
on the Closing Date and ending on
____________, 199_.
Pre-Funding Account.............. If Section 7(a) Companion Loans and SBA 504
Loans are not included in the Trust Fund on
the Closing Date, cash in an amount not to
exceed approximately $_________ (the
"Pre-Funded Amount") will be deposited on the
Closing Date into an account (the
"Pre-Funding Account"). Amounts in the
Pre-Funding Account may be used only (i) to
acquire Subsequent SBA Loans and (ii) to make
accelerated payments of principal on the
Certificates. During the period (the "Funding
Period") from the Closing Date until the
earliest of (i) the date on which the amount
on deposit in the Pre-Funding Account, is
less than $200,000, (ii) the date on which an
Event of Default occurs under the Agreement
or (iii) the close of business on
____________, 199_, amounts will, from time
to time, be withdrawn from the Pre-Funding
Account to purchase Subsequent SBA Loans in
accordance with the Agreement. Any Pre-Funded
Amount remaining at the end of the Funding
Period will be distributed as a principal
prepayment on the next Remittance Date to the
Certificates. However, any Pre-Funded Amount
remaining at the close of business on
____________, 199_ will be distributed as a
principal prepayment on __________, 199_ (the
"Special Remittance Date") to the
Certificates.
Capitalized Interest
Account........................ If the Pre-Funding Account is established, on
the Closing Date, the Representative also
will make a cash deposit in an account (the
"Capitalized Interest Account") to be pledged
to the Trustee. The amount, if any, deposited
in the Capitalized Interest Account will be
used by the Trustee on the Remittance Dates
occurring in __________, __________ and
__________ 199_ to fund the excess, if any,
of (i) the amount of interest accrued for
each such Remittance Date at the weighted
average Class A and Class B Remittance Rates
on the portion of the Certificates having
principal balances exceeding the principal
balances of the Unguaranteed Interests over
(ii) the amount of any earnings on funds in
the Pre-Funding Account that are available to
pay interest on the Certificates on each such
Remittance Date. Additionally, if a principal
prepayment is made on the Special Remittance
Date to any Class of Certificates, such Class
of Certificates also will receive on such
date, from the Capitalized Interest Account,
an amount equal to __ days' interest at the
applicable Remittance Rate on the amount of
such principal prepayment. Any amounts
remaining in the Capitalized Interest Account
on the Special Remittance Date and not used
for such purposes are required to be paid
directly to the Representative on such
Special Remittance Date.
Available Funds.................. With respect to each Remittance Date, the
"Available Funds" will equal the sum of (i)
all amounts (including any Excess Spread)
received from any source by the Servicer or
any Subservicer during the preceding calendar
month with respect to principal and interest
on the SBA Loans (net of the amount payable
to the holder of the Guaranteed Interest, the
FTA's Fee, the Premium Protection Fee, the
Additional Fee and the Servicing Fee (as
defined under "--Servicing Fee" herein)),
(ii) advances by the Servicer, (iii) amounts
to be transferred from the Pre-Funding
Account and the Capitalized Interest Account
with respect to the Remittance Dates in
__________, __________ and __________ 199_
and (iv) amounts in the Spread Account.
Interest......................... To the extent of the Available Funds, and
prior to payments of principal, on each
Remittance Date the Class A and Class B
Certificateholders, in that order, will be
entitled to receive interest accrued for the
related Interest Accrual Period at the
adjustable rate described below on the Class
A or Class B Certificate Balance, as the case
may be (each as defined below), outstanding
immediately prior to such Remittance Date.
If, on any Remittance Date, the Class A or
Class B Certificates do not receive the full
amount of interest to which they are
entitled, such shortfall, plus interest
thereon compounded monthly at the then
applicable Class A or Class B Remittance Rate
(each as defined below), will be added to the
amount of interest they are entitled to
receive on succeeding Remittance Dates. The
aggregate amounts of interest payable to the
Class A and Class B Certificates on each
Remittance Date are referred to herein as the
"Class A Interest Distribution Amount" and
the "Class B Interest Distribution Amount",
respectively. Notwithstanding the foregoing,
if a principal payment is made to a Class of
Certificates on the Special Remittance Date,
each such Class also will receive on such
date __ days' interest at the applicable
Remittance Rate on the amount of such
prepayment. Further, the Class A and Class B
Interest Distribution Amounts for the
__________ 199_ Remittance Date will be based
on 30 days' interest on the related
Certificate Balance on __________, 199_,
after giving effect to such prepayment.
Interest will accrue on the Certificates on
the basis of a 360-day year consisting of
twelve 30-day months at a per annum rate (the
"Class A Remittance Rate" and "Class B
Remittance Rate", respectively) equal to:
Class A: During the initial Interest Accrual
Period, _____% per annum. During each
subsequent Interest Accrual Period, the Prime
Rate (as defined below) in effect on the
preceding Adjustment Date (as defined below)
minus _____% per annum, subject to the
adjustments described under "Description of
the Agreement and the Certificates--Class A
and Class B Interest Distribution Amounts"
herein.
Class B: During the initial Interest Accrual
Period, _____% per annum. During each
subsequent Interest Accrual Period, the Prime
Rate in effect on the preceding Adjustment
Date minus _____% per annum, subject to the
adjustments described under "Description of
the Agreement and the Certificates--Class A
and Class B Interest Distribution Amounts"
herein.
The Class A and Class B Remittance Rates will
be adjusted on the first Business Day (as
defined under "Certain Definitions" herein)
of each January, April, July and October,
commencing __________, 199_ (each, an
"Adjustment Date"). The Prime Rate will equal
the lowest prime lending rate published in
the Money Rate Section of THE WALL STREET
JOURNAL for the applicable Adjustment Date.
As stated above, the amount of interest paid
on the Class A and Class B Certificates on
each Remittance Date is based upon the amount
of interest due on the SBA Loans in the month
preceding such Remittance Date. For each such
monthly payment, the related SBA Loan
Interest Rate is based on the Prime Rate in
effect for such SBA Loan in the month
preceding the month such monthly payment is
due. For example, the monthly payment due on
an SBA Loan in October 199_ will be based
upon the Prime Rate in effect for such SBA
Loan in September 199_ (which, for SBA Loans
adjusting quarterly, generally will be the
Prime Rate in effect on July 1, 199_). This
monthly payment will be distributed to
Certificateholders on the Remittance Date in
November 199_. For this Remittance Date,
interest on the Class A and Class B
Certificates will accrue based upon the Prime
Rate in effect on the first Business Day of
October 199_.
Interest accruing on the Certificates for the
Remittance Dates occurring in each February,
May, August and November will be based upon
the Prime Rate in effect on the first
Business Day in the preceding January, April,
July and October, respectively. However, the
interest payments on the SBA Loans required
to be distributed to Certificateholders on
each such Remittance Date generally will be
based upon the Prime Rate in effect on the
first Business Day in the preceding October,
January, April and July, respectively. As a
result of this mismatch, the actual amount of
interest distributed to the
Certificateholders in February, May, August
and November may be subject to the
adjustments described under "Description of
the Agreement and the Certificates -- Class A
and Class B Interest Distribution Amounts"
herein.
As of any date, the "Class A Certificate
Balance" will equal the Class A Certificate
Balance on the Closing Date reduced by all
amounts previously distributed to Class A
Certificateholders and allocable to
principal. The "Class B Certificate Balance"
will be calculated in a similar manner.
Principal........................ To the extent of the Available Funds
remaining after payment of interest as
described above, on each Remittance Date,
holders of the Class A Certificates will
receive an amount equal to the lesser of (A)
such remaining Available Funds and (B) the
sum of (i) the Class A Principal Distribution
Amount (as defined below) and (ii) the Class
A Carry-Forward Amount (as defined below).
To the extent of the Available Funds
remaining after payment of interest as
described above and payment of principal on
the Class A Certificates, holders of the
Class B Certificates will receive an amount
equal to the lesser of (A) such remaining
Available Funds and (B) the sum of (i) the
Class B Principal Distribution Amount (as
defined below) and (ii) the Class B
Carry-Forward Amount (as defined below).
With respect to each Remittance Date, the
"Class A Principal Distribution Amount" and
the "Class B Principal Distribution Amount"
will equal the Class A Percentage or the
Class B Percentage (each as defined below),
as the case may be, multiplied by the total
of (i) the Unguaranteed Percentage of all
payments and other recoveries of principal of
an SBA Loan (net of amounts reimbursable to
the Servicer pursuant to the Agreement)
received by the Servicer or any Subservicer
in the immediately preceding calendar month
(with respect to any Remittance Date, the
"Due Period"), excluding amounts received
relating to SBA Loans which have been
delinquent 24 months or have been determined
to be uncollectible, in whole or in part, by
the Servicer to the extent that the Class A
Certificateholders or the Class B
Certificateholders, as the case may be, have
previously received the Class A Percentage or
the Class B Percentage, as the case may be,
of the principal portion of the Unguaranteed
Interest of such SBA Loans; (ii) the
principal portion of any Unguaranteed
Interest actually purchased by a Seller for
breach of a representation and warranty or
other defect and actually received by the
Trustee as of the related Determination Date;
(iii) any adjustments with respect to
substitutions of SBA Loans for which a Seller
has breached a representation or warranty
deposited in the Principal and Interest
Account and transferred to the Certificate
Account as of the related Determination Date;
(iv) the Unguaranteed Percentage of all
losses on SBA Loans which were finally
liquidated during the applicable Due Period;
(v) the Unguaranteed Percentage of the then
outstanding principal balance of any SBA Loan
which, as of the first day of the related Due
Period, has been delinquent for 24 months or
has been determined to be uncollectible, in
whole or in part, by the Servicer; and (vi)
amounts, if any, released from the
Pre-Funding Account on the July, __________,
__________ and ____________, 199__ Remittance
Dates.
With respect to each Remittance Date, the
"Class A Carry-Forward Amount" and the "Class
B Carry-Forward Amount" will equal the
aggregate amount, if any, by which (i) the
Class A Principal Distribution Amount or the
Class B Principal Distribution Amount, as the
case may be, with respect to any preceding
Remittance Date exceeded (ii) the amount of
the actual principal distribution to the
Class A Certificates or the Class B
Certificates, as the case may be, on such
Remittance Date.
With respect to each Remittance Date, the
"Class A Percentage" will equal _____%,
representing the beneficial ownership
interest of the Class A Certificates in the
Trust Fund.
With respect to each Remittance Date, the
"Class B Percentage" will equal _____%,
representing the beneficial ownership
interest of the Class B Certificates in the
Trust Fund.
On each Remittance Date, Available Funds
remaining after payment of interest and
principal to the Class A and Class B
Certificates and payment of the Trustee's
fees and expenses will be deposited in the
Spread Account and, to the extent amounts in
the Spread Account would exceed the then
applicable Specified Spread Account
Requirement, such excess will be distributed
to the Spread Account Depositor (as defined
under "--Spread Account"). See--Spread
Account" herein.
The aggregate amount of principal payable
with respect to each Class of Certificates on
each Remittance Date as described above,
together with interest as calculated above
under "--Interest", constitutes the "Class A
Remittance Amount" and the "Class B
Remittance Amount", as the case may be, for
such Remittance Date.
Subordination of Class B
Certificates................... The rights of the holders of the Class B
Certificates to receive distributions with
respect to interest and principal will be
subordinated to such rights of the holders of
the Class A Certificates to the extent
described above under "--Securities Offered".
This subordination is intended to enhance the
likelihood of regular receipt by holders of
Class A Certificates of the full amount of
their scheduled monthly payments of interest
and, after distribution of the Class B
Interest Distribution Amount, principal, and
to afford the holders of the Class A
Certificates a measure of protection against
losses resulting from liquidated SBA Loans
equal to (i) the amount of funds remaining in
the Spread Account after payment of interest
on the Class A and Class B Certificates and
(ii) the then outstanding Class B Certificate
Balance.
Remittance Date.................. Distributions to Certificateholders will be
made on the 15th day of each month, or if
such day is not a business day, on the
succeeding business day, commencing _______,
199_ (each, a "Remittance Date"). Any Pre-
Funded Amount remaining at the close of
business on _________, 199_ (together with __
days' interest thereon at the applicable
Remittance Rates) will be distributed by or
on behalf of the Trustee on the Special
Remittance Date to the Class A and Class B
Certificates. Such distribution will be made
to each person in whose name a Certificate of
the applicable Class is registered on
_________, 199_.
The last scheduled Remittance Date for the
Certificates is ________, 20__. It is
expected that the actual last Remittance Date
for each Class of Certificates will occur
significantly earlier than such scheduled
Remittance Date. See "Yield, Maturity, and
Prepayment Considerations" herein.
Record Date...................... Distributions on the Certificates will be
made by or on behalf of the Trustee on each
Remittance Date to each person in whose name
a Certificate is registered on the last day
of the preceding calendar month (the "Record
Date").
Closing Date..................... _________, 199_
Spread Account................... TMS SBA Holdings, Inc., a special purpose,
bankruptcy remote Delaware corporation (the
"Spread Account Depositor") will establish a
reserve account (the "Spread Account") with
the Trustee. The Spread Account will not be a
part of the Trust Fund but will be pledged to
the Trustee as security for the obligations
of the Spread Account Depositor under the
Agreement pursuant to an agreement (the
"Spread Account Agreement") between the
Spread Account Depositor and the Trustee.
On the Closing Date, the Spread Account
Depositor will make an initial cash deposit
into the Spread Account in an amount equal to
___% of the Original Pool Principal Balance
(the "Initial Deposit"). Thereafter, on each
Remittance Date the Trustee will deposit into
the Spread Account the cash, if any,
remaining after payment of interest and
principal to the holders of the Certificates
as described above under "--Interest" and
"--Principal", and payment of amounts
required to be deposited into the Expense
Account and certain amounts reimbursable to
the Servicer, until the aggregate amount then
on deposit in the Spread Account (the "Spread
Balance") equals the sum of (i) the then
outstanding principal balance of the
Unguaranteed Interests of all SBA Loans 180
days or more delinquent and (ii) the greater
of (a) __% of the then outstanding aggregate
principal balance of the Unguaranteed
Interests of all the SBA Loans, or (b) __% of
the Original Pool Principal Balance;
provided, however, that for purposes of
clauses (i) and (ii)(a), there shall be
excluded the principal portion of the
Unguaranteed Interest of SBA Loans which have
been delinquent 24 months or have been
determined to be uncollectible, in whole or
in part, by the Servicer, to the extent that
the Certificateholders have previously
received the principal portion of the
Unguaranteed Interest of such SBA Loans (the
sum of such amounts is referred to herein as
the "Specified Spread Account Requirement").
Amounts, if any, on deposit in the Spread
Account will be available to be applied to
payments of interest and principal on the
Certificates on any Remittance Date.
The Spread Account Depositor will not be
required to refund any amounts previously
properly distributed to it, regardless of
whether there are sufficient funds on a
subsequent Remittance Date to make a full
distribution to holders of the Certificates
on such Remittance Date.
The funding and maintenance of the Spread
Account is intended to enhance the likelihood
of timely payment of principal and interest
to the holders of the Certificates; however,
if the SBA Loan Pool experiences levels of
delinquencies and losses above the scenarios
used to obtain the ratings on the Class B
Certificates, the Spread Account could be
depleted, and shortfalls could result. See
"Risk Factors -- Spread Account",
"Description of the Agreement and the
Certificates--Spread Account" and "Ratings"
herein.
The SBA Loan Pool................ The following is a description of the SBA
Section 7(a) Loans and the related
Unguaranteed Interests expected to be
delivered to the Trustee on the Closing Date.
As described herein, the Sellers reserve the
right to include in the Trust Fund an
aggregate principal amount of up to
approximately $_________ of Section 7(a)
Companion Loans and SBA 504 Loans having the
characteristics set forth in "The SBA Loan
Pool--Section 7(a) Companion Loans and SBA
504 Loans." If the Sellers do not sell to the
Trust Fund such Section 7(a) Companion Loans
and SBA 504 Loans, it is expected that the
Sellers will sell to the Trust Fund SBA
Section 7(a) Loans having overall
characteristics substantially similar to the
SBA Section 7(a) Loans being delivered on the
Closing Date.
All the SBA Section 7(a) Loans were
originated or acquired by the Sellers in
accordance with the underwriting criteria
described in the Prospectus under "The SBA
Loan Lending Program -- Underwriting Criteria
for SBA Section 7(a) Loans." None of the SBA
Section 7(a) Loans are balloon loans and each
is fully amortizing in accordance with its
terms. On the Closing Date, it is expected
that the Trust Fund will contain the
Unguaranteed Interest in _______ SBA Section
7(a) Loans, which SBA Section 7(a) Loans are
secured primarily by first liens on
commercial real property generally used by
the borrower or its affiliates in the conduct
of their business. The remainder of the SBA
Section 7(a) Loans were originated primarily
to targeted franchisees healthcare
professionals, and other professionals such
as attorneys and accountants, and for
financing business acquisition. These loans
are often secured by second liens on personal
real estate and personal guarantees and may
include liens on machinery and equipment and
other business assets. The SBA Section 7(a)
Loans were originated to businesses located
in __ states and the District of Columbia;
primarily in California. As of the Cut-Off
Date, no more than approximately ____% of the
SBA Section 7(a) Loans (by principal balance
of Unguaranteed Interests), representing ___
SBA Section 7(a) Loans, were made to
borrowers whose businesses are included in
the same four digit standard industrial code
classification. See "The SBA Loan Program"
herein.
As of the Cut-Off Date, the aggregate and
average unpaid principal portion of the
Unguaranteed Interests of the SBA Section
7(a) Loans were approximately $____________
and $____________, respectively, the
aggregate and average unpaid principal
portion of the Guaranteed Interests of the
SBA Section 7(a) Loans were approximately
$____________ and $_____________,
respectively, the maximum and minimum
original principal portion of the
Unguaranteed Interests of the SBA Section
7(a) Loans were approximately $_________ and
$_______, respectively, and the maximum and
minimum original principal portion of the
Guaranteed Interests of the SBA Section 7(a)
Loans were approximately $________ and
$________, respectively. The aggregate
original principal portion of the
Unguaranteed Interests of the SBA Section
7(a) Loans was approximately $___________ and
the aggregate original principal portion of
the Guaranteed Interests of the SBA Section
7(a) Loans was approximately $------------.
As of the Cut-Off Date, the SBA Section 7(a)
Loans bore interest at rates (each, a "Note
Rate") which ranged from _____% to _____% per
annum and the weighted average Note Rate was
approximately ______% per annum. As of the
Cut-Off Date, the SBA Section 7(a) Loans had
a weighted average age of approximately __
months, a weighted average original term of
approximately ___ months, a weighted average
gross margin of approximately ____%, a
weighted average lifetime floor of
approximately ____%, and a weighted average
debt-service coverage ratio of approximately
_____. The weighted average Guaranteed
Percentage of the SBA Section 7(a) Loans was
approximately ____%. The weighted average
Excess Spread, expressed as a percentage of
the principal balances of the Unguaranteed
Interests, was approximately _____% as of the
Cut-Off Date. Such Excess Spread is in
addition to the Extra Interest (as defined
under "Description of the Agreement and the
Certificates--Class A and Class B Interest
Distribution Amounts" herein) available from
the unguaranteed portion of the SBA Section
7(a) Loans. Approximately _____% of the SBA
ss. 7(a) Loans (by principal balance of
Unguaranteed Interests) do not have a
lifetime interest rate cap. As of the Cut-Off
Date, the weighted average lifetime cap of
SBA Section 7(a) Loans with lifetime interest
rate caps was approximately ____%. As
described herein, the existence of a lifetime
interest rate cap or floor will not limit the
Excess Spread included in the related
Unguaranteed Interest. See "The SBA Loan
Pool" herein.
Transfer of Assets............... Each Note will be endorsed by the applicable
Seller by means of an allonge (I.E., a
separate ---- piece of paper attached to the
Note) and delivered to the FTA (or with
respect to the Notes relating to the Section
7(a) Companion Loans and the SBA 504 Loans,
delivered to the Trustee). On or before the
Closing Date (or, with respect to a
Subsequent SBA Loan, on or before the related
transfer date), the FTA (or with respect to
the Section 7(a) Companion Loans and the SBA
504 Loans, if any, the Trustee) will
acknowledge receipt of each such Note for
each SBA Loan in the SBA Loan Pool and that
each such Note has been endorsed as follows
(bracketed language is applicable only for
SBA Section 7(a) Loans): "Pay to the order of
[Name of Trustee], and its successors and
assigns, as trustee under that certain
Pooling and Servicing Agreement dated as of
_________, 199_, for the benefit of [the
United States Small Business Administration
and] holders of The Money Store SBA
Loan-Backed Certificates, Series 199_-_,
Class A and Class B[, as their respective
interests may appear], without recourse".
With respect to each SBA Loan in the SBA Loan
Pool, the applicable Seller will be required
to deliver the following additional
documentation to the Trustee at or prior to
the Closing Date (or, with respect to a
Subsequent SBA Loan, in the case of (a)
below, at or prior to the related transfer
date):
(a) For each SBA Loan secured by commercial
real property or residential real property:
(1) Original recorded Mortgage, or if the
original is unavailable, a copy thereof
certified to be true and complete by the
applicable Seller.
(2) Certified copy of the Assignment of the
Mortgage endorsed as follows (bracketed
language is applicable only for SBA Section
7(a) Loans): "[Name of Trustee], ("Assignee")
its successors and assigns, as trustee under
the Pooling and Servicing Agreement dated as
of ________, 199_ [, subject to the
Multi-Party Agreement dated as of ________,
199_]." The original assignments will be
transmitted by the applicable Seller for
recording promptly following the Closing
Date.
(3) Original recorded intervening
assignments, if any, or if the original is
unavailable, copies thereof certified by the
applicable Seller to be true and complete.
(4) Originals or certified copies of all
title insurance policies or other evidence of
lien position, including but not limited to
PIRT policies, limited liability reports and
lot book reports, to the extent the Sellers
obtain such policies or other evidence of
lien position in accordance with the criteria
described herein.
(b) For all SBA Loans:
(1) Blanket assignment of all collateral
securing the SBA Loan, including without
limitation, all rights under applicable
guarantees and insurance policies.
(2) Irrevocable power of attorney of the
applicable Seller to the Trustee to execute,
deliver, file or record and otherwise deal
with the collateral for the SBA Loans in
accordance with the Agreement. The power of
attorney will be delegable by the Trustee to
the Servicer and any successor servicer and
will permit the Trustee or its delegate to
prepare, execute and file or record UCC
financing statements and notices to insurers.
(3) Blanket Uniform Commercial Code ("UCC")
UCC-1 financing statements identifying by
type all collateral for the SBA Loans in the
SBA Loan Pool and naming the Trustee, and
with respect to the SBA Section 7(a) Loans,
the SBA, as Secured Parties and the
applicable Seller as the Debtor. See "The
Agreements-- Sale of SBA Loans" in the
Prospectus.
The Trustee will be required to provide an
interim certification as to the receipt of
such documents within 90 days after the
Closing Date and to provide a final
certification within one year after the
Closing Date.
Multi-Party Agreement............. TMSIC and MSNY, as Sellers, the Servicer, the
Trustee and the SBA will enter into a
Multi-Party Agreement, dated as of _________,
199_ (the "Multi-Party Agreement"), which
will set forth the relationship of the
parties with respect to the SBA Section 7(a)
Loans and the proceeds thereof and the
consent of the SBA to the transactions
contemplated by the Agreement.
Servicing of the
SBA Loans....................... MSNY will service the SBA Loans sold by it to
the Trust Fund and TMSIC will service the SBA
Loans sold by it and TMSCMI to the Trust
Fund, in each case, in accordance with the
Agreement and, with respect to the SBA
Section 7(a) Loans, the SBA Rules and
Regulations and the Multi-Party Agreement,
and will cause the SBA Loans to be serviced
with the same care as it customarily employs
and exercises in servicing and administering
small business loans for its own account,
giving due consideration for the reliance of
the Trustee on the Servicer. Such servicing
includes, without limitation, the right to
release and/or substitute collateral for an
SBA Loan.
Monthly Advances.................. The Servicer is required to remit to the
Trustee no later than the day of each month
which is three business days prior to the
Remittance Date (the "Determination Date")
for deposit in the Certificate Account the
amount (the "Monthly Advance"), if any, by
which (i) 30 days' interest at a rate equal
to the then applicable weighted average Class
A and Class B Remittance Rates plus the rate
used in determining certain expenses of the
Trust Fund (the "Adjusted SBA Loan Remittance
Rate") on the aggregate Class A and Class B
Principal Balances immediately prior to the
related Remittance Date (as the amount
calculated pursuant to this clause (i) may be
adjusted in accordance with the limits
described under "Description of the Agreement
and the Certificates--Class A and Class B
Interest Distribution Amounts" herein)
exceeds (ii) the amount received by the
Servicer as of the related Record Date in
respect of interest on the SBA Loans minus
the interest payable to the holders of the
Guaranteed Interest, the Additional Fee and
the fee payable to the FTA (plus, for the
Remittance Dates in ___________, ___________
and _____________, 199_, the sum of (a) all
funds to be transferred to the Certificate
Account from the Capitalized Interest Account
for such Remittance Date and (b) certain
investment earnings on amounts in the
Pre-Funding Account for the applicable
Remittance Date). The Service is not required
to make monthly advances which it determines,
in good faith, would be nonrecoverable from
amounts received in respect of the SBA loans.
Monthly Advances are reimbursable in the
first instance from late collections of
interest, Liquidation Proceeds, Insurance
Proceeds and proceeds received by the
Servicer in connection with condemnation,
eminent domain or a release of lien
("Released Mortgaged Property Proceeds")
collected with respect to the related SBA
Loan as to which the Monthly Advances were
made. The Servicer's right to reimbursement
for such advances in excess of such amounts
is limited to late collections of interest
received on the SBA Loans generally;
PROVIDED, HOWEVER, that the Servicer's right
to such reimbursement is subordinate to the
rights of the Certificateholders, the holder
of the Premium Protection Fee and the holders
of the Guaranteed Interest. Monthly Advances
are intended to provide sufficient funds for
the payment of interest to the
Certificateholders at the then applicable
Class A or Class B Remittance Rate, plus an
additional amount, if any, required to pay
the fees and expenses of the Trustee.
Compensating Interest............. Not later than each Determination Date, with
respect to each SBA Loan as to which a
principal prepayment in full or a Curtailment
was received during the related Due Period,
the Servicer is required to remit to the
Trustee, from amounts otherwise payable to
the Servicer as servicing compensation, an
amount ("Compensating Interest") equal to any
excess of (a) 30 days' interest on the
Unguaranteed Percentage of the related
principal balance at the Adjusted SBA Loan
Remittance Rate over (b) that portion of the
amount of interest actually received in
respect of the related SBA Loan during such
Due Period and available to be paid to the
Certificateholders.
Servicing Advances................ The Servicer will be entitled to
reimbursement for amounts advanced by it
constituting "out-of-pocket" costs and
expenses relating to (i) the preservation and
restoration of any related Mortgaged Property
or other collateral, (ii) enforcement
proceedings, including foreclosures and (iii)
certain other customary amounts described in
the Agreement. Such advances ("Servicing
Advances") are generally reimbursable to the
Servicer from Liquidation Proceeds, Released
Mortgaged Property Proceeds, Insurance
Proceeds and such other amounts as may be
collected by the Servicer from the related
Borrower or otherwise relating to the SBA
Loan in respect of which such amounts are
owed; PROVIDED, HOWEVER, that Servicing
Advances in excess of such amounts are
reimbursable to the same extent and from the
same sources as Monthly Advances.
Servicing Fee..................... The Servicer is entitled to a servicing fee
of ___% per annum (the "Servicing Fee") of
the unpaid principal balance of each SBA
Loan, calculated and paid monthly from the
interest portion of monthly payments,
Liquidation Proceeds and certain other
proceeds collected. See "The
Agreements--Servicing and Other Compensation
and Payment of Expenses" in the Prospectus.
Optional Termination by
the Servicer.................... The Servicer may, at its option, terminate
the Agreement on any date on which the then
outstanding aggregate principal balance of
the Unguaranteed Interests is less than 5% of
the sum of (i) the Original Pool Principal
Balance and (ii) the original Pre-Funded
Amount by purchasing, on the next succeeding
Remittance Date, all of the Unguaranteed
Interests and any other assets in the
Trust Fund at a price equal to the sum of (i)
100% of the then outstanding Class A and
Class B Principal Balances, and (ii) 30 days'
interest thereon at the then applicable Class
A and Class B Remittance Rates (the
"Termination Price"). See "Description of the
Agreement and the Certificates--Termination;
Purchase of SBA Loans" herein.
Tax Considerations .............. No real estate mortgage investment conduit
("REMIC") election will be made for the Trust
Fund. Stroock & Stroock & Lavan 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 the Class A
Certificates or the Class B Certificates will
be treated as issued with original issue
discount ("OID").
Special considerations may apply to cash
method holders of Class B Certificates by
reason of the subordination of the Class B
Certificates. Also, special considerations
may apply to individuals and certain
pass-through entities that hold Class A
Certificates or Class B Certificates. See
"Risk Factors--Federal Income Tax
Considerations" and "Federal Income Tax
Consequences" herein and "Federal Income Tax
Consequences" in the Prospectus.
ERISA Considerations............. No Certificates may be purchased for, or on
behalf of, any employee benefit plan or other
retirement arrangement which is subject to
Title I of the Employee Retirement Income
Security Act of 1974, as amended, and/or
Section 4975 of the Internal Revenue Code of
1986, as amended, or any entity whose
underlying assets include plan assets by
reason of such plan or account investing in
such entity (including insurance company
separate or general accounts and collective
investment funds). By its acceptance of a
Certificate, each Certificateholder will be
deemed to have represented and warranted that
it is not subject to the foregoing
limitations. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment................. No representation will be made as to whether
or the extent to which the Certificates
constitute legal investments for investors.
Rating .......................... It is a condition to their issuance that the
Class A Certificates be rated "Aaa" and "AAA"
by [Moody's Investors Service, Inc.
("Moody's")] and[ Duff & Phelps Credit Rating
Co. ("Duff & Phelps")], respectively, and
that the Class B Certificates be rated not
lower than "___" and "___" by [Moody's] and
[Duff & Phelps], respectively. A security
rating is not a recommendation to buy, sell
or hold securities and may be subject to
revision or withdrawal at any time. No person
is obligated to maintain the rating on any
Certificate. See "Ratings" herein.
Registration of the
Certificates................... The Class A Certificates will be represented
by global certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of The
Depository Trust Company ("DTC") in the
United States, or CEDEL, Societe anonyme
("CEDEL") or the Euroclear System
("Euroclear") in Europe. The Class B
Certificates will be either (i) registered in
the name of Cede, as the nominee of DTC in
the United States, or CEDEL or Euroclear in
Europe, with similar effect as the Class A
Certificates, or (ii) issued in physical
form, as determined by the Sellers prior to
the initial issuance of the Certificates. No
Holder of a Certificate registered through
DTC will be entitled to receive definitive
certificates ("Definitive Certificates")
representing such person's interest, except
in the event that Definitive Certificates are
issued in respect of such person's interest
under the limited circumstances described
herein. All references herein to "Class A and
Class B Certificateholders" or "Holders" will
reflect the rights of the beneficial owners
of Class A and Class B Certificates, as such
rights may be exercised, in the case of those
Certificates registered through DTC, 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
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.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
Sellers and the Representative are faced with the task of completing their
compliance goals in connection with the year 2000 issue during the next year and
a half. The year 2000 issue is the result of prior computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any of the Sellers' or the Representative's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could result in a major computer system
failure or miscalculations. The Sellers and the Representative are presently
engaged in various procedures to ensure that their computer systems and software
will be year 2000 compliant.
However, in the event that the Sellers, the Representative or any of their
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the Sellers or the
Representatives under the Agreement could be materially adversely affected.
LIMITED LIQUIDITY
There is currently no secondary market for the Certificates. Although [Name
of Underwriting] (the "Underwriter") currently intends to make a secondary
market in the Certificates, it is under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a secondary market does
develop, that it will provide Holders of the Certificates with liquidity of
investment or that it will continue for the lives of the Certificates. In
addition, transfers of the Class B Certificates will be restricted as described
under "ERISA Considerations".
FEDERAL INCOME TAX CONSIDERATIONS
If the Class B Certificateholders receive distributions of less than their
proportionate share of the Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Class B Certificates,
although the matter is not free from doubt, Federal Tax Counsel believes that
holders of Class B Certificates would be treated for federal income tax purposes
as if they had (1) received as distributions their full share of such receipts,
(2) paid over to the Class A Certificateholders an amount equal to such
Shortfall Amount, and (3) retained the right to reimbursement of such amounts to
the extent of future collections otherwise available for deposit in the Spread
Account. However, Federal Tax Counsel cannot opine to such treatment.
