PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 7, 1997)
$250,000,000
[MONEY STORE LOGO]
THE MONEY STORE HOME IMPROVEMENT TRUST 1997-II
$94,900,000 Class A-1 6.36% Certificates
$61,800,000 Class A-2 6.58% Certificates
$27,675,000 Class A-3 6.81% Certificates
$33,125,000 Class M-1 7.17% Certificates
$18,750,000 Class M-2 7.70% Certificates
$13,750,000 Class B 7.71% Certificates
The Money Store Home Improvement Loan Certificates, Series 1997-II (the
"Certificates"), will represent fractional undivided ownership interests in a
trust fund, designated as The Money Store Home Improvement Trust 1997-II (the
"Trust"). The Certificates will consist of (i) three classes of senior
Certificates (the "Senior Certificates"): Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates (collectively, the "Class A
Certificates"); (ii) three classes of subordinated Certificates (the
"Subordinated Certificates"): Class M-1 Certificates and Class M-2 Certificates
(the "Class M Certificates") and Class B Certificates (the "Class B
Certificates"); (iii) one class of interest-only certificates (the "Class X
Certificates"); and (iv) two classes of residual certificates: Class R-1
Certificates and Class R-2 Certificates (the "Class R Certificates"). Only the
Class A Certificates, Class M Certificates and Class B Certificates are being
offered hereby (collectively, the "Offered Certificates").
(COVER CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" ON PAGE S-36 HEREIN AND PAGE 18 OF THE PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE CERTIFICATES OFFERED HEREBY.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE MONEY STORE INC. OR
ANY OF ITS AFFILIATES OR SUBSIDIARIES. EXCEPT FOR
THE FHA LOANS, THE LOANS ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL
AGENCY, AND NO GOVERNMENTAL AGENCY HAS PASSED UPON THE ACCURACY OF
THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates will be purchased by Lehman Brothers Inc. and
Prudential Securities Incorporated (the "Underwriters") from the Representative,
on behalf of the Originators, and will be offered by the Underwriters from time
to time in negotiated transactions or otherwise, at varying prices to be
determined at the time of sale. Aggregate proceeds to the Originators from the
sale of the Offered Certificates are expected to be approximately $249,234,641,
plus accrued interest, before deducting expenses payable by the Originators
estimated to be approximately $300,000. See "Underwriting" herein.
The Offered Certificates are offered by the Underwriters, 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 Offered Certificates will be made in
book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company in the United States or Cedel Bank, societe anonyme
("Cedel Bank") or the Euroclear System ("Euroclear") in Europe on or about June
30, 1997 (the actual such date being hereinafter referred to as the "Closing
Date").
LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED
JUNE 26, 1997
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The rights of the holders of the Class M-1, Class M-2 and Class B
Certificates to receive distributions on each Remittance Date (as defined
herein) will be subordinated to such rights of the holders of the Class A-1,
Class A-2 and Class A-3 Certificates and, in addition, to such rights of the
holders of the Class M-1 Certificates (in the case of the Class M-2 and Class B
Certificates) and of the Class M-2 Certificates (in the case of the Class B
Certificates), all to the extent described herein.
The primary assets of the Trust will consist of a pool (the "Pool") of
loans (the "Loans") having the characteristics described herein. The Loans will
consist primarily of fixed rate, single family residential first, second and
more junior home improvement mortgage loans (the "Home Improvement Loans"),
certain of which loans (the "FHA Loans") are partially insured by the Federal
Housing Administration (the "FHA") of the United States Department of Housing
and Urban Development ("HUD") under Title I of the National Housing Act of 1934
("Title I"). The FHA Loans will have original terms to stated maturity of up to
20 years and the other Home Improvement Loans (the "Conventional Loans") will
have original terms to stated maturity of up to 25 years. The Trust will also
include funds on deposit in a separate trust account (the "Pre-Funding Account")
to be established with the Trustee (as defined herein). All of the Loans were
originated or purchased by certain wholly-owned subsidiaries (the "Originators")
of the Representative. The Money Store Inc. will act as the servicer (in such
capacity, the "Servicer") of the Loans and the administrator (in such capacity,
the "Claims Administrator") of the FHA Loans. Except for 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.
Additional loans (the "Subsequent Loans") may be purchased by the Trust
from the Originators from time to time on or before the close of business on
September 25, 1997 from funds on deposit in the Pre-Funding Account. On the
Closing Date, an aggregate cash amount not to exceed $62,500,000 will be
deposited into the Pre-Funding Account. See "The Agreement-Pre-Funding Account"
herein.
Distributions of principal and interest to the holders of each Class of
Certificates will be made on the 15th day of each month or, if the 15th day is
not a business day, the first business day thereafter, commencing July 1997
(each such day, a "Remittance Date") to the owners of each such Class of
Certificates as of the preceding Record Date (as defined herein). Holders of any
Class of Certificates are referred to herein as "Holders" or
"Certificateholders."
There is currently no secondary market for any Class of Certificates. The
Underwriter intends to make a secondary market for the Certificates, but has no
obligation to do so. There can be no assurance that a secondary market for any
Class of Certificates will develop or, if one does develop, that it will offer
sufficient liquidity of investment or continue.
As described herein, two separate real estate mortgage investment conduit
("REMIC") elections will be made in connection with certain assets of the Trust
for federal income tax purposes. As described more fully herein, the Class A
Certificates, the Class M Certificates, the Class B Certificates and Class X
Certificates will be designated as "regular interests" in a REMIC and each class
of Class R Certificates will represent the "residual interest" in the related
REMIC. See "Federal Income Tax Consequences" in the Prospectus and "Federal
Income Tax Considerations" herein.
The Class A Certificates, Class M Certificates and Class B Certificates
offered by this Prospectus Supplement each constitute a separate class of one
series of Certificates being offered by the Representative and the Originators
pursuant to the Prospectus dated March 7, 1997 (the "Prospectus"), of which this
Prospectus Supplement is a part and which accompanies this Prospectus
Supplement. The Prospectus contains important information regarding this
offering which is not contained herein and prospective investors are urged to
read the Prospectus and this Prospectus Supplement in full.
(END OF COVER PAGE)
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE
COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
SUMMARY OF TERMS
This following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Capitalized terms used
but not defined in this Summary of Terms have the meanings assigned to such
terms elsewhere in this Prospectus Supplement.
Securities Offered
The Money Store Home............. Improvement Loan Certificates, Series
1997-II, Class A-1, Class A-2, Class A-3,
Class M-1, Class M-2 and Class B. Each Class
of Certificates will be issued in the initial
Class Principal Balance (as defined herein)
and will bear interest for each Remittance
Date at the per annum rate set forth for such
Class on the cover page hereof.
The per annum rate at which a Class of
Certificates bears interest is referred to
herein as the "Pass- Through Rate" for such
Class.
The statistical information presented in this
Prospectus Supplement concerning the Loans is
based on the preliminary Pool expected to be
delivered to the Co-Trustee on the Closing
Date. The Representative expects that loans
(including the Subsequent Loans) that were
not contained in the preliminary Pool will be
added to the final Pool. While the
statistical distribution of the
characteristics for the final Pool of Loans
will vary somewhat from the statistical
distribution of such characteristics for the
preliminary Pool of Loans presented in this
Prospectus Supplement, the Representative
does not believe that the characteristics of
the final Pool will differ materially.
References in this Prospectus Supplement to
the characteristics of the Loans as of the
Cut-Off Date (as defined herein) are deemed
to include the characteristics, as of the
date of their origination, of those Loans
originated after the Cut-off Date and up to
the Closing Date.
Transaction Structure........... The Money Store Home Improvement Trust
1997-II, is a trust to be formed under the
laws of the State of New York. The primary
assets of the Trust will consist of the
Loans. The Trust will issue the following
Classes of Certificates:
SENIOR CERTIFICATES......... Class A-1, Class A-2 and Class A-3
Certificates.
SUBORDINATED CERTIFICATES... Class M-1, Class M-2 and Class B
Certificates.
RESIDUAL CERTIFICATES....... Class R-1 and Class R-2 Certificates (which
also constitute Subordinated Certificates and
which are not being offered hereby).
INTEREST-ONLY CERTIFICATES.. Class X Certificates (which also constitute
Subordinated Certificates and which are not
being offered hereby).
Issuer.......................... The Money Store Home Improvement Trust
1997-II.
Cut-Off Date.................... May 31, 1997 (or the date of origination of
the Loan, if later) (the "Cut-Off Date").
Closing Date.................... June 30, 1997.
Representative, Servicer and
Claims Administrator........... The Money Store Inc., a New Jersey
corporation (in its capacity as sponsor of
the Trust, the "Representative," in its
capacity as the servicer of the Loans, the
"Servicer," and in its capacity as the
administrator of the insurance claims to the
FHA (the "Claims") with respect to the FHA
Loans, the "Claims Administrator"). In the
Agreement (as defined herein), the Claims
Administrator will appoint its subsidiary,
TMS Mortgage Inc., a New Jersey corporation,
to assist in performing the functions of the
Claims Administrator. The principal offices
of The Money Store Inc. are located at 2840
Morris Avenue, Union, New Jersey 07083
(telephone number (908) 686-2000) and 3301 C
Street, Suite 100-M, Sacramento, California
95816 (telephone number (916) 446-5000). See
"The Representative and the Originators"
herein and in the Prospectus.
Trustee......................... The Chase Manhattan Bank, a New York banking
corporation, in its capacity as trustee. See
"The Agreement-The Trustee" herein.
Co-Trustee...................... Chase Manhattan Bank Delaware, a Delaware
banking corporation, will be the co-trustee
under the Agreement (the "Co-Trustee"). See
"The Agreement- The Co-Trustee" herein.
Custodian...................... First Trust National Association, a national
banking association, headquartered in St.
Paul, Minnesota, or such other entity
acceptable to the Trustee and the Servicer,
will be the "Custodian" with respect to the
Loans. In such capacity, it will retain the
files relating to the Loans. The Custodian is
a subsidiary of First Bank Systems,
Minneapolis, Minnesota. See "The
Agreement-The Custodian" herein.
Originators of the Loans........ Each Loan will have been originated and
underwritten, or purchased and
re-underwritten, by the Originators, all of
which are wholly-owned subsidiaries of the
Representative. Additionally, each Subsequent
Loan to be included in the Trust will have
been originated and underwritten, or
purchased and re-underwritten, by an
Originator.
Description of the
Certificates
GENERAL....................... The Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the
"Agreement"), dated as of May 31, 1997, among
the Representative, the Originators and the
Trustee.
The Certificates will represent fractional
undivided ownership interests in the Trust,
the assets of which will consist primarily of
Home Improvement Loans having the
characteristics described herein.
The projected last Remittance Dates for each
Class of Certificates is as set forth herein
under "Maturity, Prepayment and Yield
Considerations." It is expected that the
actual last Remittance Date for each Class of
Certificates will occur significantly earlier
than its projected last Remittance Date. See
"Maturity, Prepayment and Yield
Considerations" herein.
The Certificates are issuable in book-entry
form in minimum denominations of $1,000
original principal amount and integral
multiples of $1,000 in excess thereof.
The Certificates are issued by, and payable
solely from the property of, the Trust. The
undivided percentage interest of the holder
of any Certificate in the distributions to be
made to the related Class (the "Percentage
Interest") will be equal to the percentage
obtained by dividing the denomination
specified on such Certificate by the original
principal balance of such Class.
Distributions................. On each Remittance Date the Available
Remittance Amount (net of the Servicing Fee,
the Contingency Fee and the fees due the
Trustee) will be distributed to the
Certificateholders in the amounts and order
of priority set forth in A through P below:
A. CLASS A INTEREST........ One calendar month's interest (computed on
the basis of a 360-day year of twelve 30-day
months) will be paid concurrently to the
Holders of each Class of Class A Certificates
on each Remittance Date, to the extent of the
Available Remittance Amount in the
Certificate Account on such date, at the
related Pass-Through Rate on the Current
Principal Balance of each Class of Class A
Certificates.
The "Class A Current Principal Balance" as of
any Remittance Date is the sum of the Class
A-1 Current Principal Balance, the Class A-2
Current Principal Balance and the Class A-3
Current Principal Balance. With respect to
any Remittance Date, the sum of the amounts
determined by multiplying the components of
the Class A Current Principal Balance by
one-twelfth of the respective Class A
Pass-Through Rates is hereinafter referred to
as the "Class A Interest Distribution
Amount."
If on a particular Remittance Date, the
Available Remittance Amount in the
Certificate Account is less than the Class A
Interest Distribution Amount, the amount of
interest to be distributed in respect of the
Class A Certificates will be allocated among
each Class thereof (and within a Class among
the Certificates of such Class) pro rata in
accordance with their respective entitlements
to interest, and the amount of the shortfall
for each Class of Class A Certificates,
together with interest thereon at the
applicable Pass Through Rates to the extent
permitted by law (the "Class A-1 Interest
Shortfall Carryforward Amount," the "Class
A-2 Interest Shortfall Carryforward Amount"
and the "Class A-3 Interest Shortfall
Carryforward Amount," respectively, and,
collectively, the "Class A Interest Shortfall
Carryforward Amounts"), will be carried
forward and distributed as described, and
subject to the limitations set forth, under
"-I. Class A Interest Shortfall Carryforward
Amounts" below.
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 accrued interest at the applicable
Pass-Through Rate on the amount of such
prepayment. Further, the Class A Interest
Distribution Amount for the October 1997
Remittance Date will be based on the Class A
Current Principal Balance on September 26,
1997, after giving effect to such principal
prepayment.
B. CLASS M-1 INTEREST...... One calendar month's interest (computed on
the basis of a 360-day year of twelve 30-day
months) will be paid to the Holders of the
Class M-1 Certificate on each Remittance
Date, to the extent of the Available
Remittance Amount, if any, remaining in the
Certificate Account on such date (after
distribution of interest to the Holders of
the Class A Certificates), at the Class M-1
Pass-Through Rate on the Current Principal
Balance of the Class M-1 Certificates. With
respect to any Remittance Date, the amount
determined by multiplying the Class M-1
Current Principal Balance by one-twelfth of
the Class M-1 Pass-Through Rate is
hereinafter referred to as the "Class M-1
Interest Distribution Amount."
If on a particular Remittance Date, the
Available Remittance Amount remaining in the
Certificate Account on such date (after
distribution of interest to the Holders of
the Class A Certificates) is less than the
Class M-1 Interest Distribution Amount, the
amount of interest to be distributed in
respect of the Class M-1 Certificates will be
allocated among the Certificates of such
Class pro rata in accordance with their
respective entitlements to interest, and any
remaining deficiency, together with interest
thereon at the applicable Pass-Through Rate
to the extent permitted by law (the "Class
M-1 Interest Shortfall Carryforward Amount"),
will be carried forward and distributed as
described, and subject to the limitations set
forth, under "--K. Class M-1 Interest
Shortfall Carryforward Amounts" below.
C. CLASS M-2 INTEREST...... One calendar month's interest (computed on
the basis of a 360-day year of twelve 30-day
months) will be paid to the Holders of the
Class M-2 Certificate on each Remittance
Date, to the extent of the Available
Remittance Amount, if any, remaining in the
Certificate Account on such date (after
distribution of interest to the Holders of
the Class A and Class M-1 Certificates), at
the Class M-2 Pass-Through Rate on the
Current Principal Balance of the Class M-2
Certificates. With respect to any Remittance
Date, the amount determined by multiplying
the Class M-2 Current Principal Balance by
one-twelfth of the Class M-2 Pass-Through
Rate is hereinafter referred to as the "Class
M-2 Interest Distribution Amount" (and,
together with the Class M-1 Interest
Distribution Amount, the "Class M Interest
Distribution Amount").
If on a particular Remittance Date, the
Available Remittance Amount remaining in the
Certificate Account on such date (after
distribution of interest to the Holders of
the Class A and Class M-1 Certificates) is
less than the Class M-2 Interest Distribution
Amount, the amount of interest to be
distributed in respect of the Class M-2
Certificates will be allocated among the
Certificates of such Class pro rata in
accordance with their respective entitlements
to interest, and any remaining deficiency,
together with interest thereon at the
applicable Pass- Through Rate to the extent
permitted by law (the "Class M-2 Interest
Shortfall Carryforward Amount" and, together
with the Class M-1 Interest Shortfall
Carryforward Amount, the "Class M Interest
Shortfall Carryforward Amounts"), will be
carried forward and distributed as described,
and subject to the limitations set forth,
under "-M. Class M-2 Interest Shortfall
Carryforward Amounts" below.
D. CLASS B INTEREST........ One calendar month's interest (computed on
the basis of a 360-day year of twelve 30-day
months) will be paid to the Holders of the
Class B Certificate on each Remittance Date,
to the extent of the Available Remittance
Amount, if any, remaining in the Certificate
Account on such date (after distribution of
interest to the Holders of the Class A and
Class M Certificates), at the Class B
Pass-Through Rate on the Current Principal
Balance of the Class B Certificates. With
respect to any Remittance Date, the amount
determined by multiplying the Class B Current
Principal Balance by one-twelfth of the Class
B Pass- Through Rate is hereinafter referred
to as the "Class B Interest Distribution
Amount."
If on a particular Remittance Date, the
Available Remittance Amount remaining in the
Certificate Account on such date (after
distribution of interest to the Holders of
the Class A and Class M Certificates) is less
than the Class B Interest Distribution
Amount, the amount of interest to be
distributed in respect of the Class B
Certificates will be allocated among the
Certificates of such Class pro rata in
accordance with their respective entitlements
to interest, and any remaining deficiency,
together with interest thereon at the
applicable Pass-Through Rate to the extent
permitted by law (the "Class B Interest
Shortfall Carryforward Amount"), will be
carried forward and distributed as described,
and subject to the limitations set forth,
under "-O. Class B Interest Shortfall
Carryforward Amounts" below.
E. CLASS A PRINCIPAL
DISTRIBUTION AMOUNT.... Holders of each Class of Class A Certificates
will be entitled to receive on each
Remittance Date as payments of principal, in
the order of priority set forth below and to
the extent of the Available Remittance Amount
in the Certificate Account on such Remittance
Date after payment of the Class A, Class M
and Class B Interest Distribution Amounts
(collectively, the "Interest Distribution
Amounts"), the Senior Percentage of the
Principal Distribution Amount. For any
Remittance Date, the "Principal Distribution
Amount" is the excess, if any, of (A) the
sum, without duplication, of (i) all payments
and other recoveries of principal of a Loan
(net of amounts reimbursable to the Servicer
pursuant to the Agreement) received by the
Servicer or any Subservicer in the related
Due Period; (ii) the principal portion of any
Loan actually purchased by the Representative
for breach of a representation and warranty
or other defect and actually received by the
Trustee as of the related Determination Date;
(iii) any adjustments with respect to
substitutions of Loans for which the
Representative or an Originator has breached
a representation or warranty deposited in the
Principal and Interest Account and
transferred to the Certificate Account as of
the related Determination Date; (iv) the then
outstanding Principal Balance of any Loan
which, during the related Due Period, has
become a Liquidated Loan; and (v) amounts, if
any, released from the Pre-Funding Account on
the Remittance Dates during the Funding
Period over (B) the Subordination Reduction
Amount for such Remittance Date. The amount
determined by multiplying the Senior
Percentage by the Principal Distribution
Amount is hereinafter referred to as the
"Class A Formula Principal Distribution
Amount."
The "Senior Percentage" for any Remittance
Date prior to the Class B Cross-over Date,
and for any Remittance Date on or after the
Class B Cross-over Date on which the Trigger
Event is in effect (as described under
"Description of the Certificates-Flow of
Funds-H. Class B Principal Distribution
Amount"), will be 100%. For any Remittance
Date on or after the Class B Cross-over Date
on which the Trigger Event is not in effect,
the "Senior Percentage" will equal a
fraction, expressed as a percentage, the
numerator of which is the sum of the Current
Principal Balances of the Class A and the
Class M Certificates as of the immediately
preceding Remittance Date and the denominator
of which is the sum of the Current Principal
Balances of the Class A, the Class M and the
Class B Certificates as of the immediately
preceding Remittance Date.
A "Liquidated Loan" is a defaulted Loan or a
Mortgaged Property (a) as to which all
amounts that the Servicer expects to recover
on account of such Loan have been received
(including from FHA Payments) or (b) is a 90
Day Delinquent Loan.
The "Class A Principal Distribution Amount"
for any Remittance Date is intended to be
equal to the Class A Formula Principal
Distribution Amount. If the Class A Formula
Principal Distribution Amount exceeds the
Available Remittance Amount in the
Certificate Account on such Remittance Date
(after payment of all Interest Distribution
Amounts), then the Class A Principal
Distribution Amount shall instead equal such
remaining Available Remittance Amount.
The Class A Principal Distribution Amount
will be distributed first to the Holders of
the Class A-1 Certificates until the Class
A-1 Current Principal Balance has been
reduced to zero, then to the Holders of the
Class A-2 Certificates until the Class A-2
Current Principal Balance has been reduced to
zero, and then to the Holders of the Class
A-3 Certificates until the Class A-3 Current
Principal Balance has been reduced to zero;
provided, however that on any Remittance Date
on which the Current Principal Balance of the
Subordinated Certificates has been reduced to
zero, any amounts payable to the Class A
Certificates on such Remittance Date shall be
distributed pro rata and not sequentially.
Holders of each Class of Class A Certificates
will be paid principal on each Remittance
Date in accordance with their respective
Percentage Interests.
The "Subordination Reduction Amount" for any
Remittance Date is equal to the lesser of (i)
the amount set forth in clause (A) of the
definition of Principal Distribution Amount
and (ii) the excess, if any, of the then
current Spread Amount over the then current
Specified Subordinated Amount (as defined
under "Description of the Certificates-Credit
Enhancement").
The "Spread Amount" for any Remittance Date
is equal to the excess, if any, of (i) the
aggregate principal balances of the Loans as
of the last day of the immediately preceding
Due Period and any amounts on deposit in the
Pre-Funding Account over (ii) the aggregate
principal balances of the Certificates (after
taking into account all distributions of
principal on such Remittance Date).
The "Spread Amount Stepdown Date" means the
later to occur of (i) the Distribution Date
occurring in January 2000 and (ii) the first
Distribution Date on which the principal
balance of the Loans as of the last day of
the related Due Period is less than 50% of
the sum of the aggregate principal balances
of the Initial Loans as of the Cut-Off Date
and the original Pre- Funded Amount (the
"Original Collateral Amount").
F. CLASS M-1 PRINCIPAL
DISTRIBUTION AMOUNT... On each Remittance Date on and after the
Class A Current Principal Balance has been
reduced to zero, the Holders of the Class M-1
Certificates will be entitled to receive, as
payments of principal, the Senior Percentage
of the Principal Distribution Amount (the
"Class M-1 Formula Principal Distribution
Amount"), subject to the prior payment of all
Interest Distribution Amounts payable on such
Remittance Date and Class A Principal
Distribution Amounts, if any, payable on such
Remittance Date, until the Class M-1 Current
Principal Balance is reduced to zero.
The "Class M-1 Principal Distribution Amount"
for any Remittance Date is intended to be
equal to the Class M-1 Formula Principal
Distribution Amount. If the Class M-1 Formula
Principal Distribution Amount exceeds the
Available Remittance Amount in the
Certificate Account on such Remittance Date
(after payment of all Interest Distribution
Amounts, and, if any, the Class A Principal
Distribution Amounts), then the Class M-1
Principal Distribution Amount shall instead
equal such remaining Available Remittance
Amount.
On each Remittance Date on or after the Class
B Cross-over Date on which the Trigger Event
is not in effect, payments of principal will
be made to Class B Certificateholders, even
if Class M-1 Certificateholders are not yet
entitled to receive payments of principal
because the Class A Current Principal Balance
has not been reduced to zero.
G. CLASS M-2 PRINCIPAL
DISTRIBUTION AMOUNT.... On each Remittance Date on and after the
Class A Current Principal Balance and the
Class M-1 Current Principal Balance have been
reduced to zero, the Holders of the Class M-2
Certificates will be entitled to receive, as
payments of principal, the Senior Percentage
of the Principal Distribution Amount (the
"Class M-2 Formula Principal Distribution
Amount"), subject to the prior payment of all
Interest Distribution Amounts payable on such
Remittance Date and Class A and Class M-1
Principal Distribution Amounts, if any,
payable on such Remittance Date, until the
Class M-2 Current Principal Balance is
reduced to zero.
The "Class M-2 Principal Distribution Amount"
for any Remittance Date is intended to be
equal to the Class M-2 Formula Principal
Distribution Amount. If the Class M-2 Formula
Principal Distribution Amount exceeds the
Available Remittance Amount in the
Certificate Account on such Remittance Date
(after payment of all Interest Distribution
Amounts and, if any, the Class A Principal
Distribution Amounts and the Class M-1
Principal Distribution Amount), then the
Class M-2 Principal Distribution Amount shall
instead equal such remaining Available
Remittance Amount.
On each Remittance Date on or after the Class
B Cross-over Date on which the Trigger Event
is not in effect, payments of principal will
be made to Class B Certificateholders, even
if Class M-2 Certificateholders are not yet
entitled to receive payments of principal
because either the Class A Current Principal
Balance or the Class M-1 Current Principal
Balance has not been reduced to zero.
H. CLASS B PRINCIPAL
DISTRIBUTION AMOUNT.... Prior to the Class B Cross-over Date, there
will be no distributions of principal on the
Class B Certificates. The "Class B Cross-over
Date" will be the earlier of (A) the
Remittance Date on which the Class M-2
Principal Balance is reduced to zero, and (B)
the first Remittance Date on or after the
Remittance Date in July 2000 on which the
fraction, expressed as a percentage, the
numerator of which is the sum of the Class A
and Class M Current Principal Balances as of
the immediately preceding Remittance Date and
the denominator of which is the aggregate
outstanding principal balance of the Loans as
of the end of the second preceding Due
Period, is less than or equal to 75%.
On each Remittance Date on or after the Class
B Cross-over Date and prior to the Remittance
Date on which the Class A and Class M Current
Principal Balances have been reduced to zero,
holders of Class B Certificates will be
entitled to distributions of principal only
if the Trigger Event (as described under
"Description of the Certificates-Flow of
Funds -H. Class B Principal Distribution
Amount" herein) is not in effect on such
Remittance Date.
On each Remittance Date on or after the Class
B Cross-over Date, if the Trigger Event is
not in effect on such Remittance Date, the
Holders of the Class B Certificates will be
entitled to receive, as payments of
principal, the Class B Percentage (as
described under "Description of the
Certificates-Flow of Funds-H. Class B
Principal Distribution Amount" herein) of the
Principal Distribution Amount (the "Class B
Formula Principal Distribution Amount"),
subject to the prior payment of all Interest
Distribution Amounts and all Class A and
Class M Principal Distribution Amounts, if
any, payable on such Remittance Date, until
the Class B Current Principal Balance is
reduced to zero.
The "Class B Principal Distribution Amount"
for any Remittance Date is intended to be
equal to the Class B Formula Principal
Distribution Amount. If the Class B Formula
Principal Distribution Amount exceeds the
Available Remittance Amount in the
Certificate Account on such Remittance Date
(after payment of all Interest Distribution
Amounts and, if any, the Class A Principal
Distribution Amounts and the Class M
Principal Distribution Amounts), then the
Class B Principal Distribution Amount shall
instead equal such remaining Available
Remittance Amount.
I. CLASS A INTEREST SHORTFALL
CARRYFORWARD AMOUNTS..... On each Remittance Date, after all payments
of amounts as set forth in A through H above,
inclusive, the aggregate Class A Interest
Shortfall Carryforward Amounts will be paid
concurrently to the Holders of each Class of
Class A Certificates to the extent of the
remaining Available Remittance Amount in the
Certificate Account on such date. If on a
particular Remittance Date, the remaining
Available Remittance Amount in the
Certificate Account is less than the
aggregate Class A Interest Shortfall
Carryforward Amounts, the portion of the
remaining Available Remittance Amount to be
distributed in respect of each Class of Class
A Certificates will be allocated among the
Classes (and within a Class among the
Certificates of such Class) pro rata in
accordance with their respective entitlements
to Class A Interest Shortfall Carryforward
Amounts, and any Class A Interest Shortfall
Carryforward Amounts not paid shall be
carried forward to the next Remittance Date.
J. ACCELERATED PRINCIPAL
DISTRIBUTION AMOUNT...... On each Remittance Date, after all payments
of amounts as set forth in A through I above,
inclusive, the Accelerated Principal
Distribution Amount will be paid to the
Holders of the Certificates in the same order
and priority as payments of the Principal
Distribution Amount described in E, F, G and
H above. For any Remittance Date the
"Accelerated Principal Distribution Amount"
equals the lesser of (i) the remaining
Available Remittance Amount in the
Certificate Account on such Remittance Date
and (ii) the Subordinated Deficiency Amount
for such Remittance Date.
For any Remittance Date, the "Subordinated
Deficiency Amount" equals the excess, if any,
of (i) the Specified Subordinated Amount for
such Remittance Date over (ii) the then
current Spread Amount, after giving effect to
all payments previously made on such
Remittance Date.
K. CLASS M-1 INTEREST SHORTFALL
CARRYFORWARD AMOUNTS.... On each Remittance Date, after all payments
of amounts as set forth in A through J above,
inclusive, the aggregate Class M-1 Interest
Shortfall Carryforward Amounts will be paid
to the Holders of the Class M-1 Certificates
to the extent of the lesser of (i) the
remaining Available Remittance Amount in the
Certificate Account on such date and (ii) the
Available Maximum Subordination Amount (as
defined under "Description of the
Certificates-Flow of Funds - P. Class B
Realized Loss Amount"). If on a particular
Remittance Date, the remaining Available
Remittance Amount in the Certificate Account
is less than the aggregate Class M-1 Interest
Shortfall Carryforward Amounts, the portion
of the remaining Available Remittance Amount
to be distributed in respect of the Class M-1
Certificates will be allocated among the
Certificates of such Class pro rata, and any
Class M-1 Interest Shortfall Carryforward
Amounts not paid shall be carried forward to
the next Remittance Date, subject to the
Available Maximum Subordination Amount.
L. CLASS M-1 REALIZED
LOSS AMOUNT............. On each Remittance Date, after all payments
of amounts as set forth in A through K above,
inclusive, the Class M-1 Realized Loss Amount
(as defined under "Description of the
Certificates- Credit Enhancement-Application
of Monthly Excess Spread") will be paid to
the Holders of the Class M- 1 Certificates to
the extent of the lesser of (i) the remaining
Available Remittance Amount in the
Certificate Account on such Remittance Date
and (ii) the Available Maximum Subordination
Amount. If on a particular Remittance Date,
the remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class M-1 Realized Loss Amount, the
portion of the remaining Available Remittance
Amount to be distributed in respect of the
Class M-1 Certificates will be allocated
among the Certificates of such Class, pro
rata, and any Class M-1 Realized Loss Amount
not paid shall be carried forward to the next
Remittance Date, subject to the Available
Maximum Subordination Amount.
M. CLASS M-2 INTEREST SHORTFALL
CARRYFORWARD AMOUNTS..... On each Remittance Date, after all payments
of amounts as set forth in A through L above,
inclusive, the Class M-2 Interest Shortfall
Carryforward Amounts will be paid to the
Holders of the Class M-2 Certificates to the
extent of the lesser of (i) the remaining
Available Remittance Amount in the
Certificate Account on such Remittance Date
and (ii) the Available Maximum Subordination
Amount. If on a particular Remittance Date,
the remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class M-2 Interest Shortfall
Carryforward Amounts, the portion of the
Available Remittance Amount to be distributed
in respect of the Class M-2 Certificates will
be allocated among the Certificates of such
Class pro rata, and any Class M-2 Interest
Shortfall Carryforward Amounts not paid shall
be carried forward to the next Remittance
Date, subject to the Available Maximum
Subordination Amount.
N. CLASS M-2 REALIZED
LOSS AMOUNT ON EACH......... Remittance Date, after all payments of
amounts as set forth in A through M above,
inclusive, the Class M-2 Realized Loss Amount
(as defined under "Description of the
Certificates- Credit Enhancement-Application
of Monthly Excess Spread") will be paid to
the Holders of the Class M- 2 Certificates to
the extent of the lesser of (i) the remaining
Available
Remittance Amount in the Certificate Account
on such Remittance Date and (ii) the
Available Maximum Subordination Amount. If on
a particular Remittance Date, the remaining
Available Remittance Amount in the
Certificate Account is less than the
aggregate Class M-2 Realized Loss Amount, the
portion of the remaining Available Remittance
Amount to be distributed in respect of the
Class M-2 Certificates will be allocated
among the Certificates of such Class, pro
rata, and any Class M-2 Realized Loss Amount
not paid shall be carried forward to the next
Remittance Date, subject to the Available
Maximum Subordination Amount.
O. CLASS B INTEREST SHORTFALL
CARRYFORWARD AMOUNTS........ On each Remittance Date, after all payments
of amounts as set forth in A through N above,
inclusive, the aggregate Class B Interest
Shortfall Carryforward Amounts will be paid
to the Holders of the Class B Certificates to
the extent of the lesser of (i) the remaining
Available Remittance Amount in the
Certificate Account on such date and (ii) the
Available Maximum Subordination Amount. If on
a particular Remittance Date, the remaining
Available Remittance Amount in the
Certificate Account is less than the
aggregate Class B Interest Shortfall
Carryforward Amounts, the portion of the
Available Remittance Amount to be distributed
in respect of the Class B Certificates will
be allocated among the Certificates of such
Class pro rata, and any Class B Interest
Shortfall Carryforward Amounts not paid shall
be carried forward to the next Remittance
Date, subject to the Available Maximum
Subordination Amount.