Under this analysis, (1) Class B Certificateholders would be required to
accrue as current income any interest, OID income, or (to the extent paid on the
SBA Loans) accrued market discount of the Trust Fund that was a component of the
Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that amount would not be
available from any source to reimburse such loss), and (3) reimbursement of such
Shortfall Amount prior to such a claim of worthlessness would not be taxable
income to Class B Certificateholders because such amount was previously included
in income. Those results should not significantly affect the inclusion of income
for Class B Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B Certificateholders on the cash method
of accounting by, in effect, placing them on the accrual method. Moreover, the
character and timing of loss deductions is unclear.
A Certificateholder will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Internal Revenue Code of 1986, as amended. If a Certificateholder is an
individual, estate or trust, the deduction for such Holder's share of such fees
will be allowed only to the extent that all of such Holder's miscellaneous
itemized deductions, including such Holder's share of such fees, exceed two
percent of such Holder's adjusted gross income. For other federal income tax
considerations, see "Federal Income Tax Consequences" herein and "Federal Income
Tax Consequences" in the Prospectus.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences" herein and "Federal Income Tax Consequences" in the
Prospectus, potential investors should consider the state income tax
consequences of the acquisition, ownership, and disposition of the Certificates.
State income tax law may differ substantially from the corresponding federal
law, and this Prospectus Supplement and the accompanying Prospectus do not
purport to describe any aspect of the income tax laws of any state. Therefore,
potential investors should consult their own tax advisors with respect to the
various state tax consequences of an investment in the Certificates.
NATURE OF COLLATERAL
As set forth herein under "The SBA Loan Pool--General," commencing in 1995
the Sellers increased their focus on originating SBA Loans to targeted
franchises and professionals and for financing business acquisitions. These
loans are secured primarily by liens on machinery and equipment, other business
assets and personal guarantees. In originating these loans, the Sellers place
primary emphasis on the creditworthiness of the small business concern and
related Obligor, and less emphasis is given to the value of the related
collateral. In some instances, the amount of the SBA Loan exceeds the sum of the
value of the related collateral. If such loans were to go into default, the
Trust may realize little or no liquidation proceeds.
Further, because the market value of equipment and other business assets
generally declines with age or obsolescence, such equipment and/or other assets
may not provide adequate security in the event it is repossessed and sold. Some
of the equipment, such as computers, also may be subject to sudden, significant
declines in value because of technological advances. Also, in liquidation sales
the Trust may be unable to realize the fair market value of any collateral sold.
UNPERFECTED SECURITY INTERESTS IN CERTAIN COLLATERAL
For each SBA Loan secured by real property, assignments of the related
Mortgages will be transmitted by the applicable Seller for recording promptly
following the Closing Date. Also, the Sellers will deliver to the Trustee
blanket assignments of all other collateral securing the SBA Loans. In
connection with originating SBA Loans secured by collateral other than real
estate, the Sellers obtain and file UCC financing statements naming the related
Obligor as debtor where such action is necessary to perfect a security interest
in such collateral. Because of the administrative burden and expense that would
be entailed in so doing, these UCC financing statements will not be re-assigned
to the Trustee. The Trustee will have the benefit of the Sellers' security
interest in the collateral related to such SBA Loans. However, since assignments
will not be recorded in the name of the Trustee, if the Sellers were to become
debtors under the federal bankruptcy code or similar applicable state laws, a
creditor or trustee in bankruptcy thereof, or the Sellers as
debtors-in-possession, might be able to defeat the Trustee's security interest
in such collateral. Additionally, certain judgment creditors of, or tax and
other liens against, the Sellers or their property may have priority over the
Trustee's security interest.
JUNIOR LIENS
Approximately ___% of the SBA Loans secured by a Commercial Property (other
than certain SBA Section 7(a) Loans originated in conjunction with a Section
7(a) Companion Loan) constitute a first lien on the related Commercial Property.
The majority of such SBA Loans also are secured by a first lien on related
business assets. However, certain SBA Loans secured by a Commercial Property
(including but not limited to those originated in conjunction with a Section
7(a) Companion Loan), along with substantially all of the SBA Loans secured by a
Residential Property, constitute second or third liens and the related Prior
Liens are not included in the SBA Loan Pool. Also, many of the SBA Loans are
secured by collateral other than real property. See "The SBA Loan Pool -
General" herein.
The primary risk to holders of SBA Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Prior Liens to satisfy fully both such Prior Liens
and the SBA Loan. If a holder of a Prior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holders of each Prior Lien. The claims of the holders of all Prior Liens will be
satisfied in full out of proceeds of the liquidation of the Prior Liens, if such
proceeds are sufficient, before the Trust Fund receives any payments in respect
of the SBA Loan.
If the Servicer were to foreclose on any mortgage securing an SBA Loan, it
would do so subject to any related Prior Liens. For the debt related to the SBA
Loan to be paid in full at such sale, a bidder at the foreclosure sale of the
related Mortgaged Property would have to bid an amount sufficient to pay off all
sums due under the SBA Loan and the Prior Liens or purchase the Mortgaged
Property, for the full amount of the SBA Loan, subject to the Prior Liens.
Similarly, if the Servicer were to take possession of any other Collateral, it
would do so subject to any related Prior Lien. See "Federal Income Tax
Consequences" herein and "Federal Income Tax Consequences" in the Prospectus.
SBA LOAN INTEREST RATES
The rate of interest borne by each SBA Loan (the "SBA Loan Interest Rate")
is equal to the Prime Rate as of the first Business Day or, with respect to
certain SBA Loans, the first day of the related calendar quarter, in each case
plus the appropriate margin. With respect to SBA Section 7(a) Loans having
Unguaranteed Interests with an aggregate principal amount of approximately
$____________, the terms of the related Notes limit the maximum and minimum SBA
Loan Interest Rates, respectively. Generally, the terms of such Notes provide
that the SBA Loan Interest Rate cannot increase (or decrease) five percentage
points above (or below) the SBA Loan Interest Rate in effect when the related
SBA Loan was fully funded. These maximum and minimum SBA Loan Interest Rate
provisions will not have a disproportionate effect on the Holders of either
Class of Certificates. As described herein, if, as a result of such maximum and
minimum SBA Loan Rate provisions, more or less interest is collected on the SBA
Loans than would be collected in the absence of such provisions, such excess or
shortfall will be allocated to the Class A and Class B Certificates pro rata in
accordance with the amount of interest each such Class of Certificates would
otherwise be entitled to receive but for such adjustment. Because in determining
the Class A and Class B Interest Distribution Amounts, provision is made for
such maximum and minimum SBA Loan Rates, if the full amount of interest required
to be paid on the SBA Loans in accordance with their terms is collected, and
required amounts are received by the Trust Fund, such amounts will be sufficient
to pay interest on the Certificates, regardless of changes in the underlying
interest rates. See "The SBA Loan Pool -- Certain Characteristics of the SBA
Loan Pool" and "Description of the Agreement and the Certificates -- Class A and
Class B Interest Distribution Amounts" herein.
GEOGRAPHIC CONCENTRATION
Approximately ___%, ___%, ___% and ___% of the Trust Assets will consist of
SBA Loans that are secured by Mortgaged Properties located in the states of
_________, __________, __________ and __________, respectively. Because of the
relative geographic concentration of the SBA Loans within these states,
delinquencies and losses on the SBA Loans may be higher than would be the case
if the SBA Loans comprising the Trust Assets were more geographically
diversified. With respect to the SBA Loans in these states, certain of the
Mortgaged Properties may be more susceptible to certain types of special hazards
that are not covered by any casualty insurance, such as earthquakes, floods and
other natural disasters and major civil disturbances, than similar properties
located in other parts of the country.
SPREAD ACCOUNT
As described herein, the Spread Account is intended to enhance the
likelihood of timely payment of principal and interest on the Certificates.
However, if the SBA Loan Pool experiences extremely high levels of delinquencies
and losses, the Spread Account could be depleted, resulting in shortfalls in
payments to the Certificateholders. Any such shortfall would be allocated
against payments of principal, first to the Class B Certificateholders and then
to the Class A Certificateholders. Additional shortfalls would be allocated
against payments of interest, first to the Class B Certificateholders and then
to the Class A Certificateholders. See "Description of the Agreement and the
Certificates -- Spread Account" herein.
THE SBA LOAN POOL
GENERAL
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate principal balances of the SBA Section
7(a) Loans expected to be delivered to the Trustee on the Closing Date, and the
Unguaranteed Interests or the Guaranteed Interests therein, as the case may be,
at the close of business on the Cut-Off Date and all dollar amounts are based on
the principal balances thereof at the close of business on the Cut-Off Date. As
used herein, the term "Cut-Off Date" means _____, 199__ with respect to each SBA
Loan originated on or prior to such date and the applicable date of origination
for each SBA Loan originated after such date. All of the SBA Loans were, and all
of the Subsequent SBA Loans will have been, originated or acquired by the
Sellers and consist of adjustable-rate loans, evidenced by promissory notes (the
"SBA Notes") and, in the case of the SBA Section 7(a) Loans, partially
guaranteed by the SBA. The principal portion of the Unguaranteed Interests of
the SBA Section 7(a) Loans aggregated approximately $______________ as of the
Cut-Off Date. The SBA Section 7(a) Loans were originated to businesses located
in ___ states and the District of Columbia. The SBA Section 7(a) Loans were
primarily originated to businesses located in ___________, __________,
___________ and ___________.
Historically, most of the SBA Section 7(a) Loans originated by the Sellers
were loans primarily secured by first liens on commercial real property used by
the related borrower or its affiliates in the conduct of their business.
Commencing in 1995, the Sellers increased their focus on originating loans to
targeted franchisees, health care professionals and other professionals, such as
attorneys and accountants, and for financing business acquisitions. These loans
generally are secured by second liens on personal real estate, personal
guarantees, liens on machinery and equipment and other business assets. The
Seller's believe that this approach is consistent with their philosophy of
expanding into selected markets that present opportunities for growth. In
originating these loans, the Sellers concentrate on analyzing the underlying
business and the borrower's ability to repay the related loan. The Sellers'
believe that at the time of origination each such loan is adequately secured by
one or more items of Collateral. See "The SBA Loan Lending Program--Underwriting
Criteria for SBA Section 7(a) Loans" in the Prospectus.
Approximately ____% of the SBA Section 7(a) Loans (by principal balance)
were originated to businesses located in California, a state currently
experiencing economic difficulties. This concentration results primarily from
the Servicer being headquartered in California, where it began originating SBA
Loans in the early 1980s and where it expanded its marketing efforts and market
share prior to the current economic conditions. The Sellers believe that the
concentration of SBA Section 7(a) Loans in the Trust Fund originated to
businesses located in California is representative of their SBA Section 7(a)
Loan portfolio as a whole.
PAYMENTS ON THE SBA LOANS
The SBA Loans have payments of principal and interest due on the first of
the month with interest payable in arrears at a rate equal to the Prime Rate as
of the first Business Day or, with respect to certain SBA Loans, the first day
of the related calendar quarter, in each case plus the appropriate margin
(subject to applicable lifetime floors and caps). For example, the Prime Rate on
October 1st is used to determine the interest rate paid for the months of
October, November and December. Since interest is paid in arrears, interest and
principal for these months is scheduled to be received in November, December and
January, respectively. The monthly payment received is apportioned between
interest and principal based upon a "simple interest" basis, which means that
payments are applied as they are received first to accrued interest, then to
principal, with interest calculated on the number of days between the current
and previous payments. If a monthly payment is received prior to its due date,
less of such payment will be allocated to interest than would be the case if
such payment were received on its due date. Conversely, if a monthly payment is
received after its due date, more of such payment will be allocated to interest
than would be the case if such payment were received on its due date. None of
the SBA Loans is a balloon loan and each is fully amortizing in accordance with
its terms. However, the monthly payments are re-calculated each quarter to
reflect changes in interest rates, the then-current principal balance and the
then-remaining term to maturity.
CERTAIN CHARACTERISTICS OF THE SBA LOAN POOL
Set forth below is a description of certain characteristics of the SBA
Section 7(a) Loans expected to constitute the SBA Loan Pool as of the Closing
Date. As described herein, the Sellers reserve the right to sell to the Trust
Fund Section 7(a) Companion Loans and SBA 504 Loans in an aggregate principal
amount of up to approximately $__________ and having the characteristics set
forth under "-- Section 7(a) Companion Loans and SBA 504 Loans." If such loans
are not sold to the Trust Fund, it is expected that the Sellers will sell to the
Trust Fund SBA Section 7(a) Loans having overall characteristics substantially
similar to the SBA Section 7(a) Loans being delivered on the Closing Date.
Certain of the percentage columns may not sum to 100.00% due to rounding.
[Each chart will set forth at least the following information for the specific
characteristic: (i) aggregate unpaid principal balance, (ii) percentage based
upon aggregate principal balance and (iii) number of SBA Loans].
<PAGE>
The geographic distribution of the SBA Section 7(a) Loans by state as of
the Cut-Off Date was as follows:
<PAGE>
The interest rates borne by the SBA Notes (the "Note Rates") were
distributed as follows as of the Cut-Off Date:
<PAGE>
The Margins added to the Prime Rate on each Interest Adjustment Date to
determine the new Note Rates were distributed as of the Cut-Off Date as follows:
<PAGE>
The minimum lifetime Note Rates borne by the SBA Section 7(a) Loans were as
follows (1):
- -----------------------------
(1) For purposes of determining the weighted average minimum lifetime Note Rate,
those SBA Section 7(a) Loans not containing a stated minimum lifetime Note Rate
are assumed to have a minimum lifetime Note Rate equal to the applicable Margin.
<PAGE>
The maximum lifetime Note Rates borne by the SBA Section 7(a) Loans were as
follows:
<PAGE>
The distribution of the number of remaining months to maturity of the SBA
Section 7(a) Loans as of the Cut-Off Date was as follows:
<PAGE>
The distribution of the number of months since origination of the SBA
Section 7(a) Loans as of the Cut-Off Date was as follows:
<PAGE>
The years in which the SBA Section 7(a) Loans were originated was as
follows:
<PAGE>
The Excess Spread as a percentage of the principal balance of the
Unguaranteed Interests of the SBA Section 7(a) Loans as of the Cut-Off Date was
as follows: (1)
- -------------------------
(1) With respect to each SBA Section 7(a) Loan, the Excess Spread is included in
the related Unguaranteed Interest.
<PAGE>
The Unguaranteed Percentage of the SBA Section 7(a) Loans as of the Cut-Off
Date was as follows:
<PAGE>
The distribution of the debt-service coverage ratios at origination of the
SBA Section 7(a) Loans was as follows: (1)
- ------------------------
(1) Represents the ratio of the pro forma annual debt service payments to annual
net operating income.
(2) For these SBA Section 7(a) Loans, the Borrower had a negative net operating
income for the fiscal year for which ratio was determined. The Sellers believed
that based upon the projected net operating income and certain other factors, it
was appropriate to originate such SBA Section 7(a) Loan.
<PAGE>
The distribution of the original terms of the SBA Section 7(a) Loans was as
follows:
<PAGE>
The distribution of the original balances of the SBA Section 7(a) Loans was
as follows:
<PAGE>
The distribution of the original balances of the Unguaranteed Interests was
as follows:
<PAGE>
The distribution of the principal balances of the SBA Section 7(a) Loans as
of the Cut-Off Date was as follows:
<PAGE>
The distribution of the principal balances of the Unguaranteed Interests as
of the Cut-Off Date was as follows:
<PAGE>
The type of program under which the SBA Section 7(a) Loans were originated
was as follows:
<PAGE>
Subsequent SBA Loans
The Subsequent SBA Loans to be included in the Trust Fund are expected to
have the following characteristics as of the Cut-Off Date (unless otherwise
indicated): 1
Maximum original Unguaranteed Interest......................$_______
Minimum original Unguaranteed Interest......................$_______
Maximum original Guaranteed Interest........................$_______
Minimum original Guaranteed Interest........................$_______
Range of Note Rates......................................____%-____%
Range of ages........................................__ to __ months
Range of original terms............................___ to ___ months
Range of gross margins................................____% to ____%
Range of original debt service
Coverage ratios......................................_____% to ____%
- --------
1 The actual characteristics of the Subsequent SBA Loans to be included in
the Trust Fund may vary somewhat from the characteristics presented. The
Sellers do not expect that any such variation will be material.
<PAGE>
SECTION 7(A) COMPANION LOANS AND SBA 504 LOANS.
The Section 7(a) Companion Loans and SBA 504 Loans, if any, to be included
in the Trust Fund are expected to have the following characteristics as of the
Cut-Off Date (unless otherwise indicated):(1)
Average unpaid principal balance............................$____________
Maximum original principal balance..........................$____________
Minimum original principal balance..........................$____________
Range of Note Rates......................................... ___%-___%
Weighted average Note Rate.................................. ___%
Weighted average age........................................ mos.
Weighted average original term.............................. mos.
Weighted average gross margin............................... ___%
Weighted average original L-T-V (based
on net discounted collateral value)....................... ___%
Weighted average original L-T-V (without
giving effect to discounts to
collateral values)........................................ ___%
Weighted average original debt service
coverage ratio............................................ ___%
[If a significant portion of the Trust Fund will consist of Section 7(a)
Companion Loans and/or SBA 504 Loans, charts similar to those set forth
above for the SBA Section 7(a) Loans will be included.]
- -------------------
(1) The actual characteristics of the Section 7(a) Companion Loans and SBA 504
Loans, if any, to be included in the Trust Fund may vary somewhat from the
characteristics presented. The Sellers do not expect that any such variation
will be material.
<PAGE>
THE SBA LOAN PROGRAM
GENERAL
The Small Business Act of 1953 (the "Act"), which created the Small
Business Administration, also established the general business loan program
under Section 7(a) of the Act (the "Section 7(a) Program"). The Section 7(a)
Program was intended to encourage lenders to provide loans to qualifying small
businesses. Loans made under the Section 7(a) Program can be used to construct,
expand or convert facilities, to purchase building equipment or materials or to
finance machinery and equipment, business acquisitions and inventory. Money lent
under the Section 7(a) Program also can be used for working capital.
The Act also established the SBA 504 Loan Program (the "SBA 504 Loan
Program") to encourage lenders to provide fixed asset financing to existing
qualifying small businesses. SBA 504 Loans may be used for plant acquisition,
construction, renovation, expansion, land and site improvements, acquisition and
installation of machinery and equipment and the interest on interim financing.
SBA 504 Loans are not guaranteed by the SBA.
THE SECTION 7(A) LOAN GUARANTY PROGRAMS
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the Guaranteed Participant
Program, the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guaranty the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
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.
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. 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.
THE SELLERS' PARTICIPATION IN SBA SECTION 7(A) PROGRAM
The Sellers have been named as Preferred Lenders by the SBA in each major
SBA loan market in which they operate (except for newly established offices).
Based upon this experience, the Sellers expect to be upgraded to Preferred
Lender status in all markets where they now operate. However, it is unknown when
such upgradings will occur. See "The Sellers" herein.
THE SECTION 7(A) COMPANION PROGRAM
For most applications submitted between January 1, 1995 and October 12,
1995 the maximum loan size for most loans originated under the Section 7(a)
Program was reduced administratively to $500,000. To assist qualified borrowers
in obtaining more financing when needed, the Sellers introduced a program (the
"Section 7(a) Companion Program") pursuant to which TMSCMI originated a loan
(the "Section 7(a) Companion Loan") to the related borrower in situations in
which the total amount financed would otherwise exceed the current $500,000
limit. The maximum amount for a Section 7(a) Companion Loan currently is
approximately $800,000, which maximum may be increased where the Collateral or
LTV warrants it. Although Section 7(a) Companion Loans are not guaranteed by the
SBA, they are secured by a first lien on the related primary collateral, with
the Section 7(a) Loan being secured by a second lien on such collateral.
Section 7(a) Companion Loans may be utilized by a borrower for all eligible
Section 7(a) Loan purposes. Section 7(a) Companion Loans are originated only in
conjunction with a Seller obtaining an SBA guarantee of the companion Section
7(a) Loan under the Certified Lender Program (the SBA currently prohibits
Section 7(a) Companion Loans in connection with the Preferred Lender Program).
Section 7(a) Companion Loans bear interest and have terms to maturity as
described above under "--Section 7(a) Loan Parameters."
SBA 504 LOAN PROGRAM
The SBA 504 Loan Program was established to encourage lenders to provide
fixed asset financing to existing qualifying small businesses. SBA 504 Loans may
be used for plant acquisition, construction, renovation, expansion, land and
site improvements, acquisition and installation of machinery and equipment as
well as certain closing costs and professional fees and the interest on interim
financing. The lender provides approximately 50% of project costs in a
conventional loan agreement, with borrowers providing a minimum 10% equity
contribution. The SBA provides the remainder of the financing. Each SBA 504 Loan
must be approved by the SBA.
The funds used by the SBA to originate its portion of a project generated
pursuant to the SBA 504 Loan Program are obtained by issuing SBA-guaranteed
debentures on behalf of a certified development company (a "CDC"). A CDC is an
organization sponsored by private interests or by state or local governments.
The debentures are pooled monthly and sold through a certificate mechanism to
the public market. The SBA 504 Loans are not guaranteed by the SBA.
SBA 504 Loans bear interest and have terms to maturity as described above
under "--Section 7(a) Loan Parameters."
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The value of an investment in the Certificates may be affected by, among
other things, a change in interest rates. If interest rates fall below the then
current Note Rates on the SBA Loans, the rate of prepayment on such SBA Loans
may increase. Prepayments, delinquencies and defaults may also be influenced by
a number of other factors including economic conditions.
On each Remittance Date, the Certificateholders are entitled to receive 30
days' interest on the Class A or Class B Principal Balance, as the case may be,
immediately prior to such Remittance Date at the applicable Class A or Class B
Remittance Rate, subject to the adjustments described under "Description of the
Agreement and the Certificates--Class A and Class B Interest Distribution
Amounts" herein. This is the case even if Principal Prepayments or Curtailments
are received with respect to the SBA Loans during the related Due Period. With
respect to such Principal Prepayments and Curtailments the Servicer will remit
to the Trustee for deposit in the Certificate Account, from amounts otherwise
payable to it as servicing compensation, Compensating Interest as described
under "Description of the Agreement and the Certificates--Payments on the SBA
Loans; Distributions on the Certificates" herein.
For the Certificates, the net effect of each distribution respecting
interest generally will be the pass-through on each Remittance Date to each
Certificateholder of an amount which is equal to 30 days' interest at the Class
A or Class B Remittance Rate, as the case may be, subject to the adjustments
described herein.
The Excess Spread on the guaranteed portions of the SBA Section 7(a) Loans
will be available to make up shortfalls in amounts to which Certificateholders
are entitled on Remittance Dates. The amount of Excess Spread varies from loan
to loan and will be eliminated when a borrower prepays a loan in full. However,
the Excess Spread will not be affected by any applicable lifetime interest rate
caps on the SBA Section 7(a) Loans. This is because the Guaranteed Interests are
sold with lifetime interest rate caps equal to the cap on the related SBA
Section 7(a) Loan less the sum of the Excess Spread, the fee payable to the FTA,
the Premium Protection Fee and, with respect to the Additional Fee SBA Loans,
the Additional Fee. In addition, the Excess Spread on an SBA Section 7(a) Loan
in default will be paid by the SBA until the purchase by the SBA of the related
Guaranteed Interest (up to 120 days of accrued interest).
With respect to SBA Section 7(a) Loans for which the Guaranteed Interest
was sold in the secondary market on or after September 1, 1993 (unless the
related SBA Section 7(a) Loan was approved by the SBA on or after October 12,
1995) and SBA Section 7(a) Loans approved by the SBA on or after October 12,
1995, regardless of whether they were sold in the Secondary Market (the
"Additional Fee SBA Loans"), a fee equal to 40 basis points and 50 basis points,
respectively, per annum on the outstanding balance of the Guaranteed Interest of
such Additional Fee SBA Loans (the "Additional Fee") is required to be paid by
the related Seller to the SBA. Although such Additional Fee is the
responsibility of the related Seller, the Additional Fee will be funded from the
interest received by the related Obligor. Accordingly, any such Additional Fee
will reduce the Excess Spread on the related SBA Section 7(a) Loan.
Unscheduled payments, delinquencies, defaults on the SBA Loans and
distributions from the Pre-Funding Account, if any, on the Remittance Dates in
________, _________ and ______, 199__ and the Special Remittance Date will
affect the amount of funds available to make distributions on each Remittance
Date. In addition, the Servicer may, at its option, on any date on which the
then outstanding aggregate principal balance of the Unguaranteed Interests is
less than 5% of the sum of (i) the Original Pool Principal Balance and (ii) the
original Pre-Funded Amount, if any, purchase from the Trust Fund all of the
Unguaranteed Interests and any other assets in the Trust Fund at a price equal
to the sum of (x) 100% of the then outstanding Class A and Class B Principal
Balances, and (y) 30 days' interest thereon at the then applicable Class A and
Class B Remittance Rates (the "Termination Price"). See "Description of the
Agreement and the Certificates--Termination; Purchase of SBA Loans" herein.
However, because the SBA Loans may prepay, the weighted average life of the
Certificates or the date on which the outstanding aggregate principal balances
of the Unguaranteed Interests will be less than 5% of the sum of (i) the
Original Pool Principal Balance and (ii) the Original Pre-Funded Amount, if any,
cannot be determined.
None of the SBA Loans are balloon loans and each is fully amortizing in
accordance with its terms. The SBA Loans may be prepaid at any time without
payment of a prepayment fee or penalty. In general, when the level of prevailing
interest rates for similar loans significantly declines, the rate of prepayment
is likely to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions. Prepayments, liquidations
and purchases of the Unguaranteed Interests will result in distributions to
Certificateholders of amounts which would otherwise be distributed over the
remaining terms of the SBA Loans.
The final scheduled Remittance Date for the Certificates is _________,
20__, which is the date on which the principal balances of the Class A and Class
B Certificates would be reduced to zero, assuming that no prepayments are
received on the SBA Loans and that distributions of principal of and interest on
each of the SBA Loans are timely received. The weighted average life of the
Certificates is likely to be shorter than would be the case if payments actually
made on the SBA Loans conformed to the foregoing assumptions, and the final
Remittance Date with respect to the Certificates could occur significantly
earlier than the final scheduled Remittance Date because (i) prepayments are
likely to occur and (ii) the Servicer may cause a termination of the Trust Fund
when the then outstanding aggregate principal balance of the Unguaranteed
Interests is less than 10% of the sum of (i) the Original Pool Principal Balance
and (ii) the Original Pre-Funded Amount, if any.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the Closing Date to the date on which each dollar
in respect of principal of such Certificate is repaid. The weighted average
lives of the Certificates will be influenced by, among other factors, the rate
at which principal payments (including Monthly Payments, Principal Prepayments,
Excess Payments and Curtailments) are made on the SBA Loans.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Constant
Prepayment Rate ("CPR"), represents an assumed constant rate of prepayment per
annum relative to the then outstanding principal balance of a pool of new SBA
loans. The CPR does not purport to be either a historical description of the
prepayment experience of any pool of SBA loans or a prediction of the
anticipated rate of prepayment of any pool of SBA loans, including the SBA
Loans.
The Sellers make no representation as to the particular factors that will
affect the prepayment of the SBA Loans, as to the percentage of the principal
balance of the SBA Loans that will be paid as of any date or as to the overall
rate of prepayment on the SBA Loans.
Greater than anticipated prepayments of principal will increase the yield
on Certificates purchased at a price less than par. Greater than anticipated
prepayments of principal will decrease the yield on Certificates purchased at a
price greater than par. The effect on an investor's yield due to principal
prepayments on the SBA Loans occurring at a rate that is faster (or slower) than
the rate anticipated by the investor in the period immediately following the
issuance of the Certificates will not be entirely offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
lives of the Certificates will also be affected by the amount and timing of
delinquencies and defaults on the SBA Loans and the recoveries, if any, on
defaulted SBA Loans and foreclosed properties. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted SBA Loans and foreclosed properties result in principal payments on
the Certificates faster than otherwise scheduled.
The following table under the heading "Weighted Average Lives of the Class
A and Class B Certificates" assumes, among other things, that (i) (a) the
scheduled payment in each month for each SBA Loan has been based on the
outstanding balance as of the first day of the month preceding the month of such
payment, (b) the initial Note Rate for the SBA Loans delivered at closing for
the ______ 199_ scheduled payments are _____% and _____% plus the applicable
Gross Margin and the initial Note Rates for the SBA Loans delivered at the
subsequent funding for the ______, 199__ Scheduled Payment are ___% and ___%,
respectively per the chart below and (c) thereafter, the scheduled payments and
remaining term to stated maturity for each SBA loan is as set forth below
(rather than based on the actual SBA Loan characteristics) so that such
scheduled payments would amortize the remaining balance by its stated maturity
date, (ii) scheduled monthly payments of principal and interest on the SBA Loans
will be timely received on the first day of each month (with no defaults),
commencing __________, 199_, (iii) the Servicer does not exercise its option to
purchase the Unguaranteed Interest and thereby cause a termination of the
Agreement, (iv) principal prepayments on the SBA Loans represent prepayments in
full of individual SBA Loans and will be received on the last day of each month
commencing __________, 199_ at the respective percentages of CPR set forth in
the table and (v) the Certificates will be issued on __________, 199_. The
following table also assumes that the Pre-Funding Account is established, the
original Pre-Funded Amount equals its maximum permitted amount and the entire
Pre-Funded Amount is used to purchase SBA Section 7(a) Loans at the end of the
Pre-Funding Period.
NOTE RATE GROSS MARGIN BALANCE REMAINING TERM
% % $
% % $
% % $
% % $
Based upon the foregoing assumptions, some or all of which are unlikely to
reflect actual experience, the following table indicates the projected weighted
average lives of each Class of Certificates at various CPRs. As used in the
table, 0% CPR indicates no Principal Prepayments, Curtailments or Excess
Payments. The Class A and Class B Certificates were priced assuming __% CPR. If
the entire Pre-Funded Amount were used to purchase Section 7(a) Companion Loans
and SBA 504 Loans, rather than SBA Section 7(a) Loans, the weighted average
lives of the Class A and Class B Certificates would not differ materially.
WEIGHTED AVERAGE LIVES OF THE CLASS A AND CLASS B CERTIFICATES
WEIGHTED EARLIEST RETIREMENT
AVERAGE AT SERVICER'S
CPR LIFE (YEARS)(1) OPTION(2)
[ 0%]
[ 4%]
[ 8%]
[ 12%]
- --------
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each payment of principal by the number of years from the
date of issuance to the related Remittance Date, (ii) summing the 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 Unguaranteed Interests is less than 10%
of the sum of (i) the Original Pool Principal Balance and (ii) the original
Pre-Funded Amount, if any.
Since the individual characteristics of the SBA Loans will not correspond
to those assumed above, the actual weighted average lives and the earliest
retirement dates of the Certificates will vary from those of the underlying SBA
Loans even if any indicated CPR is met. In addition, there is no assurance that
Principal Prepayments, Curtailments or Excess Payments will occur, or, if they
do occur, that they will occur at a constant rate approximating any of the
indicated CPRs.
THE SELLERS
TMSIC and TMSCMI are New Jersey corporations, and wholly-owned subsidiaries
of The Money Store Inc. (the "TMSI"). MSNY, a New York corporation, is a
wholly-owned subsidiary of TMSIC. TMSIC is headquartered in Sacramento,
California and began originating SBA Section 7(a) Loans in 1979. TMSCMI is
headquartered in Sacramento, California and began originating SBA 504 Loans in
1994 and Section 7(a) Companion Loans in 1995. MSNY is headquartered in
Sacramento, California and began originating SBA Section 7(a) Loans in 1980.
MSNY only originates SBA Section 7(a) Loans to businesses located in the State
of New York. The Sellers became the largest originator of SBA guaranteed loans
in 1983 and have maintained that position in each of the past __ SBA fiscal
years. The Sellers originated approximately $___ million of SBA Loans during
calendar 199_ and, at December 31, 199_ and December 31, 199_, were servicing a
portfolio of SBA Loans aggregating approximately $___ billion and $___ billion,
respectively.
TMSI, headquartered in Sacramento, California and Union, New Jersey, is a
financial services company engaged, through its operating divisions, primarily
in originating, servicing and selling consumer and commercial loans. As of
_____________, 19__, TMSI maintained ___ offices in __ states, Puerto Rico and
the District of Columbia through which it conducted business in the following
areas: (i) mortgage loans; (ii) SBA Loans and (iii) government guaranteed
student loans. TMSI, through its subsidiaries, also originates loans partially
insured by the Federal Housing Administration under Title I of the National
Housing Act.
On June 30, 1998, The Money Store Inc., became a wholly-owned subsidiary of
First Union National Bank, a national banking subsidiary of First Union
Corporation. First Union Corporation is the parent of First Union Capital
Markets.
First Union Corporation is a North Carolina-based, multi-bank holding
company registered under the Bank Holding Company Act of 1956, as amended, and
the rules and regulations promulgated thereunder (the "BHCA"). Through its
full-service banking offices, First Union Corporation provides a wide range of
commercial and retail banking services and trust services in Connecticut,
Delaware, Florida, Georgia, Maryland, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. Such
offices are operated by First Union National Bank, headquartered in Charlotte,
North Carolina, except the Delaware offices, which are operated by First Union
Bank of Delaware. First Union Corporation also provides various other financial
services, including mortgage banking, home equity lending, credit cards,
leasing, investment banking, insurance and securities brokerage services,
through other subsidiaries. As of and for the three months ended March 31, 1998,
First Union Corporation had on a restated basis taking into consideration the
acquisition by First Union Corporation of CoreStates Financial Corp. on April
28, 1998, assets of $220 billion. First Union Corporation is the sixth largest
bank holding company in the United States, based on assets at March 31, 1998.
First Union National Bank, a national banking association with its
headquarters in Charlotte, North Carolina, provides a wide range of commercial
and retail banking services and trust services in all of the states listed
above, except Delaware. On February 28, 1998, First Union National Bank merged
with an affiliated national bank. As of and for the three months ended March 31,
1998, First Union Corporation reported (on a historical basis) assets of $160
billion.
At ___________, 199_, the Sellers originated SBA Loans through ___ sales
regions in __ states, comprising __ SBA Districts. The Sellers have originated
SBA Loans in approximately __ out of __ total SBA jurisdictions/field
territories. They possess PLP status in __ SBA jurisdictions and they possess
Guaranteed Participant Program ("GPP") status in an additional ___. For the year
ended December 31, 199_, the Sellers originated approximately __% of their SBA
Section 7(a) Loans under the Preferred Lender Program ("PLP"), with
substantially all of the remainder originated under the Certified Lender Program
("CLP"). New offices originate under the GPP until approved within the SBA
District. The Sellers apply the same level of loan review and documentation for
all loans, regardless of the program under which they were originated. In the
normal course of their business, the Sellers may have originated CLP loans in
areas where they were Preferred Lenders due to specific eligibility requirements
of the Section 7(a) Program. The Sellers believe that such practice is common in
the industry, that the SBA is aware of it and has raised no objection thereto.
DELINQUENCY EXPERIENCE
The following table sets forth the Sellers' delinquency and charge-off
experience with respect to their portfolio of SBA Loans as of the dates
indicated. There can be no assurance, and no representation is made, that the
delinquency and charge-off experience with respect to the SBA Loans included in
the Trust Fund will be similar to that reflected in the table below. The Sellers
believe that the increase in net loan charge-offs as a percentage of their SBA
loan portfolio as of and for the years ended December 31, 199_, 199_ and 199_,
is primarily due to general adverse economic conditions. The Sellers commenced
originating Section 7(a) Companion Loans in January 1995 and SBA 504 Loans in
1994. Accordingly, no meaningful delinquency and charge-off experience exists
for these loans. There can be no assurance, and no representation is made, that
the delinquency and charge-off experience with respect to the Section 7(a)
Companion Loans and the SBA 504 Loans will be similar to that of the SBA Section
7(a) Loans.
SBA LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
As of and for the Years ________ Months Ended
ENDED DECEMBER 31, 199 , 199
199 199 199
--- --- ---
30-59 days past due(1)..............
60-89 days past due(1)..............
90+ days past due(1)................
Loans charged-off, net..............
Loans charged-off, net, as a
percentage of the SBA
unguaranteed interests(2).........
SBA unguaranteed
interests(3)......................
Total SBA Loan serviced
portfolio(4)......................
- --------------------
(1) The delinquency percentages are calculated based upon the aggregate
guaranteed and unguaranteed interests of the SBA Loans which are
delinquent by the number of days indicated divided by total aggregate
principal balance of the guaranteed and unguaranteed interests of the
SBA Loans contained in the Sellers' SBA loan portfolio.
(2) The percentage of loan charge-offs is calculated based upon the dollar
amount of charge-offs divided by the dollar amount of the principal
portion of unguaranteed interests contained in the Sellers' SBA loan
portfolio.
(3) Amounts shown are the aggregate principal balances of the unguaranteed
interests of loans in the Sellers' SBA loan portfolio on the last day
of the related period.
(4) Includes guaranteed interests serviced for others.
- -------------------------
CERTAIN LITIGATION
Because the nature of the business of the Parent and the Sellers involves
the collection of numerous accounts, the validity of liens and compliance with
state and federal lending laws, the Parent and the Sellers are subject to claims
and legal actions in the ordinary course of their business. While it is
impossible to estimate with certainty the ultimate legal and financial liability
with respect to such claims and actions, including that described above, the
Parent and the Sellers believe that the aggregate amount of such liabilities
will not result in monetary damage which in the aggregate would have a material
adverse effect on the financial condition of the Parent or the Sellers.
DESCRIPTION OF THE AGREEMENT AND THE CERTIFICATES
GENERAL
The Certificates will be issued by a Trust Fund organized and existing
under the laws of the State of New York. Each Certificate represents a certain
fractional undivided ownership interest in the Trust Fund created and held
pursuant to the Agreement, subject to the limits and the priority of
distribution described therein. The Trust Fund consists primarily of the right
to receive the Unguaranteed Interests in such SBA Loans as are from time to time
subject to the Agreement, together with all proceeds thereof and certain related
assets.
The Certificates will not represent obligations of the Sellers, any of
their affiliates or the SBA.
The Class A Certificates will be issued in book-entry form and the Class B
Certificates will be issued either in book-entry or physical form, as determined
by the Sellers prior to issuance of the Certificates. Each Class of Certificates
will be issued in minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof, except that one Certificate of each Class may be
issued in a different denomination, and, if so issued, will be held in physical
form.
The Servicer will be responsible for ensuring that each SBA Loan is
serviced in accordance with the Agreement and the SBA Rules and Regulations.
However, MSNY will service the SBA Loans originated or acquired by it.
PAYMENTS ON THE SBA LOANS; DISTRIBUTIONS ON THE CERTIFICATES
The Agreement requires that the Servicer cause an account (the "Principal
and Interest Account") to be established and maintained at one or more
Designated Depository Institutions.
All funds in the Principal and Interest Account are required to be held (i)
uninvested, up to the limits insured by the FDIC (as defined under "Certain
Definitions") or (ii) invested in Permitted Instruments. Any investment earnings
on funds held in the Principal and Interest Account are for the account of the
Servicer.
The Servicer is required to deposit in the Principal and Interest Account
(within two Business Days of receipt): (i) all payments received after the
Cut-Off Date on account of interest on the SBA Loans (net of the portion thereof
required to be paid to the holders of the Guaranteed Interest, the FTA's Fee,
the Premium Protection Fee, the Additional Fee and the Servicing Fee and other
servicing compensation payable to the Servicer as permitted by the Agreement),
(ii) the Unguaranteed Percentage of all payments received after the Cut-Off Date
on account of principal on the SBA Loans, including the Unguaranteed Percentage
of all Excess Payments, Principal Prepayments, Curtailments, Net Liquidation
Proceeds, Insurance Proceeds (other than amounts to be applied to the
restoration or repair of the related Mortgaged Property, or to be released to
the Obligor) and Released Mortgaged Property Proceeds, (iii) any amounts paid in
connection with the repurchase of the Unguaranteed Interest of an SBA Loan and
the amount of any adjustment for substituted SBA Loans, (iv) the amount of any
losses incurred in connection with investments in Permitted Instruments and (v)
certain amounts relating to insufficient insurance policies and Foreclosed
Property.
The Servicer may make withdrawals from the Principal and Interest Account
only for the following purposes:
(i) to remit to the Trustee on each Determination Date (as
defined below) for deposit in the Certificate Account, the portion of
the Available Funds for the related Remittance Date that is net of
Compensating Interest, Monthly Advances and amounts then on deposit in
the Spread Account (and, with respect to the Determination Dates
occurring in ______, _________ and ___________, net of amounts then on
deposit in the Pre-Funding Account and the Capitalized Interest
Account);
(ii) to reimburse itself for any accrued unpaid Servicing Fees,
unreimbursed Monthly Advances and for unreimbursed Servicing Advances
to the extent deposited in the Principal and Interest Account (and not
netted from Monthly Payments received). The Servicer's right to
reimburse itself for unpaid Servicing Fees and, except as provided in
the following sentence, Servicing Advances and Monthly Advances shall
be limited to Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Servicer from the Mortgagor or otherwise relating to
the SBA Loan in respect of which such unreimbursed amounts are owed.
The Servicer's right to reimbursement for Monthly Advances and
Servicing Advances in excess of such amounts shall be limited to any
late collections of interest received on the SBA Loans generally,
including Liquidation Proceeds, Released Mortgaged Property Proceeds,
Insurance Proceeds and any other amounts. The Servicer's right thereto
shall be subordinate to the rights of the Certificateholders and the
holders of the Guaranteed Interest;
(iii) to withdraw any amount received from an Obligor that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final, nonappealable order of a court having
competent jurisdiction;
(iv) (a) to make investments in Permitted Instruments and (b) to
pay itself interest paid in respect of Permitted Instruments or by a
Designated Depository Institution on funds deposited in the Principal
and Interest Account;
(v) to withdraw any funds deposited in the Principal and Interest
Account that were not required to be deposited therein or were
deposited therein in error;
(vi) to pay itself servicing compensation or interest as
permitted under the definition of Excess Proceeds; and
(vii) to clear and terminate the Principal and Interest Account
upon the termination of the Agreement;
Not later than the close of business on each Determination Date, the
Servicer will remit to the Trustee for deposit in the Certificate Account any
required Monthly Advance and/or Compensating Interest.
The Servicer is required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Property or other Collateral, (ii)
any enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage. Each such expenditure will constitute a "Servicing Advance".
The Servicer is obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Servicer may recover Servicing
Advances to the extent set forth in clause (ii) above.
On the 15th day of each month commencing in _______, 199_, or, if such 15th
day is not a Business Day, the first Business Day immediately following (each
such day being a "Remittance Date"), until the principal balances of the Class A
and Class B Certificates are reduced to zero, the Trustee or Paying Agent will
be required to distribute to each person in whose names a Certificate is
registered at the close of business on the last day of the month immediately
preceding the month of the related Remittance Date (the "Record Date") such
Certificateholder's Percentage Interest multiplied by the amount to be
distributed to the Class A or Class B Certificateholders, as the case may be on
such Remittance Date as described below under "--Flow of Funds" herein.
Additionally, any Pre-Funded Amount remaining at the close of business on
__________, 199_ (together with __ days' interest thereon at the applicable
Remittance Rates) will be distributed by or on behalf of the Trustee on the
Special Remittance Date to the Class A and Class B Certificates. Such
distribution will be made to each person in whose name a Certificate of the
applicable Class is registered on ___________, 199__.
On each Remittance Date, the Trustee will mail to each Certificateholder a
statement setting forth, among other things, certain information as to the
distribution being made on such Remittance Date, the fees to be paid to the
Servicer and Trustee and the loss and delinquency status of the SBA Loans.
Although the information contained in such statements will be prepared by the
Servicer, neither such information nor any other financial information furnished
to Certificateholders will be examined and reported upon, and an opinion will
not be expressed by, an independent public accountant.
CERTIFICATE ACCOUNT
The Trustee has agreed to establish and maintain in its trust department a
non-interest-bearing trust account (the "Certificate Account").
PRE-FUNDING ACCOUNT
If Section 7(a) Companion Loans and SBA 504 Loans are not included in the
Trust Fund on the Closing Date, the Pre-Funded Amount will be deposited on the
Closing Date into the Pre-Funding Account. Amounts in the Pre-Funding Account
may be used only (i) to acquire Subsequent SBA Loans, and (ii) to make
accelerated payments of principal on the Certificates. During the Funding Period
amounts will, from time to time, be withdrawn from the Pre-Funding Account to
purchase Subsequent SBA Loans in accordance with the Agreement. Any Pre-Funded
Amount remaining at the end of the Funding Period will be distributed as a
principal prepayment on the next Remittance Date to the Certificates. However,
any Pre-Funded Amount remaining at the close of business on ______________, 199_
will be distributed as a principal prepayment on the Special Remittance Date.
All funds in the Pre-Funding Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds in the
Pre-Funding Account will be applied to payment of interest on the Certificates.
CAPITALIZED INTEREST ACCOUNT
If the Pre-Funding Account is established, on the Closing Date, the
Representative also will make a cash deposit into the Capitalized Interest
Account. The amount, if any, deposited therein will be used by the Trustee on
the Remittance Dates occurring in ____________, ____________ and _________,
199__ to fund the excess, if any, of (i) the amount of interest accrued for each
such Remittance Date at the weighted average on the portion of the Class A and
Class B Certificates having principal balances exceeding the principal balances
of the Unguaranteed Interests, over (ii) the amount of any earnings on funds in
the Pre-Funding Account that are available to pay interest on the Certificates
on each such Remittance Date. Additionally, if a principal prepayment is made on
the Special Remittance Date to any Class of Certificates, such Class of
Certificates also will receive on such date, from the Capitalized Interest
Account, an amount equal to __ days' interest at the applicable Remittance Rate
on the amount of such principal prepayment. Any amounts remaining in the
Capitalized Interest Account on the Special Remittance Date and not used for
such purposes are required to be paid directly to the Representative on such
Special Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
FLOW OF FUNDS
The Agreement requires the Servicer to withdraw on each Determination Date
that portion of the Available Funds in the Principal and Interest Account and to
remit such amount together with the Monthly Advances and Compensating Interest
for the related Remittance Date to the Trustee for deposit in the Certificate
Account. Upon receipt on each Determination Date of such amount, the Trustee is
required to deposit such amount into the Certificate Account.
On each Remittance Date the Trustee is required to withdraw from the
Certificate Account the sum of (i) that portion of the Available Funds received
from the Servicer, and (ii) the amounts, if any, deposited therein from the
Spread Account as described below under "--Spread Account" herein, and (iii)
with respect to the Remittance Dates in _________, __________ and __________
199_, the amounts, if any, deposited therein from the Pre-Funding Account and
the Capitalized Interest Account, and make distributions thereof in the
following order of priority:
(i) First, to the Class A Certificates in an amount up to the
Class A Interest Distribution Amount;
(ii) Second, to the Class B Certificates in an amount up to the
Class B Interest Distribution Amount;
(iii) Third, to the Class A Certificates in an amount up to the
sum of (a) the Class A Principal Distribution Amount and (b) the Class
A Carry Forward Amount;
(iv) Fourth, to the Class B Certificates, in an amount up to the
sum of (a) the Class B Principal Distribution Amount and (b) the Class
B Carry-Forward Amount;
(v) Fifth, to the Expense Account in an amount up to one-twelfth
of the Annual Expense Escrow Amount plus any amount required to be
paid to the Trustee pursuant to the Agreement resulting from
insufficiencies in the Expense Account;
(vi) Sixth, to the Servicer in an amount up to the Reimbursable
Amounts;
(vii) Seventh, to the Spread Account, any remainder unless and
until the amount therein equals the Specified Spread Account
Requirement; and
(viii) Eighth, to the Spread Account Depositor, any amounts in
excess of the Specified Spread Account Requirement.
CLASS A AND CLASS B INTEREST DISTRIBUTION AMOUNTS
To the extent of the Available Funds, and prior to payments of principal,
on each Remittance Date the Class A and Class B Certificateholders, in that
order, will be entitled to receive interest accrued for the related Interest
Accrual Period at the then applicable Class A or Class B Remittance Rate on the
Class A or Class B Principal Balance, as the case may be, outstanding
immediately prior to such Remittance Date, subject to the adjustment set forth
in the next paragraph. If, on any Remittance Date, the Class A or Class B
Certificates do not receive the full amount of interest to which they are
entitled, such shortfall, plus interest thereon at the then applicable Class A
or Class B Remittance Rate, compounded monthly, will be added to the amount of
interest they are entitled to receive on succeeding Remittance Dates. The
aggregate amounts of interest payable to the Class A and Class B Certificates on
each Remittance Date are referred to herein as the "Class A Interest
Distribution Amount" and the "Class B Interest Distribution Amount"
respectively.
As stated herein, many of the SBA Loans contain minimum and/or maximum Note
Rate provisions. As a result, if the then current Prime Rate plus the applicable
margin would exceed the applicable maximum Note Rate (or fall below the
applicable minimum Note Rate), the actual Note Rate borne by such SBA Loan will
be less than (or greater than) the Note Rate that such SBA Loan would bear if
such limits were not in effect. Additionally, as described under "Summary of
Terms -- Interest", for the Remittance Dates occurring in each February, May,
August and November, interest accruing on the Class A and Class B Certificates
will be based upon the Prime Rate in effect on the first Business Day of the
preceding January, April, July and October, respectively, while interest
payments on the SBA Loans adjusting quarterly required to be distributed on such
Remittance Dates generally will be based on the Prime Rate in effect on the
first Business Day of the preceding October, January, April and July,
respectively. Accordingly, for each Remittance Date the aggregate amount of
interest payable with respect to each of the SBA Loans in accordance with their
terms, net of the interest payable to the holders of the Guaranteed Interest,
the Excess Spread (other than the portion thereof allocated to the Servicing Fee
on the Guaranteed Interest), the Servicing Fee, the Premium Protection Fee, the
FTA's Fee, the Additional Fee (with respect to the Additional Fee SBA Loans),
the Extra Interest (as defined below) and the fees and expenses of the Trustee
allocable to such interest, might exceed or be less than the interest accrued on
the SBA Loans at the weighted average Class A and Class B Remittance Rates. Any
such excess or shortfall will be allocated to the Class A and Class B
Certificates pro rata in accordance with the amount of interest each such Class
of Certificates would otherwise be entitled to receive but for such adjustment.
With respect to each SBA Loan, the "Extra Interest Percentage" will equal
the excess of (i) the Note Rate that would be in effect for such SBA Loan as of
the Cut-Off Date (or Subsequent Cut-Off Date) without giving effect to any
applicable lifetime floor or cap over (ii) the sum of the rates used in
determining the Servicing Fee and the Trustee's fees and expenses and the
initial weighted average Class A and Class B Remittance Rates without giving
effect to any applicable lifetime floor or cap.
For each Remittance Date, the "Extra Interest" for an SBA Loan will equal
the product of (i) the principal portion of the Unguaranteed Interest of such
SBA Loan for such Remittance Date and (ii) one-twelfth of the applicable Extra
Interest Percentage.
CLASS A AND CLASS B PRINCIPAL DISTRIBUTION AMOUNTS
With respect to each Remittance Date, the "Class A Principal Distribution
Amount" and the "Class B Principal Distribution Amount" will equal the Class A
Percentage or the Class B Percentage, as the case may be, multiplied by the
total of (i) the Unguaranteed Percentage of all payments and other recoveries of
principal of an SBA Loan (net of amounts reimbursable to the Servicer pursuant
to the Agreement) received by the Servicer or any Subservicer during the related
Due Period, excluding amounts received with respect to SBA Loans which have been
delinquent 24 months or have been determined to be uncollectible, in whole or in
part, by the Servicer to the extent that the Class A Certificateholders or the
Class B Certificateholders, as the case may be, have previously received the
Class A Percentage or the Class B Percentage, as the case may be, of the
principal portion of the Unguaranteed Interest of such SBA Loans; (ii) the
principal portion of any Unguaranteed Interest actually purchased by a Seller
for breach of a representation and warranty or other defect and actually
received by the Trustee as of the related Determination Date; (iii) any
adjustments with respect to substitutions of SBA Loans for which a Seller has
breached a representation or warranty deposited in the Principal and Interest
Account and transferred to the Certificate Account as of the related
Determination Date; (iv) the Unguaranteed Percentage of all losses on SBA Loans
which were finally liquidated during the applicable Due Period; (v) the
Unguaranteed Percentage of the then outstanding principal balance of any SBA
Loan which, as of the first day of the related Due Period, is delinquent 24
months or determined by the Servicer to be uncollectible in whole or in part;
and (vi) amounts, if any, released from the Pre-Funding Account on the _______,
_______ and _________ 199_ Remittance Dates.
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates will be issued in
June 199_ with a May 31, 199_ Cut-Off Date and that distributions on the
Certificates are made on the 15th day of each month (or, if such 15th day is not
a Business Day, the next succeeding Business Day):
May 31 .................... Cut-Off Date. The Original Pool Principal Balance
will be the aggregate principal amount of the
Unguaranteed Interests of the SBA Loans at the
close of business on May 31, 199_ after
application of all payments collected on or before
such date.
June 1-30................. The Subservicers remit to the Servicer for deposit
in the Principal and Interest Account all amounts
received on account of the Unguaranteed Interests
of the SBA Loans.
June 30.................... First Record Date. Distribution on July 15, 199_
will be made to Certificateholders of record on
the Closing Date. Subsequent record dates will be
the last day of the month preceding the Remittance
Date.
July __ ................... Determination Date. The Servicer determines the
amount of principal and interest that will be
distributed to the Certificateholders on July 15,
and transfers funds in the Principal and Interest
Account to the Trustee for deposit in the
Certificate Account together with any Monthly
Advances, Compensating Interest and, to the extent
necessary, amounts from the Spread Account.
July 15................... Remittance Date. The Trustee or the Paying Agent
will distribute to Certificateholders the amounts
required to be distributed pursuant to the
Agreement.
SPREAD ACCOUNT
On the Closing Date, the Spread Account Depositor will make an initial cash
deposit into the Spread Account in an amount equal to ___% of the Original Pool
Principal Balance (the "Initial Deposit"). Thereafter, on each Remittance Date
the Trustee will deposit into the Spread Account the Available Funds, if any,
remaining after payment of interest and principal to the holders of the
Certificates, amounts required to be deposited into the Expense Account and
certain amounts reimbursable to the Servicer, each as described above, until the
aggregate amount then on deposit in the Spread Account (the "Spread Balance")
equals the sum of (i) the then outstanding principal balance of the Unguaranteed
Interests of all SBA Loans 180 days or more delinquent and (ii) the greater of
(a) ___% of the then outstanding aggregate principal balance of the Unguaranteed
Interests of all the SBA Loans, or (b) the amount of the Initial Deposit;
provided, however, that for purposes of clauses (i) and (ii)(a), there shall be
excluded the principal portion of the Unguaranteed Interest of SBA Loans which
have been delinquent 24 months or have been determined to be uncollectible, in
whole or in part, by the Servicer, to the extent that the Certificateholders
have previously received the Unguaranteed Portion of the principal balance of
such SBA Loans (the sum of such amounts is referred to herein as the "Specified
Spread Account Requirement").
On each Remittance Date, to the extent funds are available therefor, the
Trustee will withdraw from the Spread Account for deposit into the Certificate
Account the amount, if any, by which (i) the sum of (a) the Class A and Class B
Interest Distribution Amounts, (b) the Class A and Class B Principal
Distribution Amounts and (c) the Class A and Class B Carry-Forward Amounts
exceeds (ii) the Available Funds for such Remittance Date (but excluding from
such definition, amounts in the Spread Account).
The Spread Account Depositor will not be required to refund any amounts
previously properly distributed to it, regardless of whether there are
sufficient funds on a subsequent Remittance Date to make a full distribution to
holders of the Certificates on such Remittance Date.
The funding and maintenance of the Spread Account is intended to enhance
the likelihood of timely payment of principal and interest to the holders of the
Certificates; however, if the SBA Loan Pool experiences levels of delinquencies
and losses above the scenarios used to obtain the ratings on the Class B
Certificates, the Spread Account could be depleted, and shortfalls could result.
See "Ratings" herein.
MONTHLY ADVANCES
The Servicer is required to remit to the Trustee no later than the
Determination Date for deposit in the Certificate Account the amount the Monthly
Advance, if any, by which (i) 30 days' interest at a rate equal to the then
applicable weighted average Class A and Class B Remittance Rates plus the
Adjusted SBA Loan Remittance Rate on the aggregate Class A and Class B Principal
Balances immediately prior to the related Remittance Date (as the amount
calculated pursuant to this clause (i) may be adjusted in accordance with the
limits described under "Description of the Agreement and the Certificates--Class
A and Class B Interest Distribution Amounts" herein) exceeds (ii) the amount
received by the Servicer as of the related Record Date in respect of interest on
the SBA Loans minus the interest payable to the holders of the Guaranteed
Interest, the Additional Fee, the Premium Protection Fee, and the fee payable to
the FTA (plus, for the Remittance Dates in _________, _________, __________ and
_________, 199__, the sum of (a) all funds to be transferred to the Certificate
Account from the Capitalized Interest Account for such Remittance Date and (b)
certain investment earnings on amounts in the Pre-Funding Account for the
applicable Remittance Date). The Servicer is not required to make Monthly
Advances which it determines, in good faith, would be nonrecoverable from
amounts received in respect of the related SBA Loans.
Monthly Advances are reimbursable in the first instance from late
collections of interest, Liquidation Proceeds, Insurance Proceeds and proceeds
received by the Servicer in connection with condemnation, eminent domain or a
release of lien ("Released Mortgaged Property Proceeds") collected with respect
to the related SBA Loan as to which the Monthly Advances were made. The
Servicer's right to reimbursement for such advances in excess of such amounts is
limited to late collections of interest received on the SBA Loans generally;
PROVIDED, HOWEVER, that the Servicer's right to such reimbursement is
subordinate to the rights of the Certificateholders, the holder of the Premium
Protection Fee and the holders of the Guaranteed Interest. Monthly Advances are
intended to provide sufficient funds for the payment of interest to the
Certificateholders at the then applicable Class A or Class B Remittance Rate,
plus an additional amount, if any, required to pay the fees and expenses of the
Trustee.
COMPENSATING INTEREST
Not later than each Determination Date, with respect to each SBA Loan as to
which a principal prepayment in full or a Curtailment was received during the
related Due Period, the Servicer is required to remit to the Trustee, from
amounts otherwise payable to the Servicer as servicing compensation, an amount
("Compensating Interest") equal to any excess of (a) 30 days' interest on the
Unguaranteed Percentage of the related principal balance at the Adjusted SBA
Loan Remittance Rate over (b) that portion of the amount of interest actually
received in respect of the related SBA Loan during such Due Period and available
to be paid to the Certificateholders.
REGISTRATION OF CERTIFICATES
The Class A Certificates will initially be registered in the name of Cede,
the nominee of DTC. The Class B Certificates will be either (i) registered in
the name of Cede, as the nominee of DTC, with similar effect as the Class A
Certificates, or (ii) issued in physical form, as determined by the Sellers
prior to the initial issuance of the Certificates. Certificates registered in
the name of Cede are referred to herein as the "Book-entry Certificates."
Persons acquiring beneficial ownership interests in the Class A or Class B
Certificates ("Certificate Owners") will hold their Class A or Class B
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. [___________] 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 Sellers duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the Servicer or the Sellers, as set forth in the
Agreement, which failure continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer or the
Sellers, as the case may be, by the Trustee or to the Servicer, or the
Sellers, as the case may be, and the Trustee by any Certificateholder;
or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
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
SBA, the Trustee and the Majority Certificateholders, or upon the determination
that the Servicer's duties thereunder are no longer permissible under applicable
law or administrative determination and such incapacity cannot be cured by the
Servicer. No such resignation shall become effective until a successor has
assumed the Servicer's responsibilities and obligations in accordance with the
Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). If, however, the Trustee is
unable to act as Successor Servicer, or if the SBA so requests, the Trustee may
appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to the SBA, [Moody's]
and [Duff & Phelps] having a net worth of not less than $15,000,000 and which is
an approved SBA guaranteed lender in good standing, operating pursuant to an
effective Loan Guaranty Agreement as the Successor Servicer in the assumption of
all or any part of the responsibilities, duties or liabilities of the Servicer.
TERMINATION; PURCHASE OF SBA LOANS
The Agreement will terminate upon notice to the Trustee of the earlier of
either: (a) the final payment or other liquidation of the last SBA Loan, or the
disposition of all property acquired upon foreclosure of any SBA Loan and the
remittance of all funds due thereunder or (b) mutual consent of the Servicer and
all Certificateholders in writing; provided, however, that in no event will the
trust established by the Agreement terminate later than twenty-one years after
the death of the last surviving lineal descendant of Joseph P. Kennedy, late
Ambassador of the United States to the Court of St. James, alive as of the
Cut-Off Date.
The Servicer may, at its option, terminate the Agreement on any date on
which the then outstanding aggregate principal balance of the Unguaranteed
Interests is less than 5% of the sum of (i) the Original Pool Principal Balance
and (ii) the Original Pre-Funded Amount by purchasing, on the next succeeding
Remittance Date, all of the Unguaranteed Interests and any other assets in the
Trust Fund at a price equal to the sum of (i) 100% of the then Outstanding Class
A and Class B Principal Balances, and (ii) 30 days' accrued interest thereon at
the then applicable Class A and Class B Remittance Rates (the "Termination
Price"); provided, however, that under certain circumstances set forth in the
Agreement, the Servicer may not take such action prior to providing [Moody's]
and [Duff & Phelps] with an opinion of counsel that such termination would not
be deemed a fraudulent conveyance by the Servicer.
THE TRUSTEE
[Name of Trustee], a ___________ located in _____________________, has been
named Trustee pursuant to the Agreement.
The Agreement requires that the Trustee shall at all times be (i) a
national banking association or banking corporation or trust company organized
and doing business under the laws of the United States of America or of any
State, (ii) authorized under such laws to exercise corporate trust powers, (iii)
having a combined guaranteed capital and surplus of at least $30,000,000, (iv)
having unsecured and unguaranteed long-term debt obligations rated at least Baa3
by [Moody's] and BBB- by [Duff & Phelps] (provided [Duff & Phelps] is rating the
unsecured and unguaranteed long-term debt obligations of the Trustee), or such
other ratings as is acceptable to the SBA, (v) is subject to supervision or
examination by a federal or state authority, (vi) is an approved SBA guaranteed
lender in good standing, operating pursuant to an effective Loan Guaranty
Agreement, and (vii) is reasonably acceptable to the SBA. If at any time the
Trustee shall cease to be eligible in accordance with the provisions described
in this paragraph, it shall resign upon request of the Majority
Certificateholders in the manner and with the effect specified in the Agreement.
The Trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Agreement. Upon receiving notice of
resignation, the Servicer shall promptly appoint a successor trustee or trustees
meeting the eligibility requirements set forth above in the manner set forth in
the Agreement. If no successor trustee shall have been appointed and have
accepted appointment within 60 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
No resignation or removal of the Trustee and no appointment of a successor
trustee shall become effective until the acceptance of appointment by a
successor trustee.
The Majority Certificateholders with the consent of the SBA, [Moody's] and
[Duff & Phelps], or the SBA, may remove the Trustee under the conditions set
forth in the Agreement and appoint a successor trustee in the manner set forth
therein.
The Servicer shall give notice of each removal of the Trustee to the
Certificateholders, which notice shall include the name of the successor trustee
and the address of its corporate trust office.
Upon acceptance of appointment by a successor trustee in the manner
provided in the Agreement, the Servicer shall give notice thereof to the
Certificateholders.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more Persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Agreement, such powers, duties, obligations, rights and trusts
as the Servicer and the Trustee may consider necessary or desirable.
Neither the Trustee, its authorized agent(s) nor representative(s) will
conduct an independent review and assessment on whether SBA Loans should be
foreclosed or the underlying property should be liquidated when a default has
occurred with respect thereto.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP, special federal tax counsel ("Federal Tax Counsel"), as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Investors should consult their own
tax advisors in determining the federal, state, local and other tax consequences
to them of the purchase, ownership and disposition of Certificates. For purposes
of this tax discussion (except with respect to information reporting, or where
the context indicates otherwise), the terms "Certificateholder" and "holder"
mean the beneficial owner of a Certificate. All Certificateholders should also
see "Federal Income Tax Consequences--Non-REMIC Certificates Issued by a Grantor
Trust" on the Prospectus.