P. CLASS B REALIZED
LOSS AMOUNT.................On each Remittance Date, after all payments of
amounts as set forth in A through O above,
inclusive, the Class B Realized Loss Amount
(as defined under "Description of the
Certificates- Credit Enhancement-Application
of Monthly Excess Spread") will be paid to
the Holders of the Class B Certificates to
the extent of the lesser of (i) the remaining
Available Remittance Amount in the
Certificate Account on such Remittance Date
and (ii) the Available Maximum Subordination
Amount. If on a particular Remittance Date,
the remaining Available Remittance Amount in
the Certificate Account is less than the
aggregate Class B Realized Loss Amount, the
portion of the remaining Available Remittance
Amount to be distributed in respect of the
Class B Certificates will be allocated among
the Certificates of such Class, pro rata, and
any Class B Realized Loss Amount not paid
shall be carried forward to the next
Remittance Date, subject to the Available
Maximum Subordination Amount.
When the Available Maximum Subordination
Amount has been reduced to zero, (i) no
further Class M-1, Class M-2 or Class B
Interest Shortfall Carryforward Amounts or
Class M-1, Class M-2 or Class B Realized Loss
Amounts shall be carried forward to
succeeding Remittance Dates and, (ii)
interest shall cease to accrue on all
remaining Class M-1, Class M-2 or Class B
Interest Shortfall Carryforward Amounts.
Credit Enhancement.............. The credit enhancement provided for the
benefit of the Certificates consists of (i)
the Spread Amount and (ii) the subordination
of the Class M and Class B Certificates.
SPREAD AMOUNT AND APPLICATION
OF REALIZED LOSSES............. Certain provisions of the Trust are intended
to provide for limited acceleration of the
Certificates relative to the amortization of
the Loans, generally in the early months of
the transaction. This limited accelerated
amortization is achieved by applying certain
excess interest collected on the Loans to the
payment of principal on the Certificates.
This acceleration feature is intended to
create an amount (the "Spread Amount")
resulting from, and equal to, the excess of
the aggregate principal balances of the
Loans, plus amounts on deposit in the
Pre-Funding Account, over the aggregate
Current Principal Balances of the
Certificates.
If a Loan becomes a Liquidated Loan during a
Due Period, the Net Liquidation Proceeds
relating thereto and allocated to principal
may be less than the then outstanding balance
of such Loan. The amount of such
insufficiency is a "Realized Loss."
To the extent that Realized Losses are
experienced, such Realized Losses will reduce
the aggregate outstanding balance of the
Loans (i.e., a reduction in the collateral
balance will occur). Since the Spread Amount
is the excess, if any, of the aggregate
principal balances of the Loans plus amounts
on deposit in the Pre-Funding Account over
the aggregate Current Principal Balances of
the Certificates, Realized Losses, to the
extent experienced and not covered by
application of the Available Remittance
Amount, will in the first instance reduce the
Spread Amount.
If on any Remittance Date after taking into
account all Realized Losses experienced
during the prior Due Period and after taking
into account the distribution of principal
(including the Accelerated Principal
Distribution Amount) with respect to the
Certificates on such Remittance Date, the
aggregate Current Principal Balance of the
Certificates exceeds the aggregate balance of
the Loans as of the end of the related Due
Period (i.e., if the level of
overcollateralization is negative), then the
Current Principal Balance of the Subordinate
Certificates will be reduced (in effect,
"written down") such that the level of the
Spread Amount is zero, rather than negative.
Such a negative level is an "Applied Realized
Loss Amount," which will be applied as a
reduction in the Current Principal Balance of
the related Subordinate Certificates in
reverse order of seniority, i.e., first
against the Class B Current Principal Balance
until it is reduced to zero, then against the
Class M-2 Current Principal Balance until it
is reduced to zero and then against the Class
M-l Current Principal Balance until it is
reduced to zero. The Agreement does not
permit the "write down" of the Current
Principal Balance of any Class A Certificate.
Once the Current Principal Balance of a Class
of Subordinate Certificates has been "written
down," the amount of such write down will no
longer bear interest, nor will such amount
thereafter be "reinstated" or "written up,"
although the amount of such write down may,
on future Remittance Dates, be paid to
Holders of the Subordinate Certificates which
experienced the write down, in direct order
of seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2
Certificates and, third, the Class B
Certificates).
SUBORDINATION OF CLASS M
AND CLASS B CERTIFICATES... The rights of the Holders of the Class M
Certificates and the Class B Certificates to
receive distributions with respect to the
Loans will be subordinated to such rights of
the Class A Certificateholders. This
subordination is intended to enhance the
likelihood of regular receipt by the holders
of the Class A Certificates of the full
amount of their monthly payments of interest
and principal and to afford such holders
protection against losses on Liquidated
Loans. The protection afforded to the Holders
of the Class A Certificates by means of the
subordination feature will be accomplished by
the preferential right of the Holders of the
Class A Certificates (i) to receive, prior to
any distribution being made on a Remittance
Date in respect of principal or interest on
the Class M Certificates and the Class B
Certificates, the amount of interest due them
on each Remittance Date out of the Available
Remittance Amount on deposit on such date in
the Certificate Account and (ii) to receive,
prior to any distribution being made on a
Remittance Date in respect of principal on
the Class M Certificates and the Class B
Certificates, the amount of principal due
them on each Remittance Date out of the
Available Remittance Amount on deposit on
such date in the Certificate Account.
In addition, the rights of the Holders of the
Class M-2 Certificates and Class B
Certificates to receive distributions with
respect to the Loans will be subordinate to
such rights of the Holders of the Class M-1
Certificates. This subordination is intended
to enhance the likelihood of regular receipt
by the Holders of the Class M-1 Certificates
of the full amount of their monthly payments
of interest and principal and to afford such
holders protection against losses on
Liquidated Loans. The protection afforded to
the Holders of the Class M-1 Certificates by
means of the subordination feature will be
accomplished by the preferential right of the
Holders of the Class M-1 Certificates (i) to
receive, prior to any distribution being made
on a Remittance Date in respect of principal
or interest on the Class M-2 Certificates and
the Class B Certificates, the amount of
interest due them on each Remittance Date out
of the Available Remittance Amount on deposit
on such date in the Certificate Account and
(ii) to receive, prior to any distribution
being made on a Remittance Date in respect of
principal on the Class M-2 Certificates and
the Class B Certificates, the amount of
principal due them on each Remittance Date
out of the Available Remittance Amount on
deposit on such date in the Certificate
Account.
In addition, the rights of the Holders of the
Class B Certificates to receive distributions
with respect to the Loans will be subordinate
to such rights of the Holders of the Class
M-2 Certificates. This subordination is
intended to enhance the likelihood of regular
receipt by the Holders of the Class M-2
Certificates of the full amount of their
monthly payments of principal and interest
and to afford such holders protection against
losses on Liquidated Loans. The protection
afforded to the Holders of the Class M-2
Certificates by means of the subordination
feature will be accomplished by the
preferential right of the Holders of the
Class M-2 Certificates (i) to receive, prior
to any distribution being made on a
Remittance Date in respect of interest or
principal on the Class B Certificates, the
amount of interest due them on each
Remittance Date out of the Available
Remittance Amount on deposit on such date in
the Certificate Account and (ii) to receive,
prior to any distribution being made on a
Remittance Date in respect of principal on
the Class B Certificates, the amount of
principal due them on each Remittance Date
out of the Available Remittance Amount on
deposit on such date in the Certificate
Account.
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 $62,500,000. Amounts in the
Pre-Funding Account may be used only (i) to
acquire Subsequent Loans and (ii) to make
accelerated payments of principal on the
Certificates. During the period (the "Funding
Period") from the Closing Date until the
earliest of (i) the date on which the amount
on deposit in the Pre- Funding Account is
less than $200,000, (ii) the date on which an
Event of Default (as defined in the
Agreement) occurs under the Agreement or
(iii) the close of business on September 25,
1997, amounts will, from time to time, be
withdrawn from the Pre- Funding Account to
purchase Subsequent Loans in accordance with
the Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
will be distributed as a principal prepayment
on the next Remittance Date to the
Certificateholders then entitled to receive
payments of principal. However, any
Pre-Funded Amount remaining at the close of
business on September 25, 1997 will be
distributed as a principal prepayment on
September 26, 1997 (the "Special Remittance
Date") to such Certificateholders.
Capitalized Interest Account.... On the Closing Date, the Representative also
will make a cash deposit in an account (the
"Capitalized Interest Account") in the name
of the Trustee on behalf of the Trust. The
amount deposited in the Capitalized Interest
Account will be used by the Trustee on the
Remittance Dates occurring in July, August
and September 1997 to fund the excess, if
any, of (i) the amount of interest accrued
for each such Remittance Date at the weighted
average Pass-Through Rates of the
Certificates on the portion of the
Certificates having principal balances
exceeding the principal balances of the Loans
over (ii) the amount of any earnings on funds
in the Pre-Funding Account that are available
to pay interest on the Certificates on each
such Remittance Date. Additionally, if a
principal prepayment is made on the Special
Remittance Date to any Class of Certificates,
such Certificates also will receive on such
date, from the Capitalized Interest Account,
accrued interest at the applicable
Pass-Through Rates on the amount of such
principal prepayment. Any amounts remaining
in the Capitalized Interest Account on the
Special Remittance Date and not used for such
purposes are required to be paid directly to
the holders of the Class X and Class R
Certificates on such Special Remittance Date.
Remittance and Record Dates..... Distributions on the Class A, Class M and
Class B Certificates will be made by or on
behalf of the Trustee on the 15th day of each
month, or if such day is not a business day,
on the first business day thereafter,
commencing July 15, 1997 (each, a "Remittance
Date"), to each person in whose name a Class
A, Class M or Class B Certificate is
registered on the last day of the preceding
calendar month (the "Record Date"), except
that the final distribution on each Class of
each such Class of Certificates will be made
only upon presentation and surrender of such
Certificates at the office or agency
designated for that purpose. Any Pre-Funded
Amount remaining at the close of business on
September 25, 1997 (together with interest
thereon) will be distributed by or on behalf
of the Trustee on the Special Remittance Date
to the Classes of Class A, Class M or Class B
Certificates of the Trust then entitled to
receive payments of principal in the order
and percentages as described herein. Such
distribution will be made to each person in
whose name a Class A, Class M or Class B
Certificate of any such Class is registered
on August 31, 1997.
FHA Insurance................... Subject to the then remaining Reserve
Amount(as defined below) of the Trustee, each
FHA Loan will be insured by the FHA in an
amount currently equal to 90% of the sum of
the following: (i) the unpaid principal and
uncollected interest earned to the date of
default, calculated on the actuarial method
even if the Note relating to such FHA Loan
provides for simple interest, reduced by
certain amounts received by the Claims
Administrator in connection with enforcing a
lien on the related Mortgaged Property, if
any, prior to the lien, if any, of the
related FHA Loan; (ii) the unpaid amount of
interest on the unpaid principal from the
date of default to the date of the initial
submission of the related Claim to the FHA
for payment plus 15 calendar days, but not
for any period greater than nine months from
the date of default, calculated at 7% per
annum; and (iii) the amount of certain
uncollected court costs, attorney's fees, and
expenses for recording the assignment of the
related Mortgage, if any, to the United
States. See "The Trust-FHA Loans" in the
Prospectus and "Risk Factors-Limitations on
FHA Insurance" and "Lending Programs-The Home
Improvement Lending Program-FHA Loans"
herein.
The 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 Trustee,
the Originators also will file with the FHA
all documents necessary to effect the
transfer of the FHA insurance reserves
applicable to the FHA Loans to the Trustee's
FHA contract of insurance.
Based upon information provided by the FHA,
The Money Store Inc. believes that upon the
transfer referred to above and after the
Funding Period, the FHA insurance available
to the Trustee will be equal to at least (A)
10% of the principal balance of the FHA Loans
as of the Cut-Off Date or Subsequent Cut-Off
Date, as the case may be; or (B) thereafter,
10% of the principal balance of all Title I
loans originated or purchased and currently
reported for FHA insurance by the Trustee,
less amounts for insurance claims previously
paid to the Trustee by the FHA, including
payments in respect of loans other than the
FHA Loans, and increased by an amount equal
to 10% of the lesser of the original
principal balance or the purchase price paid
for Title I loans subsequently originated or
purchased of record by the Trustee (in the
case of clause (A) or (B), the "Reserve
Amount"). See "The Trust-FHA Insurance" in
the Prospectus and "Risk Factors-Limitations
on FHA Insurance" herein.
FHA Claims paid to the Trustee by the FHA
with respect to Title I loans other than the
FHA Loans may affect the total amount of the
Reserve Amount.
Since the adequacy of the Trustee's Reserve
Amount is dependent upon future events,
including the 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 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 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 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 Trustee the related
Trustee's Loan File. With respect to any 90
Day Delinquent FHA Loan transferred to the
Claims Administrator as described above, the
Claims Administrator shall deposit (or, if
the Claims Administrator is not also the
Servicer, the Claims Administrator shall
instruct the Servicer to deposit) in the
applicable Certificate Account within 24
hours of receipt or determination thereof the
following amounts (such amounts to be net of
certain amounts that would be reimbursable to
the Servicer under the Agreement with respect
to amounts in the applicable Certificate
Account): (i) any FHA Payments; (ii) the
amount, if any, by which the FHA Payment was
reduced in accordance with FHA regulations
due to the Claims Administrator enforcing a
lien on the related Mortgaged Property, if
any, prior to the lien, if any, of the
related 90 Day Delinquent FHA Loan; and (iii)
any principal and interest payments received
with respect to a 90 Day Delinquent FHA Loan
after the Due Period in which the FHA Loan is
transferred to the Claims Administrator and
before either the related FHA Payment is paid
or the related Trustee's Loan File is
returned to the Trustee, as the case may be
(the amounts referred to in (ii) and (iii)
above are referred to herein as "Related
Payments"). If an FHA Loan becomes a 90 Day
Delinquent FHA Loan when there is
insufficient coverage in the Reserve Amount
or if the Claims Administrator determines not
to file a Claim with the FHA with respect to
such 90 Day Delinquent FHA Loan, the Trustee
will not transfer such FHA Loan to the Claims
Administrator, no Claim will be made to the
FHA and the Servicer may take other action,
including the commencement of foreclosure
proceedings, on the related Mortgaged
Property, if any. The Servicer will continue
to make Monthly Advances with respect to
interest on 90 Day Delinquent FHA Loans as
described under "Monthly Advances" herein.
The Certificateholders will not have any
direct right to receive the FHA Payments from
the FHA. See "Risk Factors-Dependence on
Claims Administrator, Representative and
Servicer for Making FHA Claims and Paying the
FHA Payments" herein. A "90 Day Delinquent
Loan" is a Loan with respect to which four
consecutive monthly payments have not been
received by the Servicer as of the last day
of the related Due Period unless, on or prior
to the last day of the Due Period in which
the fourth Monthly Payment is due, the
Servicer has received from the related
Obligor an amount at least equal to one
unpaid monthly payment. A "90 Day Delinquent
FHA Loan" is a 90 Day Delinquent Loan that is
also an FHA Loan.
An "FHA Payment" is any amount paid by the
FHA pursuant to a Claim with respect to a 90
Day Delinquent FHA Loan.
FHA Premium Account............. The Trustee will establish with itself a
separate account with respect to the Trust
(the "FHA Premium Account") to reimburse the
Claims Administrator for the payment to the
FHA of the annual insurance premium (the "FHA
Insurance Premium") on each FHA Loan in the
Trust. The FHA Insurance Premium is an annual
premium equal to 0.5% of the original
principal balance of each FHA Loan. If the
related Obligor pays the FHA Insurance
Premium in addition to the monthly payment,
any payment of the FHA Insurance Premium
received during a Due Period will be
deposited in the FHA Premium Account on the
related Remittance Date by the Trustee from
the related Certificate Account. In certain
states, the Servicer is prohibited from
directly collecting the FHA Insurance Premium
from the Obligor. With respect to FHA Loans
secured by Mortgaged Properties located in
such states, the Servicer will cause to be
deposited in the FHA Premium Account with
respect to the Trust a specified percentage
of each scheduled interest payment. Since an
Obligor pays interest on the declining
principal balance of the related FHA Loan and
the FHA Insurance Premium is based upon the
original principal balance of the FHA Loan,
the amount of interest allocated to the FHA
Premium Account may be more or less than the
amount of the related FHA Insurance Premium.
The Servicer has agreed to satisfy any
resulting shortfall from its own funds.
The Pool........................ Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
concerning the Loans are measured by the
aggregate principal balances of the Pool of
Loans described herein at the close of
business on the Cut-Off Date and all dollar
amounts are based on the principal balances
of such Loan at the close of business on the
Cut-Off Date. The Loans that will comprise
the Trust as of the Closing Date are referred
to herein as the "Initial Loans." The Loans
will consist of fixed rate home improvement
mortgages (the "Home Improvement Mortgages")
and the related promissory notes, retail
installment contracts or obligations, or
sales agreements (the "Home Improvement
Mortgage Notes") secured, except as set forth
below, by one- to four-family residences,
units in planned unit developments ("PUDs")
and units in condominium developments (the
"Home Improvement Mortgaged Properties" or
"Mortgaged Properties").
As stated above, the Agreement will provide
that Subsequent Loans may be purchased by the
Trust from the Originators from time to time
on or before the close of business on
September 25, 1997 from funds on deposit in
the Pre-Funding Account. Each Subsequent Loan
(including Dealer Loans, as defined herein
under "Lending Programs-The Home Improvement
Lending Program-Dealer/Contractor
Origination") will be originated and
underwritten, or purchased and
re-underwritten, by one of the Originators,
substantially in accordance with the
Originators' underwriting criteria described
herein under the caption "Lending
Programs-The Home Improvement Lending
Program-FHA Loans-Title I Underwriting
Requirements," in connection with Subsequent
Loans that are FHA Loans, and "Lending
Programs-The Home Improvement Lending
Program-Conventional Home Improvement Loans-
Underwriting Criteria," in connection with
Subsequent Loans that are Conventional Loans.
The purchase price for each Subsequent Loan
will be no greater than its unpaid principal
balance as of the related Subsequent Cut-Off
Date. The Agreement will provide that the
Loans, following the conveyance of any
Subsequent Loans to the Trust, must, in the
aggregate, conform to certain specified
characteristics. See "The
Agreement-Representations and Warranties" in
the Prospectus. The following is a
description of certain characteristics of the
pool of Home Improvement Loans expected to be
delivered to the Trustee on the Closing Date.
The Representative expects that the aggregate
pool of Subsequent Loans delivered during the
Funding Period also will conform to these
characteristics.
Between approximately 15.0% to 25.0% of the
Home Improvement Loans will be FHA Loans. The
remainder of the Home Improvement Loans will
be Conventional Loans. The Loans will have
been originated and underwritten, or
purchased and re- underwritten, by one of the
Originators substantially in accordance with
the Originators' underwriting criteria
described herein under the caption "Lending
Programs-The Home Improvement Lending
Program-FHA Loans-Title I Underwriting
Requirements," in connection with FHA Loans,
and "Lending Programs-The Home Improvement
Lending Program-Conventional Home Improvement
Loans-Underwriting Criteria," in connection
with Conventional Loans.
No more than approximately 40.0%, 10.0%,
10.0% 10.0%, 10.0%, 10.0% and 10.0% of the
Home Improvement Loans will be secured by
Home Improvement Mortgaged Properties located
in California, Florida, Georgia, Illinois,
Nevada, New York and Texas, respectively. No
more than approximately 5% of the Home
Improvement Loans will be secured by Home
Improvement Mortgaged Properties located in
any other state. Based on representations
made by the mortgagor on a Home Improvement
Mortgage Note (the "Mortgagor" or "Obligor"),
no less than approximately 99% of the Home
Improvement Loans will be secured by one- to
four-family residences, no more than
approximately 2% of the Home Improvement
Loans will be secured by vacation homes,
secondary residences, or investment
properties, no more than approximately 2% of
the Home Improvement Loans will be secured by
individual units in low rise condominiums, no
more than approximately 2% of the Home
Improvement Loans will be secured by two-,
three- or four-family houses, no more than
approximately 1% of the Home Improvement
Loans will be secured by five or more unit
residential or mixed-use residential and
commercial properties ("Multifamily Mortgaged
Properties") and no Home Improvement Loan
will be secured by individual units of other
types including high rise condominiums and
mixed-use buildings. No more than
approximately 2% of the Home Improvement
Loans will be secured by manufactured homes.
No less than approximately 4.0% of the Home
Improvement Loans will be secured by first
mortgage liens on the related Home
Improvement Mortgaged Property, no less than
approximately 75% of the Home Improvement
Loans will be secured by second mortgage
liens on the related Home Improvement
Mortgaged Property and the remainder of the
Home Improvement Loans will be secured by
more junior mortgage liens on the related
Home Improvement Mortgaged Property.
The FHA Loans are insured by the FHA to the
extent described herein. The Conventional
Loans are not insured by any governmental
entity. The Home Improvement Loans will
provide for a schedule of payments which will
be, if timely paid, sufficient to amortize
fully the principal balance of the Home
Improvement Loan on or before its maturity
date. The Home Improvement Loans will be
"simple interest" loans. However, with
respect to FHA Loans secured by Mortgaged
Properties located in states where the
Servicer collects the FHA Insurance Premium
directly from the related Obligor, payments
are applied to the FHA Insurance Premium
prior to accrued interest. The Home
Improvement Loans will bear interest at fixed
rates (each, a "Home Improvement Interest
Rate").
The Home Improvement Loans will bear interest
at fixed Home Improvement Interest Rates
which range from approximately 8.00% to
approximately 17.00%. The weighted average
Home Improvement Interest Rate of the Home
Improvement Loans will be no less than
approximately 12.50%. The lowest principal
balances of any Home Improvement Loan as of
the respective Cut-Off Date will be
approximately $1,000, and the highest will be
approximately $100,000. As of the respective
Cut-Off Date, the average principal balance
of the Home Improvement Loans will be no more
than approximately $25,000. As of the
respective Cut-Off Date, the weighted average
remaining term to stated maturity of the Home
Improvement Loans will be between
approximately 218 months to 228 months. The
weighted average term to stated maturity of
the Home Improvement Loans at origination
will be between approximately 220 months to
230 months. Each Home Improvement Loan that
is a first lien is covered by a title
insurance policy.
Servicing of the Loans........... The Servicer will serve as master servicer
for the Loans in accordance with the
Agreement. The Servicer may act through
subservicers, including the Originators or
other affiliates of the Servicer.
Monthly Advances................ The Servicer is required to remit to the
Trustee no later than the day of each month
which is at least three business days prior
to the Remittance Date and is in no case
earlier than the seventh business day of such
month (the "Determination Date") the amount
(a "Monthly Advance"), if any, by which (a)
the sum of (x) 30 days' interest at the
weighted average Adjusted Loan Remittance
Rate on the aggregate outstanding Principal
Balances of each Class of Certificates
immediately prior to the related Remittance
Date and (y) the Monthly Excess Spread, if
any, for the related Remittance Date relating
to the Loans exceeds (b) the amount received
by the Servicer in respect of interest on the
Loans as of the related Record Date (and with
respect to the Remittance Dates in July,
August and September 1997, the sum of (i) all
funds to be transferred to the Certificate
Account from the Capitalized Interest Account
for such Remittance Date and (ii) certain
investment earnings on amounts in the
Pre-Funding Account for the applicable
Remittance Date). Such advances by the
Servicer are reimbursable in the first
instance from late collections of interest
including amounts received in connection with
the liquidation of defaulted Loans
("Liquidation Proceeds"), amounts paid by any
insurer pursuant to any insurance policy
covering a Loan, Mortgaged Property or REO
Property ("Insurance Proceeds"), FHA Payments
and proceeds received by the Servicer in
connection with condemnation, eminent domain
or a release of lien ("Released Mortgaged
Property Proceeds") collected with respect to
the related Loan as to which the advances
were made, and any other amount that
otherwise would be distributed on the Class X
and Class R Certificates. The "Adjusted Loan
Remittance Rate," for a Class of Certificates
will equal the sum of the Pass-Through Rate
for such Class and a rate used to determine
certain expenses of the Trust. Certain of the
Loans may bear interest at a rate below the
Adjusted Loan Remittance Rate for the related
Class. Any such Loan will be sold to the
Trust at a discount so as to create, for each
such Loan, a mortgage interest rate that,
when applied to the purchase price paid by
the Trust for such Loan, will at least equal
the related Adjusted Loan Remittance Rate.
Compensating Interest............ Not later than each Determination Date, with
respect to each Loan to which the Servicer
received a principal payment in full in
advance of the final scheduled due date (a
"Principal Prepayment") or received a
principal payment that is in excess of five
times the scheduled monthly payment due, but
which was not intended by the Mortgagor or
Obligor to satisfy the Loan in full or to
cure a delinquency (a "Curtailment") during
the related Due Period, the Servicer is
required to remit to the Trustee from amounts
otherwise payable to the Servicer as
servicing compensation (including the
Contingency Fee), an amount ("Compensating
Interest") equal to any excess of (a) 30
days' interest on the principal balance of
each such Loan as of the beginning of the
related Due Period, at the weighted average
Adjusted Loan Remittance Rate applicable to
the Remittance Date on which the Compensating
Interest will be distributed over (b) the
amount of interest actually received on the
related Loan during such Due Period.
Servicing and Contingency Fees.. The Servicer is entitled to a servicing fee
of 0.25% per annum of the principal balance
of each Loan (the "Servicing Fee"), and a
contingency fee of 0.25% per annum of the
principal balance of each Loan (the
"Contingency Fee"), each calculated and
payable monthly from the interest portion of
scheduled monthly payments, Liquidation
Proceeds and certain other amounts collected.
Rating.......................... It is a condition to the issuance of the
Class A Certificates that each Class be rated
"AAA" by Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc.
("S&P"), and "Aaa" by Moody's Investors
Service, Inc. ("Moody's" and, together with
S&P, the "Rating Agencies"). It is a
condition to the issuance of the Class M-1
Certificates that they be rated at least "AA"
by S&P and at least "Aa2" by Moody's. It is a
condition to the issuance of the Class M-2
Certificates that they be rated at least "A"
by S&P and at least "A2" by Moody's. It is a
condition to the issuance of the Class B
Certificates that such Class be rated at
least "BBB" by S&P and at least "Baa2" by
Moody's. A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time. No person is
obligated to maintain the rating on any Class
of Certificates. See "Rating of the
Certificates" herein.
Optional Termination by the
Servicer....................... On any Remittance Date from and after the
Remittance Date on which the aggregate
principal balances of the Loans are less than
10% of the Original Collateral Amount (such
date, the "Optional Servicer Termination
Date"), the Servicer may, at its option,
purchase, on the next succeeding Remittance
Date, all of the Loans and any related
Mortgaged Property title to which has been
acquired in foreclosure or by deed in lieu of
foreclosure (an "REO Property") at a price
set forth in the Agreement (the "Termination
Price") at least equal to the sum of (x) 100%
of the Principal Balances of the Loans,
including those evidenced by REO Properties,
and including the portion of the principal
balance of each 90 Day Delinquent FHA Loan
for which the Certificateholders have not
received payment and for which a Claim was
submitted to the FHA, and (y) 30 days'
interest thereon at the then applicable
weighted average Pass-Through Rates of the
Certificates. See "The Agreement" herein and
in the Prospectus.
REMIC Election and Tax Status.... For Federal income tax purposes, two separate
elections will be made to treat certain
assets of the Trust as real estate mortgage
investment conduits ("REMICs"). The Class A,
Class M, Class B and Class X Certificates
will constitute "regular interests" in a
REMIC and each class of Class R Certificates
will constitute the sole "residual interest"
in the related REMIC. See "Federal Income Tax
Considerations" herein and "Federal Income
Tax Consequences" in the Prospectus.
ERISA Considerations............. As described under "ERISA Considerations"
herein, the Class A Certificates may be
purchased by a pension or other employee
benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or by individual
retirement accounts or certain types of Keogh
plans which are not subject to ERISA but are
subject to Section 4975 of the Code
("Plans"), pursuant to certain exemptions
from potential prohibited transaction rules
of ERISA which would otherwise prohibit a
broad range of transactions involving Plan
assets and persons having certain specified
relationships to a Plan and related excise
tax provisions of Section 4975 of the Code.
One such exemption is Prohibited Transaction
Exemption 91-14, 56 Fed. Reg. 7,413 (February
22, 1991) (the "Exemption"), which provides
an exemption for transactions involving the
purchase, holding or transfer of certain
asset backed certificates by Plans. See
"ERISA Considerations" herein and in the
Prospectus. No Class M or Class B
Certificates may be purchased for, or on
behalf of, any Plan or any entity whose
underlying assets include plan assets by
reason of such plan or account investing in
such entity (including insurance company
separate or general accounts and collective
investment funds). By its acceptance of a
Class M or Class B Certificate, each Holder
of a Class M or Class B Certificate will be
deemed to have represented and warranted that
it is not subject to the foregoing
limitations. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment Considerations.. No Class of Certificates will constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Investors should consult
their own legal advisers in determining
whether and the extent to which a Class of
Certificates constitutes legal investments
for such investors. See "Legal Investment
Considerations" herein.
Registration of the
Certificates................... The Certificates will be represented by
global certificates registered in the name of
Cede & Co. ("Cede"), as the nominee of The
Depository Trust Company ("DTC"). No
Certificateholder will be entitled to receive
definitive certificates ("Definitive
Certificates") representing such person's
interest, except in the event that Definitive
Certificates are issued under the limited
circumstances described herein. All
references herein to "Certificateholders" or
"Holders" will reflect the rights of the
beneficial owners of Certificates, as such
rights may be exercised through DTC and
Participants except as otherwise specified
herein. See "Risk Factors-Book- Entry
Registration" in the Prospectus and
"Book-Entry Certificates" herein.
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors.
TRUST ASSETS ARE THE ONLY SOURCE OF CREDIT ENHANCEMENT.
The subordination of the Subordinate Certificates to the Class A
Certificates, the further subordination within the Subordinate Certificates, and
the overcollateralization provisions of the Trust are the sole sources of
protection against losses on Loans and other shortfalls in available funds. If
losses or other shortfalls exceed the protection afforded by such mechanisms,
Holders of the Offered Certificates will bear such losses and shortfalls as
described herein. See "Description of the Certificates-Credit Enhancement." The
assets of the Trust are the sole source of funds for distributions on the
Certificates.
SUBORDINATION--LIMITED PROTECTION AFFORDED TO CLASS A AND CLASS
M CERTIFICATES.
The rights of the Holders of the Class M-1 Certificates to receive
distributions with respect to the Loans will be subordinate to the rights of the
holders of the Class A Certificates to receive such distributions, the rights of
Holders of the Class M-2 Certificates to receive distributions with respect to
the Loans will be subordinate to the rights of the Holders of the Class A and
the Class M-1 Certificates to receive such distributions and the rights of the
Holders of the Class B Certificates to receive distributions with respect to the
Loans will be subordinate to the rights of the Holders of the Class A, Class M-1
and Class M-2 Certificates to receive such distributions. The subordination of
the Subordinate Certificates relative to the Class A Certificates (and of the
more junior Classes of Subordinate Certificates to the less junior Classes
thereof) is intended to enhance the likelihood of regular receipt by the Holders
of the Class A Certificates (and such less junior Classes of Subordinate
Certificates) of the full amount of the monthly distributions allocable to them,
and to afford such Holders protection against losses.
DEPENDENCE ON CLAIMS ADMINISTRATOR, REPRESENTATIVE, AND SERVICER
FOR MAKING FHA CLAIMS AND PAYING THE FHA PAYMENTS
The Trustee, Co-Trustee and the Certificateholders are dependent on the
Claims Administrator to (1) assure that the FHA Loans will be insured by the
FHA, (2) make Claims on 90 Day Delinquent FHA Loans and (3) remit all FHA
Payments received from the FHA to the Trustee in accordance with the terms of
the Agreement. See "The Agreement-Obligations of The Claims Administrator"
herein.
LIMITATIONS ON FHA INSURANCE
The FHA Loans are covered by FHA insurance to the extent described herein.
The Agreement provides that if an FHA Loan becomes a 90 Day Delinquent FHA Loan
and if sufficient coverage is available in the related Reserve Amount, the
Claims Administrator may, in its sole option, file a Claim with the FHA with
respect to such 90 Day Delinquent FHA Loan. If such a Claim is submitted and
assuming the Representative, the Originators and the Claims Administrator comply
with the provisions described herein, the FHA will pay with respect to such 90
Day Delinquent FHA Loan the amount set forth under "The Home Improvement Lending
Program-FHA Loans-Insurance Claims Procedures for Title I Loans" herein
regardless of whether, in the case of FHA Loans, the related Mortgaged Property,
if any, has available equity over and above all liens on such property.
The availability of FHA insurance following a default on an FHA Loan is
subject to a number of conditions, including strict compliance with FHA
regulations in originating and servicing the FHA Loan and limits on the
aggregate insurance coverage available with respect to all FHA Title I loans
then owned and reported for FHA insurance by the Trustee. Although the Claims
Administrator is an FHA-approved lender and believes, and represents and
warrants in the Agreement, that it has complied with FHA regulations, such
regulations are susceptible to substantial interpretation. The Claims
Administrator is not required to obtain, and has not obtained, approval from the
FHA of its origination and servicing practices. Failure to comply with FHA
regulations may result in a denial of FHA insurance claims, and there can be no
assurance that the FHA's enforcement of its regulations will not change in the
future. In addition, any Claim paid by the FHA will cover only 90% of the sum of
the unpaid principal (determined on the actuarial basis) on the FHA Loan, a
portion of the unpaid interest and certain other liquidation costs.