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 SBA Loan
(the "Spread"). The Spread will be treated as "stripped coupons" within the
meaning of Section 1286 of the Code. The Servicer may also be deemed to have
retained a "stripped coupon" if and to the extent that the Servicing Fee is
determined to be unreasonable. In addition, because the Class B Remittance Rate
exceeds the Class A Remittance Rate, a portion of the interest accrued on each
SBA Loan will be treated as a "stripped coupon" purchased by the Class B
Certificateholders. Accordingly, each Class A Certificateholder will be treated
as owning its pro rata percentage interest in the principal of, and interest
payable on, the Unguaranteed Interest of each SBA Loan (minus the portion of the
interest payable on such SBA Loan that is treated as Spread, as a stripped
coupon retained by the Servicer or as a stripped coupon purchased by the Class B
Certificateholders), and such interest in the Unguaranteed Interest of each SBA
Loan will be treated as a "stripped bond" within the meaning of Section 1286 of
the Code. Similarly, each Class B Certificateholder will be treated as owning
its pro rata percentage interest in the principal of the Unguaranteed Interest
of each SBA Loan, plus a disproportionate share of the interest payable on each
SBA Loan.
CLASS A CERTIFICATEHOLDERS
Because Class A Certificates represent stripped bonds, they will be subject
to the original issue discount ("OID") rules of the Code. Accordingly, the tax
treatment of a Class A Certificateholder will depend upon whether the amount of
OID on a Class A Certificate is less than a statutorily defined DE MINIMIS
amount.
In general, under regulations issued under Section 1286 of the Internal
Revenue Code of 1986, as amended (the "Code"), the amount of OID on an SBA Loan
treated as a "stripped bond" will be DE MINIMIS if it is less than 0.25 percent
of the stated redemption price at maturity, as defined in Section 1273(a)(2) of
the Code, multiplied by the number of years remaining after the purchase date
until the maturity of the SBA Loan. The maturity date is based on the weighted
average maturity date (and a reasonable prepayment assumption may have to be
taken into account in determining weighted average maturity). Under the
regulations, the portion of the interest on each SBA Loan payable to the Class A
Certificateholders will be treated as "qualified stated interest". As a result,
the amount of OID on an SBA Loan will equal the amount by which the price at
which a Certificateholder is deemed to have acquired an interest in an SBA Loan
(the "Purchase Price") is less than the portion of the remaining principal
balance of the SBA Loan allocable to the interest acquired. Although Federal Tax
Counsel cannot opine on the matter, the Trust Fund intends to take the positions
(i) that the amount of OID on the SBA Loans will be determined by aggregating
all payments on the SBA Loans allocable to the Class A Certificateholders (not
including the Spread), and treating the portion of all payments on the SBA Loans
allocable to Class A Certificateholders as a single obligation on an aggregate
basis, rather than being determined separately with respect to each SBA Loan,
and (ii) that no separate allocation of consideration must be made to accrued
interest or to amounts held in the Certificate Account.
Based on these positions, the Trust Fund anticipates that the Certificates
will not be issued initially with OID (or that any OID present will be DE
MINIMIS). The Internal Revenue Service ("IRS") could require, instead, that the
computation be performed on an SBA Loan by SBA Loan basis. In the preamble to
the regulations under Section 1286 of the Code, the IRS requests comment on
appropriate aggregation rules. Any such recalculation could adversely affect the
timing and character of a Class A Certificateholder's income. The IRS might also
require that a portion of the purchase price for a Certificate be allocated to
accrued interest on each SBA Loan and to amounts held in the Certificate Account
pending distribution to Certificateholders at the time of purchase as though
such accrued interest and collections on the SBA Loans were separate assets
purchased by the Certificateholder. Any such allocation would reduce the
Purchase Price and thus increase the discount (or decrease the premium) on the
SBA Loans.
If the amount of OID is DE MINIMIS under the rule set forth above, the
Class A Certificates would not be treated as having OID. Each Class A
Certificateholder would be required to report on its federal income tax return
its share of the gross income of the Trust Fund, including interest and certain
other charges accrued on the SBA Loans and any gain upon collection or
disposition of the SBA Loans (but not including any portion of the Spread). Such
gross income attributable to interest on the SBA Loans would exceed the Class A
Remittance Rate by an amount equal to the Class A Certificateholder's share of
the expenses of the Trust Fund for the period during which it owns a Class A
Certificate. The Class A Certificateholder would be entitled to deduct its share
of expenses of the Trust Fund to the extent described below. Any amounts
received by a Class A Certificateholder from the Spread Account or from the
subordination of the Class B Certificates will be treated for federal income tax
purposes as having the same character as the payments they replace. A Class A
Certificateholder would report its share of the income of the Trust Fund under
its usual method of accounting. Accordingly, interest would be includable in a
Certificateholder's gross income when it accrues on the SBA Loans, or, in the
case of Certificateholders who are cash basis taxpayers, when received by the
Servicer on behalf of Certificateholders. The actual amount of discount on an
SBA Loan would be includable in income as principal payments are received on the
SBA Loans.
If, contrary to the treatment anticipated by the Trust Fund, the OID on an
SBA Loan is not DE MINIMIS, a Class A Certificateholder will be required to
include in income, in addition to the amounts described above, any OID as it
accrues, regardless of when cash payments are received, using a method
reflecting a constant yield on the SBA Loans. It is possible that the IRS could
require use of a prepayment assumption in computing the yield of an SBA Loan. If
an SBA Loan is deemed to be acquired by a Certificateholder at a significant
discount, such treatment could accelerate the accrual of income by a
Certificateholder.
Although the Trustee intends to account for OID, if any, reportable by
holders of Class A Certificates by reference to the price paid for a Class A
Certificate by an initial purchaser, the amount of OID will differ for
subsequent purchasers. Such subsequent purchasers should consult their tax
advisers regarding the proper calculation of OID on the interest in SBA Loans
represented by a Class A Certificate.
As to SBA Loans that are real estate mortgages, a Certificateholder may be
able (or may be required) to account for any discount on such SBA Loans as
market discount rather than OID if either (i) the amount of OID with respect to
the Certificate was treated as zero under the OID DE MINIMIS rule when the
Certificate was stripped or (ii) no more than 1% (i.e., 100 basis points),
including any amount of servicing in excess of reasonable servicing, is stripped
off from the SBA Loans. As noted above, the Trust Fund intends to account for
the SBA Loans on an aggregate basis and does not intend to report separately for
this purpose with respect to the SBA Loans that are real estate mortgages.
In the event that an SBA Loan is treated as purchased at a premium (i.e.,
its Purchase Price exceeds the portion of the remaining principal balance of
such SBA Loan allocable to the Certificateholder), such premium will be
amortizable by the Certificateholder as an offset to interest income (with a
corresponding reduction in the Certificateholder's basis) under a constant yield
method over the term of the SBA Loan if an election under Section 171 of the
Code is made with respect to the interests in the SBA Loans represented by the
Certificates or was previously in effect. Any such election will also apply to
all debt instruments held by the Certificateholder during the year in which the
election is made and all debt instruments acquired thereafter.
A Certificateholder will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Code. If a Certificateholder is an individual, estate or trust, the deduction
for such holder's share of such fees will be allowed only to the extent that all
of such holder's miscellaneous itemized deductions, including such holder's
share of such fees, exceed two percent of such holder's adjusted gross income.
CLASS B CERTIFICATEHOLDERS
IN GENERAL. Except as described below, it is believed that the Class B
Certificateholders will be subject to tax in the same manner as Class A
Certificateholders. However, no federal income tax authorities address the
precise method of taxation of an instrument such as the Class B Certificates and
Federal Tax Counsel cannot opine on this issue. In the absence of applicable
authorities, the Trustee intends to report income to Class B Certificateholders
in the manner described below.
Each Class B Certificateholder will be treated as owning (i) the Class B
Percentage of the principal portion of the Unguaranteed Interest on each SBA
Loan plus (ii) a disproportionate portion of the interest on each SBA Loan (not
including the Spread). Income will be reported to a Class B Certificateholder
based on the assumption that all amounts payable to the Class B
Certificateholders are taxable under the coupon stripping provisions of the Code
and treated as a single obligation. In applying those provisions, the Trustee
will take the position that a Class B Certificateholder's entire share of the
interest on an SBA Loan will qualify as "qualified stated interest." Thus,
except to the extent modified by the effects of subordination of the Class B
Certificates, as described below, income will be reported to Class B
Certificateholders in the manner described above for holders of the Class A
Certificates.
EFFECT OF SUBORDINATION. If the Class B Certificateholders receive
distributions of less than their share of the Trust Fund's receipts of principal
or interest (the "Shortfall Amount") because of the subordination of the Class B
Certificates, it is believed that holders of Class B Certificates would probably
be treated for federal income tax purposes as if they had (l) received as
distributions their full share of such receipts, (2) paid over to the Class A
Certificateholders an amount equal to such Shortfall Amount, and (3) retained
the right to reimbursement of such amounts to the extent of future collections
otherwise available for deposit in the Spread Account. However, Federal Tax
Counsel cannot opine to such treatment.
Under this treatment, (1) Class B Certificateholders would be required to
accrue as current income any interest, OID income, or (to the extent paid on the
SBA Loans) accrued market discount of the Trust Fund that was a component of the
Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that that amount would not
be available from any source to reimburse such loss), and (3) reimbursement of
such Shortfall Amount prior to such a claim of worthlessness would not be
taxable income to Class B Certificateholders because such amount was previously
included in income. Those results should not significantly affect the inclusion
of income for Class B Certificateholders on the accrual method of accounting,
but could accelerate inclusion of income to Class B Certificateholders on the
cash method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions is unclear and Federal Tax
Counsel cannot opine as to such character or timing.
STATUS OF THE CERTIFICATES AS REAL PROPERTY LOANS
The Certificates generally will be "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code, and interest income on the Certificates
generally will be "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, to the extent
that the SBA Loans are mortgages secured by real property. The Certificates
generally will be treated as "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, to the
extent that the SBA Loans are secured by residential real property.
SALES OF CERTIFICATES
A holder that sells a Certificate will recognize gain or loss equal to the
difference between the amount realized on the sale and its adjusted basis in the
Certificate. In general, such adjusted basis will equal the holder's cost for
the Certificate, increased by the amount of any income previously reported with
respect to the Certificate, and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Any such gain or loss generally will be capital gain or loss
if the assets underlying the Certificate were held as capital assets, except
that, in the case of a Certificate that was acquired with more than a DE MINIMIS
amount of market discount, such gain will be treated as ordinary interest income
to the extent of the portion of such discount that accrued during the period in
which the seller held the Certificate and that was not previously included in
income.
FOREIGN INVESTORS
A Certificateholder who is not a "United States person" (as defined below)
and is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Certificate
generally will not be subject to United States income or withholding tax in
respect of payments of interest or original issue discount on a Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such holder is not
a United States person and providing the name and address of such holder).
Treasury Regulations (the "Final Withholding Regulations"), which are generally
effective with respect to payments made after December 31, 1999, consolidate and
modify the current certification requirements and means by which a holder may
claim exemption from United States federal income tax withholding and provide
certain presumptions regarding the status of holders when payments to the
holders cannot be reliably associated with appropriate documentation provided to
the payor. All holders should consult their tax advisors regarding the
application of the Final Withholding Regulations. However, distributions of
interest to a holder who is not a United States person will be subject to
withholding tax at a rate of 30 percent, unless such withholding tax rate is
reduced by an applicable treaty, to the extent that such interest distributions
are attributable to SBA Loans originated on or prior to July 18, 1984. For these
purposes, the term "United States person" means a citizen or a resident of the
United States, a corporation, partnership, or other entity created or organized
in, or under the laws of, the United States or any political subdivision
thereof, an estate the income of which is subject to United States federal
income taxation regardless of its source, or a trust not described in Section
7701(a)(31) of the Code.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds from
the sale of Certificates, to Certificateholders who are not "exempt recipients"
may be subject to the "backup withholding" tax under Section 3406 of the Code at
a rate of 31 percent, if such holders fail to furnish certain information,
including their taxpayer identification numbers, to the Trustee, its agent, or
the broker effecting a sale of the Certificate, or otherwise fail to establish
an exemption from such tax. Any amounts deducted and withheld from a
distribution to a Certificateholder would be allowed as a credit against such
Certificateholder's federal income tax. Furthermore, certain penalties may be
imposed by the IRS on a Certificateholder who is required to supply information
but who does not do so in the proper manner.
ERISA CONSIDERATIONS
Neither an Underwriter Exemption (as defined in the Prospectus) nor
Prohibited Transaction Class Exemption 83-1 is applicable to the purchase,
holding or transfer of the Certificates. Therefore, no Certificates may be
purchased for, or on behalf of, any employee benefit plan or other retirement
arrangement which is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue
Code of 1986, as amended, or any entity whose underlying assets include plan
assets by reason of such plan or account investing in such entity (including
insurance company separate or general accounts and collective investment funds).
Each Certificateholder will be deemed to have represented and warranted that it
is not subject to the foregoing limitations. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase Certificates or to purchase
Certificates representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
for the sale of the Class A and Class B Certificates, dated __________, 199__
(the "Underwriting Agreement"), the Sellers have agreed to sell and the
Underwriter has agreed to purchase all the Class A and Class B Certificates. The
Class A and Class B Certificates will be offered by the Underwriter to the
public in negotiated transactions. After the Class A and Class B Certificates
are released for sale to the public, the offering price and other selling terms
may be varied by the Underwriter. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Class A and Class B
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A and Class B Certificates by
them may be deemed to be underwriting discounts and commissions under the 1933
Act.
[The distribution of the Class A and Class B Certificates by the
Underwriters may be effected from time to time, in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of sale. This Prospectus Supplement and the Prospectus may be used by
First Union Capital Markets, a division of Wheat First Securities, Inc. ("First
Union Capital Markets") in connection with offers and sales related to
market-making transactions in the Class A and Class B Certificates. First Union
Capital Markets may act as principal or agent in such transactions.]
In connection with the offering, the Underwriter and the selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Class A
Certificates. Such transactions may include stabilization transactions in
accordance with Rule 104 of Regulation M, pursuant to which such person may bid
for or purchase the Class A Certificates for the purpose of stabilizing their
market price. The Underwriter may also create a short position for the account
of the Underwriter by selling more the Class A Certificates in connection with
the offering than it is committed to purchase, and in such case may purchase the
Class A Certificates in the open market following completion of the offering to
cover all or a portion of such short position. Any of the transactions described
in this paragraph may result in the maintenance of the price of the Class A
Certificates at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may discontinue at any time.
The Representative and the Sellers are affiliates of First Union Capital
Markets. The Underwriters or agents and their associates may be customers of
(including borrowers from), engage in transactions with, and/or perform services
for the Representative, its affiliates, and the Trustee in the ordinary course
of business.
The Representative and the Sellers have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the 1933 Act.
RATINGS
It is a condition to their issuance that the Class A Certificates be rated
"Aaa" and "AAA" by [Moody's] and [Duff & Phelps], respectively, and that the
Class B Certificates be rated at least "___" and "___" by [Moody's] and [Duff &
Phelps], respectively. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time. No
person is obligated to maintain the rating on any Certificate.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Stroock & Stroock & Lavan
LLP, New York, New York. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the Underwriter by
Kilpatrick Stockton LLP, Charlotte, North Carolina. Stroock & Stroock & Lavan
LLP also will render opinions relating to the transfer of the Unguaranteed
Interests from the Sellers to the Trust Fund and as to the material federal
income tax consequences associated with the purchase, ownership and disposition
of the Certificates. See "Risk Factors -- The Status of the SBA Loans in the
Event of Bankruptcy of the Sellers" and "Federal Income Tax Consequences" herein
and "Federal Income Tax Consequences" in the Prospectus.
FINANCIAL INFORMATION
The Sellers have determined that their financial statements are not
material to the offering made hereby. Except for certain representations and
warranties relating to the SBA Loans, the obligations of the Sellers with
respect to the SBA Loans are primarily limited to contractual servicing
obligations.
The Trust Fund has been formed to own the SBA Loans and to issue the
Certificates. The Trust Fund had no assets or obligations prior to the issuance
of the Certificates and will not engage in any activities other than those
described herein. Accordingly, no financial statements with respect to the Trust
Fund are included in this Prospectus Supplement.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Class A and
Class B 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
SBA loans ("SBA Loan-Backed Certificates").
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 SBA 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 SBA
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 or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. 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
PAGE
Account.............................................................. *
Act.................................................................. S-49
Additional Fee....................................................... S-6
Additional Fee SBA Loans............................................. S-6
Adjusted SBA Loan Remittance Rate.................................... S-21
Adjustment Date...................................................... S-11
Aggregate Class A Certificate Principal Balance...................... *
Aggregate Class B Certificate Principal Balance...................... *
Agreement............................................................ S-4
Annual Expense Escrow Amount......................................... *
Assignee............................................................. S-25
Assignment of Mortgage............................................... *
Available Funds...................................................... S-9
BIF.................................................................. *
Book-entry Certificates.............................................. S-78
Business Day......................................................... *
Capitalized Interest Account......................................... S-9
CDC.................................................................. S-52
Cede................................................................. S-24
CEDEL................................................................ S-1
CEDEL Participants................................................... S-80
Certificate Account.................................................. S-60
Certificateholder or Holder.......................................... *
Certificate Owners................................................... S-78
Certificate Register................................................. *
Certificate Registrar................................................ *
Certificates......................................................... S-1
Certified Lender..................................................... S-49
Class A Carry-Forward Amount......................................... S-13
Class A Certificates................................................. S-2
Class A Certificate Balance.......................................... S-12
Class A Interest Distribution Amount................................. S-10
Class A Percentage................................................... S-13
Class A Principal Distribution Amount................................ S-12
Class A Remittance Amount............................................ S-14
Class A Remittance Rate.............................................. S-10
Class B Carry-Forward Amount......................................... S-13
Class B Certificates................................................. S-2
Class B Certificate Balance.......................................... S-12
Class B Interest Distribution Amount................................. S-10
Class B Percentage................................................... S-13
Class B Principal Distribution Amount................................ S-12
Class B Remittance Amount............................................ S-14
Class B Remittance Rate.............................................. S-10
Closing Date......................................................... S-14
CLP.................................................................. S-56
Code................................................................. S-68
Collateral........................................................... *
Commercial Property ................................................ *
Compensating Interest................................................ S-21
Cooperative.......................................................... S-81
CPR.................................................................. S-54
Curtailment.......................................................... *
Cut-Off Date......................................................... S-7
Definitive Certificates.............................................. S-24
Designated Depository Institution.................................... *
Determination Date................................................... S-20
DOL.................................................................. S-32
DTC.................................................................. S-24
Due Date ............................................................ *
Due Period........................................................... S-12
Duff & Phelps........................................................ S-23
ERISA................................................................ S-23
Euroclear............................................................ S-1
Euroclear Operator................................................... S-80
Euroclear Participants............................................... S-80
European Depositaries................................................ S-79
Event of Default .................................................... *
Excess Payments...................................................... *
Excess Proceeds...................................................... *
Excess Spread........................................................ S-7
Excluded Plan........................................................ S-95
Exemption............................................................ S-95
Expense Account...................................................... *
Extra Interest....................................................... S-62
Extra Interest Percentage............................................ S-62
FDIC................................................................. *
Federal Tax Counsel.................................................. S-23
FHLMC .............................................................. *
FNMA ................................................................ *
Foreclosed Property ................................................ *
Foreclosed Property Disposition .................................... *
FTA.................................................................. S-6
FTA's Fee............................................................ S-6
Funding Period....................................................... S-8
Global Securities.................................................... S-101
GPP.................................................................. S-67
Grantor Trust........................................................ S-30
Guaranteed Interest.................................................. S-6
Holders.............................................................. S-33
Initial Class A Certificate Principal Amount......................... S-4
Initial Class B Certificate Principal Amount......................... S-4
Initial Deposit...................................................... S-15
Insurance Proceeds................................................... *
Interest Accrual Period.............................................. S-8
IRS.................................................................. S-69
Liquidated SBA Loan ................................................ *
Liquidation Proceeds................................................. *
Loan Guaranty Agreement ............................................. *
Majority Certificateholders.......................................... *
Monthly Advance...................................................... S-20
Monthly Payment .................................................... *
[Moody's] ........................................................... S-23
Mortgage ............................................................ *
Mortgaged Property................................................... *
MSNY................................................................. S-1
Multi-Party Agreement .............................................. S-20
Net Liquidation Proceeds............................................. *
Note Rate............................................................ S-17
Notes................................................................ S-8
OID.................................................................. S-23
Obligor ............................................................ S-6
Opinion of Counsel................................................... *
Original Class A Certificate Principal Balance....................... *
Original Class B Certificate Principal Balance....................... *
Original Pool Principal Balance...................................... S-7
Paying Agent......................................................... *
Percentage Interest.................................................. *
Permitted Instruments................................................ *
Person .............................................................. *
Physical Certificates................................................ S-64
Plan................................................................. S-31
Plan Asset Regulation................................................ S-31
PLP.................................................................. S-56
Pool Principal Balance............................................... *
Preferred Lender..................................................... S-49
Pre-Funded Amount.................................................... S-8
Pre-Funding Account.................................................. S-8
Premium Protection Fee............................................... S-6
Prime Rate........................................................... S-11
Principal and Interest Account....................................... S-58
Principal Balance .................................................. *
Principal Prepayment................................................. *
Prior Lien........................................................... *
Program.............................................................. S-58
Prospectus........................................................... S-2
Purchase Price....................................................... S-69
Record Date ......................................................... S-14
Registered Holder .................................................. *
Reimbursable Amounts................................................. *
Released Mortgaged Property Proceeds................................. S-21
Relevant Depository.................................................. S-79
REMIC................................................................ S-22
Representative....................................................... S-4
Remittance Date...................................................... S-14
Residential Property................................................. *
Responsible Officer ................................................. *
Restricted Group..................................................... S-95
SAIF ................................................................ *
SBA ................................................................. S-1
SBA File ............................................................ *
SBA Form 1086 ....................................................... *
SBA Loan-Backed Certificates......................................... S-101
SBA Loan Interest Rate .............................................. *
SBA Loan Pool........................................................ S-5
SBA Loans............................................................ S-5
SBA Loan Schedule ................................................... *
SBA Notes............................................................ S-28
SBA Rules and Regulations ........................................... *
SBA 504 Loan Program................................................. S-49
SBA 504 Loans ....................................................... S-5
SBA Section 7(a) Loans ............................................. S-5
Section 7(a) Companion Loans ....................................... S-5
Section 7(a) Companion Program ..................................... S-51
Sellers ............................................................. S-4
Servicer............................................................. S-4
Servicer's Certificate .............................................. *
Servicing Advances ................................................ S-22
Servicing Fee........................................................ S-22
Servicing Officer ................................................... *
Shortfall Amount..................................................... S-25
Simple Interest...................................................... S-38
Special Remittance Date.............................................. S-10
Specified Spread Account Requirement................................. S-15
Spread............................................................... S-68
Spread Account ...................................................... S-15
Spread Account Agreement............................................. S-15
Spread Account Custodian............................................. *
Spread Account Depositor............................................. S-15
Spread Balance....................................................... S-15
Subsequent SBA Loans................................................. S-2
Subservicer.......................................................... *
Subservicing Agreement............................................... *
Successor Servicer................................................... S-85
Tax Return .......................................................... *
Termination Price.................................................... S-22
Terms and Conditions................................................. S-81
TMSCMI............................................................... S-1
TMSI................................................................. S
TMSIC................................................................ S-1
Trustee.............................................................. S-4
Trust Fund........................................................... S-4
UCC.................................................................. S-20
Underwriter.......................................................... S-2
Underwriting Agreement............................................... S-72
Unguaranteed Interest................................................ S-1
Unguaranteed Percentage ............................................. S-7
United States Person................................................. S-93
U.S. Person.......................................................... S-105
Weighted average life ............................................... S-53
* Defined in "Certain Definitions."
<PAGE>
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the definitions contained in the
Agreement and used in this Prospectus Supplement. Reference is made to the
Agreement for the full definitions of all terms.
ACCOUNT: The Certificate Account, the Expense Account and, if applicable,
the Pre-Funding Account and the Capitalized Interest Account, each established
by the Trustee for the benefit of the Certificateholders; the Expense Account
established by the Trustee for the benefit of the Trustee, and the Spread
Account held by the Spread Account Custodian pursuant to the Spread Account
Agreement. The Trustee's obligation to establish and maintain the Certificate
Account pursuant to the Agreement is not delegable.
ADDITIONAL FEE: With respect to each Additional Fee SBA Loan, the fee
payable to the SBA by the related Seller equal to 40 basis points per annum on
the outstanding balance of the Guaranteed Interest of such Additional Fee SBA
Loans.
ADDITIONAL FEE SBA LOAN: An SBA Section 7(a) Loan sold in the secondary
market on or after September 1, 1993, and, thus, subject to the Additional Fee.
AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class A Aggregate Certificate Principal Balance less
the sum of all amounts previously distributed to the Class A Certificateholders
in respect of principal.
AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Aggregate Class B Certificate Principal Balance less
the sum of all amounts previously distributed to the Class B Certificateholders
in respect of principal.
ANNUAL EXPENSE ESCROW AMOUNT: The product of ___% per annum and the Pool
Principal Balance, which is computed and payable on a monthly basis and
represents the estimated annual Trustee's fees and Trust Fund expenses.
ASSIGNMENT OF MORTGAGE: With respect to those SBA Loans secured by a
Mortgaged Property, an assignment of the Mortgage, notice of transfer or
equivalent instrument sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect of record the transfer of the
related SBA Loan to the Trustee.
BIF: The Bank Insurance Fund, or any successor thereto.
BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a day on
which banking institutions in the States of California, New York or New Jersey
are authorized or obligated by law or executive order to be closed.
CERTIFICATEHOLDER OR HOLDER: Each Person in whose name a Class A or Class B
Certificate is registered in the Certificate Register, except that, solely for
the purposes of giving any consent, waiver, request or demand pursuant to the
Agreement, any Certificate registered in the name of the Sellers, the Servicer,
any Subservicer or any affiliate of any of them, shall be deemed not to be
outstanding and the undivided Percentage Interest evidenced thereby shall not be
taken into account in determining whether the requisite percentage of
Certificates necessary to effect any such consent, waiver, request or demand has
been obtained.
CERTIFICATE REGISTER: The Certificate Register established and maintained
in accordance with the Agreement.
CERTIFICATE REGISTRAR: Initially, ________________, and thereafter, any
successor appointed pursuant to the Agreement.
COLLATERAL: All items of property (including a Mortgaged Property), whether
real or personal, tangible or intangible, or otherwise, pledged by an Obligor or
others to a Seller to secure payment under an SBA Loan.
COMMERCIAL PROPERTY: Real property (other than agricultural property or
Residential Property) that is generally used by the Obligor in the conduct of
its business.
CURTAILMENT: With respect to an SBA Loan, any payment of principal received
during a Due Period as part of a payment that is in excess of five times the
amount of the Monthly Payment due for such Due Period and which is not intended
to satisfy the SBA Loan in full, nor is intended to cure a delinquency.
DESIGNATED DEPOSITORY INSTITUTION: With respect to the Principal and
Interest Account, an entity which is an institution whose deposits are insured
by either the BIF or SAIF administered by the FDIC, the unsecured and
uncollateralized long-term debt obligations of which shall be rated A2 or better
by [Moody's] and A or better by [Duff & Phelps] or P1 by [Moody's] and A1 by
[Duff & Phelps], and which is either (i) a federal savings association duly
organized, validly existing and in good standing under the federal banking laws,
(ii) an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state, (iii) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws, or (iv) a principal subsidiary of a bank holding company, in each case
acting or designated by the Servicer as the depository institution for the
Principal and Interest Account.
DETERMINATION DATE: That day of each month which is the third Business Day
prior to the 15th day of such month.
DUE DATE: The day of the month on which the Monthly Payment is due from the
Obligor on an SBA Loan.
EVENT OF DEFAULT: The Events of Default of the Servicer specified in the
Agreement.
EXCESS PAYMENTS: With respect to a Due Period, any amounts received on an
SBA Loan in excess of the Monthly Payment due on the Due Date relating to such
Due Period which does not constitute either a Curtailment or a Principal
Prepayment or payment with respect to an overdue amount. Excess Payments are
payments of principal for purposes of the Agreement.
EXCESS PROCEEDS: As of any Remittance Date, with respect to any Liquidated
SBA Loan, the excess, if any, of (a) the Unguaranteed Percentage of the total
Net Liquidation Proceeds, over (b) the Principal Balance of such SBA Loan as of
the date such SBA Loan became a Liquidated SBA Loan plus 30 days interest
thereon at the then applicable Adjusted SBA Loan Remittance Rate; provided,
however, that such excess shall be reduced by the amount by which interest
accrued on the advance, if any, made by the Servicer at the related SBA Loan
Interest Rate(s) exceeds interest accrued on such advance at the then applicable
weighted average Class A and Class B Remittance Rates.
EXPENSE ACCOUNT: The expense account established and maintained by the
Trustee in accordance with the Agreement.
FDIC: The Federal Deposit Insurance Corporation and any successor thereto.
FHLMC: The Federal Home Loan Mortgage Corporation and any successor
thereto.
FNMA: The Federal National Mortgage Association and any successor thereto.
FORECLOSED PROPERTY: Property, the title to which is acquired in
foreclosure or by deed in lieu of foreclosure.
FORECLOSED PROPERTY DISPOSITION: The final sale of a Foreclosed Property
acquired in foreclosure or by deed in lieu of foreclosure. The proceeds of any
Foreclosed Property Disposition constitute part of the definition of Liquidation
Proceeds.
INSURANCE PROCEEDS: Proceeds paid by any insurer pursuant to any insurance
policy covering an SBA Loan, Collateral or Foreclosed Property, including but
not limited to title, hazard, life, health and/or accident insurance policies.
LIQUIDATED SBA LOAN: Any defaulted SBA Loan or Foreclosed Property as to
which the Servicer has determined that all amounts which it reasonably and in
good faith expects to recover have been recovered from or on account of such SBA
Loan.
LIQUIDATION PROCEEDS: Cash, including Insurance Proceeds, proceeds of any
Foreclosed Property Disposition, revenues received with respect to the
conservation and disposition of a Foreclosed Property, and any other amounts
received in connection with the liquidation of defaulted SBA Loans, whether
through trustee's sale, foreclosure sale or otherwise.
LOAN GUARANTY AGREEMENT: The Loan Guaranty Agreement (Deferred
Participation) (SBA Form 750) dated August 13, 1980 between the SBA and The
Money Store Investment Corporation, as such agreement may be amended from time
to time.
MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A and Class B
Certificates evidencing an Aggregate Class A Certificate Principal Balance and
Aggregate Class B Certificate Principal Balance, as the case may be, in excess
of 50% of the Aggregate Class A Certificate Principal Balance and Aggregate
Class B Certificate Principal Balance, as the case may be.
MONTHLY PAYMENT: The monthly payment of principal and/or interest required
to be made by an Obligor on the related SBA Loan, as adjusted pursuant to the
terms of the related SBA Note.
MORTGAGE: The mortgage, deed of trust or other instrument creating a lien
on a Mortgaged Property.
MORTGAGED PROPERTY: The underlying real property, if any, securing an SBA
Loan, consisting of a Commercial Property or Residential Property and any
improvements thereon.
NET LIQUIDATION PROCEEDS: Liquidation Proceeds net of (i) any
reimbursements to the Servicer made therefrom pursuant to the Agreement and (ii)
amounts required to be released to the related Obligor pursuant to applicable
law.
OPINION OF COUNSEL: A written opinion of counsel, who may, without
limitation, be counsel for the Sellers or Servicer, reasonably acceptable to the
Trustee and experienced in matters relating thereto.
ORIGINAL CLASS A CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class A Certificates issued on the Closing Date.
ORIGINAL CLASS B CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class B Certificates on the Closing Date.
PAYING AGENT: Initially, ________________, and thereafter, any other Person
that meets the eligibility standards for the Paying Agent specified in the
Agreement and is authorized by the Trustee to make payments on the Certificates
on behalf of the Trustee.
PERCENTAGE INTEREST: With respect to a Class A or Class B Certificate, the
portion of the Trust Fund evidenced by such Class A or Class B Certificate,
expressed as a percentage, the numerator of which is the denomination
represented by such Class A or Class B Certificate and the denominator of which
is the Original Class A Certificate Principal Balance or Original Class B
Certificate Principal Balance, as the case may be.
PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall include
the following:
(a) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and
interest by, the United States or any agency or instrumentality
thereof, provided such obligations are backed by the full faith and
credit of the United States, FHA debentures, Federal Home Loan Bank
consolidated senior debt obligations, and FNMA senior debt
obligations, but excluding any of such securities whose terms do not
provide for payment of a fixed dollar amount upon maturity or call for
redemption;
(b) federal funds, certificates of deposit, time deposits and
banker's acceptances (having original maturities of not more than 365
days) of any bank or trust company incorporated under the laws of the
United States or any state thereof, provided that the short-term debt
obligations of such bank or trust company at the date of acquisition
thereof have been rated Prime-1 or better by [Moody's] and Duff 1+ or
better by [Duff & Phelps];
(c) deposits of any bank or savings and loan association which
has combined capital, surplus and undivided profits of at least
$3,000,000 which deposits are held only up to the limits insured by
the BIF or SAIF administered by the FDIC, provided that the unsecured
long-term debt obligations of such bank or savings and loan
association have been rated A3 or better by [Moody's] and A or better
by [Duff & Phelps];
(d) commercial paper (having original maturities of not more than
365 days) rated Prime-1 or better by [Moody's] and Duff 1+ or better
by [Duff & Phelps];
(e) debt obligations rated Aaa by [Moody's] and AAA by [Duff &
Phelps] (other than any such obligations that do not have a fixed par
value and/or whose terms do not promise a fixed dollar amount at
maturity or call date);
(f) investments in money market funds rated Aaa or better by
[Moody's] and Duff 1+ or better by [Duff & Phelps] the assets of which
are invested solely in instruments described in clauses (i)-(v) above;
(g) certain guaranteed investment contracts and repurchase
agreements satisfying the criteria set forth in the Agreement; and
(h) any other investment acceptable to the Rating Agencies,
written confirmation of which shall be furnished to the Trustee prior
to any such investment.
PERSON: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, national banking association,
unincorporated organization or government or any agency or political subdivision
thereof.
POOL PRINCIPAL BALANCE: The aggregate Principal Balances as of any date of
determination.
PRINCIPAL AND INTEREST ACCOUNT: The principal and interest account
established by the Servicer pursuant to the Agreement.
PRINCIPAL BALANCE: With respect to any SBA Loan or related Foreclosed
Property, at any date of determination, (i) the Unguaranteed Percentage of the
principal balance of the SBA Loan outstanding as of the Cut-Off Date (or, with
respect to any Subsequent SBA Loan, as of the date set forth in the Agreement),
after application of principal payments received on or before such date, minus
(ii) the sum of (a) the Unguaranteed Percentage of the principal portion of the
Monthly Payments received during each Due Period ending prior to the most recent
Remittance Date, which were distributed pursuant to the Agreement on any
previous Remittance Date, and (b) the Unguaranteed Percentage of all Principal
Prepayments, Curtailments, Excess Payments, Insurance Proceeds, Released
Mortgaged Property Proceeds, Net Liquidation Proceeds and net income from a
Foreclosed Property to the extent applied by the Servicer as recoveries of
principal in accordance with the provisions of the Agreement, which were
distributed pursuant to the Agreement on any previous Remittance Date. The
Principal Balance of any Liquidated SBA Loan or any SBA Loan that has been paid
off will equal $0.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on an SBA
Loan equal to the outstanding principal balance thereof, received in advance of
the final scheduled Due Date which is intended to satisfy an SBA Loan in full.
PRIOR LIEN: With respect to any SBA Loan secured by a lien which is not a
first priority lien, each loan relating to the corresponding Collateral having a
prior priority lien.
REGISTERED HOLDER: With respect to any SBA Loan, the Person identified as
such in the applicable SBA Form 1086, and any permitted assignees thereof.
REIMBURSABLE AMOUNTS: As of any date of determination, an amount payable to
the Servicer and/or a Seller with respect to (i) the Monthly Advances and
Servicing Advances reimbursable pursuant to the Agreement, (ii) any advances
reimbursable pursuant to the Agreement and not previously reimbursed, and (iii)
any other amounts reimbursable to the Servicer or a Seller pursuant to the
Agreement.
RESIDENTIAL PROPERTY: Any one or more of the following, (i) single family
dwelling unit not attached in any way to another unit, (ii) row house, (iii)
two-family house, (iv) low-rise condominium, (v) planned unit development, (vi)
three- or four-family house, (vii) high-rise condominium, (viii) mixed use
building or (ix) manufactured home (as defined in FNMA/FHLMC Seller-Servicers'
Guide) to the extent that it constitutes real property in the state in which it
is located.
RESPONSIBLE OFFICER: When used with respect to the Trustee, any officer
assigned to the Corporate Trust Division, including any Vice President,
Assistant Vice President, any Assistant Secretary, any trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also, with respect to a
particular matter, any other officer to whom such matter is referred because of
such officer's knowledge of and familiarity with the particular subject. When
used with respect to a Seller, the President, any Vice President, Assistant Vice
President, or any Secretary or Assistant Secretary.
SAIF: The Savings Association Insurance Fund, or any successor thereto.
SBA FILE: The SBA File maintained with respect to each SBA Loan in
accordance with the Agreement.
SBA FORM 1086: The Secondary Participation Guaranty and Certification
Agreement on SBA Form 1086, pursuant to which investors purchase the SBA
Guaranteed Portion.
SBA LOAN INTEREST RATE: With respect to any date of determination, the then
applicable annual rate of interest borne by an SBA Loan, pursuant to its terms,
which, as of the Cut-Off Date, is shown on the SBA Loan Schedule.
SBA LOAN SCHEDULE: The schedule of SBA Loans attached as an exhibit to the
Agreement, such schedule identifying each SBA Loan by address of the related
premises, and the name of the Obligor and setting forth as to each SBA Loan the
following information: (i) the Principal Balance as of the close of business on
the Cut-Off Date, (ii) the Account Number, (iii) the original principal amount
of the SBA Loan, (iv) the SBA Loan Date and original number of months to
maturity, in months, (v) the SBA Loan Interest Rate as of the Cut-Off Date and
guaranteed rate payable to the Registered Holder and the FTA, (vi) when the
first Monthly Payment was due, (vii) the Monthly Payment as of the Cut-Off Date,
(viii) the remaining number of months to maturity as of the Cut-Off Date, (ix)
the Unguaranteed Percentage, (x) the SBA loan number, (xi) the margin which is
added to the Prime Rate to determine the SBA Loan Interest Rate, and (xii) the
lifetime minimum and maximum SBA Loan Interest Rates, if applicable.
SBA RULES AND REGULATIONS: The Small Business Act, as amended, codified at
15 U.S.C. 631 ET SEQ., all rules and regulations promulgated from time to time
thereunder and the Loan Guaranty Agreement.
SERVICER'S CERTIFICATE: The monthly certificate of the Servicer, delivered
to the Trustee in accordance with the Agreement.
SERVICING OFFICER: Any officer of the Servicer involved in, or responsible
for, the administration and servicing of the SBA Loans whose name appears on a
list of servicing officers furnished to the Trustee by the Servicer, as such
list may from time to time be amended.
SPREAD ACCOUNT CUSTODIAN: , in its capacity as Spread Account Custodian
under the Spread Account Agreement, or any successor thereto.
SUBSERVICER: The Money Store of New York, Inc. or any other person with
whom the Servicer has entered into a Subservicing Agreement and who satisfies
any requirements set forth in the Agreement in respect of the qualification of a
Subservicer.
SUBSERVICING AGREEMENT: Any agreement between the Servicer and any
Subservicer relating to subservicing and/or administration of certain SBA Loans
as provided in the Agreement, a copy of which shall be delivered, along with any
modifications thereto, to the Trustee and the SBA.
TAX RETURN: The federal income tax return to be filed on behalf of the
Trust Fund together with any and all other information reports or returns that
may be required to be furnished to the Certificateholders or filed with the
Internal Revenue Service or any other governmental taxing authority under any
applicable provision of federal, state or local tax laws.
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE SELLERS OR THE UNDERWRITER. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms....................................................S-2
Risk Factors.......................................................S-22
The SBA Loan Pool..................................................S-25
The SBA Loan Program...............................................S-47
Yield, Maturity and Prepayment
Considerations.....................................................S-49
The Sellers........................................................S-52
Description of the Agreement and the
Certificates.......................................................S-54
The Trustee....................................................... S-66
Federal Income Tax Consequences....................................S-67
ERISA Considerations...............................................S-71
Legal Investment...................................................S-71
Underwriting.......................................................S-72
Ratings............................................................S-72
Legal Matters......................................................S-73
Financial Information..............................................S-73
Annex I............................................................S-74
Index of Principal Terms...........................................S-78
Certain Definitions................................................S-82
PROSPECTUS
Prospectus Supplement............................................... 3
Available Information............................................... 3
Reports to Securityholders.......................................... 4
Incorporation of Certain Documents by
Reference........................................................... 4
Summary of Terms.................................................... 5
Risk Factors........................................................ 20
The Trusts.......................................................... 24
Use of Proceeds..................................................... 29
The Representative and the Originators.............................. 29
The SBA Loan Lending Program........................................ 30
Description of the Certificates..................................... 36
Credit Enhancement................................................. 43
Maturity, Prepayment and Yield
Considerations...................................................... 48
The Agreements...................................................... 49
Certain Legal Aspects of the SBA Loans.............................. 61
Federal Income Tax Consequences......................................64
ERISA Considerations.................................................88
Legal Investment Considerations......................................90
Plan of Distribution.................................................90
Legal Matters........................................................91
Financial Information................................................91
Rating...............................................................91
Index of Principal Terms.............................................92
Appendix I
Appendix II
THE MONEY STORE SBA LOAN
TRUST 199_-_
$______________ Class A Certificates
$____________ Class B Certificates
(Approximate)
THE MONEY STORE INVESTMENT
CORPORATION
THE MONEY STORE COMMERCIAL
MORTGAGE INC.
THE MONEY STORE OF NEW YORK, INC.
The Money Store SBA Loan-
Backed Adjustable Rate
Certificates,
Series 199_-_
PROSPECTUS SUPPLEMENT
[Name of Underwriter]
___________, 199_
<PAGE>
SUBJECT TO COMPLETION
DATED ___________ __, 1998.
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates (the
"Certificates") and The Money Store Asset Backed Notes (the "Notes" and
collectively with the Certificates, the "Securities") described herein, issuable
in one or more Series (each a "Series"), which may be sold from time to time on
terms determined at the time of sale and described in the related Supplement to
this Prospectus (each a "Prospectus Supplement"), evidencing specified interests
in, or rights to receive payments from, 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 one or more 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 commercial loans with similar characteristics (the "Non-SBA Loans," and
collectively with the SBA Loans, the "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 and/or Notes.
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") or other affiliates of 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 of the related Securities 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. Securities
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, maturity protection or derivative
instruments, to the extent described in the related Prospectus Supplement. The
Prospectus Supplement for each Series of Securities will name the entities
(which will include The Money Store or one of its affiliates and may include
other entities) which will act, directly or through one or more sub-servicers,
as master servicers (each, in such capacity, the "Master Servicer") of such
Trust Assets.
SEE RISK FACTORS ON PAGE 19 HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
The date of this Prospectus is ________ __, 1998.
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.]
<PAGE>
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Each Class of Securities of any series will represent the right to
receive, or be secured by, a specified amount of payments of principal and/or
interest on the related Trust Assets in the manner described herein and in the
related Prospectus Supplement. The right of each Class of Securities to receive
payments may be senior or subordinate to the rights of one or more of the other
Classes of such Series. The right of the holders of any Class of Notes
("Noteholders") and the right of the holders of any Class of Certificates
("Certificateholders" and collectively with the Noteholders, "Securityholders"
or "Holders") to receive any distributions of principal and interest will be set
forth in the related Prospectus Supplement. A Series may include two or more
Classes of Certificates and/or Notes which differ as to the timing and priority
of payment, interest rate or amount of distributions in respect of principal or
interest or both. A Series may include one or more Classes of Certificates
and/or Notes entitled to distributions in respect of principal, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Distributions on Certificates of any Series will be subordinated to
prior payments due on the related Notes, if any, to the extent described herein
and in the related Prospectus Supplement. The Securities of each Series will
represent fractional undivided ownership interests in the related Trust.
Distributions to Holders of Securities 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 at which any Class of Certificates (the
"Pass-Through Rate") or the rate at which any Class of Notes (the "Interest
Rate") bear interest or the method of calculating such Pass-Through Rate or
Interest Rate, which may be fixed or variable, will be set forth in the related
Prospectus Supplement. Distributions on the Certificates and/or Notes of a
Series will be made only from the assets of the related Trust and certain
related property. The Pass-Through Rate for a Class of Certificates or the
Interest Rate for a Class of Notes that bear interest based upon a floating rate
of interest, as specified in the related Prospectus Supplement, may base such
floating rate upon any of following: (i) the auction procedures described herein
(such Securities being referred to herein as "Auction Rate Securities"), (ii)
the London interbank offered rate for U.S. dollar deposits for a specified
period ("LIBOR") plus an amount set forth in the related Prospectus Supplement ,
(iii) the average bond equivalent rates of weekly auctions of Treasury bills for
a specified period (the "T-Bill Rate") plus an amount set forth in the related
Prospectus Supplement, (iv) the prime lending rate of certain leading U.S.
commercial banks plus an applicable spread, as described in the related
Prospectus Supplement (the "Prime Rate"), or (v) any such other method or
procedures used to determine the floating rate of interest as may be described
in the applicable Prospectus Supplement.
The Securities 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. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Representative or the Originators with respect to a Series of Securities
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 and/or Notes will be limited to its contractual servicing
obligations. If the amount available for distribution to Holders 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 Holders, to the extent
such deficiency is attributable to delinquent payments of principal and/or
interest during the immediately preceding Due Period (as defined herein). See
"Description of the Securities--Monthly Advances and Compensating Interest."
The yield to Holders on each Class of Certificates and/or Notes 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."
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, including First Union Capital Markets,
a division of Wheat First Securities, Inc. ("First Union Capital Markets"), an
affiliate of the Representative, 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 Securities will be set forth
in the related Prospectus Supplement. There can be no assurance that a secondary
market for the Securities will develop, or if it does develop, that it will
continue. This Prospectus may not be used to consummate sales of a Series of
Securities unless accompanied by a Prospectus Supplement.
First Union Capital Markets expects to enter into market making
transactions in the Class A Certificates and may act as principal or agent in
any such transactions. Any such purchases or sales will be made at prices
related to prevailing market prices at the time of sale. This Prospectus and the
related Prospectus Supplement may be used by First Union Capital markets in
connection with such transactions.
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 and/or Notes
to be offered hereunder, among other things, will set forth with respect to such
Series of Certificates and/or Notes: (i) the aggregate principal amount, the
Pass-Through Rate, Interest 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 and/or Notes; (ii)
certain information concerning the Trust Assets and 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 or other derivative instruments, if any, relating to the
Pools or all or part of the related Certificates and/or Notes; (iii) the
specified interest of each Class of Certificates and/or Notes 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
and/or Notes, 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 and/or Notes.
AVAILABLE INFORMATION
The Representative and the Originators have 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
Securities. 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 Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the Securityholders as described in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, a Series of
Certificates and/or Notes may be issuable in book-entry form. In such event, the
related Certificates and/or Notes will be registered in the name of Cede & Co.
("Cede"), the nominee of The Depository Trust Company ("DTC") or another
nominee. All reports will be provided to Cede or such other nominee, which in
turn will provide such reports to Participants and Indirect Participants (as
defined herein) of DTC or such other entities as described in the related
Prospectus Supplement. Such Participants and Indirect Participants will then
forward such reports to the beneficial owners of Securities. See "Description of
the Securities - 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 Securities issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and the related
Prospectus Supplement and to be a part hereof from the date of the filing of
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or 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., 707 Third Avenue, West Sacramento, California 95605, Attention: Investor
Relations, Telephone: (916) 617-2001.
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT. CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS PROSPECTUS SHALL HAVE
THE MEANINGS ASSIGNED TO SUCH TERMS ELSEWHERE IN THIS PROSPECTUS.
Securities
Offered.......................... The Money Store Asset Backed Certificates
(the "Certificates") and The Money Store
Asset Backed Notes (the "Notes"). Notes are
issuable from time to time in Series pursuant
to an Indenture (an "Indenture"), and
Certificates are issuable from time to time
in Series pursuant to either a Pooling and
Servicing Agreement (a "Pooling and Servicing
Agreement") or a Trust Agreement (a "Trust
Agreement"). As used herein, "Agreements"
means, collectively, with respect to a Series
of Certificates, the related Pooling and
Servicing Agreement or the related Trust
Agreement, with respect to a Series of Notes,
the related Indenture and the related Sale
and Servicing Agreement, as the context
requires, and with respect to a Series of
Securities, the relevant combination of
Agreements for such Series. Each Certificate
of a Series will evidence an interest in the
Trust Fund or Trust Funds for such Series, as
specified in the related Prospectus
Supplement. Each Series of Securities will
consist of one or more Classes, each Class
may differ in, among other things, the
amounts allocated to and the priority of
principal and interest payments. The
Securities of each Class will be issued in
fully registered form in the denominations
specified in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, the Securities or
certain Classes of such Securities offered
thereby may be available in book-entry form
only.
Issuers.......................... Certain trust funds (each, a "Trust")
represented by The Money Store or its
affiliates, the primary assets of which will
be the right to receive payments and other
recoveries attributable to one or more Pools
of Loans and certain other Trust Assets.
Representative
and Master
Servicer......................... The Money Store Inc. ("The
Money Store"), a New Jersey corporation or
certain of its affiliates including First
Union National Bank or certain of its
affiliates. The Prospectus Supplement
relating to any Series of Certificates
and/or Notes 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"), on the terms and
conditions set forth in the related Pooling
and Servicing Agreement or Sale and
Servicing Agreement (a "Sale and Servicing
Agreement"). The principal offices of The
Money Store are located in Sacramento,
California and Union, New Jersey. The Money
Store is a wholly-owned subsidiary of First
Union National Bank, a national banking
association subsidiary of First Union
Corporation. See "The Representative and the
Originators."
The Trust
Assets........................... The Securities will evidence fractional
undivided ownership interests in or rights to
receive payments from 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 (i) the Unguaranteed
Interest of 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 Section 7(a) Loans"), (ii) loans
made to small businesses in connection with
the origination of an SBA Section 7(a) Loan,
which related SBA Section 7(a) Loan may or
may not be part of a Trust Fund (the "Section
7(a) Companion Loans"), (iii) loans
originated under the SBA's 504 program ("SBA
504 Loans," and collectively with the SBA
Section 7(a) Loans and the Section 7(a)
Companion Loans, the "SBA Loans") and (iv)
loans originated pursuant to the Conventional
Commercial Loan Program (as defined below)
that have many similar characteristics to SBA
Section 7(a) Loans or SBA 504 Loans but were
not originated pursuant to an SBA program
(the "Non-SBA Loans"). The SBA Loans and the
Non-SBA Loans are referred to herein
collectively as the "Loans".
The "Unguaranteed Interest" will equal (i) as
to any SBA Section 7(a) Loan, all payments
and other recoveries on such SBA Section 7(a)
Loan not constituting the Guaranteed Interest
therein and certain other amounts to be
described in a Prospectus Supplement that
will not be transferred to the related Trust
and (ii) as to any Section 7(a) Companion
Loan or SBA 504 Loan or Non-SBA Loan, all
payments and other recoveries on such Section
7(a) Companion Loan, SBA 504 Loan or Non-SBA
Loan.
The payment terms of the 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 a Loan is its
"Mortgage Interest Rate." Changes to an
Adjustable Rate may be subject to
periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be
deferred and added to the principal of a
Loan for such periods and under such
circumstances as may be specified in the
related Prospectus Supplement. 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 Loan, and the amount of any
difference may be contributed from funds
supplied by the seller of the properties
securing the related Loan (the
"Mortgaged Properties") or another
source or may be treated as accrued
interest and added to the principal of
the Loan.
(b) Principal may be payable on a level
basis to fully amortize the 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 Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of
the Loan, may increase over a specified
period of time ("graduated payments"),
or may change from period to period.
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 Loan or may adjust
or decline over time, and may be
prohibited for the life of the Loan or
for certain periods ("Lockout Periods").
Certain 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 Loans may permit
prepayments without payment of a fee
unless the prepayment occurs during
specified time periods. The Loans may
include due-on-sale clauses which permit
the mortgagee to demand payment of the
entire Loan in connection with the sale
or certain other transfers of the
related Mortgaged Properties. Other
Loans may be assumable by persons
meeting the then applicable underwriting
standards of the originator.
The Mortgaged Properties relating to 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 Loans underlying a
given Series of Securities may have been
originated by the Representative, the
Originators or affiliates thereof and certain
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 Section 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
Section 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 the lien of the
related SBA Section 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 Section 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 Non-SBA Loans will have been originated
or purchased by the Originators under the
programs described under "The Trusts --
Non-SBA Loans."
The Prospectus Supplement for each Series of
Securities will specify with respect to all
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 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 Loans, (iii) the types of
Mortgaged Properties and/or other assets
securing the Loans, (iv) the original terms
to maturity of the Loans, (v) the expected
weighted average term to maturity of the
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 Loans, (vii) the expected weighted
average Loan-to-Value Ratio of the Loans,
(viii) the expected weighted average Mortgage
Rate and ranges of Mortgage Rates borne by
the Loans, (ix) in the case of 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 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 or other derivative
instruments to be provided with respect to
all or any 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 Securities may exceed the
principal balance of the Trust Assets
initially being delivered to the Trustee.
Cash in an amount up to the amount of 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
current 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 Securities 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, 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 and/or Notes.
Multi-Party
Agreement........................ In connection with each issuance of
Securities relating to SBA Section 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 Section 7(a)
Loans and the proceeds thereof and the
consent of the SBA to the transactions
contemplated by the related Agreement.
Revolving Period and
Amortization Period;
Retained Interest.............. If the related Prospectus Supplement so
provides, there may be a period commencing on
the date of issuance of a Class or Classes of
Notes and/or Certificates of a Series and
ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving
Period") during which limited or no principal
payments will be made to one or more Classes
of Notes and/or Certificates of the related
Series as are identified in such Prospectus
Supplement. Some or all collections of
principal otherwise allocated to such Classes
of Notes or Certificates may be (i) utilized
during the Revolving Period to acquire
additional Trust Assets which satisfy the
criteria described under "The
Trusts--General" and the criteria set forth
in the related Prospectus Supplement, (ii)
held in an account and invested in Permitted
Investments (as defined herein), for later
distribution to Securityholders, (iii)
applied to those Notes or Certificates for
such Series, if any, specified in the related
Prospectus Supplement as then are in
amortization, or (iv) otherwise applied as
specified in the related Prospectus
Supplement.
An "Amortization Period" is the period during
which an amount of principal is payable to
Holders of Securities which, during the
Revolving Period, were not otherwise entitled
to such payments. If so specified in the
related Prospectus Supplement, during an
Amortization Period all or a portion of
principal collections on the Loans may be
applied as specified above for a Revolving
Period and, to the extent not so applied,
will be distributed to the Classes of Notes
and/or Certificates for such Series specified
in the related Prospectus Supplement as then
being entitled to payments of principal. In
addition, if so specified in the related
Prospectus Supplement, amounts deposited in
certain accounts for the benefit of one or
more Classes of Notes or Certificates for
such Series may be released from time to time
or on a specified date and applied as a
payment of principal on such Classes of Notes
and/or Certificates. The related Prospectus
Supplement will set forth the circumstances
which will result in the commencement of an
Amortization Period.
Each Series which has a Revolving Period may
also issue to the Representative or one of
its affiliates a certificate evidencing an
undivided beneficial interest (a "Retained
Interest") in such Series not represented by
the other Securities issued by the related
Trusts. As further described in the related
Prospectus Supplement, the value of such
Retained Interest will fluctuate as the
amount of Notes and Certificates of the
related Series of Securities outstanding is
reduced.
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 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"). In addition, a Series may
include one or more Series entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments (such
Certificates, "Strip Certificates"). Certain
Series or Classes of Certificates may be
covered by a 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,
or derivative products, 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 a floating 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 Pass-Through Rate for a Class
of Certificates that pay interest based upon
a floating rate of interest, as specified in
the related Prospectus Supplement, may base
such floating rate upon any of following: (i)
the auction procedures for Auction Rate
Securities described herein, (ii) LIBOR plus
an amount set forth in the related Prospectus
Supplement, (iii) the T-Bill Rate plus an
amount set forth in the related Prospectus
Supplement, (iv) the Prime Rate plus an
applicable spread, as set forth in the
related Prospectus Supplement, or (v) any
such other method or procedures used to
determine the floating rate of interest as
may be described in the applicable 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 Securities."
With respect to any Series of Securities
including one or more Classes of Notes,
distributions in respect of the Certificates
may be subordinated in priority of payment to
payments on the Notes of such Series, to the
extent specified in the related Prospectus
Supplement.
Description of the Notes......... Any Series of Securities may include one or
more Classes of Notes, as specified in the
related Prospectus Supplement, each of which
will be issued pursuant to an Indenture and
will be treated as debt obligations of the
related Trust.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples of $1,000 (or
such other accounts as may be set forth in a
Prospectus Supplement), except that one Note
of each Class may be issued in a different
denomination, in book-entry form or in
definitive form, as specified in the related
Prospectus Supplement. See "Description of
the Securities."
Each Class of Notes will have a stated
principal amount and will bear interest at
the Interest Rate or Rates as specified in
the related Prospectus Supplement, which may
be different for each Class of Notes and may
be fixed, variable, adjustable, or any
combination of the foregoing. The related
Prospectus Supplement will specify the
Interest Rate for each Class of Notes or the
method for determining the Interest Rate. The
Interest Rate for a Class of Notes that pay
interest based upon a floating rate of
interest, as specified in the related
Prospectus Supplement, may base such floating
rate upon any of following: (i) the auction
procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount
set forth in the related Prospectus
Supplement, (iii) the T-Bill Rate plus an
amount set forth in the related Prospectus
Supplement, (iv) the Prime Rate plus an
applicable spread, as set forth in the
related Prospectus Supplement, or (v) any
such other method or procedures used to
determine the floating rate of interest as
may be described in the applicable Prospectus
Supplement. Each Note may also represent a
fractional undivided interest in, or be
entitled to receive payments from, monies on
deposit, if any, in the Pre-Funding Account
as specified in the related Prospectus
Supplement and any other account established
for the benefit of Noteholders, as specified
in the related Prospectus Supplement.
A Series may include two or more Classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations
of loss, Interest Rate or amount of payments
of principal or interest, or as to which
payments of principal or interest may or may
not be made upon the occurrence of specified
events or on the basis collections from
designated portions of the Trust Assets for
such Series. In addition, a Series may
include one or more Classes of Notes entitled
to (i) principal payments with
disproportionate, nominal or no interest
payments or (ii) interest payments with
disproportionate, nominal or no principal
payments (such Notes, "Strip Notes"). A
Series of Notes may include one or more
Classes of senior Notes (collectively,
"Senior Notes") which receive certain
preferential treatment specified in the
related Prospectus Supplement with respect to
one or more Classes of subordinate Notes
(collectively, the "Subordinated Notes").
Certain Series or Classes of Notes may be
covered by a 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
or derivative instruments, as described
herein and in the related Prospectus
Supplement.
Credit
Enhancement ..................... The Trust Assets in a Trust or the Securities
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 all Certificateholders will be
subordinated to the rights of all Noteholders
of a Series to receive distributions to the
extent described in the related Prospectus
Supplement, with respect to the Trust Assets
and other assets in the related Trust. The
rights of the holders of Subordinated
Certificates and/or Subordinated Notes, as
the case may be (collectively, "Subordinated
Securities"), of a Series to receive
distributions will be subordinated to the
rights of the holders of the Senior
Certificates and/or Senior Notes, as the case
may be (collectively, "Senior Securities"),
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 Securities 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
Securities 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 Securities 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
Distribution Account (as defined herein) to
the extent described in the related
Prospectus Supplement. The protection
afforded to the holders of Senior Securities
through subordination also may be
accomplished by allocating certain types of
losses or delinquencies to the related
Subordinated Securities to the extent
described in the related Prospectus
Supplement.
If so specified in the related Prospectus
Supplement, the same Class of Securities may
constitute Senior Certificates and/or Senior
Notes, as the case may be, with respect to
certain types of payments or certain losses
or delinquencies and Subordinated
Certificates and/or Subordinated Notes, as
the case may be, 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 and/or Subordinated
Notes, as the case may be, 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 and/or Subordinated
Notes, as the case may be, 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 holders
of Senior Certificates and/or Senior Notes,
as the case may be, or released to holders of
Subordinated Certificates and/or Subordinated
Notes, as the case may be, from the related
Trust.
B. Guaranty Insurance
Policy..................... A certificate or note guaranty insurance
policy (each a "Guaranty Insurance Policy")
may be obtained and maintained for each Class
or Series of Certificates and/or Notes.
Guaranty Insurance Policies generally
unconditionally and irrevocably guarantee
that the full amount of the distributions of
principal and interest ("Insured Payments"),
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 the Holders of
the covered Securities. 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 Loans, to guarantee any
specified rate of prepayments or to provide
funds to redeem Securities on any specified
date.
C. Spread
Amount....................... If so specified in the related Prospectus
Supplement, certain Classes of Certificates
and/or Notes 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 Securities. 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
Securities. 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
may 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 Securities 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 Securities 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 Securities.
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 Loans, limited in scope,
covering defaults on the related Loans in an
initial amount equal to a specified
percentage of the aggregate principal balance
of all 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 Loans certain physical risks
that are not otherwise insured against by
Standard Hazard Insurance Policies may be
covered by a special hazard insurance policy
or policies (a "Special Hazard Insurance
Policy"). The level of coverage of each
Special Hazard Insurance Policy will be
specified in the related Prospectus
Supplement.
F. Bankruptcy
Bonds....................... A mortgagor bankruptcy bond or bonds
("Bankruptcy Bond") may be obtained to cover
certain losses resulting from a reduction by
a bankruptcy court of scheduled payments of
principal or interest on a Loan or a
reduction by such court of the principal
amount of a 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 and/or Notes. In such case,
credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to certain
Certificates and/or Notes evidencing
interests in one or more Trusts or asset
groups prior to distributions to other
Certificates and/or Notes 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 and/or
Notes 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 Securities 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 Securities 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 and/or
Notes may be entitled to third-party payments
to help provide that the holders of such
Securities receive their unpaid principal on
or prior to a specified date.
J. Other Insurance,
Guarantees, Swaps,
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, 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 Securities 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 hedge
contract providing limited protection against
interest rate risks. If provided in the
related Prospectus Supplement, interest
and/or principal on one or more Classes of
the Securities of a Series may be paid to
Holders thereof in a currency other than U.S.
dollars. If so provided, the Trust may, in
connection therewith, enter into one or more
currency rate swaps to provide limited
protection against foreign currency rate
fluctuation risks. One or more Classes of
Securities also may be issued in conjunction
with a put or call feature entitling (in the
case of a put) or obligating (in the case of
a call) the applicable Securityholders to
sell some or all of its Securities to the
party named in the applicable Prospectus
Supplement on the date or dates set forth
therein. Any such arrangements must be
acceptable to each nationally recognized
rating agency that provides a rating for the
related Series of Securities (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 Loan Remittance
Rate (as defined herein under "Description of
the Securities--Monthly Advances and
Compensating Interest") on the then
outstanding principal balance of the related
Series of Certificates and/or Notes 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 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 Loans
("Liquidation Proceeds"), amounts paid by any
insurer pursuant to any insurance policy
covering a 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 Loans as to which the advances were
made, and certain other amount that would
otherwise be distributed on the Securities.
The Master Servicer will not be required to
make any Monthly Advances which it
determines, in good faith, would be
nonrecoverable from amount received in
respect of the Loans. See "Description of the
Securities--Monthly Advances and Compensating
Interest."
Compensating
Interest......................... If so specified in the related Prospectus
Supplement, with respect to each 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 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 Loan as of the beginning
of the related Due Period at the applicable
weighted average Adjusted Loan Remittance
Rate over (b) the amount of interest actually
received on the related 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 certain Classes of Certificates or
Notes, or certain other entities specified in
the related Prospectus Supplement may have
the option to effect early retirement of a
Series of Securities 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 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
Securities under the circumstances and in the
manner specified in the related Prospectus
Supplement and herein under "The Agreement--
Termination; Purchase of Loans."
Trustee ......................... The trustee or trustees under any Agreement
relating to a Series of Securities (each, a
"Trustee") will be specified in the related
Prospectus Supplement. Additionally, any
Co-Trustees, Custodians or Co-Custodians will
be set forth in the related Prospectus
Supplement.
Federal Income Tax
Consequences..................... The federal income tax consequences of the
purchase, ownership and disposition of the
Securities 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"), and,
if such election is not made, whether the
Trust is structured and intended to be
treated as a grantor trust, a partnership or
otherwise.
REMIC. If an election is to be made to treat
the Trust (or certain assets of the Trust)
for a Series of Securities 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)(4)(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 may be classified as a
grantor trust for federal income tax purposes
and not as an association taxable as a
corporation or a taxable mortgage pool. 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)(4)(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.