Prior to the transfer of the FHA Loans to the Co-Trustee, the FHA Loans
will be insured by the FHA, to the extent described herein, under the related
Originator's FHA contract of insurance. In connection with the transfer of the
FHA Loans from the Originators to the Trustee, the Originators also will file
with the FHA all documents necessary to effect the transfer of the FHA insurance
reserves applicable to the FHA Loans to the Trustee's FHA contract of insurance.
Based upon information provided by the FHA, The Money Store Inc. believes
that upon the transfer referred to above and after the Funding Period, the FHA
insurance available to the Trustee will be equal to at least (A) 10% of the
principal balance of the FHA Loans as of the Cut-Off Date or Subsequent Cut-Off
Date, as the case may be; or (B) thereafter, 10% of the principal balance of all
Title I loans originated or purchased and currently reported for FHA insurance
by the Trustee, less amounts for insurance claims previously paid to the Trustee
by the FHA, including payments in respect of loans other than the FHA Loans, and
increased by an amount equal to 10% of the lesser of the original principal
balance or the purchase price paid for Title I loans subsequently originated or
purchased of record by the Trustee.
FHA Claims paid to the Trustee by the FHA with respect to Title I loans
other than the FHA Loans may affect the total amount of the Reserve Amount.
Since the adequacy of the Trustee's Reserve Amount is dependent upon future
events, including the 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-General" herein.
HOME IMPROVEMENT LENDING PROGRAMS
Prospective Certificateholders should consider, in addition to the
information described under "The Single Family Loan Lending Program" in the
Prospectus, the following with respect to the Home Improvement Loans.
FHA LOANS
THE TITLE I LOAN PROGRAM-GENERAL
The National Housing Act of 1934 (the "NHA Act"), in Sections 1 and 2(a)
thereof, authorized the creation of the FHA and the Title I credit insurance
program (the "Title I Loan Program"). Several types of loans may be made under
the Title I Loan Program, including, among others, property improvement loans
(the "Title I Property Improvement Loans") which may be made by approved lenders
to finance alterations, repair or improvement of existing single family,
multifamily and nonresidential structures. See "The Trusts-FHA Loans" in the
Prospectus for a general description of the Title I Loan Program.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS
The following is a description of the requirements for Title I Property
Improvement Loans currently in effect.
A Title I Property Improvement Loan cannot be used to purchase property.
The loan proceeds may only be used to finance property improvements which
substantially protect or improve the basic livability or utility of the property
to be improved. The loan amount may include the cost of the proposed
improvements and (i) architectural and engineering services; (ii) building
permit costs; (iii) credit report costs; (iv) 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; (v) title examination costs; (vi)
appraisal fees in connection with a loan or combination of loans on the same
property with a total principal balance in excess of $15,000; and (vii)
commencing July 5, 1995, origination fees charged by the lender.
One borrower may have multiple loans on multiple properties. In addition, a
borrower may obtain more than one loan to improve one property as long as the
total balance does not exceed the maximum permitted for the particular type of
loan involved.
The following maximum dollar limits applied to Title I property improvement
loans when the FHA Loans were originated:
TYPE OF PROPERTY LOAN LIMIT
Single Family $25,000 per property
(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 costs from the borrower:
(i) origination fee; (ii) for applications taken after June 3, 1996, discount
points (which may be payable by the borrower or dealer, if applicable); and
(iii) certain other specified fees and charges. These costs set forth in item
(i) with respect to loans for which the credit application was received prior to
July 5, 1995, and the costs set forth in items (ii) and (iii) cannot be paid out
of the loan proceeds.
An eligible borrower of a secured Title I loan must have at least a
one-half interest in one of the following: (i) fee simple title to the related
mortgaged property; (ii) a lease on the mortgaged property which runs at least
six months longer than the loan term; or (iii) a recorded land installment
contract on the mortgaged property.
There are two different types of FHA Loans and Conventional Loans: (1)
direct loans ("Direct Loans") and (2) dealer or dealer-contractor loans ("Dealer
Loans"). On a Direct Loan, the proceeds of the loan are disbursed directly to
the borrower, and there is no participation in the loan application process by a
dealer-contractor. On a Dealer Loan, the dealer-contractor participates in the
financing in some fashion, such as presenting the loan application to the
lending institution, receiving the check or money order (although made payable
to the borrower) or accompanying the borrower to the institution for the purpose
of receiving payment. On Dealer Loans, before it may disburse funds, the lender
must have in its possession a properly signed and dated completion certificate,
a copy of the dealer-contractor's contract or sales agreement, and a borrower's
authorization certificate, if the loan proceeds are to be disbursed to the
dealer-contractor.
TITLE I UNDERWRITING REQUIREMENTS
Specified loan underwriting requirements must be satisfied prior to loan
approval and disbursement of funds. For secured Title I loans the lender must
verify that the borrower has at least a one-half interest in the mortgaged
property. Additionally, the Originator requires that all owners in fee simple
have signed the lien instrument. A copy of the cost estimated on a direct loan
or a contract signed by the contractor and borrower must be reviewed with the
nature of the work to be done specifically described in the contract. In
addition, the loan file must contain the promissory note, lien instrument and
other documents required by regulation.
The borrower's current paying habits and previous credit history must be
ascertained by obtaining a consumer credit report and by other credit
investigation. Written verification of income and employment is also required.
This may include any one of the following: (i) recent payroll stubs
(year-to-date plus current); (ii) verification of employment forms; (iii) signed
tax returns (self-employed); or (iv) financial statements (self-employed).
Generally, any Title I loan originated after August 1994 in excess of
$7,500 must be secured by a recorded lien on the improved property which is
evidenced by a mortgage or deed of trust executed by the borrower and all other
owners in fee simple. Prior to August 1994, any Title I loan in excess of $5,000
was required to be secured by such a recorded lien. In order to facilitate the
financing of small home improvement projects, the FHA does not require loans of
$7,500 or less, in the case of Title I loans originated after August 1994, and
$5,000 or less, in the case of Title I loans originated prior to August 1994, to
be secured by the property being improved. Notwithstanding the preceding
sentence, such loans must be secured by a recorded lien on the improved
property, if, including such loan, the total amount of all Title I loans
obtained by the borrower exceeds $7,500, or $5,000, as the case may be.
Effective November 18, 1991, for any secured Title I loan or combination of
loans on the same property with a total unpaid principal balance in excess of
$15,000, the borrower is required to have equity in the property being improved
in an amount at least equal to the loan amount, except for certain loans
originated by a governmental institution.
Effective August 15, 1994, for secured Title I loans the requirement that
the borrower have equity in the property was eliminated for owner-occupied
properties if the structure being improved has been completed and occupied at
least six months prior to the date of the related application. For non
owner-occupied properties, or owner occupied properties not meeting this
requirement, the borrower is required to have equity in the property being
improved in an amount at least equal to the loan amount and all existing liens
on such property.
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 attempt a face-to-face meeting or conduct a telephone
interview prior to accelerating the maturity of the note and filing an insurance
claim.
If the lender's efforts to have the loan brought current are unsuccessful,
the lender is required to notify credit reporting agencies, file a claim with
the FHA for insurance and assign the loan to the United States government,
unless the lender chooses to proceed against the mortgaged property under its
Title I security instrument. If the lender chooses so to proceed, it may not,
without the approval of FHA, also file an insurance claim. However, if the
lender holds an obligation secured by the mortgaged property which is senior to
the Title I loan, it may both proceed against the mortgaged property under the
senior lien instrument and file an insurance claim for the Title I loan. When a
lender files an insurance claim with the FHA, the FHA reviews the claim, the
submitted loan documents relating to the loan and the lender's servicing
practices in order to verify compliance with FHA Title I requirements. Based
upon this review, the loan is either accepted or rejected for insurance claims.
Subject to the then remaining reserve amount, the amount of the insurance
claim payment, when made, is equal to 90% of the sum of the following amounts:
(1) The unpaid amount of the loan obligation (net of unpaid principal and
the uncollected interest earned to the date of default calculated according to
the actuarial method).
(2) The unpaid amount of interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days, calculated at the rate of 7% per
annum. (However, interest will not be paid for any period greater than nine
months from the date of default).
(3) The amount of uncollected court costs including fees paid for issuing,
serving and filing a summons.
(4) The amount of attorneys' fees on an hourly or other basis for time
actually expended and billed, not to exceed $500.
(5) The amount of expenses for recording the assignment of the loan to the
United States.
Because Certificateholders do not hold a contract of insurance, the FHA
will not recognize the Certificateholders as owners of the FHA Loans, or any
portion thereof, who are entitled to submit Claims to the FHA.
Certificateholders will have no direct right to receive insurance payments from
the FHA.
DEALER/CONTRACTOR ORIGINATION
The Originators originate loans through and purchase contracts from home
improvement contractors located in various states throughout the United States.
An Originator employs account executives who contact home improvement
contractors and explain the merits and features of the Originator's available
financing plans. Account executives review contractor needs and discuss the
Originator's prevailing home improvement loan rates, terms, credit standards and
policies. If a contractor desires to utilize the Originator's financing
programs, it must make application to the Originator for contractor approval.
The Originator has a contractor approval process pursuant to which the financial
condition, business experience, and qualifications of the contractor are
reviewed prior to its approval to sell or refer loans to the Originator. An
approved contractor's qualifications are reviewed annually in order to determine
whether such approval will be continued. The annual re-approval process includes
the updating of financial and business reference information. Contractors are
also monitored as to default levels, delinquency trends and customer complaint
resolution.
All contractor loans are written on an Originator's approved documents and
are either executed by the borrower in the presence (i) of the Originator's
employees or designated agents or (ii) of the contractor. All contracts which
are purchased are written on forms provided or approved by the Originator. Each
loan or contract is individually approved in accordance with the Originator's
guidelines. The contractor submits the customer credit application and
construction contract to the appropriate Originator office where the customer's
credit worthiness is determined. Credit analysis includes a review of the
customer's previous credit experience, paying habits, length and likelihood of
continued employment, ability to repay the debt, and other factors. The credit
analysis also includes the determination of the ratio of a customer's long-term
debt payments in relation to their gross monthly income.
The Originators require that all secured home improvement loans and
contracts be secured by a recorded lien on the property to be improved. Liens
may be in first, second or more junior position. Certain other criteria for FHA
insured loans and contracts are described under the caption "FHA Loans." If an
Originator determines that the application meets the Originator's underwriting
guidelines (and FHA regulations where applicable) and the credit is approved,
the Originator originates the loan or purchases the contract. Unless a customer
has specifically requested staged funding of a contract, contracts are not
purchased until the customer has verified satisfactory completion of the home
improvement project. Where staged funding is used, the Originator requests a
completion certificate from the customer within 60 days of funding.
Property values are generally determined by a drive-by "as-is" appraisal
with the cost of the improvement added to the appraisal to reflect the "after
improvement" value of the property. Title insurance is required on some FHA
Loans where the mortgage is in first position.
CONVENTIONAL LOANS - UNDERWRITING CRITERIA
Conventional Loans are underwritten in the same manner as the FHA Loans
except that the loan proceeds may be used for projects that do not qualify for
FHA Loans, the amount of the loan may exceed applicable FHA limits and the loan
maturity may be for up to 25 years from origination. However, the maximum amount
of an unsecured Conventional Home Improvement Loan is $12,500.
Conventional Loans and contracts are not insured by the FHA.
The original principal amount of a Conventional Loan generally may not
exceed $40,000 for the Originator's secured no equity program, a program in
which no appraisal is required and no loan-to-value ratio is calculated, and
generally may not exceed $75,000 for the Originator's other secured contractor
programs.
THE REPRESENTATIVE AND THE ORIGINATORS
The Money Store Inc. will act as the Servicer of the Loans. Except for
certain representations and warranties relating to the Loans and certain other
matters, The Money Store Inc.'s obligations with respect to the Loans are
limited to its contractual servicing obligations.
The Money Store Inc. is a New Jersey corporation and the parent company of
the Originators and their affiliates. The Money Store Inc. is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store Inc. is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store Inc.
and its subsidiaries primarily consist of home equity loans, including Home
Improvement Loans (collectively, "Home Equity Loans"), loans (the "SBA Loans")
guaranteed in part by the United States Small Business Administration (the
"SBA") and government guaranteed student loans ("Student Loans"). The Money
Store Inc. began providing financing for new and used vehicles (the "Auto
Loans") in early 1995.
Since 1967, The Money Store Inc. and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States. Based upon industry sources, the Representative believes that during
1995 The Money Store Inc. and its subsidiaries were among the largest
originators, by principal amount, of home equity loans in the United States. In
1979, The Money Store Inc. and its subsidiaries began to originate SBA Loans
and, based upon statistics compiled by the SBA, the Representative believes that
during each of the last 14 SBA fiscal years it originated a greater principal
amount of SBA Loans than any other originator of such loans in the United
States. In 1984, The Money Store Inc. and its subsidiaries entered into the
government guaranteed student loan origination market.
For the years ended December 31, 1995 and 1996 and for the three months
ended March 31, 1997, The Money Store Inc. and its subsidiaries originated or
purchased approximately $3.8 billion, $5.7 billion and $1.6 billion of loans,
respectively. Of those loans, approximately 75%, 73% and 70%, respectively, by
principal amount were home equity loans, approximately 12%, 11% and 9%,
respectively, by principal amount were SBA Loans, approximately 10%, 8%, and 10%
respectively, by principal amount were Student Loans and approximately 3%, 8%
and 11%, respectively, by principal amount were Auto Loans. The business
strategy of The Money Store Inc. has been to identify and pursue niche lending
opportunities which management believes have had widespread unsatisfied demand.
At March 31, 1997, The Money Store Inc. and its subsidiaries operated out
of 227 branch locations in 50 states, the District of Columbia and the
Commonwealth of Puerto Rico.
The following table shows the originations and portfolio balances of The
Money Store Inc. and its subsidiaries for the periods indicated:
<TABLE>
<CAPTION>
ORIGINATIONS AND SERVICED LOAN PORTFOLIO BY LOAN TYPE
(Dollars in thousands)
Year Ended December 31,
1994 1995
Originations Originations
<S> <C> <C> <C> <C> <C> <C>
NUMBER SERVICED NUMBER SERVICED
AMOUNT OF LOAN AMOUNT OF LOAN
LOANS PORTFOLIO LOANS PORTFOLIO
Home Equity Loans $2,013,027 38,644 $3,725,918 $2,885,044 67,828 $5,751,677
% of Total 72.4% 63.2% 75.5% 66.7%
SBA Loans $420,416 1,143 $1,605,645 $440,728 1,461 $1,907,050
% of Total 15.1% 27.2% 11.5% 22.1%
Student Loans $345,965 136,354 $566,906 $369,129 139,946 $845,501
% of Total 12.5% 9.6% 9.7% 9.8%
Auto Loans $128,070 13,141 $117,239
% of Total 3.3% 1.4%
----------- -------- ----------- ---------- -------- ----------
Total $2,779,408 176,141 $5,898,469 $3,822,971 222,376 $8,621,467
=========== ======== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
1996 1997
Originations Originations
<S> <C> <C> <C> <C> <C> <C>
Number Serviced Number Serviced
AMOUNT OF Loan AMOUNT OF LOANS Loan
LOANS PORTFOLIO PORTFOLIO
Home Equity Loans $4,150,992 104,519 $8,230,776 $1,140,615 29,437 $8,885,941
% of Total 72.9% 67.5% 69.7% 67.3%
SBA Loans $635,498 1,769 $2,282,384 $144,439 370 $2,362,484
% of Total 11.2% 18.7% 8.8% 17.9%
Student Loans $458,459 168,837 $1,203,739 $175,540 18,264 $1,352,617
% of Total 8.0% 9.9% 10.7% 10.2%
Auto Loans $448,105 45,124 $475,533 $176,225 17,596 $604,101
% of Total 7.9% 3.9% 10.8% 4.6%
----------- -------- ----------- ----------- --------- ------------
Total $5,693,054 320,249 $12,192,432 $1,636,819 65,667 $13,205,143
=========== ========= =========== =========== ========== =============
</TABLE>
<PAGE>
Although the Originators have no maximum dollar amount for Home Equity
Loans, the actual maximum amount that the Originators will lend is determined by
the applicant's ability to repay the loan, the value of the borrower's equity in
the real estate and the ratio of such equity to the home's appraised value. For
Home Equity Loans originated in 1994, 1995, 1996 and for the three months ended
March 31, 1997, the average loan size was approximately $52,000, $43,000,
$40,000 and $39,000, respectively.
In July 1993, the Originators introduced a revised program of originating
home equity loans (the "Equity Advantage Loans") with combined loan-to-value
ratios exceeding 80%. Equity Advantage Loans are secured by first or second
liens, generally possess lower debt-to-income ratios and bear a higher rate of
interest than home equity loans with lower combined loan-to-value ratios.
The following table illustrates The Money Store Inc.'s delinquency and
charge-off experience with respect to Home Equity Loans in its servicing
portfolio. The Money Store Inc. does not separately report the delinquency and
charge-off experience of its Home Improvement Loans and there can be no
assurance, and no representation is made, that the delinquency and charge-off
experience with respect to the Home Improvement Loans will be similar to that
reflected in the table below.
<TABLE>
<CAPTION>
HOME EQUITY LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
As of and
As and for the Years for the
Ended December 31, Three
Months Ended
March 31,
<S> <C> <C> <C> <C>
1994 1995 1996 1997
30-59 days past due 1.77% 1.76% 1.31% 1.84%
60-89 days past due 0.42% 0.68% 0.81% 0.82%
90+ days past due 1.86% 2.42% 3.83% 3.93%
Loans charged-off, net $19,942 $24,205 $37,039 $12,551
Loans charged-off, net,
as a percentage of 0.54% 0.42% 0.45% 0.57%
the home equity loan portfolio(1)
(1) The percentage of Home Equity Loan charge-offs is calculated based upon
the dollar amount of charge-offs divided by the dollar amount of Home Equity
Loans contained in the Company's serviced loan portfolio.
</TABLE>
While the above delinquency and charge-off experience represents the
Servicer's recent experience, there can be no assurance that the future
delinquency and charge-off experience on the Loans included in the Trust will be
similar. The Servicer can neither quantify the impact of any recent property
value declines on the Loans nor predict whether, to what extent or how long such
declines may continue. In a period of such decline, the rates of delinquencies,
foreclosures and losses on the Loans could be higher than those heretofore
experienced in the mortgage lending industry in general. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses. See "Description of the Certificates" herein for a
discussion of the effect to Certificateholders of delinquencies in payments on
the Loans.
LEGAL PROCEEDINGS
Because the nature of the business of The Money Store Inc. involves the
collection of numerous accounts, the validity of liens and compliance with state
and federal lending laws, The Money Store Inc. is subject to claims and legal
actions in the ordinary course of its business. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect
to such claims and actions, The Money Store Inc. believes that the aggregate
amount of such liabilities will not result in monetary damage which would have a
material adverse effect on the financial condition of The Money Store Inc.
THE LOAN POOL
GENERAL
Certain data with respect to the Initial Loans expected to be included in
the Trust is set forth below. References in this Prospectus Supplement to the
characteristics of the Loans as of the Cut-Off Date are deemed to include the
characteristics, as of the date of their origination, of those Loans originated
after the Cut-Off Date and up to the Closing Date. A Current Report on Form 8-K
containing a detailed description (the "Detailed Description") of the Initial
Loans will be available to purchasers of the Certificates upon request and will
be filed with the Securities and Exchange Commission within 15 days after
issuance of the Certificates. The Detailed Description will specify the
principal balance of the Loans as of the Cut-Off Date, the initial principal
balance of each Class of the Certificates and will also include the following
information regarding the Loans (in each case, presented by (i) principal
balance of the Trust as of the Cut-Off Date; (ii) percentage of the Trust by
principal balance and (iii) number of Initial Loans for the Trust): geographical
distribution of the Mortgaged Properties, interest rates, original principal
balances, number of months since origination and months remaining to stated
maturity.
The statistical information presented in this Prospectus Supplement
concerning the Loans is based on the preliminary Pool expected to be delivered
to the Co-Trustee on the Closing Date. The Representative expects that loans
(including the Subsequent Loans) that were not contained in the preliminary Pool
will be added to the final Pool. While the statistical distribution of the
characteristics for the final Pool of Loans will vary somewhat from the
statistical distribution of such characteristics for the preliminary Pool of
Loans presented in this Prospectus Supplement, the Representative does not
believe that the characteristics of the final Pool will differ materially.
The Agreement will provide that Subsequent Loans may be purchased by the
Trust from the Originators from time to time on or before the close of business
on September 25, 1997 from funds on deposit in the Pre-Funding Account. Each of
the Subsequent Loans will have been originated and identified prior to the
Closing Date. Any Subsequent Loan so acquired will have been originated and
underwritten, or purchased and re-underwritten, by one of the Originators,
substantially in accordance with the Originator's underwriting criteria
described herein under the caption "Lending Programs-The Home Improvement
Lending Program-FHA Loans-Title I Underwriting Require ments," in the case of
FHA Loans, or "Lending Programs-The Home Improvement Lending
Program-Conventional Home Improvement Loans-Underwriting Criteria," in the case
of Conventional Loans. The purchase price for each Subsequent Loan will be no
greater than its unpaid principal balance as of the related Subsequent Cut-Off
Date. The Agreement will provide that the Pool, following the conveyance of any
Subsequent Loans to the Pool, must, in the aggregate, conform to certain
specified characteristics. See "The Agreement-Representations and Warranties" in
the Prospectus.
HOME IMPROVEMENT LOANS
The Home Improvement Loans consist of fixed-rate, residential home
improvement mortgages, deeds of trust or other security instruments (the "Home
Improvement Mortgages" or "Mortgages"), and the related promissory notes, retail
installment contracts or obligations, or sales agreements (the "Home Improvement
Mortgage Notes" or "Notes") secured, except as set forth below, by one- to
four-family residences, units in planned unit developments and units in
condominium developments (the "Home Improvement Mortgaged Properties" or
"Mortgaged Properties"). The following is a description of certain
characteristics of the pool of Home Improvement Loans expected to be delivered
to the Trustee on the Closing Date. The Representative expects that the
aggregate pool of Subsequent Loans delivered during the Funding Period also will
conform to these characteristics.
Between approximately 15.0% to 25.0% of the Home Improvement Loans will be
FHA Loans. The remainder of the Home Improvement Loans will be Conventional
Loans. The Initial Loans will have been originated and underwritten, or
purchased and re-underwritten, by one of the Originators, substantially in
accordance with the Originators' underwriting criteria described herein under
the caption "Lending Programs-The Home Improvement Lending Program-Title I
Underwriting Requirements," in the case of FHA Loans, or "Lending Programs-The
Home Improvement Lending Programs-Conventional Home Improvement
Loans-Underwriting Criteria," in the case of Conventional Loans. Certain of the
Conventional Loans may contain provisions requiring the related Mortgagor to pay
a penalty in connection with certain prepayments. Unless otherwise noted, all
percentages in this general discussion are measured by the expected principal
balance of the Initial Loans described herein on the Cut-Off Date and the
statistics are given as of the Cut-Off Date.
No less than approximately 4.0% of the Loans will be secured by first
mortgage liens, no less than approximately 75% of the Loans will be secured by
second mortgage liens and the remainder of the Loans will be secured by more
junior mortgage liens. Based on representations made by the Obligors, no less
than approximately 99% of the Loans will be secured by one-to four-family
residences, no more than approximately 2% of the Loans are secured by vacation
homes, secondary residences, or investment properties, no more than
approximately 2% of the Loans will be secured by individual units in low-rise
condominiums, no more than approximately 2% of the Loans will be secured by
two-, three- or four-family houses, no more than approximately 1% of the Loans
will be secured by Multifamily Mortgaged Properties and no Loan will be secured
by individual units of other types including high-rise condominiums and
mixed-use buildings. No more than approximately 2% of the Loans will be secured
by manufactured homes.
No more than approximately 40.0%, 10.0%, 10.0%, 10.0%, 10.0%, 10.0%, and
10.0% of the Loans are secured by Mortgaged Properties located in California,
Florida, Georgia, Illinois, Nevada, New York and Texas, respectively. No more
than approximately 5% of the Loans will be secured by Mortgaged Properties
located in any other state.
The FHA Loans are insured by the FHA to the extent described herein. The
Conventional Loans are not insured or guaranteed by any governmental entity.
The Loans will bear interest at fixed rates which range from approximately
8.00% to 17.00% per annum. The weighted average Home Improvement Interest Rate
on the Loans will be no less than approximately 12.50% per annum. The lowest
principal balance of any Loan as of the respective Cut-Off Date will be
approximately $1,000 and the highest will be approximately $100,000. As of the
respective Cut-Off Date the average principal balance of the Loans will be no
more than approximately $25,000. As of the respective Cut-Off Date, the weighted
average remaining terms to stated maturity of the Loans will be between
approximately 218 months and 228 months. The weighted average term to stated
maturity of the Loans at origination will be between approximately 220 months to
230 months. None of the Loans will be Loans which provide for a stated maturity
of less than the period of time of the corresponding amortization schedule
("Balloon Loans").
PAYMENTS ON THE LOANS
The Loans will generally provide for a schedule of payments which will be,
if timely paid, sufficient to amortize fully the principal balance of the
related Initial Loan on or before its maturity date. Interest with respect to
the Initial Loans will accrue on either an actuarial interest method or a simple
interest method.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments on such Loans received either earlier
or later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
The simple interest method provides for the amortization of the amount of
each loan over a series of equal monthly payments. However, unlike the monthly
payment under the actuarial interest method, each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance at the stated interest rate and based upon the period elapsed
since the preceding payment of principal was made, using the method permitted by
applicable law. As payments are received under the loan, the amount received is
applied first to interest accrued to the date of payment and the balance, if
any, is applied to reduce the unpaid principal balance; provided, however, that
with respect to FHA Loans secured by Mortgaged Properties located in states
where the Servicer collects the FHA Insurance Premium directly from the related
Mortgagor, payments are applied first to the FHA Insurance Premium. Accordingly,
if a borrower pays a fixed monthly installment on such a loan before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment on the loan after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would be had
the payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly reduced. In
addition, a late charge may be imposed with respect to the past due amount.
The amount of interest payable to the Holders of Certificates on each
Remittance Date will not be affected by interest accruing on the Loans based on
the simple interest method. On each Remittance Date, the Holders of Certificates
are entitled to receive 30 days' interest at the applicable Pass-Through Rate on
the outstanding principal balances of the applicable Class of Certificates. The
Servicer is required to remit to the Trustee the excess, if any, of the amount
of interest the Holders of Certificates are entitled to receive on each
Remittance Date over the interest collected on the Loans during the related Due
Period and available to pay interest on the Certificates. See "The Agreement-
Monthly Advances and Compensating Interest" herein.
Similarly, the compensation payable to the Servicer will not be affected by
interest accruing on the Loans based on the simple interest method. The Servicer
is entitled to receive a fee based on the principal balance of the Loans, not
upon the portion of a monthly payment allocable to interest. See "The
Agreement-Servicing and Other Compensation and Payment of Expenses" herein.
With respect to simple interest Loans, if a payment is received on such a
Loan before its due date, more of such payment will be used on the related
Remittance Date to pay principal on the Certificates than if such payment was
received on such due date. Conversely, if a payment is received on such a Loan
after its scheduled due date, less of such payment will be used on the related
Remittance Date to pay principal on the Certificates than if such payment was
received on its due date. This will not affect the total amount of principal to
be received by the Holders of Certificates over the life of the transaction, but
it may affect the weighted average lives of the Certificates.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The effective yield on the Certificates will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate because, while
interest will accrue on such Certificates from the first day of each month, the
distribution of such interest will not be made until the 15th day (or if such
15th day is not a business day, the next succeeding business day) of the month
following the month of accrual.
In general, because the Loans will bear fixed interest rates, when the
level of prevailing interest rates for similar loans significantly declines, the
rate of prepayment of such Loans is likely to increase, although the prepayment
rate is influenced by a number of other factors, including general economic
conditions and homeowner mobility. Similarly, when the level of interest rates
for similar loans significantly rises, the rate of prepayment of such Loans may
decrease. No prediction can be made as to the prepayment rate that the Loans
will actually experience.
Generally, junior priority mortgage loans have smaller average principal
balances than first priority mortgage loans and are not viewed by borrowers as
permanent financing. Accordingly, the Loans that are secured by junior liens may
experience a higher rate of prepayment than traditional first priority mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on mortgage loans for Federal income tax purposes may result
in a higher rate of prepayment of such junior Loans. The obligation of the
Servicer to enforce the "due-on-sale" provisions of the Loans may also increase
prepayments. The prepayment experience of the Pool may be affected by a wide
variety of factors, including general and local economic conditions, mortgage
market interest rates, the availability of alternative financing and homeowner
mobility. The Company is unaware of any reliable studies that would project the
prepayment risks associated with the Loans based upon current interest rates and
economic conditions and the historical prepayment experience of the Company's
portfolio of Home Improvement Loans.
Unscheduled payments, delinquencies, repurchases of defective Loans,
defaults on the Loans and distributions from the Pre-Funding Account will affect
the amount of funds available to make distributions on each Remittance Date. In
addition, the Servicer may, at its option, on any Remittance Date on and after
the Optional Servicer Termination Date, purchase from the Trust all of the Loans
in the Trust and any related REO Properties at the Termination Prices.
If prepayments of principal are received on the Loans at a rate greater
than that assumed by an investor (including distributions from the Pre-Funding
Account and receipt of Accelerated Principal Distribution Amounts), the yield
will be increased on Certificates purchased by such investor at a price less
than par (i.e., the principal balance of a Certificate at the time of its
purchase). Similarly, if prepayments of principal are received on the Loans at a
rate greater than that assumed by an investor, the yield will be decreased on
Certificates purchased at a price greater than par. The effect on an investor's
yield of principal prepayments on the Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Certificates may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of the Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Loans and the
liquidations of defaulted Loans. Delinquencies and defaults will generally slow
the rate of payment of principal to the Certificateholders since the Servicer is
not obligated to advance for delinquent payments of principal. However, this
effect will be offset to the extent that lump sum recoveries on defaulted Loans
and foreclosed Mortgaged Properties result in principal payments on the Loans
faster than otherwise scheduled. Additionally, the Holders of the Certificates
will be entitled to any FHA Payments received by the Claims Administrator.
As described herein, certain Classes of Certificates will be entitled to
receive payments of principal prior to other Classes of Certificates. As a
result, the Classes of Certificates receiving payments of principal first will
immediately be affected by the prepayment rate on the Loans in the Trust.
However, the timing of commencement of principal distributions and the weighted
average lives of each Class of Certificates will be affected by the prepayment
rate experienced both before and after the commencement of principal
distributions on any such Class.
If during the Funding Period the entire original Pre-Funded Amount has not
been used to purchase Subsequent Loans, on the Special Remittance Date, certain
Classes of Certificates will be prepaid in part from and to the extent of such
remaining amounts. Although no assurances can be given, it is anticipated by the
Representative that the principal amount of Subsequent Loans sold to the Trust
will require the application of substantially all the amounts on deposit in the
Pre-Funding Account, and that there should be no material principal prepaid on
the Certificates from such amounts.
The Loans are either (i) "simple interest" or "date-of-payment loans" or
(ii) "actuarial method" loans. If a payment is received on a Loan which is a
"simple interest" loan later than scheduled, a smaller portion of such payment
will be applied to principal and a greater portion will be applied to interest
than would have been the case had the payment been received on the scheduled due
date, resulting in such Loan having a longer weighted average life than would
have been the case had the payment been made as scheduled. Conversely, if a
payment on a Loan is received earlier than scheduled, more of such payment will
be applied to principal and less to interest than would have been the case had
the payment been received on its scheduled due date, resulting in such Loan
having a shorter weighted average life than would have been the case had the
payment been made as scheduled.
In the event that less than 30 days' interest is collected on a Loan during
a Due Period, whether due to prepayment in full or a Curtailment, the Servicer
is obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of Compensating
Interest that the Servicer is obligated to pay, and are not otherwise covered by
Monthly Excess Spread, the yield on the Certificates of the Trust will be
adversely affected. Any shortfall in collections of interest resulting from the
early receipt of a scheduled payment will not be covered by Compensating
Interest, but will be covered by Monthly Advances.
The projected last Remittance Dates for each Class of Certificates is as
follows:
PROJECTED LAST
CLASS REMITTANCE DATE
A-1 July 15, 2008
A-2 October 15, 2013
A-3 March 15, 2016
M-1 February 15, 2020
M-2 August 15, 2028
B August 15, 2028
The projected last Remittance Date for the Class B Certificates is the
Remittance Date following the latest date upon which a Loan in the Trust
matures, including Subsequent Loans, plus 12 months. The projected last
Remittance Date for each other Class of Certificates is the date on which the
principal balance of the respective Class would be reduced to zero, assuming
that no prepayments are received on the Loans, that payment of principal of and
interest on each of the Loans is timely received and each Class of Certificates
receives payments of principal as described herein. The weighted average lives
of the Certificates are likely to be shorter than would be the case if payments
actually made on the Loans conformed to the foregoing assumptions, and the final
Remittance Dates with respect to each Class of Certificates could occur
significantly earlier than the last projected Remittance Dates because the
Servicer may purchase all of the Loans under the limited circumstances described
herein. In addition, prepayments are likely to occur on the Loans, which also
would shorten the weighted average life of the Certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Certificates will be influenced by the priorities established in the Agreement,
and by the rate at which principal payments on the Loans in the Trust are paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes Principal Prepayments, Curtailments, FHA
Payments and liquidations due to default). Prepayments on mortgage loans are
commonly measured relative to a prepayment standard or model.