PARTNERSHIP. If no election is to be made to
treat the Trust for a Series as a REMIC and
it is so specified in the related Prospectus
Supplement, the Trust will generally be
treated as a partnership for federal income
tax purposes, and Federal Tax Counsel will
deliver its opinion generally to the effect
that the Trust will not be an association (or
publicly traded partnership) taxable as a
corporation, or a taxable mortgage pool, for
federal income tax purposes. Each Noteholder,
by the acceptance of a Note of such Series,
will agree to treat such Note as
indebtedness, and each Certificateholder, by
the acceptance of a Certificate of such
series, will agree to treat the related Trust
as a partnership in which such
Certificateholder is a partner for federal
income and state tax purposes.
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 Section 4975 of the
Code should carefully review with their legal
advisors whether an investment in Securities
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
Securities 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
Securities 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
Securities....................... Securities may be represented by global
certificates and/or notes registered in the
name of Cede, as nominee of DTC, or another
nominee. In such case, Securityholders will
not be entitled to receive definitive
certificates and/or notes representing such
Holders' interests, except in certain
circumstances described in the related
Prospectus Supplement. See "Description of
the Securities--Book-Entry Registration"
herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities will
develop or, if a secondary market does develop, that it will provide Holders of
the Securities with liquidity of investment or that it will continue for the
lives of the Securities. In addition, transfers of certain Classes of Securities
may be restricted as set forth in the related Prospectus Supplement.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates and/or Notes in book-entry form may reduce the
liquidity of such Securities in the secondary trading market since investors may
be unwilling to purchase Securities for which they cannot obtain physical
certificates or notes.
Since transactions in Certificates and Notes will, in most cases, be able
to be effected only through DTC, Direct or Indirect Participants and certain
banks, the ability of a Securityholder to pledge a Certificate or Note to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such Securities may be limited due to lack of a
physical certificate representing such Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such 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 Securityholders either directly or indirectly through Indirect
Participants or such other entities as described in the related Prospectus
Supplement. See "Description of the Securities--Book-Entry Registration."
NATURE OF SECURITY
Certain of the 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
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 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. The Representative will not be able to quantify
the impact of any property value declines on the 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 Loans could be
higher than those historically experienced in the mortgage lending industry in
general.
Certain of the 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 Loan. The ability of a
Mortgagor to refinance such a 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 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 Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related 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 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 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 Loan or permanently reduce the
principal balance of such Loan, thus either delaying or permanently limiting the
amount received by the Trust with respect to such Loan. Moreover, in the event a
bankruptcy court prevents the transfer of the related Mortgaged Property to a
Trust, any remaining balance on such Loan may not be recoverable.
Even assuming that the Mortgaged Properties and other collateral securing a
Loan provide adequate security for the Loans, substantial delays could be
encountered in connection with the liquidation of defaulted Loans and
corresponding delays in the receipt of related proceeds by the Securityholders
could occur. An action to foreclose on a Mortgaged Property securing a 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 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 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 a Loan fail to provide adequate security for the Loans and
insufficient funds are available from applicable Credit Enhancement,
Securityholders 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 Loans--
Environmental Considerations."
In each Agreement the Originators will represent and warrant that at the
time of origination of each 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 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.
PRE-FUNDING ACCOUNTS
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities.
The ability of a Trust Fund to obtain subsequent Loans during the related
Pre-Funding Period will be dependent on the ability of the Originators to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Originators to originate or acquire such Loans
will be affected by a variety of social and economic factors, including the
prevailing level of market interest rates, unemployment levels and consumer
perception of general economic conditions.
PREPAYMENT CONSIDERATIONS
The Loans may be prepaid in full or in part at any time. The rate of
prepayments of the 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 LOANS IN THE EVENT OF BANKRUPTCY OF AN ORIGINATOR
The Originators believe that upon the sale of a Series of Certificates
and/or Notes to an independent third party for fair value and without recourse,
such sale will constitute an absolute and unconditional sale of such
Certificates and/or Notes and the interests in the 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 Loans, a trustee in bankruptcy
or other creditor could attempt to recharacterize the sale of the Loans as a
borrowing by such Originator or any such affiliate with the result that
Securities are deemed to be creditors of such Originator or such affiliate,
secured by a pledge of the Loans. If such an attempt were successful, a trustee
in bankruptcy could elect to accelerate payment of the Securities and liquidate
the Loans with the Securityholders entitled to the then outstanding principal
amount thereof together with accrued interest. Thus, the Holders of Securities
could lose the right to future payments of interest, might suffer reinvestment
loss in a lower interest rate environment and, if the Loans are sold for a price
less than the then outstanding principal balances of all classes of Securities,
certain Certificateholders and/or Noteholders might suffer a loss of principal.
In connection with the issuance of each Series of Securities, 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 Loans in each Loan to a Trust
constitutes a sale under applicable law. Therefore, the 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 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 Loans required to be made by
the Master Servicer under the Agreement will have the same effect on the
Securityholders as a prepayment of the related 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 Loans, the Certificates and/or Notes will be prepaid in part
from and to the extent of such remaining amounts.
Collections on the Loans may vary due to the level and frequency of
delinquent payments and of prepayments. Collections on the Loans may also vary
due to seasonal business patterns and payment habits of borrowers.
The Loans may be "simple interest" or "date-of-payment loans". If a payment
is received on a 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 Loan having a longer average life than would have been
the case had the payment been made as scheduled. Conversely, if a payment on a
Loan is received earlier than scheduled, more of such payment will be applied to
principal and less to interest than would have been the case had the payment
been received on its scheduled due date, resulting in such Loan having a shorter
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.
SECURITY RATING
If as set forth in the related Prospectus Supplement, the rating of one or
more classes of Securities may depend, to a large extent, on the
creditworthiness of a third party provider of credit enhancement. In such event,
any reduction in the rating assigned to the claims-paying ability of such
provider below the rating initially given to such Class of Securities would
likely result in a reduction in the rating of such Series of Securities. See
"Rating."
UNAUDITED STATEMENTS
On each Remittance Date, the Trustee will mail to each Securityholder 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
Master Servicer and Trustee and the loss and delinquency status of the Loans.
Although the information contained in such statements will be prepared by the
Master Servicer, neither such information nor any other financial information
furnished to Securityholders 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 Securities -- Payments on the Loans; Distribution on the
Securities" herein.
THE TRUSTS
A Trust for any Series of Securities will include the Trust Assets
consisting of a Pool* comprised of (i) SBA Section 7(a) Loans, (ii) Section 7(a)
Companion Loans, (iii) SBA 504 Loans, and (iv) Non-SBA Loans, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Trust Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
- --------
* Whenever the terms "Pool," "Certificates," "Notes" and
"Securities" are used in this Prospectus, such terms will
be deemed to apply, unless the context indicates otherwise,
to one specific Pool, the Certificates representing
certain undivided fractional interests, as described below,
in a single Trust consisting primarily of the Loans in
such Pool, and the Notes shall refer to debt obligations of
such Trust secured by the related Pool of SBA Loans.
Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates of one
specific Series, the term "Interest Rate" will refer to the
Interest Rate borne by the Notes of one specific Series
and the term "Trust" will refer to one specific Trust.
The Notes of each Series will be secured by the pledge of the assets of the
related Trust, and the Certificates of each Series will represent interests in
the assets of the related Trust. The Securities 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 Securities 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 Securities 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 Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities 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 Securities.
GENERAL
The real property which secures repayment of the 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 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 Loans to
be included in a Trust will be described in the related Prospectus Supplement
and may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (I.E., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate). The specified rate of interest on
a Loan is its "Mortgage Interest Rate". Changes to an Adjustable Rate
may be subject to periodic limitations, maximum rates, minimum rates
or a combination of such limitations. Accrued interest may be deferred
and added to the principal of a Loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. 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 Loan, and the amount of any difference may be contributed
from funds supplied by the seller of the Mortgaged Property securing
the related Loan or another source or may be treated as accrued
interest added to the principal of the Loan.
(b) Principal may be payable on a level basis to fully amortize
the 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 Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Loan, may increase over a specified period of time
("graduated payments") or may change from period to period. 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. Loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of some or all of the payments due during a specified period,
which may be recouped as deferred interest, or otherwise.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Loan or may decline over time,
and may be prohibited for the life of the Loan or for certain periods
("lockout periods"). Certain 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 Loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The
Loans may include due-on-sale clauses which permit the mortgagee to
demand payment of the entire Loan in connection with the sale or
certain transfers of the related Mortgaged Property. Other Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Originator.
The Prospectus Supplement for each Series of Securities will contain
information with respect to all the 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 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 Loans; (iii) the types of Mortgaged Properties and/or
other assets securing the Loans (iv) the original terms to maturity of the
Loans; (v) the expected weighted average term to maturity of the 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 Loans; (vii) the expected Mortgage Interest Rate and ranges of Mortgage
Interest Rates borne by the Loans; (viii) in the case of Loans having Adjustable
Rates, the expected weighted average of the Adjustable Rates, if any; (ix) the
amount of any Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond to be maintained with respect to such
Pool; (x) the amount, if any, and terms of any other credit enhancement or other
derivative instruments to be provided with respect to all or any Loans or the
Pool; and (xi) the expected geographic location of the Mortgaged Properties. If
specific information respecting the Loans is not known to the Representative at
the time the related Securities 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.
Unless otherwise provided in the related Prospectus Supplement, the only
obligations of the Representative or the Originators with respect to a Series of
Securities will be to provide (or, where the Representative or an Originator
acquired a Loan from another originator, obtain from such originator) certain
representations and warranties concerning the Loans and to assign to the Trustee
for such Series of Securities the Representative's or Originator's rights with
respect to such representations and warranties. See "The Agreements--Sale of
Loans." The obligations of the Master Servicer with respect to the 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 Loans in the amounts
described herein under "Description of the Securities -- Monthly Advances and
Compensating Interest." 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 Securities 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 Securities at the time and in
the manner set forth in the related Prospectus Supplement.
SBA SECTION 7(A) LOANS
The SBA Section 7(a) Loans will consist of the Unguaranteed Interests 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 Section 7(a) 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. part 120. As to any SBA Section 7(a) Loan, the
right to receive the guaranteed portion of the principal balance thereof
together with interest thereon at a per annum rate in effect from time to time
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 Section 7(a)
Loan to SBA Section 7(a) Loan, will not be included in the related Trust Fund
and Securityholders will have no right or interest therein. As to any SBA
Section 7(a) Loan, the "Unguaranteed Interest" will equal all payments and other
recoveries on such SBA Section 7(a) Loan not constituting the Guaranteed
Interest therein and certain other amounts to be described in a Prospectus
Supplement that will not be transferred to the related Trust.
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
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 the lien of the related SBA Section
7(a) Loan.
Section 7(a) Companion Loans may be utilized by a borrower for all eligible
SBA Section 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
Section 7(a) Loan under the Certified Lender Program (the SBA currently
prohibits Section 7(a) Companion Loans in connection with the Preferred Lender
Program). Section 7(a) Companion Loans bear interest and have terms to maturity
as described above under "--SBA 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.
NON-SBA LOANS
Certain of the Non-SBA Loans will be loans made in connection with the
Conventional Commercial Loan Program (the "Conventional Commercial Loan
Program") of the Representative and the Originators. Created November 1, 1996,
the Conventional Commercial Loan Program is designed to assist qualified
borrowers in obtaining financing ("Conventional Commercial Loans"). Conventional
Commercial Loans may currently be used for hotel/motel acquisition,
construction, renovation, conversion, refinance, expansion, land and site
improvements, acquisition and installation of furniture, fixtures and equipment
as well as certain closing costs and professional fees, working capital and the
interest on interim financing. The Originators provide up to approximately 75%
of project costs in a conventional loan agreement, with borrowers providing a
minimum 25% equity contribution.
ORIGINATION MECHANISMS. The Originators primarily generate Conventional
Commercial Loans through two mechanisms. The first, known as the Franchise
Finance Division, utilizes a national referral network of trade associations,
hotel/motel franchisors and independent or affiliated commercial loan brokers.
Franchise Account Managers perform essentially the same tasks as local sales
representatives and are compensated primarily through commissions.
The second origination arm, known as the HFS Group, generates business
primarily from its contractual relationship as a preferred vendor with HFS,
Incorporated ("HFS"). Commercial Loan Representatives of the HFS Group work with
the sales and transfer/renewal departments for each of the franchise concepts to
locate customers. All customer contact is handled by telephone through a
national sales center in Sacramento, California.
Both the Franchise Finance Division and the HFS Group also receive
referrals from the Originators' national network of sales offices serving local
markets.
COLLATERAL FOR CONVENTIONAL COMMERCIAL LOANS. Conventional Commercial Loans
are first-lien mortgages for the purchase, development or refinance of franchise
hotel/motel properties. The national franchisors that represent the focus for
this program include the HFS franchise concepts itemized above and other major
hotel/motel franchisors, including Choice Hotels International and Best Western
International.
Each Conventional Commercial Loan originated by an Originator is secured by
a first lien on the related primary collateral. Additional liens on secondary
collateral may also be taken. The borrower is required to fund at least 25% of
the total allowable project costs; however, the Originator may require a higher
equity percentage for certain larger projects and projects with special credit
risks. The Loan-to-Value Ratio for Conventional Commercial Loans may not exceed
75% of the lower of cost or appraised value. The Originators also generally
require a minimum debt service coverage ratio of 1.25:1 for the most recent two
full years, interim and projected periods.
Conventional Commercial Loans that are originated for construction purposes
generally possess a maximum Loan-to-Value Ratio of 75% of the lower of the
appraised value or the total of the construction budget, interim interest,
contingency and loan point and fees.
COMPETITION. The Originators' main competitors vary by region and by
market. Its primary competitors are banks and finance companies such as PMC
Capital Inc., Allied Capital Commercial Corp. and Hotel Capital Corp. of
America. The Originators do not believe that any one competitor, or a small
group of competitors, is dominant in the industry.
UNDERWRITING CRITERIA FOR CONVENTIONAL COMMERCIAL LOANS. The Originators
seek to control the risk of default of the actual credit through their
underwriting standards. The underwriting for the Originators' Conventional
Commercial Loan Program emphasizes historical operating performance and debt
service coverage to help determine the repayment ability of the borrower. It is
also expected by the Originators that qualifying owners generally have direct
industry experience. Lack of experience must be offset by significant training
provided by the franchisor, by an extended transition period during which the
seller of the business will remain on site or by contracting with a
professional, qualified management firm.
As with SBA Section 7(a) Loans, SBA 504 Loans and SBA Section 7(a)
Companion Loans, the Originators have established review procedures to help
ensure that all loans that they originate or acquire comply with the policy
defined for the Conventional Commercial Loan Program. Commercial loan officers
evaluate each applicant's financial statements, credit reports and other data to
determine if the credit and collateral satisfy the Originator's standards. These
standards include historic debt service coverage, reasonableness of projections
and strength of management. For each application, qualified personnel also
perform a site inspection to determine the appropriateness of the location for
the proposed use, observe the economic conditions of the local market and
inspect the property for obvious structural defects or environmental issues.
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 general knowledge of the industry, (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 industry
and knowledge specific to the market in which the project is proposed. Following
credit review and approval but prior to loan funding, a feasibility study and an
appraisal for the proposed project are commissioned by the commercial loan
officer from an appraiser approved by Originator. For construction loans, the
feasibility study must be based on, at a minimum, preliminary plans and
specifications along with a cost breakdown prepared by a qualified third party.
The Originators consider this feasibility information to be critical in
assessing the viability of a proposed project in a specific market area. A Phase
I environmental site assessment report is also required on each project to be
financed.
The maximum loan amount for the Conventional Commercial Loan Program is
$3,000,000; the minimum loan is $250,000. A prepayment penalty is imposed on
loans that are prepaid within the first five years of the loan term. The
Originators require a first lien position on the fee interest in the subject
facility and all business assets financed with a Conventional Commercial Loan.
The personal guarantees of owners, principals and affiliate businesses will
generally be required. Non-recourse financing may be considered on a case-by
case basis as warranted by the overall creditworthiness of the applicant and the
viability of the proposed project.
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 commercial loan officer. The commercial loan
officer is 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 and the strengths
and weaknesses of the credit. In addition, for each proposed loan, the
commercial loan officer performs a collateral analysis, financial analysis
(including historical debt service coverage) and business and personal credit
checks.
If the commercial loan officer 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. All Conventional Commercial Loans above $1,500,000
are reviewed and approved by a committee of not less than three members of an
Originator's senior client administration group, including at least one senior
credit officer.
The Originators also may originate Non-SBA Loans with characteristics
substantially the same as SBA Section 7(a) Loans or SBA 504 Loans.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Securities of each Series for general corporate
purposes, including repayment of debt, including, but not limited to, warehouse
facilities, and the origination and acquisition of Loans and other Trust Assets.
The Representative expects Securities to be sold in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The Loans will have been originated or acquired by the Originators. The
Money Store or one of its affiliates, including First Union National Bank or
certain of its affiliates, may act as a Master Servicer of the Loans and other
Trust Assets. Except for certain representations and warranties relating to the
Loans and other Trust Assets and certain other matters, the obligations of The
Money Store and the Originators with respect to the 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 wholly-owned
subsidiary of First Union National Bank, a national banking subsidiary of First
Union Corporation.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, Loans, 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 Section 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, franchisors 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 Section 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. Average
loan sizes for originations during 1994, 1995 and 1996 were approximately
$368,000, $302,000 and $359,000, 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 senior vice-president of production, who reports to
the executive vice-president of the 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 Section
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 Section 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 Section 7(a) Companion Loan is originated in connection with an SBA Section
7(a) Loan, the SBA Section 7(a) Companion Loan will be secured by a first-lien
mortgage, with the SBA Section 7(a) Loan being secured by a second-lien mortgage
in addition to other collateral. SBA Section 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 SierraWest
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 debt of the subject business to the subject businesses'
annual net operating income plus certain non-cash extraordinary items) 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 approval 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's 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 Section 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 Section 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" or "Loan-to-Value
Ratio") of 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 Section 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 Section 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 Section 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 Section 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 Section 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 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 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, with respect to SBA Loans, 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 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 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 an SBA 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 SBA 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 SBA Section
7(a) Loans, except that The Money Store Commercial Mortgage Inc. (one of the
Originators) 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 SBA 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 related loan made by the SBA being
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 related loan made by the SBA
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 and the Non-SBA Loans are substantially the same as those
described above for the SBA Section 7(a) Loans, except that the SBA is not
involved in the workout or liquidation procedures.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued, from time to time, pursuant to
either a Pooling and Servicing Agreement or a Trust Agreement, and each Series
of Notes will be issued, from time to time, pursuant to an Indenture, each to be
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/or certain affiliates thereof, and the Trustee for the benefit of the
related Certificateholders or Noteholders, as the case may be, of such Series. A
Series may contain either Certificates or Notes or a combination thereof. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust. A form
of a Pooling and Servicing Agreement, Trust Agreement, Sale and Servicing
Agreement and an Indenture have each 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 Securities 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
Securities 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 Security of such Series
addressed to The Money Store Inc., 707 Third Avenue, West Sacramento, California
95605 Attention: Corporate Counsel.
GENERAL
The Securities of each Series will represent debt obligations of, in the
case of Notes, or fractional undivided ownership interests in, in the case of
Certificates, a Trust created pursuant to the related Agreement and/or such
other assets as may be described in the related Prospectus Supplement. The
Securities will be issued in fully registered form, in minimum denominations of
$1,000 and integral multiples of $1,000 in excess thereof (or such other amounts
do may be set forth in a Prospectus Supplement), except that one Certificate or
Note of each Class may be issued in a different denomination.
Definitive Securities, 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 Security 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 security administrator may
perform certain duties in connection with the administration of the Securities.
The Securities will not represent obligations of the Representative (except
with respect to a Guaranty issued in connection with a Series), 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
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 Distribution 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 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, or
other credit enhancement or maturity protection or other derivative instrument
covering any Securities, any Loan in the related Pool or any related Mortgaged
Property which is required to be maintained pursuant to the related Agreement.
Each Series of Securities will be issued in one or more Classes. Each Class
of Securities 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 Securities may be divided into two or more Sub-Classes, as specified in
the related Prospectus Supplement.
A Series may include two or more Classes of Certificates, as specified in
the related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Pass-Through Rate or amount of payments
of principal or interest, or as to which payments of principal or interest may
or may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Trust Assets for such Series. A
Series of Certificates may include one or more Classes of Senior Certificates
that receive certain preferential treatment, specified in the related Prospectus
Supplement, with respect to one or more Classes of Subordinated Certificates of
such Series. Certain Series or Classes of Certificates within a Series may be
covered by a 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, or derivative products, in each case as described herein
and in the related Prospectus Supplement. The Pass-Through Rate for a Class of
Certificates that pay interest based upon a floating rate of interest, as
specified in the related Prospectus Supplement, may base such floating rate upon
any of the following: (i) the auction procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount set forth in the related Prospectus
Supplement , (iii) the T-Bill Rate plus an amount set forth in the related
Prospectus Supplement, (iv) the Prime Rate plus an applicable spread, as set
forth in the related Prospectus Supplement, or (v) any such other method or
procedures used to determine the floating rate of interest as may be described
in the applicable Prospectus Supplement. In addition, a Series may include one
or more Classes of Certificates entitled to (a) principal payments with
disproportionate, nominal or no interest payments or (b) interest payments with
disproportionate, nominal or no principal payments (Strip Certificates).
A Series may include two or more Classes of Notes, as specified in the
related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Interest Rate or amount of payments of
principal or interest, or as to which payments of principal or interest may or
may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Trust Assets for such Series. A
Series of Notes may include one or more Classes of Senior Notes which receive
certain preferential treatment specified in the related Prospectus Supplement
with respect to one or more Classes of Subordinated Notes of such Series.
Certain Series or Classes of Notes within a Series may be covered by a 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, or derivative products, in each case as described herein and in the
related Prospectus Supplement. The Interest Rate for a Class of Notes that pay
interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of following: (i)
the auction procedures for Auction Rate Securities described herein, (ii) LIBOR
plus an amount set forth in the related Prospectus Supplement , (iii) the T-Bill
Rate plus an amount set forth in the related Prospectus Supplement, (iv) the
Prime Rate plus an applicable spread, as set forth in the related Prospectus
Supplement, or (v) any such other method or procedures used to determine the
floating rate of interest as may be described in the applicable Prospectus
Supplement. In addition, a Series may include one or more Classes of Notes
entitled to (a) principal payments with disproportionate, nominal or no interest
payments or (b) interest payments with disproportionate, nominal or no principal
payments (Strip Notes).
With respect to any Series of Securities that includes one or more Classes
of Notes, distributions in respect of the Certificates may be subordinated in
priority of payment to payments on the Notes of such Series, to the extent
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities 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 Securities are
registered at the close of business on the record dates specified in the
Prospectus Supplement unless Definitive Securities have been issued, the
registered holder of all Securities will be Cede or such other nominee specified
in the related Prospectus Supplement. Distributions will be made by check mailed
to the persons entitled thereto at the address appearing in the register
maintained for holders of Securities (the "Security 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 Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee or other person
specified in the final distribution notice to Securityholders.
DISTRIBUTIONS ON SECURITIES
Each Class of Securities 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 Securities 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 Securities of such Series
throughout the lives of the Securities 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 Securities entitled to distributions allocable to interest, the
right to receive interest at a fixed rate or a floating rate; and (vii) include,
as to Securities 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 Securities will be
made by the Trustee out of, and only to the extent of, funds available in the
related Distribution Account and other accounts (each a "Distribution Account")
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 Distribution Account and such
other accounts as may be described in the related Prospectus Supplement and
distribute to the Securityholders 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 Distribution Account as of the Determination Date, or, in the case of
Classes which have been assigned an aggregate principal balance and Pass-Through
Rate or Interest Rate, payments of interest and payments in reduction of such
aggregate principal balance from all amounts on deposit in the Distribution
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 Securityholders will have the effect of
accelerating the amortization of Senior Notes or Senior Certificates, as the
case may be, while increasing the interests evidenced by the Subordinated Notes
or Subordinated Certificates, as the case may be, in the related Trust.
Distributions to any Class of Securities will be made pro rata to all
Securityholders of that Class, or as otherwise described in a Prospectus
Supplement.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on any Notes or Certificates that are Auction
Rate Securities. Appendix I hereto contains a more detailed description of these
procedures. Prospective investors in the Auction Rate Securities should read
carefully the following summary, along with the more detailed description in
Appendix I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The
broker/dealers are notified by the auction agent of the interest rate for the
upcoming interest period and are provided with settlement instructions relating
to purchases and sales of Auction Rate Securities.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders - the minimum interest rate that a current investor is
willing to accept in order to continue to HOLD some or all of its
Auction Rate Securities for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL a specified
principal amount of Auction Rate Securities, regardless of the
upcoming interest rate; and
(iii) Potential Bid Orders - the minimum interest rate that a potential
investor (or a current investor wishing to purchase additional Auction
Rate Securities) is willing to accept in order to BUY a specified
principal amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
In connection with each auction, Auction Rate Securities will be purchased
and sold between investors and potential investors at a price equal to their
then outstanding principal balance (I.E., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 UNITS SELL 50 Units at 3.05%
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 UNITS AT 3.12% 50 Units at 3.11%
300 Units 50 Units at 3.14%
100 UNITS AT 3.15%
350 Units
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
Order Number Cumulative Order Number Cumulative Total
NUMBER OF UNITS TOTAL (UNITS) _% NUMBER __OF UNITS_ (UNITS) %
- ------ -------- ------------- ----- ------ ----------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
(W) Winning Order (L) Losing Order
</TABLE>
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next period that interest will accrue (each an "Interest
Period"), when another auction will be held. Multiple orders at the winning rate
are allocated units on a pro rata basis. Notwithstanding the foregoing, in no
event will the interest rate exceed the lesser of the Net Loan Rate or the
Maximum Auction Rate (each as described in Appendix I).
The above example assumes that a successful auction has occurred (I.E., all
Sell Orders and all Bid/Hold Orders below the new interest rate were fulfilled).
In certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (I.E., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate (as
defined below).
As stated above, the foregoing is only a summary of the auction procedures.
A more detailed description of these procedures is contained in Appendix I.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Securityholders (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 Loan Remittance Rate (as defined below)
on the then outstanding principal balance of the related Series of Securities
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 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 Securities, the "Adjusted Loan
Remittance Rate" will equal the sum of the related Pass-Through Rate or Interest
Rate and the rate used in determining certain expenses payable by the related
Trust, as more specifically set forth in the related Prospectus Supplement. The
Master Servicer will not be required to make any Monthly Advances which it
determines, in good faith, would be nonrecoverable from amounts in respect of
the Loans.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each Loan for
which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Distribution Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such Loan as of the beginning of the related
Due Period at the applicable weighted average Adjusted Loan Remittance Rate,
over (b) the amount of interest actually received on the related Loan for such
Due Period (such difference, "Compensating Interest").
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Trust Assets which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Permitted Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of principal
is payable to Holders of a Series which, during the Revolving Period, were not
otherwise entitled to such payments. If so specified in the related Prospectus
Supplement, during an Amortization Period all or a portion of principal
collections on the Loans may be applied as specified above for a Revolving
Period and, to the extent not so applied, will be distributed to the Classes of
Notes or Certificates for such Series specified in the related Prospectus
Supplement as then being entitled to payments of principal. In addition, if so
specified in the related Prospectus Supplement, amounts deposited in certain
accounts for the benefit of one or more Classes of Notes or Certificates for
such Series may be released from time to time or on a specified date and applied
as a payment of principal on such Classes of Notes or Certificates. The related
Prospectus Supplement will set forth the circumstances which will result in the
commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Notes and Certificates of the related Series of
Securities
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
and/or Notes of a Series 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 and notes. 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 and/or Noteholders, as
applicable, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Certificates and/or Notes of a
Series registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Securityholders will
receive all distributions of principal of and interest on the Securities and
reports relating to the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
and reports relating to the Securities 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 Securityholders. Unless and until Definitive Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Agreement. The beneficial
holders of such Certificates and/or Notes of a Series will only be permitted to
exercise the rights of Certificateholders and/or Noteholders, as applicable,
under the applicable 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 Securities and is required to
receive and transmit reports and payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities similarly are required to make
book-entry transfers and receive and transmit such reports and payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the rules provide a mechanism by
which Securityholders will receive distributions and reports and will be able to
transfer their interests.
Unless and until Definitive Securities are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
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 Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a physical certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Securityholders only at the direction of and on
behalf of Participants whose holdings include current principal amounts of
outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Notes and/or Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Securityholders or their nominees ("Definitive Securities"), 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 Securities. Upon surrender by DTC of the certificates and/or notes
representing the Securities and instruction for re-registration, the Trustee
will issue the Notes and/or Certificates in the form of Definitive Securities,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders. Thereafter, payments of principal of and interest
on the Securities will be made by the Trustee directly to Securityholders in
accordance with the procedures set forth herein and in the related Agreement.
The final distribution of any Security (whether Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Remittance Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Securities 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 Notes and/or Certificates of such Series, (ii) the use of a
Guaranty 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, third party guarantees or maturity protection, derivative instruments,
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
Securities 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 Securities will bear their allocable share of
deficiencies. If a form of credit enhancement applies to several Classes of
Securities, 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 Securities. 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
All Classes of Certificates are Subordinated in right of payment to any
Class of Notes in a given Series to the extent described in the related
Prospectus Supplement. To enhance the likelihood of regular receipt by holders
of Senior Certificates or Senior Notes, as the case may be, 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 or Subordinated Notes, as the case may be,
of a Series will instead be payable to holders of one or more Classes of Senior
Certificates or Senior Notes, as the case may be, under the circumstances and to
the extent specified in the Prospectus Supplement. If specified in the related
Prospectus Supplement, the holders of Senior Certificates or Senior Notes, as
the case may be, 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 Distribution Account, prior to any such distribution
being made to holders of the related Subordinated Certificates or Subordinated
Notes, a the case may be, 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 or Senior Notes, as the case may be,
through subordination also may be accomplished by first allocating certain types
of losses or delinquencies to the related Subordinated Certificates or
Subordinated Notes, as the case may be, to the extent described in the related
Prospectus Supplement. If aggregate losses and delinquencies in respect of such
Loans were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or Subordinated Notes, as the case may be,
or, if applicable, were to exceed the specified maximum amount, holders of
Senior Certificates or Senior Notes, as the case may be, would experience losses
on the Securities.
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 or Subordinated Notes, as the case may be,
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 Senior Notes, as the case may be,
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
Securities 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
Securities may be Senior Certificates or Senior Notes, as the case may be, with
respect to certain types of payments or certain types of losses or delinquencies
and Subordinated Certificates or Subordinated Notes, as the case may be, 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 or Senior Notes, as the case may be, and Subordinated Certificates
or Subordinated Notes, as the case may be, may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates or Subordinated Notes, as the case may be,
respectively, through a cross support mechanism or otherwise. As between Classes
of Senior Certificates or Senior Notes, as the case may be, and as between
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
distributions may be allocated among such Classes (i) in the order of their
scheduled final Remittance 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 or Subordinated Notes, as the case may be,
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
Holders of Senior Certificates or Senior Notes, as the case may be, or released
to Holder of Subordinated Certificates or Subordinated Notes, as the case may
be, from the related Trust.
GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy may be obtained and maintained for any Class or Series of Certificates
and/or Notes. The issuer of any Guaranty Insurance Policy (a "Security Guaranty
Insurer") will be described in the related Prospectus Supplement. A copy of any
such Guaranty Insurance Policy will be attached as an exhibit to the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy will unconditionally and irrevocably guarantee to Securityholders 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 Securityholders,
for distribution by the Trustee to each Securityholder. The "Insured Payment"
will equal the full amount of the distributions of principal and interest to
which Securityholders are entitled under the related Agreement plus any other
amounts specified therein or in the related Prospectus Supplement.
The specific terms of any Guaranty Insurance Policy will be as set forth in
the related Prospectus Supplement. 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 Loans, to guarantee any specified rate of prepayments or to
provide funds to redeem Certificates and/or Notes on any specified date.
Subject to the terms of the related Agreement, the Guaranty Insurer may be
subrogated to the rights of each Securityholder to receive payments under the
Securities to the extent of any payments by such Security Guaranty Insurer under
the related Guaranty Insurance Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Securities 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 Securities. 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 Securities. 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 Securities 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
Securities 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 Securities.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of 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 Loans. Each Mortgage Pool Insurance Policy will, subject to the
limitations described below, cover loss by reason of default in payment on the
related 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 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
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 a 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 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 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 Loan
occurring when the servicer of such 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 Securities 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 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 Securityholders.
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 Securities 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
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.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Loan or a reduction by such court of the principal
amount of a 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 Securities 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 Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders."