The following tables have been prepared assuming that the Trust is
comprised of loan groups having the following characteristics:
<TABLE>
<CAPTION>
ASSUMED INITIAL ORIGINAL REMAINING AMORTIZATION ASSUMED
CUT-OFF DATE MORTGAGE TERM OF TERM TO METHOD DELIVERY
PRINCIPAL INTEREST AMORTIZATION MATURITY of
BALANCE RATE (IN MONTHS) (IN MONTH) LOANS
<S> <C> <C> <C> <C> <C>
$ 3,806,150.89 12.751% 57 55 Level Closing
$27,685,180.64 12.870% 114 112 Level Closing
$53,717,617.82 12.466% 179 177 Level Closing
$81,632,335.10 13.041% 240 238 Level Closing
$83,158,715.55 12.163% 300 299 Level Closing
</TABLE>
<PAGE>
The following tables also have been prepared assuming (i) all distributions
with respect to the Certificates will be made at the scheduled times as
described below under "Description of the Certificates," (ii) distributions on
the Certificates are received in cash on the 15th day of each month, commencing
July 1997, (iii) prepayments represent payment in full of individual Loans and
are received on the last day of each month (commencing in June 1997) and include
30 days' interest thereon at the applicable Home Improvement Interest Rate, (iv)
the Servicing Fee and Contingency Fee for each Loan will be 0.25% and 0.25% per
annum, respectively, of the principal balance thereof, (v) no delinquencies or
defaults in payments by Obligors of principal and interest on the Loans are
experienced, (vi) no right of optional termination is exercised except as noted
below, and (vii) the Certificates are purchased on June 30, 1997.
For each Class of Certificates, the scenarios presented below assume that
the Representative exercises its option to establish the Pre-Funding Account and
that the Pre-Funded Amount equals its maximum permitted amount. The scenarios
also assume that the entire Pre-Funded Amount is used to purchase Subsequent
Loans by July 31, 1997.
The model used in this Prospectus Supplement is a prepayment assumption
(the "Prepayment Assumption") which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. The tables relating to the
Certificates are priced at various Home Equity Prepayment ("HEP") assumptions.
HEP assumes that a pool of loans prepays in the first month at a constant
prepayment rate ("CPR") that corresponds in CPR to one-tenth the given HEP
percentage and increases by an additional one-tenth each month thereafter until
the tenth month, where it remains at a CPR equal to the given HEP percentage.
The "100% Prepayment Assumption" assumes a CPR of 1.7% per annum of the then
outstanding principal balance of the Loans in the first month in the life of
such Loans and an additional 1.7% per annum in each month thereafter until the
tenth month. Beginning in the tenth month and in each month thereafter during
the life of the Loans, 100% Prepayment Assumption assumes a CPR of 17% per annum
each month. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption, i.e., no prepayments
on the Loans having the characteristics described below. Correspondingly, 100%
Prepayment Assumption assumes a prepayment rate equal to 100% of the related
Prepayment Assumption, 125% Prepayment Assumption assumes 125% of each of the
rates described above; and so forth. The Prepayment Assumption does not purport
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of the Pool, including the related Loans.
Neither the Prepayment Assumption nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Loans included in the Trust. Variations in the actual
prepayment experience and the balance of the Loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such Loans
equals any of the specified percentages of the Prepayment Assumption.
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES
<S> <C> <C>
PERCENTAGE WEIGHTED
OF PREPAYMENT AVERAGE EXPECTED
ASSUMPTION LIFE (YEARS) MATURITY
0% 4.48 09/15/06
75% 1.19 01/15/00
100% (1) 0.99 07/15/99
125% 0.86 03/15/99
150% 0.77 12/15/98
CLASS A-2 CERTIFICATES
<S> <C> <C>
PERCENTAGE WEIGHTED
OF PREPAYMENT AVERAGE EXPECTED
ASSUMPTION LIFE (YEARS) MATURITY
0% 12.09 02/15/12
75% 3.79 11/15/02
100% (1) 2.99 09/15/01
125% 2.46 12/15/00
150% 2.08 05/15/00
CLASS A-3 CERTIFICATES
<S> <C> <C>
PERCENTAGE WEIGHTED
OF PREPAYMENT AVERAGE EXPECTED
ASSUMPTION LIFE (YEARS) MATURITY
0% 16.37 6/15/15
75% 6.49 3/15/05
100% (1) 5.13 8/15/03
125% 4.20 7/15/02
150% 3.46 8/15/01
CLASS M-1 CERTIFICATES
<S> <C> <C>
PERCENTAGE WEIGHTED
OF PREPAYMENT AVERAGE EXPECTED
ASSUMPTION LIFE (YEARS) MATURITY
- ------------- ------------ --------
0% 19.64 08/15/19
75% 9.82 02/15/10
100% (1) 7.90 10/15/07
125% 6.53 01/15/06
150% 5.43 09/15/04
CLASS M-2 CERTIFICATES
<S> <C> <C> <C>
PERCENTAGE WEIGHTED EARLIEST
OF PREPAYMENT AVERAGE Expected RETIREMENT
ASSUMPTION LIFE (YEARS) MATURITY DATE (2)
- -
0% 23.58 04/15/22 08/15/19
75% 15.92 09/15/19 03/15/10
100% (1) 13.45 01/15/17 10/15/07
125% 11.37 12/15/14 01/15/06
150% 9.66 09/15/12 10/15/04
CLASS B CERTIFICATES
PERCENTAGE WEIGHTED EARLIEST
OF PREPAYMENT AVERAGE Expected RETIREMENT
ASSUMPTION LIFE (YEARS) MATURITY DATE (2)
0% 18.66 04/15/22 08/15/19
75% 9.36 09/15/19 03/15/10
100% (1) 7.66 01/15/17 10/15/07
125% 6.42 12/15/14 01/15/06
150% 5.88 09/15/12 10/15/04
(1) Pricing Assumption.
(2) Assuming early termination of the Trust when the aggregate principal
balance of the Loans declines to a level equal to 10% of the sum of (i)
the Original Pool Principal Balance and (ii) the original Pre-Funded
Amount.
</TABLE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement, a copy of which
will be filed in a Current Report on Form 8-K with the Securities and Exchange
Commission after the initial issuance of the Certificates. The following
summaries describe material provisions of the Certificates and the Agreement,
but do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement. Terms used
herein and not otherwise defined will have the meanings set forth in the
Agreement. See "The Agreement" herein.
GENERAL
The Offered Certificates generally will represent the right to receive
payments distributable on or with respect to the Loans. The Trust also will
issue the Class X and the Class R Certificates. Only the Class A, Class B and
Class M Certificates are offered hereby.
The Certificates will not represent obligations of the Representative, the
Originators of any of their respective affiliates. The Offered Certificates will
be issued in book-entry form in minimum denominations of $1,000 original
principal amount and integral multiples of $1,000 in excess thereof.
Definitive Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee or, at the election of the Trustee,
at the office of a certificate registrar appointed by the Trustee. No service
charge will be made for any registration of exchange or transfer, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The assets of the Trust will consist of (a) the Loans that from time to
time are subject to the Agreement; (b) amounts that from time to time are
required by the Agreement to be deposited in the Certificate Accounts, the
Principal and Interest Account, the Expense Account, the Pre-Funding Account and
the Capitalized Interest Account, or to be invested in Permitted Investments;
(c) all rights under any insurance policy covering a Loan or the related
Mortgaged Property; and (d) property and any proceeds thereof acquired by
foreclosure of a Loan, deed in lieu of foreclosure or a comparable conversion.
DISTRIBUTIONS ON THE CERTIFICATES
On the 15th day of each month or, if such 15th day is not a Business Day,
the first Business Day immediately following, commencing in July 1997 (each such
day being a "Remittance Date," provided, however, that in no event shall the
Remittance Date occur less than three business days following the Determination
Date) until the Current Principal Balance of each Class of Certificates has been
reduced to zero, the Trustee or the Paying Agent will be required to distribute
to the persons in whose name a Certificate is registered at the close of
business on the last day of the month immediately preceding the month of the
related Remittance Date (the "Record Date"), such Holder's Percentage Interest
multiplied by that portion of the Distribution Amount allocable to the
respective Class of Certificates for such Remittance Date. Any Pre-Funded Amount
remaining at the close of business on September 25, 1997 will be distributed by
or on behalf of the Trustee on the Special Remittance Date (together with
accrued interest) at the applicable Pass-Through Rates on the amount of such
prepayment) to the Classes of Certificates then entitled to receive payments of
principal as described herein under "The Distribution Amounts." Such
distribution will be made to each person in whose name a Certificate of any such
Class is registered on August 31, 1997. For so long as the Certificates are in
book-entry form with DTC, the only "Holder" of the Certificates will be Cede.
See "Book-Entry Certificates."
The "Current Principal Balance" of any Class of Certificates as of any
Remittance Date is the Original Principal Balance of such Class less (i) all
amounts previously distributed to holders of such Class on account of principal
and (ii) all Applied Realized Loss Amounts previously allocated to such Class.
The "Original Principal Balance" of any Class of Certificates is the principal
balance thereof set forth on the cover page of this Prospectus Supplement.
A Certificateholder's "Percentage Interest" is that fraction, expressed as
a percentage, the numerator of which is the original denomination of such
Certificateholder's Certificate and the denominator of which is the Original
Principal Balance of the applicable Class of Certificate.
A "Business Day" is any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York or New Jersey are
authorized or obligated by law or executive order to be closed.
FLOW OF FUNDS
The "Available Remittance Amount" is defined in the Agreement to include,
with respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Servicer or any Subservicer on
the Loans (including amounts paid by the Servicer and the Representative and
excluding (a) amounts paid as reimbursement to the Servicer of advances, (b)
amounts retained by the Servicer with respect to the Servicing Fee and the
Contingency Fee, (c) amounts deposited into the Servicing Accounts and (d)
amounts recovered as voidable preferences), during the immediately preceding
calendar month (the "Due Period"), plus
(ii) the amount of any Monthly Advances and Compensating Interest payments
with respect to the Loans 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.
On each Remittance Date, the Trustee will withdraw the Available Remittance
Amount from the Certificate Account and make the following payments in the
following order of priority:
(i) to pay the monthly Trustee's fee;
(ii) to pay the Class A Current Interest Amount to the Holders of the Class
A Certificates, without priority among the Classes of Class A Certificates, as
described under "--A. Class A Interest;"
(iii) to pay the Class M-1, Class M-2 and Class B Current Interest Amounts
to the Holders of the Class M-1, Class M-2 and Class B Certificates,
respectively, in that order of priority, as described under "--B. Class M-1
Interest," "--C. Class M-2 Interest" and "--D. Class B Interest;"
(iv) to pay the Class A, Class M-1, Class M-2 and Class B Principal
Distribution Amounts to Holders of the Class A, Class M-1, Class M-2 and Class B
Certificates, respectively, generally in that order of priority, as described
under "--E. Class A Principal Distribution Amount," "--F. Class M-1 Principal
Distribution Amount," "--G. Class M- 2 Principal Distribution Amount" and "--H.
Class B Principal Distribution Amount;"
(v) to pay the Class A Interest Shortfall Carryforward Amounts to the
Holders of the Class A Certificates, without priority among the Holders of the
Class A Certificates, as described under "--I. Class A Interest Shortfall
Carryforward Amounts;"
(vi) to pay the Accelerated Principal Distribution Amount to the Holders of
the Class A, Class M-1, Class M-2 and Class B Certificates, generally in that
order of priority, as described under "--J. Accelerated Principal Distribution
Amount;"
(vii) to pay the Class M-1 Interest Shortfall Carryforward Amounts to the
Holders of the Class M-1 Certificates, as described under "--K. Class M-1
Interest Shortfall Carryforward Amounts;"
(viii) to pay the Class M-1 Realized Loss Amount to the Holders of the
Class M-1 Certificates, as described under "--L. Class M-1 Realized Loss
Amount;"
(ix) to pay the Class M-2 Interest Shortfall Carryforward Amounts to the
Holders of the Class M-2 Certificates, as described under "--M. Class M-2
Interest Shortfall Carryforward Amounts;"
(x) to pay the Class M-2 Realized Loss Amount to the Holders of the Class
M-2 Certificates, as described under "--N. Class M-2 Realized Loss Amount;"
(xi) to pay the Class B Interest Shortfall Carryforward Amounts to the
Holders of the Class B Certificates, as described under "--O. Class B Interest
Shortfall Carryforward Amounts;"
(xii) to pay the Class B Realized Loss Amount to the Holders of the Class B
Certificates as described under "--P. Class B Realized Loss Amount;"
(xiii) to reimburse the Servicer for any unreimbursed Advances; and
(xiv) to pay all amounts then remaining in the Certificate Account to the
Class X and Class R Certificateholders.
A. CLASS A INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid concurrently to the Holders of each Class of
Class A Certificates on each Remittance Date, to the extent of the Available
Remittance Amount in the Certificate Account on such date, at the related
Pass-Through Rate on the Current Principal Balance of each Class of Class A
Certificates.
The "Class A Current Principal Balance" as of any Remittance Date is the
sum of the Class A-1 Current Principal Balance, the Class A-2 Current Principal
Balance and the Class A-3 Current Principal Balance. With respect to any
Remittance Date, the sum of the amounts determined by multiplying the components
of the Class A Current Principal Balance by one-twelfth of the respective Class
A Pass-Through Rates is hereinafter referred to as the "Class A Interest
Distribution Amount."
If on a particular Remittance Date, the Available Remittance Amount in the
Certificate Account is less than the Class A Interest Distribution Amount, the
amount of interest to be distributed in respect of the Class A Certificates will
be allocated among each Class thereof (and within a Class among the Certificates
of such Class) pro rata in accordance with their respective entitlements to
interest, and the amount of the shortfall for each Class of Class A
Certificates, together with interest thereon at the applicable Pass Through
Rates to the extent permitted by law (the "Class A-1 Interest Shortfall
Carryforward Amount," the "Class A-2 Interest Shortfall Carryforward Amount" and
the "Class A-3 Interest Shortfall Carryforward Amount," respectively, and,
collectively, the "Class A Interest Shortfall Carryforward Amounts"), will be
carried forward and distributed as described, and subject to the limitations set
forth, under "-I. Class A Interest Shortfall Carryforward Amounts" below.
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 accrued interest at the applicable Pass-Through Rate
on the amount of such prepayment. Further, the Class A Interest Distribution
Amount for the October 1997 Remittance Date will be based on the Class A Current
Principal Balance on September 26, 1997, after giving effect to such principal
prepayment.
B. CLASS M-1 INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class M-1 Certificate
on each Remittance Date, to the extent of the Available Remittance Amount, if
any, remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A Certificates), at the Class M-1
Pass-Through Rate on the Current Principal Balance of the Class M-1
Certificates. With respect to any Remittance Date, the amount determined by
multiplying the Class M-1 Current Principal Balance by one-twelfth of the Class
M-1 Pass-Through Rate is hereinafter referred to as the "Class M-1 Interest
Distribution Amount."
If on a particular Remittance Date, the Available Remittance Amount
remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A Certificates) is less than the Class M-1
Interest Distribution Amount, the amount of interest to be distributed in
respect of the Class M-1 Certificates will be allocated among the Certificates
of such Class pro rata in accordance with their respective entitlements to
interest, and any remaining deficiency, together with interest thereon at the
applicable Pass-Through Rate to the extent permitted by law (the "Class M-1
Interest Shortfall Carryforward Amount"), will be carried forward and
distributed as described, and subject to the limitations set forth, under "--K.
Class M-1 Interest Shortfall Carryforward Amounts" below.
C. CLASS M-2 INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class M-2 Certificate
on each Remittance Date, to the extent of the Available Remittance Amount, if
any, remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A and Class M-1 Certificates), at the Class
M-2 Pass-Through Rate on the Current Principal Balance of the Class M-2
Certificates. With respect to any Remittance Date, the amount determined by
multiplying the Class M-2 Current Principal Balance by one-twelfth of the Class
M-2 Pass-Through Rate is hereinafter referred to as the "Class M-2 Interest
Distribution Amount" (and, together with the Class M-1 Interest Distribution
Amount, the "Class M Interest Distribution Amount").
If on a particular Remittance Date, the Available Remittance Amount
remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A and Class M-1 Certificates) is less than
the Class M-2 Interest Distribution Amount, the amount of interest to be
distributed in respect of the Class M-2 Certificates will be allocated among the
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency, together with interest
thereon at the applicable Pass-Through Rate to the extent permitted by law (the
"Class M-2 Interest Shortfall Carryforward Amount" and, together with the Class
M-1 Interest Shortfall Carryforward Amount, the "Class M Interest Shortfall
Carryforward Amounts"), will be carried forward and distributed as described,
and subject to the limitations set forth, under "--M. Class M-2 Interest
Shortfall Carryforward Amounts" below.
D. CLASS B INTEREST
One calendar month's interest (computed on the basis of a 360-day year of
twelve 30-day months) will be paid to the Holders of the Class B Certificate on
each Remittance Date, to the extent of the Available Remittance Amount, if any,
remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A and Class M Certificates), at the Class B
Pass-Through Rate on the Current Principal Balance of the Class B Certificates.
With respect to any Remittance Date, the amount determined by multiplying the
Class B Current Principal Balance by one-twelfth of the Class B Pass-Through
Rate is hereinafter referred to as the "Class B Interest Distribution Amount."
If on a particular Remittance Date, the Available Remittance Amount
remaining in the Certificate Account on such date (after distribution of
interest to the Holders of the Class A and Class M Certificates) is less than
the Class B Interest Distribution Amount, the amount of interest to be
distributed in respect of the Class B Certificates will be allocated among the
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency, together with interest
thereon at the applicable Pass-Through Rate to the extent permitted by law (the
"Class B Interest Shortfall Carryforward Amount"), will be carried forward and
distributed as described, and subject to the limitations set forth, under "-- O.
Class B Interest Shortfall Carryforward Amounts" below.
E. CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of each Class of Class A Certificates will be entitled to receive
on each Remittance Date as payments of principal, in the order of priority set
forth below and to the extent of the Available Remittance Amount in the
Certificate Account on such Remittance Date after payment of the Class A, Class
M and Class B Interest Distribution Amounts (collectively, the "Interest
Distribution Amounts"), the Senior Percentage of the Principal Distribution
Amount. For any Remittance Date, the "Principal Distribution Amount" is the
excess, if any, of (A) the sum, without duplication, of (i) all payments and
other recoveries of principal of a Loan (net of amounts reimbursable to the
Servicer pursuant to the Agreement) received by the Servicer or any Subservicer
in the related Due Period; (ii) the principal portion of any Loan actually
purchased by the Representative for breach of a representation and warranty or
other defect, and actually received by the Trustee as of the related
Determination Date; (iii) any adjustments with respect to substitutions of Loans
for which the Representative or an Originator has breached a representation or
warranty deposited in the Principal and Interest Account and transferred to the
Certificate Account as of the related Determination Date; (iv) the then
outstanding Principal Balance of any Loan which, during the related Due Period,
has become a Liquidated Loan; and (v) amounts, if any, released from the
Pre-Funding Account on the Remittance Dates during the Funding Period over (B)
the Subordination Reduction Amount for such Remittance Date. The amount
determined by multiplying the Senior Percentage by the Principal Distribution
Amount is hereinafter referred to as the "Class A Formula Principal Distribution
Amount."
The "Senior Percentage" for any Remittance Date prior to the Class B
Cross-over Date, and for any Remittance Date on or after the Class B Cross-over
Date on which the Trigger Event is in effect (as described under "Description of
the Certificates-Distribution Amounts-Class B-l Principal"), will be 100%. For
any Remittance Date on or after the Class B Cross-over Date on which the Trigger
Event is not in effect, the "Senior Percentage" will equal a fraction, expressed
as a percentage, the numerator of which is the sum of the Current Principal
Balances of the Class A and the Class M Certificates as of the immediately
preceding Remittance Date and the denominator of which is the sum of the Current
Principal Balances of the Class A, the Class M and the Class B Certificates as
of the immediately preceding Remittance Date.
The "Class A Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class A Formula Principal Distribution Amount. If
the Class A Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts), then the Class A Principal
Distribution Amount shall instead equal such remaining Available Remittance
Amount.
The Class A Principal Distribution Amount will be distributed first to the
Holders of the Class A-1 Certificates until the Class A-1 Current Principal
Balance has been reduced to zero, then to the Holders of the Class A-2
Certificates until the Class A-2 Principal Balance has been reduced to zero, and
then to the Holders of the Class A-3 Certificates until the Class A-3 Principal
Balance has been reduced to zero; provided, however that on any Remittance Date
on which the Current Principal Balance of the Subordinated Certificates has been
reduced to zero, any amounts payable to the Class A Certificates on such
Remittance Date shall be distributed pro rata and not sequentially. Holders of
each Class of Class A Certificates will be paid principal on each Remittance
Date in accordance with their respective Percentage Interests.
The "Subordination Reduction Amount" for any Remittance Date is equal to
the lesser of (i) the amount set forth in clause (A) of the definition of
Principal Distribution Amount and (ii) the excess, if any, of the then current
Spread Amount over the then current Specified Subordinated Amount.
The "Spread Amount" for any Remittance Date is equal to the excess, if any,
of (i) the aggregate principal balances of the Loans as of the last day of the
immediately preceding Due Period and any amounts on deposit in the Pre-Funding
Account over (ii) the aggregate principal balances of the Certificates (after
taking into account all distributions of principal on such Remittance Date).
The "Specified Subordinated Amount" means, for any Remittance Date (i)
prior to the Spread Amount Stepdown Date, 7% of the Original Collateral Amount
and (ii) on and after the Spread Amount Stepdown Date, the greater of (A) 14% of
the then current aggregate principal balance of the Loans as of the last day of
the related Due Period and (B) 0.5% of the Original Collateral Amount.
Notwithstanding the foregoing, upon the occurrence and during the continuance of
a Trigger Event, the Specified Subordinated Amount will equal 9.7% of the
Original Collateral Amount provided, however, that the Specified Subordinated
Amount shall never exceed the then current Principal Balance of the
Certificates.
The "Spread Amount Stepdown Date" means the later to occur of (i) the
Distribution Date occurring in January 2000 and (ii) the first Distribution Date
on which the aggregate principal balances of the Loans as of the last day of the
related Due Period is less than 50% of the Original Collateral Amount.
F. CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT
On each Remittance Date on and after the Class A Current Principal Balance
has been reduced to zero, the Holders of the Class M-1 Certificates will be
entitled to receive, as payments of principal, the Senior Percentage of the
Principal Distribution Amount (the "Class M-1 Formula Principal Distribution
Amount"), subject to the prior payment of all Interest Distribution Amounts
payable on such Remittance Date and Class A Principal Distribution Amounts, if
any, payable on such Remittance Date, until the Class M-1 Current Principal
Balance is reduced to zero.
The "Class M-1 Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class M-1 Formula Principal Distribution Amount. If
the Class M-1 Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts, and, if any, the Class A Principal
Distribution Amounts), then the Class M-1 Principal Distribution Amount shall
instead equal such remaining Available Remittance Amount.
On each Remittance Date on or after the Class B Cross-over Date on which
the Trigger Event is not in effect, payments of principal will be made to Class
B Certificateholders, even if Class M-1 Certificateholders are not yet entitled
to receive payments of principal because the Class A Current Principal Balance
has not been reduced to zero.
G. CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT
On each Remittance Date on and after the Class A Current Principal Balance
and the Class M-1 Current Principal Balance have been reduced to zero, the
Holders of the Class M-2 Certificates will be entitled to receive, as payments
of principal, the Senior Percentage of the Principal Distribution Amount (the
"Class M-2 Formula Principal Distribution Amount"), subject to the prior payment
of all Interest Distribution Amounts payable on such Remittance Date and Class A
and Class M-1 Principal Distribution Amounts, if any, payable on such Remittance
Date, until the Class M-2 Current Principal Balance is reduced to zero.
The "Class M-2 Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class M-2 Formula Principal Distribution Amount. If
the Class M-2 Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts and, if any, the Class A Principal
Distribution Amounts and the Class M-1 Principal Distribution Amount), then the
Class M-2 Principal Distribution Amount shall instead equal such remaining
Available Remittance Amount.
On each Remittance Date on or after the Class B Cross-over Date on which
the Trigger Event is not in effect, payments of principal will be made to Class
B Certificateholders, even if Class M-2 Certificateholders are not yet entitled
to receive payments of principal because either the Class A Current Principal
Balance or the Class M-1 Current Principal Balance has not been reduced to zero
H. CLASS B PRINCIPAL DISTRIBUTION AMOUNT
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B Certificates. The "Class B Cross-over Date" will be the
earlier of (A) the Remittance Date on which the Class M-2 Principal Balance is
reduced to zero, and (B) the first Remittance Date on or after the Remittance
Date in July 2000 on which the fraction, expressed as a percentage, the
numerator of which is the sum of the Class A and Class M Current Principal
Balances as of the immediately preceding Remittance Date and the denominator of
which is the aggregate outstanding principal balance of the Loans as of the end
of the second preceding Due Period, is less than or equal to 75%.
On each Remittance Date on or after the Class B Cross-over Date and prior
to the Remittance Date on which the Class A and Class M Current Principal
Balances have been reduced to zero, holders of Class B Certificates will be
entitled to receive distributions of principal only if a Trigger Event is not in
effect. A "Trigger Event" will be in effect on a Remittance Date if either (i)
the Sixty-Day Delinquency Ratio (as defined in the Agreement) as of such
Remittance Date exceeds 50% of the Class A Credit Enhancement Percentage (as
defined below); or (ii) both (A) either (x) the Weighted Average Five-Month
Sixty-Day Delinquency Ratio (as defined in the Agreement) as of such Remittance
Date exceeds 9% or (y) the Cumulative Realized Losses (as defined in the
Agreement) as of such Remittance Date exceed $28,500,000; and (B) either (x) the
Weighted Average Five-Month Sixty-Day Delinquency Ratio as of such Remittance
Date exceeds 15% or (y) the Cumulative Realized Losses as of such Remittance
Date exceed $9,500,000; or (iii) the fraction, expressed as a percentage, the
numerator of which is the sum of the Class A and Class M Current Principal
Balances as of the immediately preceding Remittance Date and the denominator of
which is the aggregate outstanding principal balance of the Loans as of the end
of the second preceding Due Period is greater than 75%.
The "Class A Credit Enhancement Percentage" on any Remittance Date is equal
to 100% minus the fraction, expressed as a percentage, the numerator of which is
the Current Principal Balance of Class A Certificates on the immediately
preceding Remittance Date and the denominator of which is the principal balance
of the Loans as of the last day of the second preceding Due Period.
On each Remittance Date on or after the Class B Cross-over Date, if the
Trigger Event is not in effect on such Remittance Date, the Holders of the Class
B Certificates will be entitled to receive, as payments of principal, the Class
B Percentage (as described under "Description of the Certificates-Distribution
Amounts-Class B Principal" herein) of the Principal Distribution Amount (the
"Class B Formula Principal Distribution Amount"), subject to the prior payment
of all Interest Distribution Amounts and all Class A and Class M Principal
Distribution Amounts, if any, payable on such Remittance Date until the Class
B-1 Current Principal Balance is reduced to zero.
Until such time as the Class A and Class M Current Principal Balances have
been reduced to zero, the "Class B Percentage" for any Remittance Date will be
100% minus the Senior Percentage. The "Class B Percentage" for each Remittance
Date, if any, after the Class A and Class M Current Principal Balances have been
reduced to zero will equal 100%.
The "Class B Principal Distribution Amount" for any Remittance Date is
intended to be equal to the Class B Formula Principal Distribution Amount. If
the Class B Formula Principal Distribution Amount exceeds the Available
Remittance Amount in the Certificate Account on such Remittance Date (after
payment of all Interest Distribution Amounts and, if any, the Class A Principal
Distribution Amounts and the Class M Principal Distribution Amounts), then the
Class B Principal Distribution Amount shall instead equal such remaining
Available Remittance Amount.
I. CLASS A INTEREST SHORTFALL CARRYFORWARD AMOUNTS
On each Remittance Date, after all payments of amounts as set forth in A
through H above, inclusive, the aggregate Class A Interest Shortfall
Carryforward Amounts will be paid concurrently to the Holders of each Class of
Class A Certificates to the extent of the remaining Available Remittance Amount
in the Certificate Account on such date. If on a particular Remittance Date, the
remaining Available Remittance Amount in the Certificate Account is less than
the aggregate Class A Interest Shortfall Carryforward Amounts, the portion of
the remaining Available Remittance Amount to be distributed in respect of each
Class of Class A Certificates will be allocated among the Classes (and within a
Class among the Certificates of such Class) pro rata in accordance with their
respective entitlements to Class A Interest Shortfall Carryforward Amounts, and
any Class A Interest Shortfall Carryforward Amounts or interest thereon not paid
shall be carried forward to the next Remittance Date.
J. ACCELERATED PRINCIPAL DISTRIBUTION AMOUNT
On each Remittance Date, after all payments of amounts as set forth in A
through I above, inclusive, the Accelerated Principal Distribution Amount will
be paid to the Holders of the Certificates in the same order and priority as
payments of the Principal Distribution Amount described in E, F, G and H above.
For any Remittance Date the "Accelerated Principal Distribution Amount" equals
the lesser of (i) the remaining Available Remittance Amount in the Certificate
Account on such Remittance Date and (ii) the Subordinated Deficiency Amount for
such Remittance Date.
For any Remittance Date, the "Subordinated Deficiency Amount" equals the
excess, if any, of (i) the Specified Subordinated Amount for such Remittance
Date over (ii) the then current Spread Amount, after giving effect to all
payments previously made on such Remittance Date.
K. CLASS M-1 INTEREST SHORTFALL CARRYFORWARD AMOUNTS
On each Remittance Date, after all payments of amounts as set forth in A
through J above, inclusive, the aggregate Class M-1 Interest Shortfall
Carryforward Amounts will be paid to the Holders of the Class M-1 Certificates
to the extent of the lesser of (i) the remaining Available Remittance Amount in
the Certificate Account on such date and (ii) the Available Maximum
Subordination Amount. If on a particular Remittance Date, the remaining
Available Remittance Amount in the Certificate Account is less than the
aggregate Class M-1 Interest Shortfall Carryforward Amounts, the portion of the
remaining Available Remittance Amount to be distributed in respect of the Class
M-1 Certificates will be allocated among the Certificates of such Class pro
rata, and any Class M-1 Interest Shortfall Carryforward Amounts not paid shall
be carried forward to the next Remittance Date, subject to the Available Maximum
Subordination Amount.
L. CLASS M-1 REALIZED LOSS AMOUNT
On each Remittance Date, after all payments of amounts as set forth in A
through K above, inclusive, the Class M-1 Realized Loss Amount will be paid to
the Holders of the Class M-1 Certificates to the extent of the lesser of (i) the
remaining Available Remittance Amount in the Certificate Account on such
Remittance Date and (ii) the Available Maximum Subordination Amount. If on a
particular Remittance Date, the remaining Available Remittance Amount in the
Certificate Account is less than the aggregate Class M-1 Realized Loss Amount,
the portion of the remaining Available Remittance Amount to be distributed in
respect of the Class M-1 Certificates will be allocated among the Certificates
of such Class, pro rata, and any Class M-1 Realized Loss Amount not paid shall
be carried forward to the next Remittance Date, subject to the Available Maximum
Subordination Amount.
M. CLASS M-2 INTEREST SHORTFALL CARRYFORWARD AMOUNTS
On each Remittance Date, after all payments of amounts as set forth in A
through L above, inclusive, the Class M-2 Interest Shortfall Carryforward
Amounts will be paid to the Holders of the Class M-2 Certificates to the extent
of the lesser of (i) the remaining Available Remittance Amount in the
Certificate Account on such Remittance Date and (ii) the Available Maximum
Subordination Amount. If on a particular Remittance Date, the remaining
Available Remittance Amount in the Certificate Account is less than the
aggregate Class M-2 Interest Shortfall Carryforward Amounts, the portion of the
Available Remittance Amount to be distributed in respect of the Class M-2
Certificates will be allocated among the Certificates of such Class pro rata,
and any Class M-2 Interest Shortfall Carryforward Amounts not paid shall be
carried forward to the next Remittance Date, subject to the Available Maximum
Subordination Amount.
N. CLASS M-2 REALIZED LOSS AMOUNT
On each Remittance Date, after all payments of amounts as set forth in A
through M above, inclusive, the Class M-2 Realized Loss Amount will be paid to
the Holders of the Class M-2 Certificates to the extent of the lesser of (i) the
remaining Available Remittance Amount in the Certificate Account on such
Remittance Date and (ii) the Available Maximum Subordination Amount. If on a
particular Remittance Date, the remaining Available Remittance Amount in the
Certificate Account is less than the aggregate Class M-2 Realized Loss Amount,
the portion of the remaining Available Remittance Amount to be distributed in
respect of the Class M-2 Certificates will be allocated among the Certificates
of such Class, pro rata, and any Class M-2 Realized Loss Amount not paid shall
be carried forward to the next Remittance Date, subject to the Available Maximum
Subordination Amount.
O. CLASS B INTEREST SHORTFALL CARRYFORWARD AMOUNTS
On each Remittance Date, after all payments of amounts as set forth in A
through N above, inclusive, the aggregate Class B Interest Shortfall
Carryforward Amounts will be paid to the Holders of the Class B Certificates to
the extent of the lesser of (i) the remaining Available Remittance Amount in the
Certificate Account on such date and (ii) the Available Maximum Subordination
Amount. If on a particular Remittance Date, the remaining Available Remittance
Amount in the Certificate Account is less than the aggregate Class B Interest
Shortfall Carryforward Amounts, the portion of the Available Remittance Amount
to be distributed in respect of the Class B Certificates will be allocated among
the Certificates of such Class pro rata, and any Class B Interest Shortfall
Carryforward Amounts not paid shall be carried forward to the next Remittance
Date, subject to the Available Maximum Subordination Amount.
P. CLASS B REALIZED LOSS AMOUNT
On each Remittance Date, after all payments of amounts as set forth in A
through O above, inclusive, the Class B Realized Loss Amount will be paid to the
Holders of the Class B Certificates to the extent of the lesser of (i) the
remaining Available Remittance Amount in the Certificate Account on such
Remittance Date and (ii) the Available Maximum Subordination Amount. If on a
particular Remittance Date, the remaining Available Remittance Amount in the
Certificate Account is less than the aggregate Class B Realized Loss Amount, the
portion of the remaining Available Remittance Amount to be distributed in
respect of the Class B Certificates will be allocated among the Certificates of
such Class, pro rata, and any Class B Realized Loss Amount not paid shall be
carried forward to the next Remittance Date, subject to the Available Maximum
Subordination Amount.
When the Available Maximum Subordination Amount has been reduced to zero,
(i) no further Class M-1, Class M-2 or Class B Interest Shortfall Carryforward
Amounts or Class M-1, Class M-2 or Class B Realized Loss Amounts shall be
carried forward to succeeding Remittance Dates and, (ii) interest shall cease to
accrue on all remaining Class M-1, Class M-2 or Class B Interest Shortfall
Carryforward Amounts.
For so long as any Certificates shall be outstanding, at no time shall the
cumulative sum of (i) all Class M-1, Class M-2 and Class B Interest Shortfall
Carryforward Amounts and (iii) Class M-1, Class M-2 or Class B Realized Loss
Amounts (such amounts being hereinafter referred to collectively as "Shortfall
Amounts") exceed $3,408,000 (the "Maximum Subordination Amount"). The "Available
Maximum Subordination Amount" at any time shall be the Maximum Subordination
Amount less all distributions previously made in respect of Shortfall Amounts.
<PAGE>
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the Certificates
consists of (i) the Spread Amount and (ii) the subordination of the Class M and
Class B Certificates.
SPREAD AMOUNT AND APPLICATION OF REALIZED LOSSES
Certain provisions of the Trust are intended to provide for limited
acceleration of the Certificates relative to the amortization of the Loans,
generally in the early months of the transaction. This limited accelerated
amortization is achieved by applying certain excess interest collected on the
Loans to the payment of principal on the Certificates. This acceleration feature
is intended to create an amount (the "Spread Amount") resulting from, and equal
to, the excess of the aggregate principal balances of the Loans, plus amounts on
deposit in the Pre-Funding Account, over the aggregate Current Principal
Balances of the Certificates.
If a Loan becomes a Liquidated Loan during a Due Period, the Net
Liquidation Proceeds relating thereto and allocated to principal may be less
than the then outstanding balance of such Loan. The amount of such insufficiency
is a "Realized Loss."
To the extent that Realized Losses are experienced, such Realized Losses
will reduce the aggregate outstanding balance of the Loans (i.e., a reduction in
the collateral balance will occur). Since the Spread Amount is the excess, if
any, of the aggregate principal balances of the Loans plus amounts on deposit in
the Pre-Funding Account over the aggregate Current Principal Balances of the
Certificates, Realized Losses, to the extent experienced and not covered by
application of the Available Remittance Amount, will in the first instance
reduce the Spread Amount.
The Agreement requires that the Spread Amount be initially increased to,
and thereafter maintained at, the Specified Subordinated Amount. This increase
and subsequent maintenance is intended to be accomplished by the application of
Monthly Excess Spread to fund Accelerated Principal Distribution Amounts. Such
Accelerated Principal Distribution Amounts, since they are funded from interest
collections on the Loans but are distributed as principal on the Offered
Certificates, will increase the related Spread Amount.
APPLICATION OF MONTHLY EXCESS SPREAD
The weighted average Adjusted Loan Remittance Rate is expected to be higher
than the weighted average of the Pass-Through Rates on the Offered Certificates,
thus generating certain excess interest collections which, in the absence of
losses, will not be necessary to fund interest distributions on the Offered
Certificates. The Agreement provides that this excess interest (the "Monthly
Excess Spread") be applied to the extent available, to make accelerated payments
of principal (i.e., the Accelerated Principal Distribution Amount) to the Class
or Classes then entitled to receive distributions of principal. Such application
will cause the aggregate Current Principal Balance of the Certificates to
amortize more rapidly than the Loans, resulting in overcollateralization.
The required level of the Spread Amount for any Remittance Date is the
Specified Spread Amount for such Remittance Date. Since the actual level of the
Spread Amount is essentially zero as of the Closing Date, in the early months of
the transaction, subject to the availability of Monthly Excess Spread,
Accelerated Principal Distribution Amounts will be paid, with the result that
the Spread Amount will increase to the level of the Specified Subordinated
Amount.
Once the Specified Subordinated Amount has been reached, Realized losses
not covered by application of Monthly Excess Spread will reduce the principal
balance of the Loans without giving rise to a corresponding reduction of the
Current Principal Balance of the Certificates). The cashflow priorities of the
Trust require that, in this situation, Accelerated Principal Distribution
Amounts be paid (subject to the availability of any Monthly Excess Spread in
subsequent months) for the purpose of re-establishing the Spread Amount at the
then-required Specified Subordinated Amount.
If on any Remittance Date after taking into account all Realized Losses
experienced during the prior Due Period and after taking into account the
distribution of principal (including the Accelerated Principal Distribution
Amount) with respect to the Certificates on such Remittance Date, the aggregate
Current Principal Balance of the Certificates exceeds the aggregate balance of
the Loans as of the end of the related Due Period (i.e., if the level of
overcollateralization is negative), then the Current Principal Balance of the
Subordinate Certificates will be reduced (in effect, "written down") such that
the level of the Spread Amount is zero, rather than negative. Such a negative
level is an "Applied Realized Loss Amount," which will be applied as a reduction
in the Current Principal Balance of the related Subordinate Certificates in
reverse order of seniority, i.e., first against the Class B Current Principal
Balance until it is reduced to zero, then against the Class M-2 Current
Principal Balance until it is reduced to zero and then against the Class M-l
Current Principal Balance until it is reduced to zero. The Agreement does not
permit the "write down" of the Current Principal Balance of any Class A
Certificate.
Once the Current Principal Balance of a Class of Subordinate Certificates
has been "written down," the amount of such write down will no longer bear
interest, nor will such amount thereafter be "reinstated" or "written up,"
although the amount of such write down may, on future Remittance Dates, be paid
to Holders of the Subordinate Certificates which experienced the write down, in
direct order of seniority (i.e., first, the Class M-1 Certificates, second, the
Class M-2 Certificates and, third, the Class B Certificates).
The "Specified Subordinated Amount" means, for any Remittance Date (i)
prior to the Spread Amount Stepdown Date, 7% of the Original Collateral Amount
and (ii) on and after the Spread Amount Stepdown Date, the greater of (A) 14% of
the aggregate principal balance of the Loans as of the last day of the related
Due Period and (B) 0.5% of the Original Collateral Amount. Notwithstanding the
foregoing, upon the occurrence and during the continuance of a Trigger Event,
the Specified Subordinated Amount will equal 9.7% of the Original Collateral
Amount; provided, however, that the Specified Subordinated Amount shall never
exceed the then Current Principal Balance of the Certificates.
The transfer of 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 issuance of the Certificates. In connection
therewith, the Rating Agencies may require that the required level of the
Specified Subordinated Amount be increased.
"Class B Applied Realized Loss Amount" means, as of any Remittance Date,
the lesser of (x) the Class B Current Principal Balance (after taking into
account the distribution of the Class B Principal Distribution Amount on such
Remittance Date, but prior to the application of the Class B Applied Realized
Loss Amount, if any, on such Remittance Date) and (y) the Applied Realized Loss
Amount as of such Remittance Date.
"Class B Realized Loss Amount" means, as of any Remittance Date, the lesser
of (x) the Class B Unpaid Realized Loss Amount as of such Remittance Date and
(y) the excess of (i) the related Monthly Excess Spread over (ii) the sum of the
Accelerated Principal Distribution Amount, the Class M-1 Realized Loss Amount,
the Class M-2 Realized Loss Amount, the Class M-1 Interest Shortfall
Carryforward Amounts, the Class M-2 Interest Shortfall Carryforward Amounts and
the Class B Interest Shortfall Carryforward Amounts, in each case for such
Remittance Date.
"Class M-1 Applied Realized Loss Amount" means, of any Remittance Date, the
lesser of (x) the Class M- 1 Current Principal Balance (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Remittance Date, but prior to the application of the Class M-1 Applied Realized
Loss Amount, if any, on such Remittance Date) and (y) the excess of (i) the
Applied Realized Loss Amount as of such Remittance Date over (ii) the sum of the
Class M-2 Applied Realized Loss Amount and the Class B Applied Realized Loss
Amount, in each case as of such Remittance Date.
"Class M-1 Realized Loss Amount" means, as of any Remittance Date, the
lesser of (x) the Class M-1 Unpaid Realized Loss Amount as of such Remittance
Date and (y) the excess of (i) the related Monthly Excess Spread over (ii) the
sum of the Accelerated Principal Distribution Amount and the Class M-1 Interest
Shortfall Carryforward Amounts, in each case for such Remittance Date.
"Class M-2 Applied Realized Loss Amount" means as of any Remittance Date,
the lesser of (x) the Class M-2 Current Principal Balance (after taking into
account the distribution of the Class M-2 Principal Distribution Amount on such
Remittance Date, but prior to the application of the Class M-2 Applied Realized
Loss Amount, if any, on such Remittance Date) and (y) the excess of (i) the
Applied Realized Loss Amount as of such Remittance Date over (ii) the Class B
Applied Realized Loss Amount as of such Remittance Date.
"Class M-2 Realized Loss Amount" means, as of any Remittance Date, the
lesser of (x) the Class M-2 Unpaid Realized Loss Amount as of such Remittance
Date and (y) the excess of (i) the related Monthly Excess Spread over (ii) the
sum of the Accelerated Principal Distribution Amount, the Class M-1 Realized
Loss Amount, the Class M-1 Interest Shortfall Carryforward Amounts and the Class
M-2 Interest Shortfall Carryforward Amounts, in each case for such Remittance
Date.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates as to any Remittance Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Remittance Dates over (y) the aggregate, cumulative amount
of related Realized Loss Amounts with respect to such Class for all prior
Remittance Dates.
SUBORDINATION OF CLASS M CERTIFICATES AND CLASS B CERTIFICATES
The rights of the Holders of the Class M Certificates and the Class B
Certificates to receive distributions with respect to the Loans will be
subordinated to such rights of the Class A Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class A Certificates of the full amount of their monthly payments
of interest and principal and to afford such holders protection against losses
on Liquidated Loans. The protection afforded to the Holders of the Class A
Certificates by means of the subordination feature will be accomplished by the
preferential right of the Holders of the Class A Certificates (i) to receive,
prior to any distribution being made on a Remittance Date in respect of
principal or interest on the Class M Certificates and the Class B Certificates,
the amount of interest due them on each Remittance Date out of the Available
Remittance Amount on deposit on such date in the Certificate Account and (ii) to
receive, prior to any distribution being made on a Remittance Date in respect of
principal on the Class M Certificates and the Class B Certificates, the amount
of principal due them on each Remittance Date out of the Available Remittance
Amount on deposit on such date in the Certificate Account.
In addition, the rights of the Holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Loans will be
subordinate to such rights of the Holders of the Class M-1 Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
Holders of the Class M-1 Certificates of the full amount of their monthly
payments of interest and principal and to afford such holders protection against
losses on Liquidated Loans. The protection afforded to the Holders of the Class
M-1 Certificates by means of the subordination feature will be accomplished by
the preferential right of the Holders of the Class M-1 Certificates (i) to
receive, prior to any distribution being made on a Remittance Date in respect of
principal or interest on the Class M-2 Certificates and the Class B
Certificates, the amount of interest due them on each Remittance Date out of the
Available Remittance Amount on deposit on such date in the Certificate Account
and (ii) to receive, prior to any distribution being made on a Remittance Date
in respect of principal on the Class M-2 Certificates and the Class B
Certificates, the amount of principal due them on each Remittance Date out of
the Available Remittance Amount on deposit on such date in the Certificate
Account.
In addition, the rights of the Holders of the Class B Certificates to
receive distributions with respect to the Loans will be subordinate to such
rights of the Holders of the Class M-2 Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the Holders of the
Class M-2 Certificates of the full amount of their monthly payments of principal
and interest and to afford such holders protection against losses on Liquidated
Loans. The protection afforded to the Holders of the Class M-2 Certificates by
means of the subordination feature will be accomplished by the preferential
right of the Holders of the Class M-2 Certificates (i) to receive, prior to any
distribution being made on a Remittance Date in respect of interest or principal
on the Class B Certificates, the amount of interest due them on each Remittance
Date out of the Available Remittance Amount on deposit on such date in the
Certificate Account and (ii) to receive, prior to any distribution being made on
a Remittance Date in respect of principal on the Class B Certificates, the
amount of principal due them on each Remittance Date out of the Available
Remittance Amount on deposit on such date in the Certificate Account.
REPORTS TO CERTIFICATEHOLDERS
On each Remittance Date, the Trustee will be required to forward to each
Certificateholder (which will be Cede, as registered Holder of each Class of
Certificates and the nominee of DTC, unless and until Definitive Certificates
are issued), a statement which will set forth, among other things:
(a) the amount of such distribution to Holders of
each Class of Certificates allocable to interest
(separately identifying any Interest Shortfall Carryforward
Amount);
(b) the amount of such distribution to holders of each
Class of Certificates allocable to principal;
(c) the amount, if any, by which the applicable Formula
Distribution Amount exceeds the applicable Class
Distribution Amount for such Remittance Date;
(d) the Current Principal Balance of each Class of
Certificates after giving effect to the distribution of
principal on such Remittance Date;
(e) the Senior Percentage and Class B Percentage for the
current Remittance Date;
(f) the Class Factor (a percentage derived from a fraction the
numerator of which is the Current Principal Balance of a particular
Class and the denominator of which is the original Principal Balance of
such Class);
(g) the Spread Amount and Specified Subordinated Amount
for such Remittance Date;
(h) the aggregate principal balance of the Loans at the
end of the preceding Due Period;
(i) whether a Trigger Event is in effect;
(j) the amount of any Applied Realized Loss Amount, Realized Loss
Amount and Unpaid Realized Loss Amount for each Class as of the close
of such Remittance Date; and
(k) the number and aggregate principal balance of Loans
delinquent (i) 30-59 days and (ii) 60 or more days.
The Statement described above to be furnished each Class of Certificates
need only provide information relating to that Class of Certificates.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class of Certificates with a 1% Percentage Interest or per
$1,000 denomination of Certificates.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") will hold their Certificates through DTC in
the United States, or Cedel Bank or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate principal balance of the
Certificates and will initially be registered in the name of Cede & Co., the
nominees of DTC. Cedel Bank and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Cedel Bank's and
Euroclear's names on the books of their respective Depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as depositary for Cedel Bank
and Morgan Guaranty Trust Company of New York, Brussels Office, will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing original Certificate Principal Balances of $1,000 and
integral multiples of $1,000 in excess thereof. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Class A Certificate"). Unless and until Definitive Class A
Certificates are issued, it is anticipated that the only "Certificateholder" of
the Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Agreement. Certificate
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedel Bank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in Cedel
Bank or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Bank Participants on such business day. Cash received in
Cedel Bank or Euroclear as a result of sales of securities by or through a Cedel
Bank Participant (as defined below) or Euroclear Participant (as defined below)
to a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Cedel Bank or Euroclear cash account only as
of the business day following settlement in DTC. For information with respect to
tax documentation procedures relating to the Certificates, see "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES-Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Bank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel Bank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Bank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel Bank is incorporated under the laws of Luxembourg as a professional
depository. Cedel Bank holds securities for its participating organizations
("Cedel Bank Participants") and facilitates the clearance and settlement of
securities transactions between Cedel Bank Participants through electronic
book-entry changes in accounts of Cedel Bank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedel Bank in any of 28 currencies, including United States dollars. Cedel Bank
provides to its Cedel Bank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel Bank interfaces with
domestic markets in several countries. As a professional depository, Cedel Bank
is subject to regulation by the Luxembourg Monetary Institute. Cedel Bank
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedel Bank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel Bank
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel Bank or Euroclear will be credited to the cash accounts of
Cedel Bank Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book- Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates, Cedel Bank
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Agreement on behalf of a
Cedel Bank Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Certificates which conflict with actions taken with respect to other
Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Servicing
Termination (as defined herein), beneficial owners having Percentage Interests
aggregating not less than 51% of the aggregate Class A Principal Balance of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates and
Certificateholders under the Agreement.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, Cedel Bank and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
None of the Seller, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
THE AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in this
Prospectus Supplement, set forth below is a summary of certain other provisions
thereof. Certain capitalized terms used in this section and not otherwise
defined, have the meanings set forth in the Prospectus.
REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties as to each Loan described
under the caption "The Agreements-Representations and Warranties" in the
Prospectus, (i) the Representative will represent in the Agreement that each FHA
Loan is an FHA Title I loan, underwritten in accordance with applicable FHA
requirements and submitted to the FHA for insurance; (ii) each Originator will
represent that, assuming sufficient coverage remains available in the Reserve
Amount, each Claim filed by the Claims Administrator with respect to a 90 Day
Delinquent FHA Loan will be honored by the FHA in accordance with the rules and
regulations of the FHA; (iii) substantially all the proceeds of each Loan have
been or will be used to acquire or to improve or protect an interest in real
property that, at the origination date of such Loan, was the only security for
such Loan; and (iv) for each Loan, after giving effect to all improvements to be
made on the related Mortgaged Property with the proceeds of such Loan, and based
upon representations of the related Obligor, the value of the related Mortgaged
Property will at least be equal to the amount of such Loan and the outstanding
amount of all other loans secured by prior liens on such Mortgaged Property.
The Servicer will also covenant that it will: (a) comply with all FHA rules
and regulations and will maintain its status as an approved lender and will at
all times hold a valid contract of insurance (unless such contract is terminated
so as not to affect the obligation of FHA to provide insurance coverage with
respect to the FHA Loans); (b) promptly pay all insurance charges and take all
action necessary to maintain insurance on the FHA Loans; (c) immediately pay,
or, if the Servicer is no longer the Claims Administrator, cause the Claims
Administrator to pay, in full, any FHA Payment into the Principal and Interest
Account; and (d) with certain exceptions, not allow any modifications or
assumptions of the FHA Loans that would vary their terms.
OBLIGATION OF THE CLAIMS ADMINISTRATOR
If any FHA Loan becomes a 90 Day Delinquent FHA Loan, and if sufficient
coverage is available in the Reserve Amount to make an FHA Payment with respect
to such FHA Loan, the Claims Administrator may, in its sole discretion, during
any subsequent Due Period, determine to file a Claim with the FHA with respect
to such 90 Day Delinquent FHA Loan. If the Claims Administrator determines to
file such a Claim, the Claims Administrator will so notify the Co-Trustee and
the Custodian no later than the Determination Date following such determination
and shall request delivery of the related Trustee's Loan File. Upon receipt of
such certification and request, the Custodian shall, no later than the related
Remittance Date, release to the Claims Administrator the related Trustee's Loan
File and the Co-Trustee and the Custodian shall execute and deliver such
instruments necessary to enable the Claims Administrator to file a Claim with
the FHA on behalf of the Co-Trustee. Within 120 days of its receipt of the
related Trustee's Loan File, the Claims Administrator shall, in its sole
discretion, either file a Claim with the FHA for an FHA Payment with respect to
such 90 Day Delinquent FHA Loan or, if the Claims Administrator determines not
to file such a Claim, return to the Co-Trustee the related Trustee's Loan File.
With respect to any 90 Day Delinquent FHA Loan transferred to the Claims
Administrator as described above, the Claims Administrator shall deposit (or, if
the Claims Administrator is not also the Servicer, the Claims Administrator
shall instruct the Servicer to deposit) in the Principal and Interest Account
within 24 hours of receipt or determination thereof the following amounts (such
amounts to be net of certain amounts that would be reimbursable to the Servicer
under the Agreement with respect to amounts in the Principal and Interest
Account): (i) any FHA Payments; (ii) the amount, if any, by which the FHA
Payment was reduced in accordance with FHA Regulations due to the Claims
Administrator enforcing a lien on the FHA Property prior to the lien of the
related 90 Day Delinquent FHA Loan; and (iii) any principal and interest
payments received with respect to a 90 Day Delinquent FHA Loan after the Due
Period in which the FHA Loan is transferred to the Claims Administrator and
before either the related FHA Payment is paid or the related Trustee's Loan File
is returned to the Co-Trustee, as the case may be (the amounts referred to in
(ii) and (iii) above are referenced to herein as "Related Payments").
If an FHA Loan becomes a 90 Day Delinquent FHA Loan when there is
insufficient coverage in the Reserve Amount, or if the Claims Administrator
determines not to file a Claim with the FHA with respect to such 90 Day
Delinquent FHA Loan, the Co-Trustee will not transfer such FHA Loan to the
Claims Administrator, no Claim will be made to the FHA and the Servicer may take
other action, including the commencement of foreclosure proceedings, on the
related Mortgaged Property.
FHA PREMIUM ACCOUNT
The FHA Premium Account will be established with the Trustee and will be
available to reimburse the Claims Administrator for the payment to the FHA of
the FHA Insurance Premium on each FHA Loan. The FHA Insurance Premium is an
annual premium equal to 0.5% of the original principal balance of the FHA Loan.
If the related Mortgagor pays the FHA Insurance Premium in addition to the
Monthly Payment, any payment of the FHA Insurance Premium received during a Due
Period will be deposited in the FHA Premium Account on the related Remittance
Date. In certain states, the Servicer is prohibited from directly collecting the
FHA Insurance Premium from the related Mortgagor. With respect to FHA Loans
secured by Mortgaged Properties located in such states, the Servicer will cause
to be deposited in the FHA Premium Account a specified percentage of each
scheduled interest payment. Since a Mortgagor pays interest on the declining
principal balance of the related FHA Loan and the FHA Insurance Premium is based
upon the original principal balance of the FHA Loan, the amount of interest
allocated to the FHA Premium Account may be more or less than the amount of the
related FHA Insurance Premium. The Servicer has agreed to satisfy any resulting
shortfall from its own funds.
PRE-FUNDING ACCOUNT
On the Closing Date, the Pre-Funded Amount will be deposited into the
Pre-Funding Account in an amount not to exceed $62,500,000. Pre-Funded Amounts
may be used only (i) to acquire Subsequent Loans for the Trust and (ii) to make
accelerated payments of principal on the Certificates of the Trust. During the
period (the "Funding Period") from the Closing Date until the earliest of (i)
the date on which the amount on deposit in the Pre-Funding Account is less than
$200,000, (ii) the date on which an Event of Default occurs under the Agreement
or (iii) at the close of business on September 25, 1997, amounts will, from time
to time, be withdrawn from the Pre-Funding Account to purchase Subsequent Loans
in accordance with the Agreement. Any Pre-Funded Amount remaining at the end of
the Funding Period will be distributed as a principal prepayment on the next
Remittance Date to the Certificates of the Trust. However, any Pre-Funded Amount
remaining at the close of business on September 25, 1997 will be distributed as
a principal prepayment on the Special Remittance Date to the applicable
Certificateholders.
All funds in the Pre-Funding Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds in the
Pre-Funding Account will be applied to payment of interest on the applicable
Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Representative also will make a cash deposit in an
account (the "Capitalized Interest Account") in the name of the Trustee on
behalf of the Trust. The amount deposited in the Capitalized Interest Account
will be used by the Trustee on the Remittance Dates occurring in July, August
and September 1997 to fund the excess, if any, of (i) the amount of interest
accrued for each such Remittance Date at the weighted average Pass-Through Rates
of the Certificates on the portion of the Certificates having principal balances
exceeding the principal balances of the Loans over (ii) the amount of any
earnings on funds in the Pre-Funding Account that are available to pay interest
on the Certificates on each such Remittance Date. Additionally, if a principal
prepayment is made on the Special Remittance Date to any Class of Certificates,
such Certificates also will receive on such date, from the Capitalized Interest
Account, accrued interest at the applicable Pass-Through Rates on the amount of
such principal prepayment. Any amounts remaining in the Capitalized Interest
Account on the Special Remittance Date and not used for such purposes are
required to be paid directly to the holders of the Class X and Class R
Certificates on such Special Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
PAYMENTS ON THE LOANS
The Agreement requires the Servicer to establish and maintain one or more
principal and interest accounts (each, a "Principal and Interest Account") at
one or more institutions designated as a "Designated Depository Institution" in
the Agreement.
All funds in the Principal and Interest Accounts are required to be held
(i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds held in the Principal and Interest Accounts are for the account of the
Servicer.
The Servicer is required to deposit in the related Principal and Interest
Account (within 24 hours of receipt) all payments received after the Cut-Off
Date on account of principal and interest on the related Loans (but net of the
Servicing Fee and the Contingency Fee with respect to each Loan, other servicing
compensation payable to the Servicer as permitted by the Agreement and any
amounts required to be deposited into the Servicing Accounts referred to below).
Not later than the day of each month which is the later of (i) the third
Business Day prior to the 15th day of such month and (ii) the seventh Business
Day of such month (each such day a "Determination Date"), the Servicer is
required to wire transfer to the Trustee the Available Remittance Amounts for
each Pool for deposit in the segregated trust accounts maintained with the
Trustee for such purpose (each a "Certificate Account").
The Agreement also will require the Servicer to establish and maintain, in
addition to the Principal and Interest Accounts one or more accounts (each a
"Servicing Account") in a depository institution the deposits of which are
insured by the Federal Deposit Insurance Corporation to the maximum extent
permitted by law. The Servicer will deposit and retain therein all collections
from the Obligors for the payment of taxes, assessments, insurance premiums, or
comparable items as agent of the Obligors and in trust as provided in the
Agreement. Amounts in any Servicing Account may relate to mortgage loans in more
than one mortgage pool or to mortgage loans not yet included in a mortgage pool.
All funds in the Servicing Accounts are required to be held (i) uninvested, up
to the limits insured by the Federal Deposit Insurance Corporation or (ii)
invested in Permitted Instruments. Any investment earnings on funds held in the
Servicing Accounts are for the account of the Servicer. Withdrawals of amounts
from the Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse the Servicer
for any advances made with respect to such items, to refund to any Obligors any
sums as may be determined to be overages, to pay interest, if required, to
Obligors on balances in the Servicing Accounts, to pay earnings not required to
be paid to Obligors to the Servicer or to clear and terminate the Servicing
Accounts at or at any time after the termination of the Agreement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
Not later than the close of business on each Determination Date, the
Servicer is required to remit to the Trustee for deposit in the Certificate
Account an amount equal to the amount, if any, by which (a) the sum of (x) 30
days' interest at the weighted average Adjusted Loan Remittance Rates on the
aggregate outstanding Principal Balances of each Class of Certificates
immediately prior to the related Remittance Date and (y) the Monthly Excess
Spread, if any, for the related Remittance Date relating to the Loans exceeds
(b) the amount received by the Servicer in respect of interest on the Loans as
of the related Record Date (and, with respect to the Remittance Dates in July,
August and September 1997, the sum of (i) all funds to be transferred to the
Certificate Account from the Capitalized Interest Account for such Remittance
Date and (ii) certain investment earnings on amounts in the Pre-Funding Account
for the Remittance Date). Such excess is defined as the "Monthly Advance."
Not later than the close of business on each Determination Date, with
respect to each Loan for which a Principal Prepayment in full or Curtailment was
received during the related Due Period, the Servicer is required to remit to the
Trustee for deposit in the Certificate Account from amounts otherwise payable to
it as servicing compensation, an amount equal to the excess of (a) 30 days'
interest on the principal balance of each such Loan as of the beginning of the
related Due Period at the weighted average Adjusted Loan Remittance Rates
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").
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; REPLACEMENT OF
SERVICER
The Servicer is entitled to a servicing fee of 0.25% per annum of the
principal balance of each Loan (the "Servicing Fee") and a contingency fee of
0.25% per annum of the principal balance of each Loan (the "Contingency Fee").
The Contingency Fee is meant to provide additional servicing compensation to a
successor servicer if The Money Store Inc. is replaced as Servicer under the
Agreement. However, as long as The Money Store Inc. acts as Servicer, it is
entitled to receive the Contingency Fee, although such amount is not deemed
servicing compensation. The Servicing Fee and Contingency Fee are each
calculated and payable monthly from the interest portion of scheduled monthly
payments, liquidation proceeds and certain other collected proceeds. In
addition, the Servicer is entitled under the Agreement to retain additional
servicing compensation in the form of assumption and other administrative fees,
prepayment penalties and premiums, late payment charges, interest paid on funds
in the Principal and Interest Accounts, interest paid on earnings realized on
Permitted Instruments, and certain other excess amounts. Upon the occurrence of
certain Servicing Delinquency Triggers (as defined in the Agreement) the holders
of Certificates representing in excess of 50% of the aggregate Current Principal
Balances of all Classes may determine to terminate the Servicer.
TERMINATION; PURCHASE OF LOANS
Each Trust will terminate upon distribution to the Certificateholders of
amounts due them following the earlier to occur of (i) the final payment or
other liquidation of the last Loan remaining in the Trust or the disposition of
all REO Property, (ii) the optional purchase of the assets of the Trust by the
Servicer as described below or (iii) the occurrence of a "qualified liquidation"
of the Trust, as permitted by the REMIC provisions of the Code as described
below; provided, however, that in no event will the Trust terminate later than
twenty-one years after the death of the last survivor of the person named in the
Agreement.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Loans are less than 10% of the sum of (i) the Original Pool Principal
Balance and (ii) the original Pre-Funded Amount the Servicer may, at its option,
purchase, on the next succeeding Remittance Date, all of the Loans and any
related REO Properties at a price equal to the Termination Price relating to the
Trust.
Following a final determination by the Internal Revenue Service (the "IRS")
or by a court of competent jurisdiction, in either case from which no appeal is
taken within the permitted time for such appeal, or if any appeal is taken,
following a final determination of such appeal from which no further appeal can
be taken, to the effect that either REMIC does not and will no longer qualify as
a REMIC pursuant to Section 860D of the Code (the "Final Determination"), at any
time on or after the date which is 30 calendar days following such Final
Determination the Holders of greater than 50 percent in Percentage Interest of
the Class A Certificates (the "Applicable Majority Certificateholders") may
direct the Trustee on behalf of the Trust to adopt a "plan of complete
liquidation" (within the meaning of Section 860F(a)(4)(B)(i) of the Code) with
respect to the related REMIC. Upon receipt of such direction by the Applicable
Majority Certificateholders, the Trustee will notify the holders of the Class R
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "Termination Notice"). The Holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, within 60
days from the date of receipt of the Termination Notice (the "Purchase Option
Period"), at their option, purchase from the Trust all the Loans and all
property theretofore acquired by foreclosure, deed in lieu of foreclosure, or
otherwise in respect of any Loan then remaining in the REMIC at a purchase price
equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period, in
the event that the Applicable Majority Certificateholders have given the Trustee
the direction described in clause (i) above, the Trustee is required to sell the
Loans and such other property in the related REMIC and distribute the proceeds
of the liquidation of such REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of such REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Applicable Majority Certificateholders
shall permit or direct in writing, after the expiration of the Purchase Option
Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee of an opinion of nationally recognized
tax counsel selected by the Holders of such Class R Certificates, which opinion
shall be reasonably satisfactory in form and substance to the Applicable
Majority Certificateholders, that the effect of the Final Determination is to
increase substantially the probability that the gross income of the related
REMIC will be subject to federal taxation, purchase from the Trust all Loans and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure,
or otherwise in respect of any Loan then remaining in the related REMIC at a
purchase price equal to the Termination Price. The foregoing opinion shall be
deemed satisfactory unless the Applicable Majority Certificateholders give the
holders of a majority of percentage interests in the Class R Certificates notice
that such opinion is not satisfactory within thirty days after receipt of such
opinion.
If the Trust were to lose its qualification as a REMIC, it might be taxable
as a grantor trust, a partnership, or an association taxable as a corporation.
If the Trust is treated as a grantor trust or a partnership, the Trust would not
be subject to a separate entity level tax, and it is not expected that the tax
treatment of the investors would be materially different from the tax treatment
if the REMIC election of the Trust had not been revoked. However, if the Trust
were treated as an association taxable as a corporation it would be subject to
Federal income taxes at corporate rates on its net income. Moreover,
distributions on the Certificates would probably not be deductible in computing
the Trust's taxable income, and all or part of the distributions to the holders
of such Certificates would probably be treated as dividend income to the
holders. Such an entity level tax could result in reduced distributions to the
Certificateholders and such Certificateholders could also be liable for a share
of such a tax. Any such corporate level tax would be borne first by the holders
of the Class R Certificates from amounts otherwise distributable to such
holders. Any remaining corporate level tax would be borne by holders of all
Classes of Certificates pro rata in proportion to the outstanding principal
balances of such Classes.