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 Securityholders, 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 Securityholders 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
Securities 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 Securities 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
Securities 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
Securities may be entitled to third-party payments to help provide that the
holders of such Securities receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES, SWAPS, 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, 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 Securities 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 hedge contract
providing limited protection against interest rate risks. If provided in the
related Prospectus Supplement, interest and/or principal on one or more Classes
of the Securities of a Series may be paid to Holders thereof in a currency other
than U.S. dollars. If so provided, the Trust may, in connection therewith, enter
into one or more currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more Classes of Securities also
may be issued in conjunction with a put or call feature entitling (in the case
of a put) or obligating (in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named in the applicable
Prospectus Supplement on the date or dates set forth therein. Any such
arrangements must be acceptable to each nationally recognized rating agency that
provides a rating for the related Series of Securities (the "Rating Agency").
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 Securities. In such case, credit support may be
provided by a cross-support feature which requires that distributions be made
with respect to Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities 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
Securities, the Pass-Through Rate or Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
The original terms to maturity of the Loans in a given Pool will vary
depending upon the type of Loans included therein. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Loans in
the related Pool. Loans generally may be prepaid without penalty in full or in
part at any time.
In general, prepayment of 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 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 Loans based upon current interest rates and economic
conditions or the historical prepayment experience of The Money Store's and its
affiliates' portfolios of Loans.
Greater than anticipated prepayments of principal will increase the yield
on Securities purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Securities
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the Loans occurring at a rate that is faster (or
slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Securities may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Loans and the recoveries,
if any, on defaulted Loans and foreclosed properties. Delinquencies and defaults
will generally slow the rate of payment of principal to the Securityholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Loans and foreclosed properties result in principal payments on the
Securities faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Loan, the Mortgagor will
be charged interest on the principal amount of the 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 a 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 Securities
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 Securities. See "The Agreement--Termination; Purchase of
Loans."
If so specified in the related Prospectus Supplement, the effective yield
to certain Securityholders 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 Securities 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 Securities.
The Prospectus Supplement relating to a Series of Securities 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 Securities. 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 Securities.
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 LOANS
Pursuant to each related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as the case may be, at the time of issuance of Securities
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 Securities 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 Securityholders; 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, unless otherwise set forth
in a Prospectus Supplement the Representative and/or the Originators will
deliver to the Trustee or, with respect to the notes executed by borrowers
evidencing a loan (each a "Loan Note") relating to the SBA Section 7(a) Loans
being delivered pursuant to (a) below, to the fiscal and transfer agent of the
SBA (the "FTA"), the following documents with respect to each Loan
(collectively, the "Trustee's Document File"):
(a) The original Loan Note, endorsed by means of an allonge as follows
(bracketed language is only for SBA Section 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 Asset-Backed [Certificates] [Notes], 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 Loans secured by Mortgaged Properties,
either: (i) the original mortgage or deed of trust (each a "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 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 Section 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 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 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 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 Loans, blanket assignment of all collateral securing the
Loan, including without limitation, all rights under applicable guarantees
and insurance policies;
(g) For all 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 Loans in accordance with the Agreement.
The power of attorney will be delegable by the Trustee to the Master
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 Loans, blanket UCC-1 financing statements identifying by
type all collateral for the Loans in each of the Pools and naming the
Trustee, and with respect to the SBA Section 7(a) Loans, the SBA, as
Secured Parties and the applicable Originator as the Debtor.
Notwithstanding the foregoing, the Representative or the applicable
Originators will not be required to record the Assignment of Mortgage to the
Trustee if the Representative delivers opinions of counsel, satisfactory to the
Rating Agencies, to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the Trustee
in the Loans.
REPRESENTATIONS AND WARRANTIES
Each Originator will represent to the Trustee and the Securityholders,
among other things, with respect to each 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 Loan set forth in the 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, with respect to the SBA Section 7(a) Loans, the
FTA, or as otherwise provided in the related Agreement;
(3) Each 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 Master Servicer or one or more Subservicers;
(4) With respect to those 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 to the security interest in such
Mortgaged Property granted in connection with the related SBA Section 7(a) Loan
and each SBA 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 each Section 7(a) Companion Loan, each SBA 504 Loan, each
Non-SBA Loan, and the Unguaranteed Interest of each SBA Section 7(a) 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 Loan will be more than 59 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) No Loan will 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 Loan or any related Mortgage, or the exercise of any
right thereunder, render either the 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 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,
with respect to the SBA Loans, the applicable SBA Rules and Regulations;
(11) 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) 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 Loan will conform, and all such Loans in the aggregate will
conform, to the descriptions thereof set forth in this Prospectus and the
related Prospectus Supplement;
(14) The terms of each 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, with respect to
the SBA Section 7(a) Loans, and the Securityholders and which will have been
delivered to the Trustee;
(15) Each Mortgaged Property which is the primary collateral for the
related Loan will be, at the time of origination of such 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, which,
with respect to the SBA Loans, must be approved by the SBA;
(16) With respect to each Loan secured by a Mortgaged Property and that is
not a first mortgage loan, either (i) no consent for the 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 each 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 Master 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 Loans which materially and adversely affects the value of
the Loans or the interest of the Securityholders in the related Loan in the case
of a representation or warranty relating to a particular 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, (x) if such Loan is an SBA Section 7(a) Loan, (i) promptly cure
such breach in all material respects, (ii) purchase the Unguaranteed Interest of
such SBA Section 7(a) Loan from its own funds at a price equal to the then
current principal balance of the Unguaranteed Interest of such SBA Section 7(a)
Loan as of the date of purchase, plus 30 days' interest thereon at the related
Adjusted Loan Remittance Rate as of the next succeeding Determination Date, plus
any accrued unpaid Servicing Fees, Monthly Advances and Servicing Advances
reimbursable to the Master Servicer, which purchase price shall be deposited in
the Principal and Interest Account on the next succeeding Determination Date or
(iii) remove such SBA Section 7(a) Loan from the related Trust and substitute
one or more qualified SBA Section 7(a) Loans; or (y) if such Loan is a Section
7(a) Companion Loan, an SBA 504 Loan or a Non-SBA Loan, (i) promptly cure such
breach in all material respects, (ii) purchase such Loan from its own funds at a
price equal to the then current principal balance of such Loan as of the date of
purchase, plus 30 days' interest thereon at the related Adjusted Loan Remittance
Rate as of the next succeeding Determination Date, plus any accrued unpaid
Servicing Fees, Monthly Advances and Servicing Advances reimbursable to the
Master Servicer, which purchase price shall be deposited in the Principal and
Interest Account on the next succeeding Determination Date or (iii) remove such
Loan from the related Trust and substitute one or more qualified Loans of
similar type. In addition, the Originators will agree to indemnify the related
Trust, the Trustee, the Securityholders, and, with respect to SBA Loans, the
SBA, 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 Securityholders and the Trustee will constitute the sole remedy
respecting a material breach of any such representation or warranty to the
Securityholders or the Trustee.
PAYMENTS ON THE LOANS
The Agreement will require the Master Servicer to establish and maintain
one or more principal and interest accounts (each a "Principal and Interest
Account") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer 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 Loans (net of the portion
thereof, if any, required to be paid to the holders of the Guaranteed Interest,
the FTA's Fee, the Additional Fee and the Servicing Fee, other servicing
compensation payable to the Master Servicer as permitted by the Agreement) and
such other amounts as may be described in a Prospectus Supplement, (ii) all
payments received after the Cut-Off Date on account of principal on the Loans
(or with respect to SBA Section 7(a) Loans, the Unguaranteed Interest of all
such sums received), 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 (or with
respect to SBA Section 7(a) Loans, the Unguaranteed Interest of all such sums
received), (iii) any amounts paid in connection with the repurchase of a Loan,
or with respect to SBA Section 7(a) Loans, the Unguaranteed Interest of such
Loan, and the amount of any adjustment for substituted 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 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 Loan. Nonetheless, the Master Servicer, in
determining the type of action that is reasonable to pursue may consider, among
other things, the unpaid principal balance of a 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
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 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 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 Master Servicer from the
Mortgagor or otherwise relating to the Loan. Servicing Advances will be
reimbursable to the Master 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 maintain 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 a 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, if applicable, 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, if applicable, 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,
if applicable), are required to be deposited by the Master Servicer in the
Principal and Interest Account.
REALIZATION UPON DEFAULTED LOANS WITH RELATED MORTGAGES
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 Section 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 Section 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 or a
Non-SBA 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 Loans.
Consistent with the foregoing and the SBA Rules and Regulations, if applicable,
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 Loan or consent to
the postponement of strict compliance with any such term or in any matter grant
indulgence to any Mortgagor, subject to the limitations set forth in the
Agreement. In the event the Master Servicer consents to the deferment of the due
dates for payments due on a 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 Loans and payments on
the Securities, (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 Security Guaranty Insurer, if any, or the Holders of not less than 50
percent of each Class of Securities, other than the holders of residual
interests, if any (the "Majority Securityholders"), by notice in writing to the
Master Servicer and with the prior written consent of the Security 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) if the Series has
the benefit of a Guaranty Insurance Policy; (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 Security Guaranty
Insurer, if any, or the Securityholders; (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 Securityholder or the Security 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 Securityholder or the
Security 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 Security Guaranty Insurer, if any, the SBA,
the Trustee and the Majority Securityholders, 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 Security
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 Security 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 LOANS
The Trust established under a Pooling and Servicing Agreement or a Trust
Agreement will terminate upon notice to the Trustee following the earlier to
occur of (i) the final payment or other liquidation of such last 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 Master Servicer or the Security
Guaranty Insurer, if any, as described below, (iii) mutual consent of the Master
Servicer, the Security Guaranty Insurer, if any, and all Securityholders 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 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 Security Guaranty Insurer, if any, may, at its
option, purchase, on the next succeeding Remittance Date, all of the Loans and
any related REO Properties at a price equal to the Termination Price. If so
provided in the related Prospectus Supplement, the Master Servicer or another
entity may purchase some or all of the Loans under the circumstances described
in such Prospectus Supplement.
On any Remittance Date on or after the Cross-Over Date on which 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 Loans,
the Security Guaranty Insurer, if any, may determine to purchase and may cause
the purchase from the Trust of all 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.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture may
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the final scheduled
Remittance Date for such Notes and any installment of interest on such Notes in
accordance with the terms of the Indenture and the Notes of such Series. In the
event of any such defeasance and discharge of Notes of such Series, holders of
Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
REMIC CONSIDERATIONS. If a REMIC election is made for a Series of
Securities, 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 Securityholders 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 Security Guaranty Insurer, if any, may notify the
Trustee of the Security Guaranty Insurer's determination to purchase from the
Trust all Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Loan, then remaining in such
REMIC at a price (the "Termination Price") equal to the sum of (x) 100% of the
aggregate principal balances of such Loans as of the day of purchase minus
amounts remitted from the Principal and Interest Account to the Distribution
Account representing collections of principal on such Loans during the current
Due Period, (y) 30 days' interest on such amount computed at the applicable
weighted average of the Adjusted Loan Remittance Rates, and (z) the interest
portion of any unreimbursed Insured Payment made by the Security Guaranty
Insurer, if any. Upon receipt of such direction by the Majority Securityholders
or of such notice from the Security Guaranty Insurer, the Trustee will notify
the holders of the residual interest in the Trust (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 Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Loan then remaining in the REMIC at a purchase price equal to
the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Securityholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
Loans and such other property in the 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 Securityholders shall permit or
direct in writing, after the expiration of the Purchase Option Period and (ii)
in the event that the Security Guaranty Insurer has given the Trustee notice of
the Security Guaranty Insurer's determination to purchase the assets described
in clause (ii) preceding, the Security 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 Security 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 Securityholders and the Security 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 Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any 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 Securityholders 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 Securityholders may exercise
any trust or power conferred on the Trustee with respect to the Securities 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 Securities, only Holders of such Class or Classes may
exercise such trust or power.
EVENTS OF DEFAULT UNDER THE INDENTURE; RIGHTS OF NOTEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Indenture for each Series of Notes include: (i) a default for
thirty (30) days or more in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the
Representative or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Representative or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the
Representative or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount of all the Notes of such Series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Holders of a majority in aggregate outstanding
amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66B% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Note of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
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 Security Guaranty Insurer, if any, without the notice to, or consent of, the
Securityholders, 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 Securityholder 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 Securities without the consent of the Holder of such Security 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 Securities affected thereby, upon the prior written
consent of the SBA and the Security 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 Securities without the consent of the
Holders of 100% of each Class of Securities 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 Security Guaranty Insurer, if any, without the notice to or
consent of the Securityholders, 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, if the Trustee becomes
insolvent or if the Trustee enters into certain business combinations. 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 LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the 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 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 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 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 prop erty 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 Securityholders if a Mortgaged Property securing a Loan
became the property of such Trust in certain circumstances and if such Cleanup
Costs were incurred. Moreover, certain states by statute impose a lien for any
Cleanup Costs incurred by such state on the property that is the subject of such
Cleanup Costs (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens. In the latter states, the security interest
of the Trustee in a property that is subject to such a Superlien could be
adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special federal tax
counsel ("Federal Tax Counsel"), the following are the material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
or Notes 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 Certificates or Notes. 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 to qualify such Trust as a Financial Asset
Securitization Investment Trust ("FASIT") pursuant to recently issued provisions
of the Code. 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 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.
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)(4)(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 (other than yield supplement
agreements). 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, Federal Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
CURRENT INCOME ON REMIC REGULAR CERTIFICATES--GENERAL. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount--Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such as
a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Remittance Date (or in the case of the first such period, begins on
the Closing Date) and ends on the next succeeding Remittance 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 Remittance
Dates but ends prior to each Remittance 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 or Interest
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 a 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 Loans or to sell defective 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-thru 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-thru entities" holding residual interests where a
disqualified organization is a record holder of an interest in the pass-thru
entity. "Pass-thru 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-thru entity" for another person will also be treated as "pass-thru
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.
For taxable years beginning after December 31, 1997, all partners of
certain electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
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 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. For taxable years beginning after December 31, 1997,
in the case of a partnership that has 100 or more partners and elects to be
treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners.
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. Recently issued Treasury
regulations (the "Final Withholding Regulations"), which are generally effective
with respect to payments made after December 31, 1999, consolidate and modify
the current certification requirements and means by which a holder may claim
exemption from United States federal income tax withholding and provide certain
presumptions regarding the status of holders when payments to the holders cannot
be reliably associated with appropriate documentation provided to the payor. All
holders should consult their tax advisers regarding the application of the Final
Withholding Regulations.
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 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 ISSUED BY A GRANTOR TRUST
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made and for which the Trust is
classified as a grantor trust for federal income tax purposes.
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 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)(4)(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 Master Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Master
Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Loans and should be characterized for federal income tax purposes as an
ownership interest in the 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 Master 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 Loans. If neither of the above exceptions applies, the
original issue discount rules will apply to the Non-REMIC Certificates.
Section 1272(a)(6) of the Code provides for use of a prepayment assumption
in determining original issue discount for any pool of debt instruments the
yield on which may be affected by reason of prepayments. Therefore, if there is
original issue discount, the holder of a Non-REMIC Certificate (whether a cash
or accrual method taxpayer) will be required to report interest income from the
Non-REMIC Certificate in each taxable year equal to the income that accrues on
the Non-REMIC Certificate in that year calculated under a constant yield method
based on the yield of the Non-REMIC Certificate (or, possibly, the yield of each
Mortgage Asset underlying such Non-REMIC Certificate) to such holder. Such yield
would be computed at the rate that, if used in discounting the holder's share of
the payments on the Mortgage Assets, would cause the present value of those
payments to equal the price at which the holder purchased the Non-REMIC
Certificate. 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 a 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 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 Loan. The method of allocating
such basis among the 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 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 a
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 a Loan under a constant yield method based on the yield of the
Loan to such holder, provided that such Loan was originated after September 27,
1985. Premium allocable to a Loan originated on or before that date should be
allocated among the principal payments on the 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 Loans or taking account of
a reasonable prepayment assumption, and Federal Tax Counsel is unable to opine
on this issue.
If a 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
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 Loan. The method of allocating
such basis among the 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 on 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 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). Treasury Regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisors regarding the application of the Final
Withholding Regulations. Interest or original issue discount on a Non-REMIC
Certificate attributable to 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 (or, after September 1, 1997, a
FASIT), (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.
NON-REMIC CERTIFICATES AND NOTES OF A TRUST INTENDED TO BE CHARACTERIZED AS A
PARTNERSHIP OR DIVISION
The discussion under this heading applies only to a series of Certificates
and Notes with respect to which a REMIC election is not made and for which the
Trust is intended to be classified as a partnership or a division for federal
income tax purpose.
Federal Tax Counsel will deliver its opinion for a Trust which is intended
to be a partnership for federal income tax purposes, as specified in the related
Prospectus Supplement, generally to the effect that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Agreements and related documents will be complied with, such
that an election has not been and will not be made to treat the Trust as an
association taxable as a corporation, and on counsel's conclusion that the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or such rule is
otherwise inapplicable to the Trust, so that the Trust will not be characterized
as a publicly traded partnership taxable as a corporation, assuming that no
action will be taken that is inconsistent with the treatment of the Trust as a
partnership (such as an election to treat the Trust as a corporation for federal
income tax purposes ("Corporation Election")). If, however, the Trust has a
single owner for federal income tax purposes, it will be treated as a division
of its owner and as such will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming that no Corporate Election is
made.
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 (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists 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 the Trust were treated as a taxable mortgage pool, it 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. Federal Tax Counsel will
deliver its opinion for a Trust which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust will not be a taxable mortgage pool. This
opinion will be based on the assumption that the terms of the Agreements and
related documents will be complied with, and on counsel's conclusion that either
the number of classes of debt obligations issued be the Trust, or the nature of
the assets held by the Trust, will exempt the Trust from treatment as a taxable
mortgage pool.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income, possibly reduced by its
interest expense on the Notes. Any such corporate income tax could materially
reduce cash available to make payments on the Notes and distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust. In additions, all distributions to the Certificateholders
would be taxable as dividends.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Representative that
in its opinion the Notes will be classified as debt for federal income tax
purposes.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of counsel, the Internal Revenue Service successfully asserted that one or more
of the Notes did not represent debt for federal income tax purposes, the Notes
might be treated as equity interests in the Trust. If so treated, the Trust
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Trust might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to foreign holders generally would be subject to
United States federal income tax and United States federal income tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Trust's
expenses.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with original issue discount within
the meaning of Section 1273 of the Code. A subsequent holder who purchases a
Note at a discount that exceeds a statutorily defined DE MINIMIS amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any original issue discount (if any), market
discount and gain previously included by such Noteholder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
Noteholder with respect to such Note. Subject to the rules of the Code
concerning market discount on the Notes, any such gain or loss generally will be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be deducted only to the extent the Noteholder has capital gains
for the taxable year, although under certain circumstances non-corporate
Noteholders can deduct losses in excess of available capital gains.
FOREIGN HOLDERS. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Representative (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Representative is a "related person" within the meaning of the Code and (ii)
provides the person otherwise required to withhold United States tax with an
appropriate statement, signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the withholding agent. However, in
that case, the signed statement must be accompanies by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest in not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-United States holder may
claim exemption from United States federal income tax withholding. All Non-
United States holders should consult their tax advisers regarding the
application of the Final Withholding Regulations, which are generally effective
with respect to payments made after December 31, 1999.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Trust will be required to
report annually to the Internal Revenue Service, and to each Noteholder of
record, the amount of interest paid on the Notes (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to their
status as nonresidents). Accordingly, each holder (other than exempt holders who
are not subject to the reporting requirements) will be required to provide,
under penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the Internal Revenue Service, as a credit against the holder's federal income
tax liability.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE ISSUER AS A PARTNERSHIP. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Representative will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
United States federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Generally, provided the
Certificates are issued at or close to face value, any such characterization
should not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity in
a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, original issue discount and bond
premium) and any gain upon collection or disposition of Loans. The Trust's
deductions will consist primarily of interest and original issue discount
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loans that corresponds to any excess of
the principal amount of the Certificates over their initial issue price; (iii)
prepayment premium payable to the Certificateholders for such month; and (iv)
any other amounts of income payable to the Certificateholders for such month.
Such allocation will be reduced by any amortization by the Trust of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust will be
allocated to the Representative. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the
Internal Revenue Service would not require a greater amount of income to be
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders, but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the Internal Revenue
Service were to require that such calculations be made separately for each Loan,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued with
original issue discount and, therefore, the Trust should not have original issue
discount income. However, the purchase price paid by the Trust for the Loans may
be greater or less than the remaining principal balance of the Loans at the time
of purchase. If so, the Loan will have been acquired at a premium or discount,
as the case may be. (As indicated above, the Trust will make this calculation on
an aggregate basis, but might be required to recompute it on a Loan by Loan
basis.)
If the Trust acquires the Loans at a market discount or premium, the Trust
will elect to include any such discount in income currently as it accrues over
the life of the Loans or to offset any such premium against interest income on
the Loans. As indicated above, a portion of such market discount income or
premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership, which it would then be treated
as transferring to its partners. The Trust will not comply with certain
technical requirements that might apply when such a constructive termination
occurs. As a result, the Trust may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The Trust does not expect to have any other assets that would give
rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN REPRESENTATIVE AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Trust might be
reallocated among the Certificateholders. The Trust's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (Internal Revenue Service Form 1065) with the Internal
Revenue Service for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the Internal Revenue Service on Schedule K-1. The Trust will provide
the Schedule K-1 information to nominees that fail to provide the Trust with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder notifies the Internal Revenue Service of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Representative will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the Internal Revenue Service. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear and federal
tax counsel is unable to opine whether the Trust would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-United States persons because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust would be
engaged in a trade or business in the United States for such purposes, the Trust
will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a United States trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If the trust is engaged in a United States trade or business, each foreign
holder might be required to file a United States individual or corporate income
tax return (including, in the case of a corporation, the branch profits tax) on
its share of the Trust's income. A foreign holder generally would be entitled to
file with the Internal Revenue Service a claim for refund with respect to taxes
withheld by the Trust taking the position that no taxes were due because the
Trust was not engaged in a United States trade or business. However, interest
payments made (or accrued) to a Certificateholder who is a foreign person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Trust, and for that reason or
because of the nature of the assets of the Trust probably will not be considered
"portfolio interest." As a result, even if the Trust was not considered to be
engaged in a United States trade or business, Certificateholders will be subject
to United States federal income tax which must be withheld at a rate of 30%,
unless reduced or eliminated pursuant to an applicable treaty. A foreign holder
would be entitled to claim a refund for such withheld tax, taking the position
that the interest was portfolio interest and therefore not subject to United
States tax. However, the Internal Revenue Service may disagree and no assurance
can be given as to the appropriate amount of tax liability. As a result, each
potential foreign Certificateholder should consult its tax advisor as to whether
an interest in a Certificate is an unsuitable investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
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 Security 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 Security 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 Securities 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
U.S. 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 Loans and any other assets of the Trust and not merely an
interest in the Securities, the assets of the Trust would become subject to the
fiduciary investment standards of ERISA, and transactions occurring between the
Representative, the Trustee, the Master Servicer, the Security 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 Securities or to the servicing
of the Loans are noted below.
Regardless of whether the Securities are treated as debt or equity for
purposes of ERISA, the acquisition or holding of Securities which are Notes by
or behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Trust is or becomes a party in interest or disqualified
person with respect to such Plan or in the event that a subsequent transfer of a
Note is made between a Plan and such party in interest or disqualified person.
However, one or more Investor Based Exemptions referred to below may be
applicable to exempt such prohibited transaction.
The DOL 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 Loans
and the property securing such Loans, and for indemnifying holders of Securities
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 Loans, or 1% of the principal balance of the
largest covered pooled 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 Loans, plus reasonable compensation for services
provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Securities to a Plan
with respect to which the Representative, the Security Guaranty Insurer, the
Master Servicer, or the Trustee is a party in interest if the Plan does not pay
more than fair market value for such Securities and the rights and interests
evidenced by such Securities are not subordinated to the rights and interests
evidenced by other Securities 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 Master
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
Master Servicer, the Security 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 Securities is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Securities; (ii) the Plan pays no more for the Securities 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
Securities to the Plan; (iv) the total value of the Securities purchased by such
Plan does not exceed 25% of the amount issued; and (v) at least 50% of the
aggregate amount of Securities is acquired by persons independent of the
Representative, the Trustee, the Master Servicer, and the Security Guaranty
Insurer.
Before purchasing Securities a fiduciary of a Plan should confirm that the
Trust is a "mortgage pool," that the Securities 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 Securities on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions (each on "Underwriter
Exemption") 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
Securities 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 Underwriter Exemption which may be
applicable to the Securities. The conditions of Underwriter Exemption, if
applied, will be set forth in "ERISA Considerations" in the Prospectus
Supplement.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Securities depending in part upon the type
of Plan fiduciary making the decision to acquire a Security 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, PTCE
84-14, regarding investments effectuated by "qualified plan asset managers",
PTCE 96-23, regarding investments effectuated by "in-house asset managers" and
PTCE 95-60, regarding investments by insurance company general accounts
("Investor Based Exemptions"). However, even if the conditions specified in an
Underwriter 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 Security 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 Securities 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 Securities offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Securities 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 Securities
as legal investments for such purchasers prior to investing in any Class of
Securities.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets, a division of Wheat First Securities, Inc.
("First Union Capital Markets"), an affiliate of the Representative, acting as
underwriter with other underwriters, if any, named therein. In such event, the
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Representative. In connection
with the sale of the Securities, underwriters may receive compensation from the
Representative or from purchasers of the Securities in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Representative.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by First Union Capital Markets acting as agent or in some
cases as principal with respect to the Securities that it has previously
purchased or agreed to purchase. If First Union Capital Markets acts as agent in
the sale of Securities, First Union Capital Markets will receive a selling
commission with respect to each Series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
Securities sold hereunder as of the Cut-off Date. The exact percentage for each
Series of Securities will be disclosed in the related Prospectus Supplement. To
the extent that First Union Capital Markets elects to purchase Securities as
principal, First Union Capital Markets may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Representative and purchasers of
Securities of each Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets, an affiliate of the Representative, in connection with
offers and sales related to market-making transactions in the Securities. First
Union Capital Markets may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
The Representative shall indemnify First Union Capital Markets and any
other underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, or will contribute to payments First Union
Capital Markets and any other underwriters may be required to make in respect
thereof.
In the ordinary course of business, First Union Capital Markets and the
Representative may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the
Representative's Mortgage Loans pending the sale of such Mortgage Loans or
interests therein, including the Securities.
The Representative anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisers in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, the
Representative, its affiliates and the Trustee in the ordinary course of
business.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Securities of each Series will be passed upon for the Representative by Stroock
& Stroock & Lavan LLP, New York, New York and certain legal matters relating to
the validity of the issuance of the Securities of each Series will be passed
upon for the Underwriter of the Securities of each Series by Kilpatrick Stockton
LLP, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new Trust will be formed to own the Trust Assets and to issue each Series
of Securities. Each such Trust will have no assets or obligations prior to the
issuance of the Securities 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 Securities 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 securities address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities 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, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through securities in extreme cases might fail to recoup their underlying
investments.
A rating of a security is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
Adjustable Rate................................................... 6
Adjusted Loan Remittance Rate..................................... 41
Agreements........................................................ 5
Amortization Period............................................... 9
ARM............................................................... 81
Auction Rate Securities........................................... 2
Balloon Loans..................................................... 20
Bankruptcy Bond................................................... 14
Basis Risk Shortfall.............................................. 64
Buydown Funds..................................................... 65
CDC............................................................... 27
Cede.............................................................. 4
Certificateholder................................................. 2
Certificates...................................................... 1
Certified Lender.................................................. 26
Certified Lender Program.......................................... 26
Class............................................................. 2
Class R Certificates.............................................. 58
Cleanup Costs..................................................... 64
Code.............................................................. 17
Commission........................................................ 3
Compensating Interest............................................. 16
Contingency Fee................................................... 54
Conventional Commercial Loan...................................... 27
Conventional Commercial Loan Program.............................. 27
Curtailment....................................................... 16
Cut-Off Date...................................................... 36
Designated Depository Institution................................. 53
Detailed Description.............................................. 24
Determination Date................................................ 16
Distribution Account.............................................. 38
DTC............................................................... 4
ERISA............................................................. 18
Event of Nonpayment............................................... 56
Federal Tax Counsel............................................... 17
Final Determination............................................... 58
FTA............................................................... 50
Funding Period.................................................... 8
Guaranteed Interest............................................... 26
Guaranteed Participant Program.................................... 26
Guaranty.......................................................... 4
Guaranty Insurance Policy......................................... 13
Holders........................................................... 2
Indenture......................................................... 5
Indirect Participant.............................................. 42
Insurance Proceeds................................................ 16
Insurance Paying Agent............................................ 44
Insured Payment................................................... 13
Interest Rate..................................................... 2
IRS............................................................... 58
LIBOR............................................................ 2
Liquidation Proceeds.............................................. 16
Loan Guaranty Agreement........................................... 26
Loan Note......................................................... 50
Loans............................................................. 1
Lockout Periods................................................... 7
Lower Tier REMIC.................................................. 74
Majority Securityholders.......................................... 56
Master Servicer................................................... 1
Monthly Advance................................................... 16
Mortgage.......................................................... 50
Mortgage Interest Rate............................................ 6
Mortgage Pool..................................................... 89
Mortgage Pool Insurance Policy.................................... 14
Mortgaged Properties.............................................. 6
Multi-Party Agreement............................................. 9
1933 Act.......................................................... 3
Non-REMIC Certificates............................................ 18
Non-SBA Loans..................................................... 6
Noteholders....................................................... 2
Notes............................................................. 1
Originators....................................................... 1
Participants...................................................... 42
Pass-Through Rate................................................. 2
Permitted Instruments............................................. 53
Permitted Investments............................................. 47
Plan.............................................................. 88
Pool.............................................................. 1
Pooling and Servicing Agreement................................... 5
Pool Insurer...................................................... 45
Preferred Lender.................................................. 26
Preferred Lender Program.......................................... 26
Pre-Funding Account............................................... 8
Prepayment Assumption............................................. 67
Prime Rate........................................................ 2
Principal and Interest Account.................................... 53
Prospectus Supplement............................................. 1
Rating Agency..................................................... 15
REMIC............................................................. 2
REMIC Certificates................................................ 64
REMIC Regular Certificates........................................ 17
REMIC Residual Certificates....................................... 17
REMIC Regulations................................................. 65
Remittance Date................................................... 2
Representative.................................................... 1
Retained Interest................................................. 10
Reserve Account................................................... 13
Revolving Period.................................................. 9
Sale and Servicing Agreement...................................... 5
SBA............................................................... 6
SBA Act........................................................... 7
SBA Loans......................................................... 1
SBA Rules and Regulations......................................... 54
SBA 504 Loans..................................................... 6
SBA 504 Loan Program.............................................. 7
SBA Section 7(a) Loans........................................... 6
Section 7(a) Program.............................................. 7
Section 7(a) Companion Loans...................................... 6
Securities........................................................ 1
Security Guaranty Insurer......................................... 44
Securityholder.................................................... 2
Security Register................................................. 38
Senior Certificates............................................... 10
Senior Notes...................................................... 12
Servicing Advance................................................. 54
Servicing Fee..................................................... 54
SMMEA............................................................. 18
Special Hazard Insurance Policy................................... 14
Special Hazard Insurer............................................. 46
Spread Amount...................................................... 13
Standard Hazard Insurance Policies................................. 7
Strip Notes........................................................ 12
Subordinated Certificates.......................................... 10
Subordinated Notes................................................. 12
Sub-Servicer....................................................... 55
Successor Servicer................................................. 57
Superlien.......................................................... 64
Supplemental Interest Payments..................................... 47
T-Bill Rate........................................................ 2
Termination Notice................................................. 58
Termination Price.................................................. 58
Tiered REMICs...................................................... 66
Trust ............................................................. 1
Trust Agreement.................................................... 5
Trust Assets....................................................... 1
Trustee............................................................ 17
Trustee's Document File............................................ 50
UCC................................................................ 42
Underwriters....................................................... 90
Unguaranteed Interests............................................. 1
United States person............................................... 77
Variable Rate REMIC Regular Certificate............................ 66
Yield Supplement Agreement......................................... 64
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each Class
of Auction Rate Securities (and may be different if otherwise set forth in a
related Prospectus Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Securities that are either Notes or
Certificates and the term "Securityholder" refers to Holders of Auction Rate
Securities.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR or such other
rate as may be set forth in the related Prospectus Supplement.
"Auction" means the implementation of the Auction Procedures on an Auction
Date.