THE TRUSTEE
The Chase Manhattan Bank 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
Chase Manhattan Bank, Delaware, a Delaware banking corporation, will be the
Co-Trustee with respect to the Loans.
THE CUSTODIAN
First Trust National Association, a national banking association
headquartered in St. Paul, Minnesota, or such other entity acceptable to the
Trustee and the Servicer, will be the Custodian with respect to the Loans. In
such capacity, it will retain the files relating to the Loans. The Custodian is
a subsidiary of First Bank Systems, Minneapolis, Minnesota.
FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, two separate elections will be made to
treat certain assets of the Trust as REMICs. Each Class Certificate will
constitute "regular interests" in a REMIC and each class of Class R Certificates
will constitute the "residual interest" in the related REMIC. See "Federal
Income Tax Consequences" in the Prospectus.
Because the Certificates will be considered REMIC regular interests, they
generally will be taxable as debt obligations under the Code, and interest paid
or accrued on such Certificates, including original issue discount with respect
to any such Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. See
"Federal Income Tax Consequences-REMIC Regular Certificates-Current Income on
REMIC Regular Certificates."
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount with respect to the Certificates is 100%
Prepayment Assumption, as 100% Prepayment Assumption is defined herein with
respect to the Pool. See "Maturity, Prepayment and Yield Considerations" herein.
However, no representation is made as to the rate at which prepayments actually
will occur.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds and separate accounts in which such plans or arrangements are
invested to which it applies and on those persons who are fiduciaries with
respect to such benefit plans. Certain employee benefit plans, such as
governmental plans (as defined in Section 3(32) of ERISA) and certain church
plans (as defined in Section 3(33) of ERISA), are not subject to ERISA. In
accordance with ERISA's general fiduciary standards, before investing in a Class
A Certificate a benefit plan fiduciary should determine whether such an
investment is permitted under the governing benefit plan instruments, is
appropriate for the benefit plan in view of its overall investment policy and
the composition and diversification of its portfolio and should consider the
ERISA provisions regarding the delegation of fiduciary responsibility with
respect to plan assets.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Representative, the Originators, the Underwriter and the Trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition or holding
or transfer of Class A Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless an exemption is available. Furthermore, if an
investing Plan's assets were deemed to include an interest in the Loans and any
other assets of the Trust and not merely an interest in the related Class A
Certificates, transactions occurring in the operation, management and servicing
of the Trust and its assets, including in the servicing of the Loans might
constitute prohibited transactions unless an administrative exemption applies.
One exemption which may be applicable to these potential prohibited transactions
is noted below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulations"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. Thus, a Plan fiduciary considering an investment in Class A
Certificates should also consider whether such an investment might constitute or
give rise to a prohibited transaction under ERISA or the Code.
DOL has granted to Lehman Brothers Inc. an administrative exemption
(Prohibited Transaction Exemption 91-14, 56 Fed. Reg. 7,413 (February 22, 1991)
(the "Exemption")) from certain of the prohibited transaction rules of ERISA
with respect to the initial purchase, the holding and the subsequent resale in
the secondary market by Plans of pass-through certificates representing a
beneficial undivided ownership interest in the assets of a trust that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption which may be applicable to the Class A
Certificates if Lehman Brothers or any of its affiliates is either the sole
underwriter or the manager or co-manager of the underwriting syndicate, or a
selling or placement agent. The conditions which must be satisfied for the
Exemption to apply to the purchase, holding and transfer of the Class A
Certificates are the following:
(i) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with an
unrelated party.
(ii) The rights and interest evidenced by a Class of Class A Certificates
acquired by the Plan are not subordinated to the rights and interest evidenced
by any other Certificates of the Trust.
(iii) The Class A Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from any of Moody's, Duff & Phelps Credit Rating Co., S & P or
Fitch Investors Service, L.P. ("Authorized Rating Agencies") and the investment
pool consists only of assets of the type enumerated in the Exemption, and which
have been included in other investment pools; certificates evidencing interest
in such other investment pools have been rated in one of the three highest
generic rating categories by an Authorized Rating Agency for at least one year
prior to a Plan's acquisition of certificates; and certificates evidencing
interest in such other investment pools have been purchased by investors other
than Plans for at least one year prior to a plan's acquisition of the Class A
Certificates.
(iv) The sum of all payments made to the Underwriter in connection with the
distribution of the Class A Certificates represents not more than reasonable
compensation for distributing the Class A Certificates. The sum of all payments
made to and retained by the Representative and the Originators pursuant to the
sale of the Loans to the Trust represents not more than the fair market value of
such Loans. The sum of all payments made to and retained by the Servicer or any
other servicer represents not more than reasonable compensation for such
services under the Agreement and reimbursement of the servicer's reasonable
expenses in connection therewith.
(v) The Trustee and the Co-Trustee must not be an affiliate of any member
of the Restricted Group as defined below.
In addition, it is a condition that the Plan investing in the Class A
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D under the Securities Act. Any Plan purchasing Class A Certificates
will be deemed to have represented, by virtue of such purchase, that it is an
accredited investor.
The Exemption does not apply to Plans sponsored by the Originators, the
Representative, the Underwriter, the Trustee, the Co-Trustee the Custodian, the
Servicer, any other servicers or any obligor with respect to Loans included in
the Trust constituting more than 5% of the aggregate unamortized principal
balance of the assets in the Trust or any affiliate of such parties (the
"Restricted Group"). No exemption is provided from the restrictions of ERISA for
the acquisition or holding of a Class A Certificate on behalf of an "Excluded
Plan" by any person who is a fiduciary with respect to the assets of such
Excluded Plan. For purposes of the Class A Certificates, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group. In addition, the Exemption
provides relief from certain self- dealing/conflict of interest prohibited
transactions that may occur when a Plan fiduciary causes a Plan to acquire Class
A Certificates and the fiduciary (or its affiliate) is an obligor on any Loan
held in the Trust provided that, among other requirements, (i) such fiduciary
(or its affiliate) is an obligor with respect to 5% or less of the fair market
value of the Loans contained in the Trust, (ii) the Plan's investment in any
Class of Class A Certificates does not exceed 25% of all of the Certificates of
such Class outstanding at the time of the Plan's acquisition and after the
Plan's acquisition of such Class of Class A Certificates, no more than 25% of
the assets over which the fiduciary has investment authority are invested in
securities of a trust containing assets which are sold or serviced by the same
entity, and (iii) in the case of initial issuance (but not secondary market
transactions), at least 50% of each Class of Class A Certificates, and at least
50% of the aggregate interest in the Trust, are acquired by persons independent
of the Restricted Group.
On May 23, 1997, the DOL published in the Federal Register a proposed
amendment to the Exemption which will extend 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 amendment will generally 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, when granted as a final
exemption, will be 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 proposed amendment to the Exemption with respect to pre-funding will
be satisfied. Therefore, if the relief granted under the final amendment
conforms to that proposed by the DOL, such relief would be applicable
retroactively to the Closing Date. Although there can be no assurance that the
final amendment will be adopted, or if adopted, that it will be identical to
that proposed, it is not anticipated that any changes will be made which would
adversely affect the applicability of the Exemption to the purchase, transfer or
holding of the Certificates by or on behalf of a Plan on account of the use of
pre-funding. However, any Plan investor who proposes to acquire Certificates in
reliance upon the Exemption should consult with its counsel and make its own
determination as to the applicability of the Exemption and the advisability of
investing in Certificates in reliance upon the proposed pre-funding amendment.
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
No Class of Offered Certificates will constitute "mortgage related
securities" for purposes of SMMEA. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgage loans
or deeds of trust may not be legally authorized to invest in such Classes of
Offered Certificates. No representation is made herein as to whether any Class
of Offered Certificates constitutes a legal investment 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 Offered
Certificates as legal investments for such purchasers prior to investing in any
Class of Offered Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated June 24, 1997 (the "Underwriting Agreement"), the Representative, on
behalf of the Originators, has agreed to sell, and each Underwriter has agreed
to purchase, the principal amount of each Class of Offered Certificates set
forth below its name.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
LEHMAN BROTHERS INC. PRUDENTIAL SECURITIES INC. TOTAL
Class A-1 $ 79,084,000 $15,816,000 $94,900,000
Class A-1 $ 51,500,000 $10,300,000 $61,800,000
Class A-3 $ 23,063,000 $ 4,612,000 $27,675,000
Class M-1 $ 27,605,000 $ 5,520,000 $33,125,000
Class M-2 $ 15,625,000 $ 3,125,000 $18,750,000
Class B $ 11,459,000 $ 2,291,000 $13,750,000
Total $208,336,000 $41,664,000 $250,000,000
</TABLE>
The Offered Certificates will be offered by the Underwriters from time to
time in negotiated transactions or otherwise, at varying prices to be determined
at the time of sale. Aggregate proceeds to the Originators from the sale of the
Offered Certificate are expected to be approximately $249,234,641, plus accrued
interest, before reducting expense payable by the Originators estimated to be
approximately $300,000.
The Representative has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Each of the Underwriters may provide investment banking services for the
Representative for which it will receive additional compensation.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Offered Certificates will be passed upon for the Representative by Eric R.
Elwin, Esq., Corporate Counsel of the Representative. Certain legal matters
relating to the issuance of the Offered Certificates will be passed upon for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Stroock &
Stroock & Lavan LLP has performed legal services for the Representative and it
is expected that it will continue to perform such services in the future.
RATING OF THE OFFERED CERTIFICATES
It is a condition to the issuance of the Class A Certificates that each
Class be rated "AAA" by S&P and "Aaa" by Moody's. It is a condition to the
issuance of the Class M-1 Certificates that they be rated at least "AA" by S&P
and at least "Aa2" by Moody's. It is a condition to the issuance of the Class
M-2 Certificates that they be rated at least "A" by S&P and at least "A2" by
Moody's. It is a condition to the offering of the Class B Certificates that they
be rated at least "BBB" by S&P and at least "Baa2" by Moody's. 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 Offered Certificates.
FINANCIAL INFORMATION
The Trust has been formed to own the Loans and to issue the Certificates.
The Trust had no assets or obligations prior to the issuance of the Certificates
and will not engage in any activities other than those described herein.
Accordingly, no financial statements with respect to the Trust are included in
this Prospectus Supplement.
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
Accelerated Principal Distribution Amount S-15
Adjusted Loan Remittance Rate S-32
Agreement S-6
Applicable Majority Certificateholders S-74
Applied Realized Loss Amount S-20
Authorized Rating Agencies S-77
Auto Loans S-41
Available Maximum Subordination Amount S-62
Available Remittance Amount S-55
Balloon Loans S-46
Beneficial owner S-67
Book-Entry Certificates S-66
Business Day S-55
Capitalized Interest Account S-23
Cede S-35
Cedel Bank S-1
Cedel Bank Participants S-68
Certificate Account S-75
Certificate Owners S-66
Certificateholders S-2
Certificates S-1
Claims S-5
Claims Administrator S-2
Class A Certificates S-1
Class A Credit Enhancement Percentage S-60
Class A Current Principal Balance S-7
Class A Formula Principal Distribution Amount S-11
Class A Interest Distribution Amount S-7
Class A Interest Shortfall Carryforward Amount S-7
Class A Principal Distribution Amount S-11
Class A-1 Interest Shortfall Carryforward Amount S-7
Class A-2 Interest Shortfall Carryforward Amount S-7
Class A-3 Interest Shortfall Carryforward Amount S-7
Class B Applied Realized Loss Amount S-64
Class B Certificates S-1
Class B Cross-over Date S-14
Class B Formula Principal Distribution Amount S-14
Class B Interest Distribution Amount S-9
Class B Interest Shortfall Carryforward Amount S-10
Class B Percentage S-60
Class B Principal Distribution Amount S-15
Class B Realized Loss Amount S-64
Class M Certificates S-1
Class M Interest Distribution Amount S-9
Class M Interest Shortfall Carryforward Amounts S-9
Class M-1 Applied Realized Loss Amount S-64
Class M-1 Formula Principal Distribution Amount S-12
Class M-1 Interest Distribution Amount S-8
Class M-1 Interest Shortfall Carryforward Amount S-8
Class M-1 Principal Distribution Amount S-13
Class M-1 Realized Loss Amount S-64
Class M-2 Formula Principal Distribution Amount S-13
Class M-2 Interest Distribution Amount S-9
Class M-2 Interest Shortfall Carryforward Amount S-9
Class M-2 Principal Distribution Amount S-13
Class M-2 Realized Loss Amount S-65
Class R Certificates S-1
Class X Certificates S-1
Closing Date S-1
Compensating Interest S-32
Contingency Fee S-32
Conventional Loans S-2
Cooperative S-68
Co-Trustee S-5
CPR S-51
Current Principal Balance S-54
Curtailment S-32
Custodian S-5
Cut-Off Date S-5
Dealer Loans S-38
Definitive Certificates S-35
Definitive Class A Certificate S-67
Designated Depository Institution S-72
Detailed Description S-45
Determination Date S-31
Direct Loans S-38
Disqualified Persons S-76
DOL S-76
DTC S-35
Due Period S-55
Equity Advantage Loans S-44
ERISA S-34
Euroclear S-1
Euroclear Operator S-68
Euroclear Participants S-68
European Depositaries S-67
Excluded Plan S-77
Exemption S-34
FHA S-2
FHA Insurance Premium S-27
FHA Loans S-2
FHA Payment S-27
FHA Premium Account S-27
Final Determination S-74
Financial Intermediary S-67
Funding Period S-22
HEP S-51
Holders S-2
Home Equity Loans S-41
Home Improvement Interest Rate S-30
Home Improvement Loans S-2
Home Improvement Mortgage Notes S-28
Home Improvement Mortgaged Properties S-28
Home Improvement Mortgages S-28
HUD S-2
Initial Loans S-28
Insurance Proceeds S-32
Interest Distribution Amounts S-10
IRS S-74
Liquidated Loan S-11
Liquidation Proceeds S-31
Loans S-2
Maximum Subordination Amount S-62
Monthly Advance S-26
Monthly Excess Spread S-63
Moody's S-33
Mortgaged Properties S-28
Mortgages S-45
Mortgagor S-29
Multifamily Mortgaged Properties S-30
NHA Act S-37
90 Day Delinquent FHA Loan S-27
90 Day Delinquent Loan S-27
Notes S-45
Obligor S-29
Offered Certificates S-1
Optional Servicer Termination Date S-33
Original Collateral Amount S-12
Original Principal Balance S-55
Originators S-2
Pass-Through Rate S-4
Percentage Interest S-6
Permitted Instruments S-72
Permitted Investments S-78
Plan Asset Regulations S-76
Plans S-34
Pool S-2
Pre-Funded Amount S-22
Pre-Funding Account S-2
Pre-Funding Limit S-77
Prepayment S-49
Prepayment Assumption S-51
Principal and Interest Account S-72
Principal Distribution Amount S-10
Principal Prepayment S-32
Prohibited Transactions S-76
Prospectus S-2
PUDs S-28
Purchase Option Period S-74
Rating Agencies S-33
Realized Loss S-19
Record Date S-23
Regular Interests S-2
Related Payments S-26
Released Mortgaged Property Proceeds S-32
Relevant Depositary S-67
REMIC S-2
Remittance Date S-2
REO Property S-33
Representative S-5
Reserve Amount S-25
Residual Interest S-2
Restricted Group S-77
Rules S-67
S&P S-33
SBA S-41
SBA Loans S-41
Senior Certificates S-1
Senior Percentage S-11
Servicer S-2
Servicing Account S-73
Servicing Fee S-32
Shortfall Amounts S-62
SMMEA S-34
Special Remittance Date S-23
Specified Subordinated Amount S-59
Spread Amount S-12
Spread Amount Stepdown Date S-12
Student Loans S-41
Subordinated Certificates S-1
Subordinated Deficiency Amount S-16
Subordination Reduction Amount S-12
Subsequent Loans S-2
Termination Notice S-74
Termination Price S-33
Terms and Conditions S-69
Title I S-2
Title I Loan Program S-37
Title I Property Improvement Loans S-37
Trigger Event S-60
Trust S-1
Trustee's Loan File S-25
Underwriters S-1
Underwriting Agreement S-80
Unpaid Realized Loss Amount S-65
Weighted Average Life S-49
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of The
Depository Trust Company, Cedel Bank or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset-Backed Certificates issues.
Secondary, cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel Bank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel Bank and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Asset-Backed Certificates issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel Bank or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Improvement Loan Asset-Backed Certificates issues in same-day funds.
TRADING BETWEEN CEDEL BANK AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Bank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CEDEL BANK OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Bank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel Bank or Euroclear through a Cedel Bank
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel Bank or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities based upon a year consisting
of 12 months of 30 days each. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Bank Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York.) If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedel Bank, or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedel Bank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel Bank or Euroclear. Under
this approach, they may take on credit exposure to Cedel Bank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedel Bank or Euroclear has extended a line of credit
to them, Cedel Bank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Bank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedel Bank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Bank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL BANK OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedel Bank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel Bank or Euroclear through a Cedel Bank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel Bank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
based upon a year consisting of 12 months of 30 days each. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the Cedel Bank Participant or Euroclear Participant
the following day, and receipt of the cash proceeds in the Cedel Bank
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Bank Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back- valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Bank Participant's or Euroclear Participant's
account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel Bank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel Bank or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC' Participant is at least one
day prior to the value date for the sale to the Cedel Bank Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
Bank, or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate.
EXCEPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES. (FORM 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a "Foreign Trust," as
defined in Section 7701(a)(31) of the Code. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advise concerning their holding and disposing of the
Global Securities.
<PAGE>
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates (the
"Certificates"), issuable in Series, which may be sold from time to time on
terms determined at the time of sale and described in the related Prospectus
Supplement, evidencing specified interests in one or more trust funds (each, a
"Trust"), the primary assets of which will consist of pools (each, a "Pool") of
certain mortgage loans and certain other mortgage-related or other similar
assets more particularly described herein (the "Mortgage Assets"). The Mortgage
Assets and other assets of any Trust will be described in the Prospectus
Supplement for the related Series of Certificates. Certain of the Mortgage
Assets may have been originated by wholly-owned subsidiaries (the "Originators")
of The Money Store Inc. ("The Money Store" or the "Representative"). Certain
other of the Mortgage Assets may have been acquired by The Money Store, an
Originator or an affiliate thereof from other lenders or government agencies, or
may consist of mortgage pass-through or mortgage-backed securities issued by
government agencies or private lenders. In addition, if so specified in the
related Prospectus Supplement, the Trust will include monies on deposit in one
or more trust accounts to be established with a Trustee (as defined herein),
which may include a Pre-Funding Account (as defined herein) which would be used
to purchase additional Mortgage Assets for the related Trust from time to time
during the Funding Period (as defined herein) specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
certain Certificates may evidence a fractional undivided ownership interest in a
Trust which will hold a beneficial ownership interest in another trust fund
which will contain the Mortgage Assets. Certificates may also be entitled to the
benefits of insurance policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees, guaranties of The Money
Store, supplemental interest payments or other forms of credit enhancement or
maturity protection, to the extent described in the related Prospectus
Supplement. The Prospectus Supplement for each Series of Certificates will name
the entities (which will include The Money Store or one of its affiliates and
may include other entities) which will act, directly or through one or more
sub-servicers, as master servicers (each, in such capacity, the "Master
Servicer") of such Mortgage Assets.
Each Series of Certificates will be issued in one or more classes (each, a
"Class"). Each Class of Certificates will evidence a fractional undivided
ownership interest of a specified percentage or portion of future interest
payments and a specified percentage or portion of future principal payments on
the Mortgage Assets in the related Trust. A Series of Certificates may include
one or more Classes that receive certain preferential treatment with respect to
one or more other Classes. One or more Classes of Certificates may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other Classes of Certificates or after the occurrence of
specified events, or may be required to absorb one or more types of losses prior
to one or more other Classes of Certificates, in each case as specified in the
related Prospectus Supplement.
SEE RISK FACTORS ON PAGE 18 HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES OFFERED
HEREBY.
The date of this Prospectus is March 7, 1997
<PAGE>
Distributions to holders of Certificates ("Certificateholders" or
"Holders") will be made on certain dates specified in the related Prospectus
Supplement (each, a "Remittance Date"), which may be monthly, quarterly,
semi-annually or at such other intervals as are specified therein. The rate (the
"Pass-Through Rate") at which Certificateholders will receive distributions of
interest on any Class of Certificates or the method of calculating such
Pass-Through Rate, which may be fixed or variable, will be set forth in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made only from the assets of the related Trust.
The Certificates will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as otherwise specified in the related Prospectus Supplement) by any
other person. Unless otherwise specified in the related Prospectus Supplement,
the only obligations of the Representative or the Originators with respect to a
Series of Certificates will be pursuant to certain limited representations and
warranties. Except for certain representations and warranties relating to the
Mortgage Assets and certain other exceptions, the Master Servicer's obligations
with respect to the related Series of Certificates will be limited to its
contractual servicing obligations. If the amount available for distribution to
Certificateholders on any Remittance Date is less than the amount due to them,
the Master Servicer, to the extent provided in the related Prospectus
Supplement, may be obligated, under certain terms and conditions, to advance
cash to such Certificateholders, to the extent such deficiency is attributable
to delinquent payments of principal and interest during the immediately
preceding Due Period (as defined herein). See "Description of the
Certificates--Monthly Advances and Compensating Interest."
The yield to Certificateholders on each Class of Certificates of a Series
may be affected by the rate of payment of principal (including prepayments) of
the Mortgage Assets in the related Trust and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
each Trust as a "real estate mortgage investment conduit" ("REMIC") for federal
income tax purposes. See "Federal Income Tax Consequences."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS
NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement. The
intention of any underwriter to make a secondary market in the Certificates will
be set forth in the related Prospectus Supplement. There can be no assurance
that a secondary market for the Certificates will develop, or if it does
develop, that it will continue. This Prospectus may not be used to consummate
sales of a Series of Certificates unless accompanied by a Prospectus Supplement.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates to be
offered hereunder, among other things, will set forth with respect to such
Series of Certificates: (i) the aggregate principal amount, Pass-Through Rate or
Rates or other applicable annual rate or rates of interest (or the manner of
determining such rate or rates) and authorized denominations of each Class of
such Certificates; (ii) certain information concerning the Mortgage Assets and
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, guaranties of The Money Store,
supplemental interest payments or other forms of credit enhancement or maturity
protection, if any, relating to the Pools or all or part of the related
Certificates; (iii) the specified interest of each Class of Certificates in, and
manner and priority of, the distributions on the Mortgage Assets; (iv)
information as to the nature and extent of subordination with respect to such
Series of Certificates, if any; (v) the Remittance Dates; (vi) information as to
the Master Servicer; (vii) the circumstances, if any, under which each Trust may
be subject to early termination; (viii) whether the Representative intends to
elect to cause the Trust to be treated as a REMIC; and (ix) additional
information with respect to the plan of sale of such Certificates.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration Statement
and amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the Certificateholders as described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, a
Series of Certificates may be issuable in book-entry form. In such event, the
related Certificates will be registered in the name of Cede, the nominee of The
Depository Trust Company. All reports will be provided to Cede, which in turn
will provide such reports to its Participants and Indirect Participants (as
defined herein). Such Participants and Indirect Participants will then forward
such reports to the beneficial owners of Certificates. See "Description of the
Certificates--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. With respect to
any Class of Certificates that is supported by a Guaranty of The Money Store,
The Money Store's Annual Report on Form 10-K for the year ended December 31,
1995, and Quarterly Reports on Form 10-Q for the periods ended March 31, June 30
and September 30, 1996, which have been filed with the Commission, are hereby
incorporated by reference in this Prospectus and the related Prospectus
Supplement. With respect to any Class of Certificates that is supported by a
Guaranty of The Money Store, all documents filed by The Money Store pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus and prior to the termination
of the offering of the Certificates shall be deemed to be incorporated by
reference into this Prospectus and the related Prospectus Supplement and to be a
part hereof from the respective dates of filing such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus. The Representative will provide without charge to each person to
whom a copy of the Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to The Money Store Inc., 3301 C Street, Suite 100-M,
Sacramento, California 95816, Attention: Investor Relations, Telephone: (916)
446-5000.
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Capitalized terms used but not defined in this Prospectus shall have
the meanings assigned to such terms elsewhere in this Prospectus.
Securities
Offered........................... The Money Store Asset Backed Certificates
(the "Certificates"), evidencing interests in
certain Pools of Mortgage Loans and certain
other Mortgage Assets (each, as defined
below), may be issued from time to time in
Series pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement")
among The Money Store Inc., as Representative
(the "Representative") of certain Trusts,
Originators, a Master Servicer, and a
Trustee, each as defined herein and as
specified in the related Prospectus
Supplement for such Series of Certificates.
Issuers........................... Certain trust funds (each, a "Trust")
represented by The Money Store, the primary
assets of which will be a Pool of Mortgage
Loans and certain other Mortgage Assets.
Representative
and Master
Servicer.......................... The Money Store Inc. ("The Money Store"), a
New Jersey corporation. The Prospectus
Supplement relating to any Series of
Certificates will name the entities (which
may include The Money Store or one of its
affiliates and may additionally include other
unrelated entities) which will act, directly
or through one or more Sub-Servicers (as
defined herein), as master servicers (each,
in such capacity, the "Master Servicer"). The
principal offices of The Money Store are
located in Sacramento, California and Union,
New Jersey. See "The Representative and the
Originators."
The Mortgage
Assets............................ The Certificates will evidence fractional
undivided ownership interests in certain
Trusts further described herein. The primary
assets of each Trust may consist of one or
more pools (each, a "Pool") of Mortgage Loans
and certain other mortgage-related assets
("Mortgage Assets") specified in the related
Prospectus Supplements, which may include (i)
first, second and more junior lien mortgage
loans, deeds of trust or participations
therein secured by one- to four-family
residential properties, including low-rise
condominiums, single family detached homes,
single-family attached homes, planned unit
developments and mixed use properties
(collectively, "Single Family Loans," which
Single Family Loans may be "Conventional
Loans" (i.e., loans that are ---- not insured
or guaranteed by any governmental agency) or
loans that are insured by the Federal Housing
Authority ("FHA") or partially guaranteed by
the Veterans' Administration ("VA") as
specified in the related Prospectus
Supplement), (ii) loans or participations
therein secured by security interests or
similar liens on shares in private,
non-profit cooperative housing corporations
("Cooperatives") and on the related
proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives'
buildings ("Cooperative Loans"), (iii) first,
second and more junior lien mortgage loans,
deeds of trust or participations therein
secured by multifamily residential or
mixed-use properties, such as rental
apartment buildings (including buildings
owned by Cooperatives) or projects containing
five or more residential units ("Multifamily
Loans"), (iv) conditional sales
contracts and installment sales or loan
agreements or participations therein secured
by manufactured housing ("Contracts"), (v)
mortgage-backed securities issued or
guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation
("FHLMC") (the "Agency Securities"), (vi)
privately issued mortgage-backed securities
("Private Mortgage-Backed Securities" or
"PMBS"), (vii) first, second and more junior
home improvement mortgage loans that are
either conventional loans ("Secured
Conventional Home Improvement Loans") or
loans originated under the Title I credit
insurance program created under the National
Housing Act of 1934 by the Federal Housing
Administration ("FHA Loans"), and (viii)
unsecured home improvement loans consisting
of conventional unsecured home improvement
loans and FHA insured home improvement loans
(the "Unsecured Home Improvement Loans"). The
Single Family Loans, Cooperative Loans,
Multifamily Loans, Secured Conventional Home
Improvement Loans, FHA Loans and Unsecured
Home Improvement Loans are sometimes referred
to herein collectively as the "Mortgage
Loans."
A. Mortgage
Loans........................ The payment terms of the Mortgage Loans to be
included in any Pool will be described in the
related Prospectus Supplement and may include
any of the following features, combinations
thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate
(a "Fixed Rate") or may be payable at a
rate that is adjustable from time to
time in relation to an index, that may
be fixed for a period of time or under
certain circumstances and is followed by
an adjustable rate, a rate that
other-wise varies from time to time, or
a rate that is convertible from an
adjustable rate to a fixed rate (each,
an "Adjustable Rate"). The specified
rate of interest on a Mortgage Loan is
its "Mortgage Interest Rate." Changes to
an Adjustable Rate may be subject to
periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be
deferred and added to the principal of a
Mortgage Loan for such periods and under
such circumstances as may be specified
in the related Prospectus Supplement.
Mortgage Loans may permit the payment of
interest at a rate lower than the
Mortgage Interest Rate for a period of
time or for the life of the Mortgage
Loan, and the amount of any difference
may be contributed from funds supplied
by the seller of the properties securing
the related Mortgage Loan (the
"Mortgaged Properties") or another
source or may be treated as accrued
interest and added to the principal of
the Mortgage Loan.
(b) Principal may be payable on a level
basis to fully amortize the Mortgage
Loan over its term, may be calculated on
the basis of an assumed amortization
schedule that is significantly longer
than the original term to maturity or on
an interest rate that is different from
the Mortgage Interest Rate, or may not
be amortized during all or a portion of
the original term. Payment of all or a
substantial portion of the principal may
be due on maturity (a "balloon"
payment). From time to time, principal
may include interest that has been
deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of
the Mortgage Loan, may increase over a
specified period of time ("graduated
payments"), or may change from period to
period. Mortgage Loans may include
limits on periodic increases or
decreases in the amount of monthly
payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject
to a prepayment fee, which may be fixed
for the life of the Mortgage Loan or may
adjust or decline over time, and may be
prohibited for the life of the Mortgage
Loan or for certain periods ("Lockout
Periods"). Certain Mortgage Loans may
permit prepayments after expiration of
the applicable Lockout Period and may
require the payment of a prepayment fee
in connection with any such subsequent
prepayment. Other Mortgage Loans may
permit prepayments without payment of a
fee unless the prepayment occurs during
specified time periods. The Mortgage
Loans may include due-on-sale clauses
which permit the mortgagee to demand
payment of the entire Mortgage Loan in
connection with the sale or certain
other transfers of the related Mortgaged
Properties. Other Mortgage Loans may be
assumable by persons meeting the then
applicable underwriting standards of the
originator.
The Mortgaged Properties relating to Mortgage
Loans may be located in any one of the fifty
states, the District of Columbia, the
Commonwealth of Puerto Rico or any other
commonwealth , territory or possession of the
United States . The Mortgaged Properties
generally will be covered by standard hazard
insurance policies ("Standard Hazard
Insurance Policies") insuring against losses
due to fire and various other causes. The
Mortgage Loans will be covered by Primary
Mortgage Insurance Policies to the extent
provided in the related Prospectus
Supplement. As set forth in the related
Prospectus Supplement, certain of the
Mortgage Loans underlying a given Series of
Certificates may have been originated by the
Representative, the Originators or affiliates
thereof and certain Mortgage Loans may have
been purchased by the Representative, an
Originator or an affiliate thereof in the
open market or in privately negotiated
transactions, including transactions with
entities affiliated with the Representative.
Certain of the Mortgage Loans may be
partially insured by the FHA, an agency of
the United States Department of Housing and
Urban Development ("HUD"), pursuant to the
Title I credit insurance program (the "Title
I Loan Program") of the National Housing Act
of 1934. Several types of loans may be made
under the Title I Loan Program, including (1)
property improvement loans; (2) manufactured
home purchase loans, (3) manufactured home
lot loans; and (4) combination loans (to
purchase a manufactured home and a lot). The
Title I Loan Program is a coinsurance
program. The lender initially is at risk for
10% of the principal balance of each loan.
The FHA will insure the remaining 90% of the
principal balance of each loan, subject to
certain limits. Such FHA insurance is
accorded the full faith and credit of the
United States of America.
The Prospectus Supplement for each Series of
Certificates will specify with respect to all
Mortgage Loans expected to be included in the
related Pool as of the related closing date,
among other things, (i) the expected
aggregate outstanding principal balance and
the expected average outstanding principal
balance of the Mortgage Loans in such Pool as
of the date specified in the Prospectus
Supplement, (ii) the largest expected
principal balance and the smallest expected
principal balance of any of the Mortgage
Loans, (iii) the types of Mortgaged
Properties and/or other assets securing the
Mortgage Loans and the percentage, if any, of
Unsecured Home Improvement Loans expected to
be included in the related Pool, (iv) the
original terms to maturity of the Mortgage
Loans, (v) the expected weighted average term
to maturity of the Mortgage Loans as of the
date specified in the Prospectus Supplement
and the expected range of the terms to
maturity, (vi) the earliest origination date
and latest maturity date of any of the
Mortgage Loans, (vii) the expected aggregate
principal balance of Mortgage Loans having
Combined Loan-to-Value Ratios at origination
exceeding 80%, (viii) the expected weighted
average Mortgage Rate or APR and ranges of
Mortgage Rates or APRs borne by the Mortgage
Loans or Contracts (as the case may be), (ix)
in the case of Mortgage Loans having
Adjustable Rates, the expected weighted
average of the Adjustable Rates as of the
date set forth in the Prospectus Supplement
and maximum permitted Adjustable Rates, if
any, (x) the expected aggregate outstanding
principal balance, if any, of "buydown"
mortgage loans (as hereinafter described) and
Mortgage Loans having graduated payment
provisions, as of the date set forth in the
Prospectus Supplement, (xi) the amount of any
Certificate Guaranty Insurance Policy,
Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond
(each as defined herein) to be maintained
with respect to such Pool, (xii) the amount
of any Primary Mortgage Insurance and
Standard Hazard Insurance (as hereinafter
described) required to be maintained with
respect to each Mortgage Loan, (xiii) the
amount, if any, and terms of any other credit
enhancement to be provided with respect to
all or any Mortgage Loans or the Pool and
(xiv) the expected geographic location of the
Mortgaged Properties, if any.
B. Contracts..................... Contracts will consist of conditional sales
and installment sales or loan agreements
secured by new or used Manufactured Homes (as
defined herein). To the extent provided in
the related Prospectus Supplement, each
Contract will be fully amortizing and will
bear interest at a fixed annual percentage
rate ("APR").
C. Agency
Securities................... The Agency Securities will consist of (i)
fully modified pass-through mortgage-backed
certificates guaranteed as to timely payment
of principal and interest by the Government
National Mortgage Association ("GNMA
Certificates"), (ii) guaranteed mortgage
pass-through certificates issued and
guaranteed as to timely payment of principal
and interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii)
Mortgage Participation Certificates issued
and guaranteed as to timely payment of
interest and, unless otherwise specified in
the related Prospectus Supplement, ultimate
payment of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC Certificates"),
(iv) stripped mortgage-backed securities
representing an undivided interest in all or
a part of either the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain GNMA, FNMA, FHLMC or other government
agency or government-sponsored agency
Certificates and, unless otherwise specified
in the Prospectus Supplement, guaranteed to
the same extent as the underlying securities,
(v) another type of guaranteed pass-through
certificate issued or guaranteed by GNMA,
FNMA, FHLMC or another government agency or
government-sponsored agency and
described in the related Prospectus
Supplement, or (vi) a combination of such
Agency Securities. All GNMA Certificates will
be backed by the full faith and credit of the
United States. No FNMA or FHLMC Certificates
will be backed, directly or indirectly, by
the full faith and credit of the United
States. The Agency Securities may consist of
pass-through securities issued under the GNMA
I Program, the GNMA II Program, FHLMC's Cash
or Guarantor Program or another program
specified in the Prospectus Supplement. The
payment characteristics of the Mortgage Loans
underlying the Agency Securities will be
described in the related Prospectus
Supplement. See "The Trusts--Agency
Securities."
D. Private Mortgage-
Backed
Securities................... Private Mortgage-Backed Securities may
include (i) mortgage participations or
pass-through certificates representing
beneficial interests in certain mortgage
loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such mortgage
loans. Although individual mortgage loans
underlying a Private Mortgage-Backed Security
may be insured or guaranteed by the United
States or an agency or instrumentality
thereof, they need not be, and the Private
Mortgage-Backed Securities themselves will
not be, so insured or guaranteed. See "The
Trusts--Private Mortgage-Backed Securities."
Unless otherwise specified in the Prospectus
Supplement relating to a Series of
Certificates, payments on the Private
Mortgage-Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private
Mortgage-Backed Securities. See "The
Trusts--Private Mortgage-Backed Securities."
The Prospectus Supplement for each Series of
Certificates will specify, with respect to
any Private Mortgage-Backed Securities owned
by the related Trust: (i) the aggregate
approximate principal amount and type of
Private Mortgage- Backed Securities; (ii)
certain characteristics of the mortgage loans
underlying the Private Mortgage-Backed
Securities, including (A) the payment
features of such mortgage loans, (B) the
approximate aggregate principal amount, if
known, of the underlying mortgage loans which
are insured or guaranteed by a governmental
entity, (C) the servicing fee or range of
servicing fees with respect to such mortgage
loans, and (D) the minimum and maximum stated
maturities of the mortgage loans at
origination; (iii) the maximum original
term-to-stated maturity of the Private
Mortgage-Backed Securities; (iv) the weighted
average term-to-stated maturity of the
Private Mortgage-Backed Securities; (v) the
pass-through or certificate rate or ranges
thereof for the Private Mortgage-Backed
Securities; (vi) the weighted average
pass-through or certificate rate of the
Private Mortgage-Backed Securities; (vii) the
issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the servicer
of the Private Mortgage-Backed Securities
(the "PMBS Servicer") and the trustee of the
Private Mortgage-Backed Securities (the "PMBS
Trustee"); (viii) certain characteristics of
credit support, if any, such as reserve
funds, insurance policies, letters of credit,
financial guaranty insurance policies or
third party guarantees, relating to the
mortgage loans underlying the Private
Mortgage-Backed Securities, or to such
Private Mortgage-Backed Securities
themselves; (ix) the terms on which
underlying mortgage loans for such Private
Mortgage-Backed Securities may, or are
required to, be repurchased prior to stated
maturity; and (x) the terms on which
substitute mortgage loans may be delivered to
replace those initially deposited with the
PMBS Trustee. See "The Trusts."
Pre-Funding
Account........................... If provided in the related Prospectus
Supplement, the original principal amount of
a Series of Certificates may exceed the
principal balance of the Mortgage Assets
initially being delivered to the Trustee.
Cash in an amount equal to such difference
(such amount, the "Pre-Funded Amount") will
be deposited into a separate trust account
(the "Pre-Funding Account") maintained with
the Trustee for the benefit of the Holders.
During the period set forth in the related
Prospectus Supplement (the "Funding Period"),
the Pre-Funded Amount in the Pre-Funding
Account may be used to purchase additional
Mortgage Assets for the related Trust subject
to the satisfaction of certain conditions
specified under the Agreements.
For a Trust that elects to be characterized
as either a REMIC or a grantor trust under
federal income tax laws, the maximum length
of the related Funding Period will not exceed
three calendar months or 90 days,
respectively, from the date of issuance of
the Certificates and otherwise the maximum
length of the Funding Period will not exceed
the period set forth in the related
Prospectus Supplement. The amount of the
initial Pre-Funded Amount is intended not to
exceed the aggregate principal balance of
additional Mortgage Assets that the
Representative anticipates will be acquired
and conveyed to the Trust during the
applicable Funding Period.
Prior to the conveyance of any additional
Mortgage Assets to the Trust, the
Representative will be required to give
notice of the additional Mortgage Assets to
be conveyed to the Trust to the Trustee(s)
and any third-party credit enhancement
provider. Upon the satisfaction of the
conditions set forth in the Agreement,
including the receipt by the Trustee of an
executed assignment, an Officer's Certificate
and a legal opinion, the Trustee will release
from the Pre- Funding Account the necessary
funds to purchase the additional Mortgage
Assets to be conveyed to the Trust on such
date. If any Pre-Funded Amount remains on
deposit in the Pre-Funding Account at the end
of the Funding Period, such amount, in the
amounts and in the manner specified in the
related Prospectus Supplement, will be used
to prepay some or all Classes of the related
Series of Certificates.
Description of the
Certificates...................... Each Certificate will represent a fractional
undivided ownership interest in the Trust
created pursuant to the related Agreement.
The primary assets of such Trust will be a
Pool of Mortgage Loans and certain other
Mortgage Assets. The Certificates of any
Series may be issued in one or more Classes,
as specified in the related Prospectus
Supplement. A Series of Certificates may
include one or more Classes of senior
Certificates (collectively, "Senior
Certificates") which receive certain
preferential treatment specified in the
related Prospectus Supplement with respect to
one or more Classes of subordinate
Certificates (collectively, the "Subordinated
Certificates"). Certain Series or Classes of
Certificates may be covered by a Certificate
Guaranty Insurance Policy, Mortgage Pool
Insurance Policy, Special Hazard Insurance
Policy, Bankruptcy Bond or other insurance
policies, cash accounts, letters of credit,
financial guaranty insurance policies, third
party guarantees, supplemental interest
payments or other forms of credit enhancement
or maturity protection, as described herein
and in the related Prospectus Supplement.
Each Class of Certificates within a Series
will evidence the interests specified in the
related Prospectus Supplement, which may (i)
include the right to receive distributions
allocable only to principal, only to interest
or to any combination thereof; (ii) include
the right to receive distributions only of
prepayments of principal throughout the lives
of the Certificates or during specified
periods; (iii) be subordinated in its right
to receive distributions of scheduled
payments of principal, prepayments of
principal, interest or any combination
thereof to one or more other Classes of
Certificates of such Series throughout the
lives of the Certificates or during specified
periods or may be subordinated with respect
to certain losses or delinquencies; (iv)
include the right to receive such
distributions only after the occurrence of
events specified in the Prospectus
Supplement; (v) include the right to receive
distributions in accordance with a schedule
or formula or on the basis of collections
from designated portions of the assets in the
related Trust; (vi) include, as to
Certificates entitled to distributions
allocable to interest, the right to receive
interest at a Fixed Rate or an Adjustable
Rate; and (vii) include, as to Certificates
entitled to distributions allocable to
interest, the right to distributions
allocable to interest only after the
occurrence of events specified in the related
Prospectus Supplement, and in each case, may
accrue interest until such events occur, as
specified in such Prospectus Supplement. The
timing and amounts of such distributions may
vary among Classes, over time, or otherwise
as specified in the related Prospectus
Supplement.
The Certificates will be issuable in fully
registered form, in minimum denominations of
$1,000 and integral multiples of $1,000 in
excess thereof (or such other amounts as may
be set forth in a Prospectus Supplement),
except that one Certificate of each Class may
be issued in a different denomination. See
"Description of Certificates."
Credit
Enhancement ...................... The Mortgage Assets in a Trust or the
Certificates of one or more Classes in the
related Series may have the benefit of one or
more types of credit enhancement, as
described in the related Prospectus
Supplement. The protection against losses
afforded by any such credit support may be
limited. Such credit enhancement may include
one or more of the following types:
A. Subordination
and Reserve
Accounts..................... The rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the Mortgage
Assets and other assets in the related Trust
will be subordinated to the rights of the
holders of the Senior Certificates of the
same Series to receive distributions to the
extent described in the related Prospectus
Supplement. This subordination is intended to
enhance the likelihood of regular receipt by
holders of Senior Certificates of the full
amount of payments which such holders would
be entitled to receive if there had been no
losses or delinquencies. The protection
afforded to the holders of Senior
Certificates through subordination may be
accomplished by the preferential right of
such holders to receive, prior to any
distribution being made in respect of the
related Subordinated Certificates, the
amounts of principal and interest due to them
on each Remittance Date out of the funds
available for distribution on such date in
the related Certificate Account (as defined
herein) to the extent described in the
related Prospectus Supplement. The protection
afforded to the holders of Senior
Certificates through subordination also may
be accomplished by allocating certain types
of losses or delinquencies to the related
Subordinated Certificates to the extent
described in the related Prospectus
Supplement.
If so specified in the related Prospectus
Supplement, the same Class of Certificates
may constitute Senior Certificates with
respect to certain types of payments or
certain losses or delinquencies and
Subordinated Certificates with respect to
other types of payments or losses or
delinquencies. If so specified in the related
Prospectus Supplement, subordination may
apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered by
Standard Hazard Insurance Policies or losses
due to the bankruptcy of a Mortgagor not
covered by a Bankruptcy Bond. If further
specified in the related Prospectus
Supplement, one or more reserve accounts
(each, a "Reserve Account") may be
established and maintained, in whole or in
part, by the deposit therein of distributions
allocable to the holders of Subordinated
Certificates for a specified time or until a
specified level is reached. The related
Prospectus Supplement will set forth
information concerning the amount of
subordination of a Class or Classes of
Subordinated Certificates in a Series, the
circumstances in which such subordination
will be applicable, the manner, if any, in
which the amount of subordination will
decrease over time, the manner of funding any
Reserve Account, and the conditions under
which amounts in any such Reserve Account
will be used to make distributions to Senior
Certificateholders or released to
Subordinated Certificateholders from the
related Trust.
B. Certificate
Guaranty
Insurance
Policy....................... A certificate guaranty insurance policy or
policies ("Certificate Guaranty Insurance
Policy") may be obtained and maintained for
each Class or Series of Certificates.
Certificate Guaranty Insurance Policies
generally unconditionally and irrevocably
guarantee that the full amount of the
distributions of principal and interest, as
well as any other amounts specified in the
related Prospectus Supplement, will be
received by an agent of the Trustee, for
distribution by the Trustee to
Certificateholders. Certificate Guaranty
Insurance Policies may have certain
limitations set forth in the related
Prospectus Supplement, including (but not
limited to) limitations on the insurer's
obligation to guarantee the Master Servicer's
obligation to repurchase or substitute for
any Mortgage Loans, to guarantee any
specified rate of prepayments or to provide
funds to redeem Certificates on any specified
date.
C. Spread
Amount....................... If so specified in the related Prospectus
Supplement, certain Classes of Certificates
may be entitled to receive limited
acceleration of principal relative to the
amortization of the related Mortgage Assets.
The accelerated amortization will be achieved
by applying certain excess interest collected
on the Mortgage Assets to the payment of
principal on such Classes of Certificates.
This acceleration feature is intended to
create an amount (the "Spread Amount"),
resulting from, and generally equal to, the
excess of the aggregate principal balances of
the applicable Mortgage Assets over the
principal balances of the applicable Classes
of Certificates. Once the required Spread
Amount is reached, and subject to the
provisions described in the next sentence and
in the related Prospectus Supplement, the
acceleration feature will cease, unless
necessary to maintain the required level of
the Spread Amount. The applicable Agreement
will provide that, subject to certain floors,
caps and triggers, the required level of the
Spread Amount may increase or decrease over
time. An increase would result in a temporary
period of accelerated amortization of the
applicable Classes of Certificates to
increase the actual level of the Spread
Amount to its required level; a decrease
would result in a temporary period of
decelerated amortization to reduce the actual
level of the Spread Amount to its required
level. An Agreement also may provide that
after one or more Classes of Certificates
have been paid to the required level of the
Spread Amount, excess interest, together with
certain other excess amounts, may be applied
to make-up shortfalls in, or accelerate the
amortization of, other Classes of
Certificates.
D. Mortgage Pool
Insurance
Policy....................... A mortgage pool insurance policy or policies
("Mortgage Pool Insurance Policy") may be
obtained and maintained for each Series
pertaining to Mortgage Loans and Contracts,
limited in scope, covering defaults on the
related Mortgage Loans or Contracts in an
initial amount equal to a specified
percentage of the aggregate principal balance
of all Mortgage Loans or Contracts included
in the Pool as of the Cut-off Date or such
other date as is specified in the related
Prospectus Supplement.
E. Special Hazard
Insurance
Policy....................... In the case of Mortgage Loans or Contracts,
certain physical risks that are not otherwise
insured against by Standard Hazard Insurance
Policies may be covered by a special hazard
insurance policy or policies (a "Special
Hazard Insurance Policy"). The level of
coverage of each Special Hazard Insurance
Policy will be specified in the related
Prospectus Supplement.
F. Bankruptcy
Bonds........................ A mortgagor bankruptcy bond or bonds
("Bankruptcy Bond") may be obtained to cover
certain losses resulting from a reduction by
a bankruptcy court of scheduled payments of
principal or interest on a Mortgage Loan or
Contract or a reduction by such court of the
principal amount of a Mortgage Loan or
Contract, and will cover certain unpaid
interest on the amount of such a principal
reduction. The level of coverage of each
Bankruptcy Bond will be specified in the
related Prospectus Supplement.
G. Cross
Support...................... If so specified in the Prospectus Supplement,
the ownership interests of separate Trusts or
separate groups of assets may be evidenced by
separate Classes of the related Series of
Certificates. In such case, credit support
may be provided by a cross-support feature
which requires that distributions be made
with respect to certain Certificates
evidencing interests in one or more Trusts or
asset groups prior to distributions to other
Certificates evidencing interests in other
asset groups or Trusts. If specified in the
related Prospectus Supplement, the coverage
provided by one or more forms of credit
support may apply concurrently to two or more
separate Trusts, without priority among such
Trusts, until the credit support is
exhausted. If applicable, the Prospectus
Supplement will identify the Trusts or asset
groups to which such credit support relates
and the manner of determining the amount of
the coverage provided thereby and of the
application of such coverage to the
identified Trusts or asset groups.
H. Supplemental
Interest
Payments..................... If so specified in the Prospectus Supplement,
one or more Classes of Certificates may be
entitled to receive supplemental interest
payments under specified circumstances.
Supplemental interest payments will be
available to fund some or all of the
difference, if any, between the interest owed
to a Class of Certificates on a Remittance
Date and the interest that would be available
to pay such interest assuming no defaults or
delinquencies on the Mortgage Assets. Such
differences may result if the interest rates
on the applicable Classes of Certificates are
based upon an index that differs from the
index used in determining the interest rates
on the Mortgage Assets. Except as otherwise
provided in a Prospectus Supplement,
supplemental interest payments will not be
available to fund shortfalls resulting from
delinquencies or defaults on the Mortgage
Assets.
I. Maturity
Protection.................... If so specified in the Prospectus Supplement,
one or more Classes of Certificates may be
entitled to third-party payments to help
provide that the holders of such Certificates
receive their unpaid principal on or prior to
a specified date.
J. The Guaranty................... If so specified in the Prospectus Supplement,
and in order to provide additional credit
enhancement, The Money Store may provide a
guaranty of amounts due on certain Classes of
Certificates. The amount and formula for
calculating such guaranty shall be as set
forth in the Prospectus Supplement.
K. Other Credit
Enhancement................... Other credit enhancement arrangements, as
described in the related Prospectus
Supplement, including (but not limited to)
one or more reserve funds, letters of credit,
financial guaranty insurance policies, a
guaranty of The Money Store or third party
guarantees, may be used to provide coverage
for certain risks of defaults or losses.
These arrangements may be in addition to or
in substitution for any forms of credit
support described in the Prospectus. Any such
arrangement must be acceptable to each
nationally recognized rating agency that
provides a rating for the related Series of
Certificates (the "Rating Agency").
Additionally, to the extent a significant
portion of the Mortgage Loans underlying a
given Series of Certificates consists of FHA
Loans, the related Prospectus Supplement will
describe the features of any related credit
support including, but not limited to, that
provided by the FHA, if any.
Monthly Advances.................. If so specified in the related Prospectus
Supplement, the Master Servicer will be
required under each Agreement to remit to the
Trustee no later than the day of each month
which is at least three business days prior
to the Remittance Date and is in no case
earlier than the seventh business day of such
month (the "Determination Date") the amount
(a "Monthly Advance"), if any, by which (a)
the sum of (x) 30 days' interest at the
weighted average Adjusted Mortgage Loan
Remittance Rate (as defined herein under
"Description of the Certificates- -Monthly
Advances and Compensating Interest") on the
then outstanding principal balance of the
related Series of Certificates and (y) the
amount, if any, required to be deposited into
the related Reserve Account (as specified in
the related Prospectus Supplement) for the
related Remittance Date exceeds (b) the
amount received by the Master Servicer in
respect of interest on the Mortgage Loans as
of the related Record Date. Such advances by
the Master Servicer are reimbursable in the
first instance from late collections of
interest, including amounts received in
connection with the liquidation of defaulted
Mortgage Loans ("Liquidation Proceeds"),
amounts paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan,
Mortgaged Property or REO Property
("Insurance Proceeds"), and proceeds received
by the Master Servicer in connection with
condemnation, eminent domain or a release of
lien ("Released Mortgaged Property Proceeds")
collected with respect to the related
Mortgage Loans as to which the advances were
made, and any other amount that would
otherwise be distributed on the Class R
Certificates. See "Description of the
Certificates--Monthly Advances and
Compensating Interest."
Compensating
Interest.......................... If so specified in the related Prospectus
Supplement, with respect to each Mortgage
Loan as to which the Master Servicer receives
a principal payment in full in advance of the
final scheduled due date (a "Principal
Prepayment") or receives a principal payment
that exceeds the scheduled payment by a
specified multiple, but which was not
intended by the Mortgagor to satisfy the
Mortgage Loan in full or to cure a
delinquency (a "Curtailment"), the Master
Servicer will be required to remit to the
Trustee, from amounts otherwise payable to
the Master Servicer as servicing
compensation, an amount ("Compensating
Interest") equal to any excess of (a) 30
days' interest on the principal balance of
each such Mortgage Loan as of the beginning
of the related Due Period at the applicable
weighted average Adjusted Mortgage Loan
Remittance Rate over (b) the amount of
interest actually received on the related
Mortgage Loan during such Due Period.
Optional
Termination....................... The Master Servicer, certain insurers, the
holders of REMIC Residual Certificates (as
defined herein), or certain other entities
specified in the related Prospectus
Supplement may have the option to effect
early retirement of a Series of Certificates
through the purchase of the related Mortgage
Assets and other assets in the related Trust
under the circumstances and in the manner
described in "The Agreement--Termination;
Purchase of Mortgage Loans."
Mandatory
Termination....................... The Trustee, the Master Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a Series of
Certificates under the circumstances and in
the manner specified in the related
Prospectus Supplement and herein under "The
Agreement--Termination; Purchase of Mortgage
Loans."
Trustee .......................... The trustee or trustees under any Agreement
relating to a Series of Certificates (each, a
"Trustee") will be specified in the related
Prospectus Supplement.
Federal Income Tax
Consequences...................... The federal income tax consequences of the
purchase, ownership and disposition of the
Certificates of each series will depend on
whether an election is made to treat the
corresponding Trust (or certain assets of the
Trust) as a "real estate mortgage investment
conduit" ("REMIC") under the Internal Revenue
Code of 1986, as amended (the "Code").
REMIC. If an election is to be made to treat
the Trust (or certain assets of the Trust)
for a Series of Certificates as a REMIC for
federal income tax purposes, the related
Prospectus Supplement will specify which
Class or Classes thereof will be designated
as regular interests in the REMIC ("REMIC
Regular Certificates") and which class of
Certificates will be designated as the
residual interest in the REMIC ("REMIC
Residual Certificates"). To the extent
provided herein and in the related Prospectus
Supplement, in the opinion of Stroock &
Stroock & Lavan, special Federal tax counsel
("Federal Tax Counsel"), Certificates
representing an interest in the REMIC
generally will be considered "real estate
assets" for purposes of Section 856(c)(5)(A)
of the Code and assets described in Section
7701(a)(19)(C) of the Code, but generally
will not be considered "residential loans"
for purposes of Section 593(g)(4)(B) of the
Code.
In the opinion of Federal Tax Counsel, for
federal income tax purposes, REMIC Regular
Certificates generally will be treated as
debt obligations of the Trust with payment
terms equivalent to the terms of such
Certificates. Holders of REMIC Regular
Certificates will be required to report
income with respect to such Certificates
under an accrual method, regardless of their
normal tax accounting method. Original issue
discount, if any, on REMIC Regular
Certificates will be includible in the income
of the Holders thereof as it accrues, in
advance of receipt of the cash attributable
thereto, which rate of accrual will be
determined based on a reasonable assumed
prepayment rate. The REMIC Residual
Certificates generally will not be treated as
evidences of indebtedness for federal income
tax purposes, but instead, as representing
rights to the taxable income or net loss of
the REMIC.
Each holder of a REMIC Residual Certificate
will be required to take into account
separately its pro rata portion of the
REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess
inclusions") generally may not be offset by
such a holder's net operating loss carryovers
or other deductions, and in the case of a
tax-exempt holder of a REMIC Residual
Certificate will be treated as "unrelated
business taxable income." In certain
situations, particularly in the early years
of a REMIC, holders of a REMIC Residual
Certificate may have taxable income, and
possibly tax liabilities with respect to such
income, in excess of cash distributed to
them. "DISQUALIFIED ORGANIZATIONS," AS
DEFINED IN "FEDERAL INCOME TAX CONSEQUENCES--
REMIC RESIDUAL CERTIFICATES--TAX ON
DISPOSITION OF REMIC RESIDUAL CERTIFICATES;
RESTRICTION ON TRANSFER; HOLDING BY
PASS-THROUGH ENTITIES," ARE PROHIBITED FROM
ACQUIRING OR HOLDING ANY BENEFICIAL INTEREST
IN THE REMIC RESIDUAL CERTIFICATES.
GRANTOR TRUST. If no election is to be made
to treat the Trust for a series of
Certificates ("Non-REMIC Certificates") as a
REMIC, the Trust will be classified as a
grantor trust for federal income tax purposes
and not as an association taxable as a
corporation. In the opinion of Federal Tax
Counsel, holders of Non-REMIC Certificates
will be treated for such purposes, subject to
the possible application of the stripped bond
rules, as owners of undivided interests in
the related Mortgage Assets generally will be
required to report as income their pro rata
share of the entire gross income (including
amounts paid as reasonable servicing
compensation) from the Mortgage Assets and
will be entitled, subject to certain
limitations, to deduct their pro rata share
of expenses of the Trust.
To the extent provided herein, Non-REMIC
Certificates generally will represent
interests in "real estate assets" for
purposes of Section 856(c)(5)(A) of the Code
and "Loans . . . principally secured by an
interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code but
should not be considered "residential loans"
for purposes of Section 593(g)(4)(B) of the
Code.
Investors are advised to consult their tax
advisors and to review "Federal Income Tax
Consequences" herein and, if applicable, in
the related Prospectus Supplement.
ERISA
Considerations.................... Fiduciaries of employee benefit plans or
other retirement plans or arrangements,
including individual retirement accounts,
certain Keogh plans, and collective
investment funds, separate accounts and
insurance company general accounts in which
such plans, accounts or arrangements are
invested, that are subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should
carefully review with their legal advisors
whether an investment in Certificates will
cause the assets of the related Trust to be
considered plan assets under the Department
of Labor ("DOL") regulations set forth in 29
C.F.R. Section 2510.3-101 (the "Plan Asset
Regulations"), thereby subjecting the Trustee
and the Master Servicer to the fiduciary
investment standards of ERISA, and whether
the purchase, holding or transfer of
Certificates gives rise to a transaction that
is prohibited under ERISA or subject to the
excise tax provisions of Section 4975 of the
Code, unless a DOL administrative exemption
applies. See "ERISA Considerations."
Legal
Investment........................ Each Prospectus Supplement will describe the
extent, if any, to which the Classes of
Certificates offered thereby will constitute
"mortgage-related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") and whether they will be
legal investments for certain types of
institutional investors under SMMEA. See
"Legal Investment" herein.
Registration of
Certificates...................... Certificates may be represented by global
certificates registered in the name of Cede &
Co. ("Cede"), as nominee of The Depository
Trust Company ("DTC"), or another nominee. In
such case, Certificateholders will not be
entitled to receive definitive certificates
representing such Holders' interests, except
in certain circumstances described in the
related Prospectus Supplement. See
"Description of the Certificates--Book-Entry
Registration" herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates will
develop or, if a secondary market does develop, that it will provide Holders of
the Certificates with liquidity of investment or that it will continue for the
lives of the Certificates.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, Direct or Indirect Participants and certain banks,
the ability of a Certificateholder to pledge a Certificate to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Certificates, may be limited due to lack of a physical
certificate representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration."
NATURE OF SECURITY
Certain of the Mortgage Loans will be loans secured by junior liens
subordinate to the rights of the mortgagee under each related senior mortgage.
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a junior
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee are satisfied in full, including any related foreclosure costs. In
addition, a mortgagee may not foreclose on the mortgaged property unless it
forecloses subject to any related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder. In
servicing mortgage loans in their portfolios, it has been the Originators'
practice to satisfy each such senior mortgage at or prior to the foreclosure
sale only to the extent that they determine any amounts so paid will be
recoverable from future payments and collections on the mortgage loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the Mortgage Loans--Foreclosure/Repossession."
An overall decline in the market value of residential real estate, the
general condition of a Mortgaged Property, or other factors, could adversely
affect the values of the Mortgaged Properties such that the outstanding balances
of the Mortgage Loans which are junior mortgage loans, together with any senior
liens on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Property before having any effect on the interest of the related
senior mortgagee. Certain of the Mortgage Loans may be secured by Mortgaged
Properties located in California and Texas. Certain areas of the country,
including California and Texas, have experienced declines in real estate values
over the last few years. Economic conditions in California are often volatile
and from time to time have been adversely affected by natural disasters,
contractions in the defense industry and declining real estate values. The
President of the United States has endorsed a list of military bases to be
closed within the next two to six years, which list includes significant bases
in California. These closures, which have been approved by Congress, along with
the recent general decline in defense spending, could have an adverse affect on
economic conditions in California. The Representative will not be able to
quantify the impact of any property value declines on the Mortgage Loans or
predict whether, to what extent or how long such declines may continue. In
periods of such declines, the actual rates of delinquencies, foreclosures and
losses on the Mortgage Loans could be higher than those historically experienced
in the mortgage lending industry in general. See "The Single Family Lending
Program--Servicing and Collections."
Certain of the Mortgage Loans may constitute "Balloon Loans." Balloon Loans
are originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon" payment which will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the Mortgage Loan. The ability of
a Mortgagor to refinance such a Mortgage Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the value
of the related Mortgaged Property, the Mortgagor's equity in the related
Mortgaged Property, the financial condition of the Mortgagor and the tax laws
and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the
Representative, the Originators, the Master Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan.
General economic conditions have an impact on the ability of borrowers to
repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by borrowers. In the
event of bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain Liquidation Proceeds (net of expenses)
sufficient to repay all amounts due on the related Mortgage Loan. The Master
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
liquidated Mortgage Loan and not yet repaid, including payments to prior
lienholders, legal fees and costs of legal action, real estate taxes, and
maintenance and preservation expenses. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans and
insufficient funds are available from applicable Credit Enhancement,
Certificateholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the smaller mortgage loan
than would be the case with a larger loan. Because the average outstanding
principal balances of the Mortgage Loans which are junior mortgage loans are
small relative to the size of the loans in a typical pool composed entirely of
first mortgages, realizations net of liquidation expenses on defaulted Mortgage
Loans which are junior mortgage loans may also be smaller as a percentage of the
principal amount of such junior mortgage loans than would be the case with a
typical pool of first mortgage loans.
Under environmental legislation and case law applicable in various states,
including California, a secured party that takes a deed in lieu of foreclosure,
acquires a mortgaged property at a foreclosure sale or which, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Considerations."
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Pool will not be secured by an interest in the related real estate
or otherwise, and the related Trust Fund, as the owner of such Unsecured Home
Improvement Loan, will be a general unsecured creditor as to such obligations.
As a consequence, in the event of a default under an Unsecured Home Improvement
Loan, the related Trust Fund will have recourse only against the borrower's
assets generally, along with all other general unsecured creditors of the
borrower. In a bankruptcy or insolvency proceeding relating to a borrower on an
Unsecured Home Improvement Loan, the obligations of the borrower under such
Unsecured Home Improvement Loan may be discharged in their entirety,
notwithstanding the fact that the portion of such borrower's assets made
available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Originators and the
Master Servicer. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Mortgage Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Master Servicer
to collect all or part of the principal of or interest on the Mortgage Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and (iv)
the NHA Act (as defined herein) with respect to FHA Loans.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act") which amended the Federal
Truth in Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered in an action under the Home Ownership Act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the mortgage loan. Any Trust for which the Mortgage Assets
include Mortgage Loans subject to the Home Ownership Act would be subject to all
of the claims and defenses which the borrower could assert against the original
lender. Any violation of the Home Ownership Act which would result in such
liability would be a breach of the applicable Originator's representations and
warranties, and the Representative would be obligated to cure, repurchase or, if
permitted by the related Agreement, substitute for the Mortgage Loan in
question.
PREPAYMENT CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social, and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
A number of factors suggest that the prepayment behavior of a pool
including junior mortgage loans may be significantly different from that of a
pool composed entirely of first mortgage loans with equivalent interest rates
and maturities. One such factor is the smaller average principal balance of a
pool of junior mortgage loans which may result in a higher prepayment rate than
that of a pool of first mortgage loans with a larger average balance, regardless
of the interest rate environment. A small principal balance, however, also may
make refinancing a junior mortgage loan at a lower interest rate less attractive
to the borrower relative to refinancing a larger balance first mortgage loan, as
the perceived impact to the borrower of lower interest rates on the size of the
monthly payment for a junior mortgage loan may be less than for a first mortgage
loan with a larger balance. Other factors that might be expected to affect the
prepayment rate of a pool of junior mortgage loans include the amounts of, and
interest rates on, the underlying senior mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and junior mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity mortgage loans for federal income tax purposes
may further increase the rate of prepayments of such junior mortgage loans. See
"Maturity, Prepayment and Yield Considerations."