"Auction Agent" means the initial auction agent under the initial Auction
Agent Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement unless
and until a substitute Auction Agent Agreement is entered into, after which
"Auction Agent Agreement" shall mean such substitute Auction Agent Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Auction Date" means, with respect to the Initial Period for each Class of
Securities, the date set forth in the related Prospectus Supplement and
thereafter, the Business Day immediately preceding the first day of each Auction
Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the
Securities is no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance
of an Event of Default; or
(C) each Auction Period commencing less than two Business Days after
the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction
Periods may be changed pursuant to the related Agreement and the related Terms
Supplement, as described herein.
"Auction Period" means, with respect to each Security, the Interest Period
applicable to such Security during which time the applicable Security Interest
Rate is determined pursuant to the related Agreement and the related Terms
Supplement, which Auction Period (after the Initial Period for such Security)
initially shall consist of between 7 days and one year (as set forth in the
related Prospectus Supplement), as the same may be adjusted pursuant to such
related Agreement and the related Terms Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the related Terms Supplement, as described herein.
"Auction Procedures" means the procedures set forth in the related Terms
Supplement and described herein by which the Auction Rate applicable to a
Security is determined.
"Auction Rate" means, with respect to any Security, the rate of interest
per annum that results from the implementation of the Auction Procedures and is
determined as described in the related Agreement and the related Terms
Supplement and this Appendix I.
"Authorized Denominations" means, the dollar amount set forth in the
related Prospectus Supplement.
"Broker-Dealer" means the initial broker-dealer under the initial
Broker-Dealer Agreement or any other broker or dealer (each as defined in the
Securities Exchange Act of 1934, as amended), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set forth
in the Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Representative and the
Trustee pursuant to the related Agreement and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction Agent
and a Broker-Dealer, and approved by Representative and the Trust, pursuant to
which the Broker-Dealer agrees to participate in Auctions as set forth in the
Auction Procedures, as from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Effective Interest Rate" means, for any Loan and any collection period,
the per annum rate at which such Loan accrues interest during such collection
period.
"Existing Securityholder" means (i) with respect to and for the purpose of
dealing with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Securityholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Security.
"Existing Securityholder Registry" means the registry of Persons who are
owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal
funds (effective) rate as published on page 118 of the Dow Jones Telerate
Service (or such other page as may replace that page on that service for the
purpose of displaying comparable rates or prices) on the immediately preceding
Business Day. If no such rate is published on such page on such date, "Federal
Funds Rate" shall mean for any date of determination, the Federal funds
(effective) rate as published by the Federal Reserve Board in the most recent
edition of Federal Reserve Statistical Release No. H.15 (519) that is available
on the Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on the
Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial Period for
such Security and each period commencing on the Rate Adjustment Date for such
Security and ending on the day before (i) the next Rate Adjustment Date for such
Security or (ii) the final maturity date of such Security, as applicable.
"Market Agent" means the entity named as market agent under the related
Agreement, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34 days
or less, either (a) the greater of (1) One-Month LIBOR plus 0.60% or (2) the
Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating Agencies
to the applicable Security are "Aa3" or "AA-" or better) or (B)One-Month LIBOR
plus 1.50% (if any one of the ratings assigned by the Rating Agencies to the
Security is less than "Aa3" or "AA-") or (ii) for Auction Periods of greater
than or equal to 35 days, either (a) the greater of One-Month LIBOR or
Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings assigned
by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or better)
or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in either case,
1.50% (if any one of the ratings assigned by the Rating Agencies to the
applicable Security is less than "Aa3" or "AA-") or such other rate as may be
set forth in the related Prospectus Supplement. For purposes of the Auction
Agent and the Auction Procedures, the ratings referred to in this definition
shall be the last ratings of which the Auction Agent has been given notice
pursuant to the Auction Agent Agreement.
"Net Loan Rate" for any Interest Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Period less the amount set forth in the related Prospectus Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may be
adjusted pursuant to a Terms Supplement or such other rate as may be set forth
in the related Prospectus Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date on
which the applicable Security Interest Rate is effective and means, with respect
to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the Auction
Date, or if no Auction Date is applicable to such Series, the Business Day
immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, with respect to any Class of Notes or
Certificates, the rate identified as such in the related Prospectus Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any Class of
Notes, the date identified as such in the related Prospectus Supplement and,
with respect to any Class of Certificates, the date set forth in the related
Agreement or the related Terms Supplement.
"Three-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three-Month Index Maturity") which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the Three Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Three Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable Interest Period will be Three-Month LIBOR in
effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing Securityholders,"
which shall mean any Securityholder according to the records of the Auction
Agent at the close of business on the Business Day preceding each Auction Date;
and (ii) "Potential Securityholders," which shall mean any person, including any
Existing Securityholder or a Broker/Dealer, who may be interested in acquiring
Securities (or, in the case of an Existing Securityholder, an additional
principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be subject to
probation procedures on the Auction Date. Each purchase or sale of Securities on
the Auction Date will be made for settlement on the first day of the Interest
Period immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
AUCTION AGENT
The entity named in the related Prospectus Supplement, will be appointed as
Auction Agent to serve as agent for a Trust in connection with Auctions. The
Trustee and the Representative will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Trustee and the Market Agent in writing and having a
combined capital stock or surplus of at least $50,000,000, or (ii) a member of
the National Association of Securities Dealers, Inc. having a capitalization of
at least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed upon it under the related Agreement and under the Auction Agent
Agreement. The Auction Agent may at any time resign and be discharged of the
duties and obligations created by the related Agreement by giving at least 90
days notice to the Trustee, the Trust, the Representative and the Market Agent.
The Auction Agent may be removed at any time by the Trustee upon the written
direction of the Security Guaranty Insurer, if applicable, or, with the consent
of the Security Guaranty Insurer, if applicable, the Securityholders of 66B% of
the aggregate principal amount of the Securities then outstanding, by an
instrument signed by the Security Guaranty Insurer, if applicable, or such
Securityholders or their attorneys and filed with the Auction Agent, the
Representative, the Trustee and the Market Agent upon at least 90 days' notice.
Neither resignation nor removal of the Auction Agent pursuant to the preceding
two sentences will be effective until and unless a Substitute Auction Agent has
been appointed and has accepted such appointment. If required by the Trust or
the Representative or by the Market Agent, with the Trust's and the
Representative's consent, a Substitute Auction Agent Agreement shall be entered
into with a Substitute Auction Agent. Notwithstanding the foregoing, the Auction
Agent may terminate the Auction Agent Agreement if, within 25 days after
notifying the Trustee, the Trust, the Representative, the Security Guaranty
Insurer, if applicable, and the Market Agent in writing that it has not received
payment of any Auction Agent Fee due it in accordance with the terms of the
Auction Agent Agreement, the Auction Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Representative (after receipt of a certificate from the Market Agent confirming
that any proposed Substitute Auction Agent meets the requirements described in
the immediately preceding paragraph above), shall use its best efforts to
appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on the Note
Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement, and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). The Trust will indemnify
and hold harmless the Auction Agent for and against any loss, liability or
expense incurred without negligence or bad faith on the Auction Agent's part,
arising out of or in connection with the acceptance or administration of its
agency under the Auction Agent Agreement and the Broker-Dealer Agreements
including the reasonable costs and expenses (including the reasonable fees and
expenses of its counsel) of defending itself against any such claim or liability
in connection with its exercise or performance of any of its respective duties
thereunder and of enforcing this indemnification provision; provided that the
Trust will not indemnify the Auction Agent as described in this paragraph for
any fees and expenses incurred by the Auction Agent in the normal course of
performing its duties under the Auction Agent Agreement and under the
Broker-Dealer Agreements, such fees and expenses being payable as described
above.
BROKER-DEALER
Existing Securityholders and Potential Securityholders may participate in
Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by
the Auction Agent from monies received from the Trustee, on the Note Remittance
Date or Certificate Remittance Date set forth in the related Prospectus
Supplement.
MARKET AGENT
In connection with each Series of Notes and the Certificates, the "Market
Agent," will act solely as agent of the Trust and will not assume any obligation
or relationship of agency or trust for or with any of the Securityholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Agreement and the related Terms Supplement,
Auctions to establish the Auction Rate for each Security issued by the Trust
will be held on each applicable Auction Date, except as described below, by
application of the Auction Procedures described herein. Such procedures are to
be applicable separately to each Class of Notes and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each
Auction Date. The Administrator will calculate and, no later than the Business
Day preceding each Auction Date, will report to the Auction Agent in writing,
the Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, and
Administrator will report to the Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If an Event of Default has occurred,
under the Indenture or the Pooling and Servicing Agreement, as applicable, the
Trustee will calculate the Non-Payment Rate on the Rate Determination Date for
(i) each Interest Period commencing after the occurrence and during the
continuance of such Payment Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Event of Default. The Auction Agent
will determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Period other than the Initial Period for a Security; provided, that if
the ownership of the Securities is no longer maintained in Book-Entry Form, or
if an Event of Default has occurred, then the Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Period. The determination by the Trustee or the Auction Agent, as the case may
be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the
absence of manifest error) be final and binding upon the Securityholders and all
other parties. If calculated or determined by the Auction Agent, the Auction
Agent will promptly advise the Trustee of the One-Month LIBOR or the Three-Month
LIBOR, as applicable.
SUBMISSION OF ORDERS
So long as the ownership of the Securities is maintained in Book-Entry
Form, an Existing Securityholder may sell, transfer or otherwise dispose of
Securities only pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction or through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Securityholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Notes and each Class of Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner (such procedures to be applicable
separately to each Class of Notes and each Class of Certificates).
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time) on each Auction Date relating to a Security:
(a) each Existing Securityholder of the applicable Security may submit
to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount and Class of outstanding Securities, if any, held by such
Existing Securityholder which such Existing Securityholder desires to continue
to hold without regard to the Security Interest Rate for such Securities for the
next succeeding Auction Period (a "Hold Order"); (ii) the principal amount and
Class of outstanding Securities, if any, which such Existing Securityholder
offers to sell if the Security Interest Rate for such Securities for the next
succeeding Auction Period will be less than the rate per annum specified by such
Existing Securityholder (a "Bid"); and/or (iii) the principal amount and Class
of outstanding Securities, if any, held by such Existing Securityholder which
such Existing Securityholder offers to sell without regard to the Security
Interest Rate for such Securities for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Securityholders
to determine the principal amount and Class of Securities which each such
Potential Securityholder offers to purchase, if the Security Interest Rate for
such Securities for the next succeeding Auction Period will not be less than the
rate per annum specified by such Potential Securityholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Securityholder will constitute an irrevocable offer to sell: (i)
the principal amount and Class of the outstanding Securities specified in such
Bid if the Security Interest Rate for such Securities will be less than the rate
specified in such Bid, (ii) such principal amount or a lesser principal amount
and Class of the outstanding Securities to be determined as described below in
"Acceptance and Rejection of Orders," if the Security Interest Rate for such
Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Security specified in such Sell Order or
(ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security as described below under "Acceptance and
Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Securityholder will constitute an irrevocable offer to purchase:
(i)the principal amount of the Security specified in such Bid if the Security
Interest Rate for such Securities will be higher than the rate specified in such
Bid or (ii) such principal amount or a lesser principal amount of such
Securities as described below in "Acceptance and Rejection of Orders," if the
Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and Class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and Class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and Class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and Class of Securities, if any,
subject to any Sell Order placed by such Existing Securityholder, and (iv) to
the extent such Bidder is a Potential Securityholder, the rate specified in such
Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable Class held
by any Existing Securityholder are not submitted to the Auction Agent prior to
the Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Representative, the Trustee nor the Auction Agent
will be responsible for any failure of a Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Securityholder or Potential
Securityholder.
An Existing Securityholder may submit multiple Orders, of different types
and specifying different rates, in an Auction with respect to Securities then
held by such Existing Securityholder. An Existing Securityholder that offers to
purchase additional Securities is, for purposes of such offer, treated as a
Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Securityholder and (ii) not
be accepted if submitted by a Potential Securityholder.
VALIDITY OF ORDERS
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the Class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the Class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the Class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the Class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the Class of Securities held by such Existing Securityholder.
BIDS. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount equal
to the excess of the principal amount of Securities of the Class held by such
Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a Class of Security is submitted on behalf of any
Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total principal
amount of such Securities over the sum of the aggregate principal amount of such
Securities subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal amount
of Securities of such Class subject to Submitted Bids by Potential
Securityholders specifying one or more rates equal to or lower than the Maximum
Auction Rate exceeds or is equal to the sum of (i) the aggregate principal
amount of Securities of such Class subject to Submitted Bids by Existing
Securityholders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Securities of such Class subject
to Submitted Sell Orders (in the event such excess or such equality exists other
than because all of the Securities are subject to Submitted Hold Orders, such
Submitted Bids by Potential Securityholders above will be hereinafter referred
to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be
the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Existing Securityholders of such Security specifying lower rates were
rejected (thus entitling such Existing Securityholders to continue to
hold the principal amount of Securities subject to such Submitted
Bids); and
(ii) each such Submitted Bid from Potential Securityholders of
such Security specifying such lowest rate and all other Submitted Bids
from Potential Securityholders specifying lower rates, were accepted,
the result would be that such Existing Securityholders described in
subparagraph (c)(i) above would continue to hold an aggregate
principal amount of Securities which, when added to the aggregate
principal amount of Securities to be purchased by such Potential
Securityholders described in this subparagraph (ii) would equal not
less than the Available Securities.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Interest Period for the applicable Security as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Securities of the applicable Security are subject to Submitted Hold Orders),
that the Auction Rate for the next succeeding Interest Period will be equal to
the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding Interest
Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Security Interest
Rate for each applicable Security, which rate will be the lesser of (a) the
Auction Rate for each such Security and (b) the Net Loan Rate. In no event shall
a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Securityholders of the applicable Security will continue to hold
the principal amount of Securities of such Class that are subject to Submitted
Hold Orders. If, with respect to a Security, the Net Loan Rate is equal to or
greater than the Bid Auction Rate and if Sufficient Bids, as described above
under "Determination of Sufficient Bids and Bid Auction Rate," have been
received by the Auction Agent, the Bid Auction Rate will be the Security
Interest Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in the
related Agreement and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security Interest
Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are
both greater than the Security Interest Rate Limitation, the Security Interest
Rate for each series shall be equal to the Security Interest Rate Limitation. If
the Auction Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because all
of the Securities are subject to Submitted Holds Orders), the Security Interest
Rate will be the lesser of the Maximum Auction Rate or the Net Loan Rate. In any
of the cases described above in this paragraph, Submitted Orders will be
accepted or rejected and the Auction Agent will take such other action as
described below under "Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that
is higher than the Security Interest Rate will be accepted, thus requiring each
such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be rejected, thus entitling each
such Existing Securityholder to continue to hold the aggregate principal amount
of Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a rate
that is equal to the Security Interest Rate will be rejected, thus entitling
such Existing Securityholder to continue to hold the aggregate principal amount
of Securities subject to such Submitted Bid, unless the aggregate principal
amount of Securities subject to such Submitted Bids will be greater than the
principal amount of Securities (the "remaining principal amount") equal to the
excess of the Available Securities over the aggregate principal amount of
Securities subject to Submitted Bids described in subparagraphs (b) and (c)
above, in which event such Submitted Bid of such Existing Securityholder will be
rejected in part and such Existing Securityholder will be entitled to continue
to hold the principal amount of Securities subject to such Submitted Bid, but
only in an amount equal to the aggregate principal amount of Securities obtained
by multiplying the remaining principal amount by a fraction, the numerator of
which will be the principal amount of Securities held by such Existing
Securityholder subject to such Submitted Bid and the denominator of which will
be the sum of the principal amount of Securities subject to such Submitted Bids
made by all such Existing Securityholders that specified a rate equal to the
Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a rate
that is equal to the Security Interest Rate will be accepted, but only in an
amount equal to the principal amount of Securities obtained by multiplying the
excess of the aggregate principal amount of Available Securities over the
aggregate principal amount of Securities subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Securities subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Securities subject to Submitted Bids made by all such Potential Securityholders
that specified a rate equal to the Security Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect to a
Security (other than because all of the Securities of such Class are subject to
Submitted Hold Orders) or if the Net Loan Rate is less than the Bid Auction Rate
(in which case the Security Interest Rate shall be the Net Loan Rate) or if the
Security Interest Rate Limitation applies, subject to the denomination
requirements described below, Submitted Orders will be accepted or rejected as
follows in the following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be rejected, thus
entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) each Existing Securityholder's Submitted Bid specifying any rate
that is higher than the Security Interest Rate and the Submitted Sell Order of
each Existing Securityholder will be accepted, thus entitling each Existing
Securityholder that submitted any such Submitted Bid or Submitted Sell Order to
sell the Securities subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Securities obtained by multiplying the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraph (b)above by a fraction, the
numerator of which will be the aggregate principal amount of Securities held by
such Existing Securityholder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Securities of a Class are subject to Submitted Hold
Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Securities of each Class to be purchased and the
aggregate principal amount of Securities of each Class to be sold by Potential
Securityholders and Existing Securityholders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate principal amount of Securities to be sold differs
from such aggregate principal amount of Securities to be purchased, determine to
which other Broker-Dealer or Broker-Dealers acting for one or more purchasers
such Broker-Dealer will deliver, or from which Broker-Dealers acting for one or
more sellers such Broker-Dealer will receive, as the case may be, Securities.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Security Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum Auction
Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate will, in the
absence of manifest error, be binding on all other parties.
Notwithstanding anything in any related Agreement or, a related Terms
Supplement to the contrary, no Auction is to be held on any Auction Date on
which there are insufficient moneys held by the Trustee under the related
Agreement and available to pay the principal of and interest due on the
applicable Security on the Note Remittance Date or Certificate Remittance Date
immediately following such Auction Date.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise each Broker-Dealer that submitted
an Order in an Auction of the Security Interest Rate for a Security for the next
Interest Period and, if such Order was a Bid or Sell Order, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, by telephone not later
than 3:00 p.m., eastern time, on the Auction Date if the Interest Rate is the
Auction Rate and not later than 4:00 p.m. eastern time on the Auction Date if
the Interest Rate is the Net Loan Rate. Each Broker-Dealer that submitted an
Order on behalf of a Bidder is required to then advise such Bidder of the
applicable Security Interest Rate for the next Interest Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, confirm purchases and sales with each Bidder
purchasing or selling Securities as a result of the Auction and advise each
Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the depository, and the accounts of the respective Participants
at DTC will be debited and credited and Securities delivered as necessary to
effect the purchases and sales of Securities as determined in the Auction.
Purchasers are required to make payment through their Participants in same-day
funds to DTC against delivery through their Participants. DTC will make payment
in accordance with its normal procedures, which now provide for payment against
delivery by its Participants in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails to
deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Securityholder, Existing Securityholder or their respective Broker-Dealer or
Participant to deliver the principal amount of Securities or to pay for the
Securities purchased or sold pursuant to an Auction or otherwise. For a further
description of the settlement procedures, see "SETTLEMENT PROCEDURES."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
related Agreement, the related Terms Supplement or under the Auction Agent
Agreement, the Market Agent Agreement or any Broker-Dealer Agreement. The
Trustee may conclusively rely upon any information required to be furnished by
the Auction Agent, the Market Agent or any Broker-Dealer without undertaking any
independent review or investigation of the truth or accuracy of such
information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Securities are outstanding, the Administrator, may, from
time to time, change the length of the one or more Auction Periods in order to
conform with then current market practice with respect to similar securities or
to accommodate economic and financial factors that may affect or be relevant to
the length of the Auction Period and the interest rate borne by the Securities
(an "Auction Period Adjustment"). The Administrator will not initiate such
change in the length of the Auction Period unless it shall have received the
written consent from the Market Agent, which consent will not be unreasonably
withheld, not less than three days nor more than 20 days prior to the effective
date of an Auction Period Adjustment. The Administrator will initiate an Auction
Period Adjustment by giving written notice to the Trustee, the Auction Agent,
the Market Agent, the Security Guaranty Insurer and DTC in substantially the
form of, or containing substantially the information contained in, the related
Agreement at least 10 days prior to the Auction Date for such Auction Period.
Any such Auction Period Adjustment shall not result in an Auction Period of
less than 7 days nor more than 91 days. If any such Auction Period Adjustment
will result in an Auction Period of less than the number of days in the then
current Auction Period, the notice described above will be effective only if it
is accompanied by a written statement of the Trustee, the Auction Agent and DTC
to the effect that they are capable of performing their duties, if any, under
the related Agreement, the Auction Agent Agreement and any Broker-Dealer
Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (a) the Trustee and
the Auction Agent receive, by 11:00 a.m., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Representative authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Trustee, the Auction Agent DTC described above and (B)
Sufficient Bids exist at the Auction on the Auction Date for such first Auction
Period. If the condition referred to in (a) is not met, the Security Interest
Rate applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (a) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Representative, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Securities. The Representative will not
consent to such change in the Auction Date unless the Representative will have
received from the Market Agent not less than three days nor more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Trust, the Representative, and DTC.
The changes in Auction terms described above may be made with respect to
any Class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Class of Securities
and may be different if specified in the related Prospectus Supplement.
(a) Not later than (i) 3:00 p.m. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next Interest
Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing Securityholder,
whether such Bid or Sell Order was accepted or rejected, in whole or
in part, and the principal amount of Securities, if any, to be sold by
such Existing Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Securityholder, whether such Bid was
accepted or rejected, in whole or in part, and the principal amount of
Securities, if any, to be purchased by such Potential Securityholder;
(v) if the aggregate amount of Securities to be sold by all
Existing Securityholders on whose behalf such Seller's Broker-Dealer
submitted Bids or Sell Orders exceeds the aggregate principal amount
of Securities to be purchased by all Potential Securityholders on
whose behalf such Buyer's Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers and the name of the
Participant, if any, of each such Buyer's Broker-Dealer (a
"Participant") acting for one or more purchasers of such excess
principal amount of Securities and the principal amount of Securities
to be purchased from one or more Existing Securityholders on whose
behalf such Seller's Broker-Dealer acted by one or more Potential
Securityholders on whose behalf each of such Buyer's Broker-Dealers
acted;
(vi) if the principal amount of Securities to be purchased by all
Potential Securityholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Securities to be sold by all
Existing Securityholders on whose behalf such Seller's Broker-Dealer
submitted a Bid or a Sell Order, the name or names of one or more
Seller's Broker-Dealers (and the name of the Participant, if any, of
each such Seller's Broker-Dealer) acting for one or more sellers of
such excess principal amount of Securities and the principal amount of
Securities to be sold to one or more Potential Securityholders on
whose behalf such Buyer's Broker-Dealer acted by one or more Existing
Securityholder on whose behalf each of such Seller's Broker-Dealers
acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential
Securityholder on whose behalf such Broker-Dealer submitted a Bid or
Sell Order in the Auction on such Auction Date whether such Bid or
Sell Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Securityholder on whose behalf
such Buyer's Broker-Dealer submitted a Bid that was accepted, in whole
or in part, to instruct such Potential Securityholder's Participant to
pay to such Buyer's Broker-Dealer (or its Participant) through DTC
the amount necessary to purchase the principal amount of the
Securities to be purchased pursuant to such Bid against receipt of
such Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Securityholder on whose behalf
such Seller's Broker-Dealer submitted a Sell Order that was accepted,
in whole or in part, or a Bid that was accepted, in whole or in part,
to instruct such Existing Securityholder's Participant to deliver to
such Seller's Broker-Dealer (or its Participant) through DTC the
principal amount of the Securities to be sold pursuant to such Order
against payment therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on
whose behalf such Broker-Dealer submitted a Bid of the Security
Interest Rate for the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order in
an Auction is required to allocate any funds received by it in connection with
such Auction pursuant to paragraph (b)(ii) above, and any Securities received by
it in connection with such Auction pursuant to paragraph (b)(iii) above, among
the Potential Securityholders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Securityholder, if any, on whose behalf such
Broker-Dealer submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following such Auction
pursuant to paragraph (a) (v) or (a) (vi) above.
(d) On each Auction Date:
(i) each Potential Securityholder and Existing Securityholder
with an Order in the Auction on such Auction Date will instruct its
Participant as provided in (b)(ii) or (b)(iii) above, as the case may
be:
(ii) each Seller's Broker-Dealer that is not a Participant in
DTC's system will instruct its Participant to deliver such Securities
through DTC to a Buyer's Broker-Dealer (or its Participant) identified
to such Seller's Broker-Dealer pursuant to (a) (v) above against
payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in
DTC's system will instruct its Participant to pay through DTC to
Seller's Broker-Dealer (or its Participant) identified following such
Auction pursuant to (a) (vi) above the amount necessary to purchase
the Securities to be purchased pursuant to (b)(ii) above against
receipt of such Securities.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in (d)(i) above will instruct DTC to execute the
transactions described under (b)(ii) or (b)(iii) above for such
Auction, and DTC will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct
DTC to execute the transactions described in (d)(ii) above for such
Auction, and DTC will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct
DTC to execute the transactions described in (d)(iii) above for such
Auction, and DTC will execute such transactions.
(f) If an Existing Securityholder selling Securities in an Auction
fails to deliver such Securities (by authorized book-entry), a Broker-Dealer may
deliver to the Potential Securityholder on behalf of which it submitted a Bid
that was accepted a principal amount of Securities that is less than the
principal amount of Securities that otherwise was to be purchased by such
Potential Securityholder. In such event, the principal amount of Securities to
be so delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Securities will constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or nondelivery of Securities which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will have
been notified of such delivery or nondelivery in accordance with the provisions
of the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Trustee nor the Auction Agent will have any responsibility or liability with
respect to the failure of a Potential Securityholder, Existing Securityholder or
their Respective Broker-Dealer or Participant to take delivery of or deliver, as
the case may be, the principal amount of the Securities purchased or sold
pursuant to an Auction or otherwise.
<PAGE>
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE REPRESENTATIVE OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY NOR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR OTHER
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms........................................................... S- 2
Risk Factors............................................................... S-22
The Loan Pool.............................................................. S-25
The SBA Loan Program....................................................... S-47
Yield, Maturity and Prepayment Considerations.............................. S-49
The Sellers................................................................ S-52
Description of the Agreement and the Securities............................ S-54
The Trustee................................................................ S-66
Federal Income Tax Consequences............................................ S-67
ERISA Considerations....................................................... S-71
Legal Investment........................................................... S-71
Underwriting............................................................... S-72
Ratings.................................................................... S-72
Legal Matters.............................................................. S-73
Financial Information...................................................... S-73
Annex I.................................................................... S-74
Index of Principal Terms................................................... S-78
Certain Definitions........................................................ S-82
(Back cover continued
on next page)
<PAGE>
PROSPECTUS
Prospectus Supplement ...................................................... 3
Available Information ...................................................... 3
Reports to Securityholders.................................................. 4
Incorporation of Certain Documents by Reference............................. 4
Summary of Terms ........................................................... 5
Risk Factors................................................................ 20
The Trusts.................................................................. 24
Use of Proceeds ............................................................ 29
The Representative and the Originators...................................... 29
The SBA Loan Lending Program................................................ 30
Description of the Securities............................................... 36
Credit Enhancement ......................................................... 43
Maturity, Prepayment and Yield Considerations .............................. 48
The Agreements ............................................................. 49
Certain Legal Aspects of the Loans ......................................... 61
Federal Income Tax Consequences ............................................ 64
ERISA Considerations ....................................................... 88
Legal Investment Considerations ............................................ 90
Plan of Distribution ....................................................... 90
Legal Matters .............................................................. 91
Experts..................................................................... 91
Financial Information....................................................... 91
Rating...................................................................... 91
Index of Principal Terms.................................................... 92
Appendix I - Auction Procedures ............................................ I-1
Appendix II - Settlement Procedures.........................................II-1
(Back cover continued
on next page)
<PAGE>
$--------------
(APPROXIMATE)
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
PROSPECTUS SUPPLEMENT
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The estimated expenses in connection with the offering, all of which will
be borne by the Registrant are as follows:
Registration Fee....................................................*
Trustee's Fee.......................................................*
Printing............................................................*
Legal Fees and Expenses.............................................*
Accounting Fees.....................................................*
Blue Sky Qualification Fees
and Expenses......................................................*
Rating Agency Fees..................................................*
Miscellaneous.......................................................*
Total...............................................................*
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14A:3-5 of the New Jersey Business Corporation Act provides that
New Jersey corporations such as The Money Store Inc. may indemnify any director,
officer, employee or agent against expenses and liabilities in connection with
any proceeding involving the director, officer, employee or agent by reason of
him or her acting in such capacity if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, did not have reasonable cause to believe such conduct was unlawful.
Article VIII of The Money Store Inc.'s Amended and Restated By-Laws entitles
officers, directors, employees and agents to indemnification to the fullest
extent permitted by Section 14A:3-5 of the New Jersey Business Corporation Act.
The Money Store Inc. maintains directors' and officers' liability insurance
which covers the directors and officers of The Money Store Inc. with policy
limits of $10,000,000, with excess coverage of an additional $10,000,000.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that The Money Store Inc. will indemnify and hold the
Trustee harmless against any losses the Trustee may sustain by reason of the
failure of The Money Store Inc. to perform its obligations under the Agreement.
ITEM 16. LIST OF EXHIBITS
(a) Any required financial statements of a provider of credit enhancement
will be incorporated by reference onto, or included as an appendix to,
the related Prospectus Supplement.
(b)
1.1 Form of Underwriting Agreement among The Money Store Inc., the
Originators and the Underwriter named therein, relating to the
distribution of the Certificates and/or Notes.*
4.1 Form of Indenture.**
4.2 Form of Pooling and Servicing Agreement.*
4.3 Form of Trust Agreement.**
5.1 Opinion of Stroock & Stroock & Lavan LLP as to legality of the
securities being registered.***
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters
(included in Exhibit 5.1).
10.1 Form of Sale and Servicing Agreement.**
23.1 Consent of Stroock & Stroock & Lavan LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (filed as part of the signature page).
25.1 Statement of Eligibility and Qualification of Trustee (Form T-1).***
- ---------------
* Filed previously in connection with Form S-3 Registration Statement
No. 33-98734 and incorporated herein by reference.
** Filed previously in connection with Amendment No. 1 to Form S-3
Registration Statement and Post-Effective Amendment No. 333-32775 and
incorporated herein by reference.
*** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing by the Registrant of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
certify that they have reasonable grounds to believe that they meet all of the
requirements for filing on Form S-3 and have duly caused this Registration
Statement to be signed on their behalf by the undersigned, thereunto duly
authorized, in the City of Sacramento, State of California, on the 5th day of
August, 1998.
THE MONEY STORE INC. ("TMS") AND THE
ORIGINATORS LISTED ON EXHIBIT A
(THE "ORIGINATORS")
By: /S/ MICHAEL BENOFF
Name: Michael Benoff
Title: Senior Vice President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Vincent Altamura, K. Wesley M. Jones or
James F. Powers, Esq., or any of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him or her and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or any of them, or their or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on August 5, 1998.
SIGNATURE TITLE
Director and Executive Vice President
- -------------------- of each Originator
Alan Turtletaub
/S/ MARC TURTLETAUB President, Chief Executive Officer
- -------------------- (Principal Executive Officer) and
Marc Turtletaub Director of TMS, Chief Executive
Officer (Principal Executive Officer) and
Director of the Money Store Investment
Corporation, The Money Store of New York,
Inc. and The Money Store Commercial
Mortgage Inc., Executive Vice President
and Director of each Originator
/S/ MICHAEL BENOFF Chief Financial Officer (Principal
- -------------------- Financial Officer) and Executive Vice
Michael Benoff President of TMS and Senior Vice
President of each Originator
/S/ MORTON DEAR Senior Executive Vice President of TMS
- -------------------- and Director of each Originator
Morton Dear
/S/ WILLIAM S. TEMPLETON Executive Vice President of TMS and
- ------------------------- President (Principal Executive
William S. Templeton Officer) and Director of each
Originator other than The Money Store
Investment Corporation, The Money Store of
New York, Inc. and the Money Store
Commercial Mortgage Inc.
/S/ PAUL LELIAKOV President (Principal Executive
- ------------------- Officer) and Director of The Money Store
Paul Leliakov Investment Corporation, The Money Store
of New York, Inc. and The Money Store
Commercial Mortgage Inc.
/S/ JAMES K. RANSOM Vice President and Principal Accounting
- --------------------- Officer of TMS and each Originator
James K. Ransom
Director of TMS
- -------------------
Jack M. Antonini
Director of TMS
- -------------------
James Maynor
Director of TMS
- --------------------------
Malcolm T. Murray, Jr.
Director of TMS
- --------------------------
Christopher Oddleifson
<PAGE>
EXHIBIT A
LIST OF ORIGINATORS
The Money Store/D.C. Inc.
The Money Store/Kentucky Inc.
The Money Store/Minnesota Inc.
The Money Store Home Equity Corp.
TMS Mortgage Inc.
The Money Store Investment Corporation
The Money Store of New York, Inc.
The Money Store Commercial Mortgage Inc.