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies and, if so
specified in the related Prospectus Supplement, amounts on deposit in the Pre-
Funding Account at the end of the Funding Period being applied to the payment of
principal of the Certificates. In addition, repurchases or purchases from a
Trust of Mortgage Loans required to be made by the Representative under the
Agreement will have the same effect on the Certificateholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the secured Mortgage Loans contain "due-on-sale" provisions,
and the Master Servicer will be required to enforce such provisions unless (i)
such enforcement would materially increase the risk of default or delinquency
on, or materially decrease the security for, such Mortgage Loan or (ii) such
enforcement is not permitted by applicable law, in which case the Master
Servicer is authorized to permit the purchaser of the related Mortgaged Property
to assume the Mortgage Loan. See "The Agreement" in the related Prospectus
Supplement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Certain of the Mortgage Loans may be "simple interest" or "date-of-payment
loans." If a payment is received on such a Mortgage Loan later than scheduled, a
smaller portion of such payment will be applied to principal and a greater
portion will be applied to interest than would have been the case had the
payment been received on the scheduled due date, resulting in such Mortgage Loan
having a longer average life than would have been the case had the payment been
made as scheduled. Conversely, if a payment on such a Mortgage Loan is received
earlier than scheduled, more of such payment will be applied to principal and
less to interest than would have been the case had the payment been received on
its scheduled due date, resulting in such Mortgage Loan having a shorter average
life than would have been the case had the payment been made as scheduled.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF
BANKRUPTCY OF THE REPRESENTATIVE OR AN ORIGINATOR
In the event of the bankruptcy of the Representative or an Originator at a
time when it or any affiliate thereof holds a Class R Certificate, a trustee in
bankruptcy of the Representative or its creditors could attempt to
recharacterize the sale of the Mortgage Loans to the related Trust as a
borrowing by the Representative, the Originator or such affiliate with the
result, if such recharacterization is upheld, that the Certificateholders would
be deemed to be creditors of the Representative, the Originator or such
affiliate, secured by a pledge of the Mortgage Loans. If such an attempt were
successful, a trustee in bankruptcy could elect to accelerate payment of the
Certificates and liquidate the Mortgage Loans, with the Certificateholders
entitled to the then outstanding principal amount thereof together with accrued
interest. Thus, the Certificateholders could lose the right to future payments
of interest, and might suffer reinvestment loss in a lower interest rate
environment.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), or similar state legislation, a
Mortgagor who enters military service after the origination of the related
Mortgage Loan (including a Mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such Mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could have an effect, for an indeterminate period
of time, on the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage Loans. In addition, the Relief Act imposes
limitations which would impair the ability of the Master Servicer to foreclose
on an affected Mortgage Loan during the Mortgagor's period of active duty
status. Thus, in the event that such a Mortgage Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
CERTIFICATE RATING
The rating of the Certificates will depend primarily on the
creditworthiness of any third party provider of credit enhancement, if any, as
set forth in the related Prospectus Supplement. Any reduction in the rating
assigned to the claims-paying ability of such provider below the rating
initially given to a Series of Certificates would likely result in a reduction
in the rating of such Series of Certificates. See "Rating."
OTHER
To the extent a significant portion of the Mortgage Loans underlying a
given series of Certificates consists of FHA Loans and/or Secured Conventional
Home Improvement Loans, the related Prospectus Supplement will describe any
additional Risk Factors related to such Mortgage Loans.
<PAGE>
THE TRUSTS
A Trust for any Series of Certificates will include the Mortgage Assets
consisting of (A) a Pool* comprised of (i) Single Family Loans, (ii) Cooperative
Loans, (iii) Multifamily Loans, (iv) Contracts, (v) FHA Loans, (vi) Secured
Conventional Home Improvement Loans, (vii) Unsecured Home Improvement Loans, or
(B) Agency Securities or Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
- --------
* Whenever the terms "Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Certificates
representing certain undivided fractional interests, as described
below, in a single Trust consisting primarily of the Mortgage Loans in
such Pool. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates of one specific Series and
the term "Trust" will refer to one specific Trust.
The Certificates will be entitled to payment only from the assets of the
related Trust and, to the extent specified in a Prospectus Supplement, payments
in respect of the assets of other trusts established by the Representative, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Certificates will evidence the entire fractional undivided
ownership interest in a Trust which will contain a beneficial ownership interest
in another Trust which will contain all or some of the Mortgage Assets.
Certain of the Mortgage Assets may have been originated by the Originators.
Other Mortgage Assets may have been acquired by the Representative, an
Originator or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative. See "Mortgage Loan Program--Underwriting Criteria."
The following is a brief description of the Mortgage Assets expected to be
included in the Trusts. If specific information respecting the Mortgage Assets
is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series (the "Mortgage Asset Schedule") will be
attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
THE MORTGAGE LOANS--GENERAL
The real property and Manufactured Homes, as the case may be, which secure
repayment of the Mortgage Loans and Contracts (the "Mortgaged Properties") may
be located in any one of the fifty states, the District of Columbia, the
Commonwealth of Puerto Rico or any other commonwealth, territory or possession
of the United States. It is expected that the Mortgage Loans or Contracts will
be Conventional Loans (i.e., loans that are not insured or guaranteed by any
governmental agency). However, if specified in the related Prospectus
Supplement, certain of the Single Family Loans may be insured by the FHA or
partially guaranteed by the VA. Mortgage Loans with Combined Loan-to-Value
Ratios and/or certain principal balances may be covered wholly or partially by
Primary Mortgage Insurance Policies. The Mortgage Loans may be covered by
Standard Hazard Insurance Policies.
All of the Mortgage Loans in a Pool will provide for payments to be made
monthly ("monthly pay"), bi-weekly or on such other terms as may be described in
a Prospectus Supplement. The payment terms of the Mortgage Loans to be included
in a Trust will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate). The specified rate of interest on
a Mortgage Loan is its Mortgage Interest Rate. Changes to an Adjustable
Rate may be subject to periodic limitations, maximum rates, minimum
rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a Mortgage Loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the Mortgage Interest Rate for a period
of time or for the life of the Mortgage Loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged Property securing the related Mortgage Loan or another source
or may be treated as accrued interest added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level basis to fully
amortize the Mortgage Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly longer
than the original term to maturity or on an interest rate that is
different from the Mortgage Interest Rate, or may not be amortized
during all or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity ("balloon"
payments). Principal may include interest that has been deferred and
added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time ("graduated payments") or may change from period to period.
Mortgage Loans may include limits on periodic increases or decreases in
the amount of monthly payments and may include maximum or minimum
amounts of monthly payments. Mortgage Loans having graduated payment
provisions may require the monthly payments of principal and interest
to increase for a specified period, provide for deferred payment of a
portion of the interest due monthly during such period, and recoup the
deferred interest through negative amortization whereby the difference
between the scheduled payment of interest and the amount of interest
actually accrued is added monthly to the outstanding principal balance.
Other Mortgage Loans sometimes referred to as "growing equity" mortgage
loans may provide for periodic scheduled payment increases for a
specified period with the full amount of such increases being applied
to principal.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers
of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards
of the Originator.
To the extent a significant portion of the Mortgage Loans underlying a
given Series of Certificates consist of FHA Loans and/or Secured Conventional
Home Improvement Loans, the related Prospectus Supplement will describe the
material provisions of such Mortgage Loans and the programs under which they
were originated. The Prospectus Supplement for each Series of Certificates will
contain information with respect to all the Mortgage Loans expected to be
included in the related Pools as of the related closing date, including (i) the
expected aggregate outstanding principal balance and the expected average
outstanding principal balance of the Mortgage Loans as of the date set forth in
the Prospectus Supplement, (ii) the largest expected principal balance and the
smallest expected, principal balance of any of the Mortgage Loans, (iii) the
types of Mortgaged Properties and/or other assets securing the Mortgage Loans
(e.g., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property) and the percentage, if
any, of Unsecured Home Improvement Loans expected to be included in the related
Pool, (iv) the original terms to maturity of the Mortgage Loans, (v) the
expected weighted average term to maturity of the Mortgage Loans as of the date
set forth in the Prospectus Supplement and the expected range of the terms to
maturity, (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the expected aggregate principal balance of Mortgage
Loans having Combined Loan-to-Value Ratios at origination exceeding 80%, (viii)
the expected Mortgage Interest Rate or APR and ranges of Mortgage Interest Rates
or APRs borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the expected weighted average of the Adjustable Rates, if any,
(x) the expected aggregate outstanding principal balance, if any, of Buy-Down
Loans and Mortgage Loans having graduated payment provisions as of the date set
forth in the Prospectus Supplement, (xi) the amount of any Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to such Pool, (xii) to the extent different from the
amounts described herein, the amount of any Standard Hazard Insurance Policy
required to be maintained with respect to each Mortgage Loan; (xiii) the amount,
if any, and terms of any other credit enhancement to be provided with respect to
all or a material portion of the Mortgage Loans or the Pool and (xiv) the
expected geographic location of the Mortgaged Properties. If specific
information respecting the Mortgage Loans is not known to the Representative at
the time the related Certificates are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement and specific information will be set forth in the Detailed
Description.
The Combined "Loan-to-Value Ratio" of a Single Family Loan at any given
time is the ratio, expressed as a percentage, determined by dividing (x) the sum
of the original principal balance of the Single Family Loan (less the amount, if
any, of the premium for credit life insurance) plus the then-current principal
balance of the related first lien, if any, by (y) the value of the related
Mortgaged Property, based upon the appraisal or valuation made at the time of
origination of the Single Family Loan. To the extent a significant portion of
the Mortgage Loans underlying a given Series of Certificates consists of FHA
loans and/or Secured Conventional Home Improvement Loans, the related Prospectus
Supplement may describe the method for calculating the Combined Loan-to-Value
Ratio, if deemed relevant by the Representative. In the case of Refinance Loans,
the value of the related Mortgaged Property generally will be based on an
appraisal or valuation obtained at the time of refinancing. For purposes of
calculating the Combined Loan-to-Value Ratio of a Contract relating to a new
Manufactured Home, the value of such Manufactured Home generally will be no
greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site) including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. The value of a used Manufactured
Home generally will be the least of the sales price, appraised value, and
National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a Manufactured Home will be
based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Mortgaged Properties), in a particular Pool become equal to or greater than the
value of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. An overall decline in the market value of real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the Mortgage Loans, together with any additional liens
on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Under such circumstances, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Certain of the residential mortgage loans to be included in a Trust are
expected to be residential mortgage loans secured by second, third or fourth
liens ("Home Equity Loans") subordinate to the rights of the mortgagee under
each related senior mortgage. The proceeds from any liquidation, insurance or
condemnation of Mortgaged Properties relating to Home Equity Loans in a Pool
will be available to satisfy the principal balance of such Home Equity Loans
only to the extent that the claims, if any, of the related senior mortgagee,
including any related foreclosure costs, are satisfied in full. In addition, the
Master Servicer may not foreclose on a Mortgaged Property relating to a Home
Equity Loan unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. Generally, in servicing Home Equity Loans in their loan
portfolios, it has been the Originators' practice to satisfy each senior
mortgage at or prior to a foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the Home Equity Loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the Mortgage Loans--
Foreclosure/Repossession."
In addition, general economic conditions and other factors (which may or
may not effect real property values) have an impact on the ability of mortgagors
to repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by mortgagors. In
the event of bankruptcy of a mortgagor, it is possible that a Trust could
experience a loss with respect to the related Mortgage Loan. In conjunction with
a mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments
of principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by such Trust with respect
thereto. Moreover, in the event a bankruptcy court prevents the transfer of the
related Mortgaged Property to the Trust, any remaining balance on such Mortgage
Loan may not be recoverable.
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the Certificateholders of the related Series.
The Representative will cause the Mortgage Loans comprising each Pool to be
assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Agreement." With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Agreement as if the Master Servicer alone were
servicing such Mortgage Loans.
The only obligations of the Representative or the Originators with respect
to a Series of Certificates will be to provide (or, where the Representative or
an Originator acquired a Mortgage Loan from another originator, obtain from such
originator) certain representations and warranties concerning the Mortgage Loans
and to assign to the Trustee for such Series of Certificates the
Representative's or Originator's rights with respect to such representations and
warranties. See "The Agreements--Sale of Mortgage Loans." The obligations of the
Master Servicer with respect to the Mortgage Loans will consist principally of
its contractual servicing obligations under the related Agreement and its
obligation to make certain cash advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Certificates--Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
If provided in the related Prospectus Supplement, the original principal
amount of a Series of Certificates may exceed the principal balance of the
Mortgage Assets initially being delivered to the Trustee. Cash in an amount
equal to such difference (the "Pre-Funded Amount") will be deposited into a
separate trust account (the "Pre-Funding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement (the "Funding
Period"), amounts on deposit in the Pre-Funding Account may be used to purchase
additional Mortgage Assets for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related Series of Certificates at the time and
in the manner set forth in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Single Family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on one- to four-family residential properties. If so specified
in a Prospectus Supplement, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low-rise condominium buildings together with such condominium units'
appurtenant interests in the common elements of the condominium buildings.
Cooperative Loans generally will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' buildings.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in low-rise
condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties. A portion of a
dwelling unit may contain a commercial enterprise.
MULTIFAMILY LOANS
"Multifamily Loans" will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on rental apartment buildings, mixed-use properties or
projects containing five or more residential units.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. In such cases, the Cooperative
owns all the apartment units in the building and all common areas. The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Substantially all of the Multifamily Loans will be secured by mixed-use
properties, with no less than approximately 90% of such properties, measured by
square footage, number of units and projected rent, being allocated to
residential units.
CONTRACTS
Contracts will consist of manufactured housing conditional sales contracts
and installment sales or loan agreements each secured by a Manufactured Home.
Contracts may be conventional, insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans Administration ("VA"), as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Contract will be fully amortizing and
will bear interest at its APR.
The "Manufactured Homes" securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which, in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract loan-to-value ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust; and the original maturities of the
Contracts and the last maturity date of any Contract.
FHA LOANS
The FHA Loans will consist of home improvement loans originated under Title
I (the "Title I Loan Program") of the National Housing Act of 1934 (the "NHA
Act"). Under the NHA Act, the Federal Housing Administration (the "FHA"), an
agency of the United States Department of Housing and Urban Development ("HUD"),
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. Several types of loans may be made under the Title I
Loan Program, including (1) property improvement loans; (2) manufactured home
purchase loans; (3) manufactured home lot loans; and (4) combination loans (to
purchase a manufactured home and a lot). Property improvement loans (the "Title
I Property Improvement Loans") may be made by approved lenders to finance
alterations, repair or improvement of existing single family, multifamily,
manufactured housing and nonresidential structures.
Title I Property Improvement Loans, in addition to improvements to protect
the livability or utility of single family, multifamily or manufactured housing
or nonresidential property, also include loans for the renovation or
preservation of historic residential structures and loans to finance the
installation of fire safety equipment in existing health care facilities. Loan
processing and credit determinations are done by an approved financial
institution. Each lender is required to use prudent lending standards in
underwriting individual loans.
Under the Title I Loan Program, the FHA does not review individual loans at
the time of approval (as is typically the case with some other federal loan
programs), except when the amount of a Title I Property Improvement Loan would
result in any borrower having a total unpaid principal obligation on such loans
in excess of certain specified amounts, in which case HUD approval must be
obtained.
The Title I Loan Program is a coinsurance program. The lender initially is
at risk for 10% of the principal balance of each loan. The FHA will insure the
remaining 90% of the principal balance of each loan, subject to the limits of
the reserve amount discussed below. Such FHA insurance is accorded the full
faith and credit of the United States of America. Thus, a lender under the
program risks the loss of up to 10% of the principal balance on every loan
submitted to the FHA for an insurance claim (or a greater amount if the lender's
reserve amount is diminished or exhausted), plus a portion of the interest on
such loans.
At the time the FHA receives a new loan origination or transfer of note
report from an approved lender, the FHA adds to the balance in the reserve
amount established by the FHA for the lender originating or purchasing such loan
an amount equal to 10% of the amount disbursed, advanced or expended by the
lender in originating or purchasing the loan. The balance in the reserve amount
limits the amount of claims the FHA is required to pay.
The reserve amount established by the FHA for each lender will be reduced
by the amount of all insurance claims approved for payment in conjunction with
losses on such loans. The lender's reserve amount will be increased based upon
additions made pursuant to the origination or purchase of eligible loans
registered for insurance.
The FHA charges a fee of 0.50% per annum of the original balance for each
loan it insures, on a non- declining basis. The FHA bills the lender annually
(on the anniversary date of origination) for the insurance premium, unless the
loan has a maturity of 25 months or less, in which case the insurance charge is
payable in one lump sum. If a loan is prepaid during the year, the FHA will not
rebate the insurance premium nor reduce the balance in the lender's insurance
coverage reserve account. The unused insurance charge will, however, be rebated
when a Title I loan is refinanced.
SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
The Secured Conventional Home Improvement Loans will consist of secured
conventional loans, the proceeds of which generally will be used for purposes
similar to those described under the heading "--FHA Loans." To the extent set
forth in the related Prospectus Supplement, the Secured Conventional Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans will consist of conventional unsecured
home improvement loans and FHA insured home improvement loans. To the extent set
forth in the related Prospectus Supplement, the Unsecured Home Improvement Loans
will be fully amortizing and will bear interest at a fixed or variable annual
percentage rate.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the United Stated Department of
Housing and Urban Development HUD. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to, among
other things, guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"),
or partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may be
a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will provide for
the payment by or on behalf of the GNMA Issuer to the registered holder of such
GNMA Certificate of scheduled monthly payments of principal and interest equal
to the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loans or VA Loans
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
loans are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("FNMA Project
Issuers") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the Housing Act ("GNMA
Project Certificates"). The Prospectus Supplement for a Series of Certificates
that includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each such pool
will consist of mortgage loans of one of the following types: (i) fixed-rate
level installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA; (iii)
adjustable rate conventional mortgage loans; or (iv) adjustable rate mortgage
loans that are insured by the FHA or partially guaranteed by the VA. Each
mortgage loan must meet the applicable standards set forth under the FNMA
purchase program. Each such mortgage loan will be secured by a first lien on a
one-family or two- to four-family residential property. Each such FNMA
Certificate will be issued pursuant to a trust indenture. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying a
FNMA Certificate are expected to be between either 8 to 15 years or 20 to 40
years. The original maturities of substantially all of the fixed rate level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate if a FNMA MBS, or the series
pass-through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute on a timely basis amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such FNMA Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of each
class in principal and interest distributions are not identical, but the classes
in the aggregate represent 100% of the principal distributions and interest
distributions (adjusted to the series pass-through rate) on the respective pool.
Because of such difference between the fractional interests in principal and
interest of each class, the effective rate of interest on the principal of each
class of FNMA SMBS may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing interests
in pools of mortgages formed on or after May 1, 1985 will be available in
book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government- sponsored enterprise created pursuant to the Federal Home
Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the
Federal Home Loan Banks. FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate Group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate Group. Under the Guarantor Program, any
such FHLMC Certificate Group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate receipt by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not, except if and to the extent specified in the
Prospectus Supplement for a Series of Certificates, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June 1,
1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). The Prospectus Supplement for a Series of
Securities issued by a Trust that included FHLMC Project Certificates will set
forth additional information regarding multi-family residential mortgage loans
that qualify for purchase by FHLMC.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government- sponsored agency, each as trustee,
or by another trustee named in the related Prospectus Supplement. FHLMC, FNMA,
GNMA or another government agency or government-sponsored agency will guarantee
each stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of mortgage
loans, or (b) collateralized mortgage obligations ("CMO's") secured by mortgage
loans. Private Mortgage-Backed Securities will have been issued pursuant to a
PMBS agreement (the "PMBS Agreement"). The seller/servicer of the underlying
mortgage loans will have entered into the PMBS Agreement with the PMBS Trustee
under the PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will
possess the mortgage loans underlying such Private Mortgage-Backed Security.
Mortgage loans underlying a Private Mortgage-Backed Security will be serviced by
the PMBS Servicer directly or by one or more sub-servicers who may be subject to
the supervision of the PMBS Servicer. The PMBS Servicer will be approved as a
servicer by FNMA or FHLMC and, if FHA Loans underlie the Private Mortgage-Backed
Securities, approved by the Department of Housing and Urban Development ("HUD")
as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Representative. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The mortgage loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such mortgage loans
may be Single Family Loans, Multifamily Loans, Cooperative Loans or Contracts
secured by Manufactured Homes. As specified in the related Prospectus
Supplement, (i) no mortgage loan underlying the Private Mortgage-Backed
Securities will have had a Combined Loan-to-Value Ratio at origination in excess
of the percentage set forth in the related Prospectus Supplement, (ii) each
underlying mortgage loan will have had an original term to stated maturity of
not less than 5 years and not more than 40 years, (iii) each underlying mortgage
loan (other than Cooperative Loans) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (iv) each mortgage
loan (other than Cooperative Loans or Contracts secured by a Manufactured Home)
will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying the
Private Mortgage-Backed Securities or with respect to the Private Mortgage-
Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for which
the related Trust includes Private Mortgage-Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the mortgage loans underlying the Private Mortgage-Backed
Securities including (A) the payment features of such mortgage loans, (B) the
approximate aggregate principal balance, if known, of underlying mortgage loans
insured or guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the underlying mortgage loans, and (D) the
minimum and maximum stated maturities of the underlying mortgage loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term- to-stated maturity
of the Private Mortgage-Backed Securities, (v) the pass-through or certificate
rate of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage- Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the mortgage loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
mortgage loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which other mortgage
loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Certificates of each Series for general corporate
purposes, including repayment of debt and the origination and acquisition of
residential mortgage loans and other loans. The Representative expects
Certificates to be sold in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The Mortgage Loans will have been originated or acquired by the
Originators. The Money Store will act as the Master Servicer of the Mortgage
Loans and other Mortgage Assets. Except for certain representations and
warranties relating to the Mortgage Loans and other Mortgage Assets and certain
other matters, the obligations of The Money Store with respect to the Mortgage
Loans and other Mortgage Assets will be limited to its contractual servicing
obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, loans partially
guaranteed by the United States Small Business Administration, student loans,
and automobile loans.
Since 1967, The Money Store and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States.
THE SINGLE FAMILY LOAN LENDING PROGRAM
OVERVIEW
The Money Store's and the Originators' mortgage lending activities consist
primarily of originating, purchasing, selling and servicing mortgage loans that
are primarily secured by one- to four-family residential properties, including
low-rise condominiums, single-family detached homes, single-family attached
homes, planned unit developments and mixed use properties (collectively, "Single
Family Loans"). It has been the Originators' policy generally not to make
mortgage loans secured by high-rise condominiums, cooperative residences or
other categories of properties that management believes have demonstrated
relatively high levels of risk. The majority of Single Family Loans are to
borrowers owning a single-family detached home. Single Family Loans are made to
borrowers for, among other purposes, education, home improvements and debt
consolidation. The Money Store and its subsidiaries also originate, with the
intention of selling and servicing, Multifamily Loans, FHA Loans, Secured
Conventional Home Improvement Loans, Unsecured Home Improvement Loans and loans
partially guaranteed by the United States Small Business Administration. In
addition, The Money Store and its subsidiaries from time to time purchase
packages of loans from other lenders or government agencies.
Historically, the majority of all loans originated and purchased by the
Originators were Single Family Loans with original terms of 15 years. Starting
in 1992, the Originators began originating and purchasing Single Family Loans
with original terms of up to 30 years. The Money Store believes that the longer
term, and correspondingly lower monthly payments, of these Single Family Loans
is attractive to customers who might otherwise refinance an existing loan or
obtain a new loan from a bank or other traditional long term lender. The Money
Store believes that its rapid turnaround time from application to funding also
makes it an attractive alternative to more traditional lenders. The following is
a description of the origination, underwriting, servicing and other procedures
used by The Money Store and the Originators in connection with their Single
Family Loan program. If a significant portion of the Mortgage Loans underlying a
given Series of Certificates consists of FHA Loans, Secured Conventional Home
Improvement Loans and/or Unsecured Home Improvement Loans, the related
Prospectus Supplement will contain a similar description of the program relating
to such Mortgage Loans.
SINGLE FAMILY LOAN ORIGINATION
The Originators' Single Family Loan origination offices are generally
located in small and medium-sized suburban communities. All Single Family Loan
origination offices have a manager who reports to senior management. Each
regional office supervises the operations of a group of states. The supervision
of all of the Originator's underwriting and administrative functions is
conducted from the Sacramento, California headquarters.
The entire application and approval process for Single Family Loans is
generally conducted by telephone. The Originators attempt to grant approvals of
loans quickly to borrowers meeting their underwriting criteria. A loan officer
is responsible for completing, evaluating and processing the loan application of
a prospective borrower based on information obtained from the borrower and
verified with third parties. Depending on the size of the loan applied for, loan
applications must be approved by an underwriter located in the Sacramento,
California headquarters. Loan officers are trained to structure loans that meet
the applicant's needs, while satisfying the Originators' lending criteria. If an
applicant does not meet the lending criteria, the loan officer may offer to make
a smaller loan, if a smaller loan would meet the lending criteria, or suggest a
debt consolidation package that better suits the applicant's needs.
The Originators also acquire Single Family Loans through an indirect
lending program, from independent brokers. Such Single Family Loans are
underwritten by the Originators using the same criteria applied to loans
originated by such Originator. Brokers participating in this program must
satisfy certain requirements established by the Originators pertaining to
experience, size of business and various licenses and approvals. The Originators
also acquire, from time to time, portfolios of Single Family Loans from various
third parties. The Originators will not sell such acquired loans to a Trust
unless the Originators determine that such loans, when originated, were
underwritten using the same criteria applied to loans originated by the
Originators.
Starting in October 1995, the Originators began originating Single Family
Loans under a program that will result in lower interest rates for borrowers
that make timely payments during the early years of the related loan. Under this
program, if a borrower remits all scheduled payments during the first year of
the loan on a timely basis, the interest rate on the loan will be reduced 0.50%
per annum. If the borrower remits all scheduled payments during the second year
of the loan on a timely basis, the interest rate will be reduced an additional
0.50% per annum and, if all payments are made during the third year of the loan
on a timely basis, the interest rate will be reduced a final 0.50% per annum.
Once the interest rate on a loan is reduced, it will not be increased,
regardless of the borrowers future payment record.
UNDERWRITING CRITERIA
The following is a brief description of certain of the underwriting
standards used by the Originators to underwrite Single Family Loans. The
underwriting process is intended to assess both the prospective borrower's
ability to repay and the adequacy of the real property security as collateral
for the loan granted. To the extent that the relevant underwriting criteria
differ from those described herein, the related Prospectus Supplement for such
Series will specifically describe such criteria.
In certain cases deemed appropriate by an Originator's underwriters, loans
may be made outside of the Originator's guidelines with the prior approval of
pre-designated senior officials. No information is available with respect to the
portion of the Mortgage Loans which was originated outside of these guidelines.
The Originators' objective in originating Single Family Loans is to provide
loans to borrowers with satisfactory income and credit histories deemed
sufficient to demonstrate the ability to repay their loan. The primary and
initial origination policy is to analyze the applicant's creditworthiness (i.e.,
a determination of the applicant's ability to repay the loan). Creditworthiness
is assessed by examination of a number of factors, including calculating a
debt-to-income ratio obtained by dividing a borrower's fixed monthly debt by the
borrower's gross monthly income. Fixed monthly debt generally includes (i) the
monthly payment under the related prior mortgages (which generally includes an
escrow for real estate taxes) based, in the case of an adjustable-rate first
mortgage, on the assumption that the then-current rate is the rate at which
interest will accrue on such loan, (ii) the monthly payment on the loan applied
for and (iii) other installment debt, including, for revolving debt, the
required monthly payment thereon or if no such payment is specified, 5% of the
balance as of the date of calculation. Fixed monthly debt does not include any
debt (other than revolving credit debt) described above that matures within less
than 10 months of the date of calculation. Except as otherwise set forth in the
related Prospectus Supplement, the debt-to-income ratio of any borrower will not
have exceeded 50% as of origination of the related loan. Creditworthiness is
also assessed by examining the applicant's credit history through standard
credit reporting bureaus, and by checking the applicant's payment history with
respect to the first mortgage, if any, on the property.
The second origination policy for Single Family Loans is a determination of
the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio guidelines are
established depending on the type of loan. For each Single Family Loan, the
Originator confirms the value of the property to be mortgaged by appraisals
(which in certain cases may be drive-by appraisals) performed by independent
appraisers. Drive-by appraisals involve a visual observation of the exterior of
the characteristics and condition of the property and the neighborhood. Because
the interior dimensions, improvements and conditions are not inspected, a
drive-by appraisal produces only a general approximation of value for the
particular property. If the Originator has previously originated a loan to the
same borrower secured by the same property within one year, the Originator may
rely on the prior appraisal in conjunction with a new drive-by appraisal. If an
appraisal is not required to be obtained for a Single Family Loan, the value of
the related mortgaged property, as represented by the borrower, may be evaluated
through other methods such as a drive-by appraisal, a review of comparable sales
or tax assessments or reliance upon a recent sales price for such mortgaged
property. Such methods do not constitute an appraisal of the related mortgaged
property. All Combined Loan-to-Value Ratios are determined prior to approval of
the loans.
The Originators have several procedures which they use to verify
information obtained from an applicant. The applicant's outstanding balance and
payment history on any senior mortgage may be verified by calling the senior
mortgage lender. If the senior mortgage lender cannot be reached by telephone to
verify this information, the Originator may rely upon information provided by
the applicant, such as a recent statement from the senior lender and
verification of payment, such as canceled checks, or upon information provided
by national credit bureaus.
In order to verify an applicant's employment status, the Originators may
obtain from the applicant recent tax returns or other tax forms (e.g., W-2
forms) or current pay stubs or may telephone the applicant's employer or obtain
written verification from the employer. As in the case of the senior mortgage
lender verification procedures, if the employer will not verify employment
history over the telephone, the Originator may rely solely on the other
information provided by the applicant.
The Originators will not close a Single Family Loan prior to receiving
evidence that the property securing the loan is insured. In addition, at the
closing, the borrower is required to sign a letter addressed to his insurance
carrier naming the Originator as a loss payee under the insurance policy, which
the Originator will thereafter mail to the insurer. Accordingly, the Originator
normally will not be named as a loss payee with respect to the property securing
the Single Family Loan at the time the loan is closed.
A title search is ordered to verify the vesting of title to the Mortgaged
Property, along with the existence of any mortgages, tax or other liens that
have been levied on the property, to assure that the lien priority will be as
represented by the borrower.
Most Single Family Loans originated or purchased by the Originators
generally are scheduled to amortize over their terms and provide for equal
monthly payments over their terms. The Originators also offer a "balloon"
mortgage on a limited basis. The Originators collect nonrefundable points, late
charges and various fees in certain states in connection with their mortgage
loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees.
Although the Originators have no maximum dollar amount for Single Family
Loans, the actual maximum amount that they will lend is determined by an
evaluation of the applicant's ability to repay the loan, the value of the
borrower's equity in the real estate and the ratio of such equity to the real
estate's appraised value.
QUALITY CONTROL
Quality control is exercised in two areas: lending and documentation
standards. In the case of Single Family Loans, a centralized quality control
staff checks to confirm that lending and documentation standards are met. Every
month, at least one office is audited and every loan type originated during the
prior month by such office is reviewed for compliance with lending and
documentation standards. Five percent of all Single Family Loans originated by
the Originators are audited at random on a monthly basis for compliance with
lending and documentation standards. Additional offices receive audits on a
random, monthly basis. In order to confirm the validity of appraisals obtained
at the time loans are made, reappraisals are obtained for the property securing
the loans in approximately two percent to five percent of the transactions.
REFINANCING POLICY
Where the Originators believe that borrowers having existing loans with
them are likely to refinance such loans due to interest rate changes or other
reasons, the Originators actively attempt to retain such borrowers through
solicitations of such borrowers to refinance with the Originators. Such
refinancings generate fee and servicing income for the Originators. Since the
solicited borrowers may refinance their existing loans in any case, the
Representative believes that this practice will be unlikely to affect the
prepayment experience of the Single Family Loans in a material respect. The
Originators also have solicited their borrowers who are in good standing to
apply for additional loans, consistent with their origination standards, where
deemed appropriate.
SERVICING AND COLLECTIONS
The Money Store, as Master Servicer, will be required under the related
Agreement to master service the Mortgage Loans and other Mortgage Assets
underlying a particular Series of Certificates with the same degree of skill and
care that it exercises with respect to all comparable loans and assets that it
master services for its own account. Servicing includes, but is not limited to,
post-origination loan processing, customer service, remittance handling,
collections and liquidations.
Borrowers are sent payment coupon books that specify the fixed payment due
and the late payment amount, if any. Due dates for payments occur throughout the
calendar month. If payment is not received within fifteen working days of the
due date, an initial collection effort is made by telephone in an attempt to
bring the delinquent account current. The various stages of delinquency are
monitored and evaluated on a monthly basis.
Means of contacting delinquent accounts include, but are not limited to,
telephone calls and collection letters. When an account is 30 days past due, the
collection supervisor analyzes the account to determine the appropriate course
of action. If a borrower is experiencing difficulty in making payments on time,
the Servicer may modify the payment schedule (as permitted by the Agreement) but
will not remove the loan from a delinquency status.
The course of action taken by the Servicer is dependent upon a number of
factors including the borrower's payment history, the amount of equity in the
related Mortgaged Property and the reason for the current inability to make
timely payments.
When a loan is 90 days past due, the related Mortgaged Property is required
to be reappraised and the results evaluated by the Company to determine a course
of action. Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received or (iii) the servicer discovers circumstances indicating
potential loss exposure. During the foreclosure process, any expenses incurred
by the Servicer may be added to the amount owed by the borrower, as permitted by
applicable law. Upon completion of the foreclosure, the property is sold to an
outside bidder, or passes to the mortgagee, in which case the Servicer proceeds
to liquidate the asset.
The Servicer may not foreclose on the property securing a junior mortgage
loan unless it forecloses subject to the related senior mortgages. In such
cases, the Servicer generally will pay the amount due on the senior mortgages to
the senior mortgagees, if the Servicer considers it to be in the best interest
of the related Certificateholders to do so. In the event that foreclosure
proceedings have been instituted on a senior mortgage prior to the initiation of
the Servicer's foreclosure action, the Servicer will either satisfy such
mortgage at the time of the foreclosure sale or take other appropriate action.
The Servicer retains "in-house" counsel in part to help assist with problem
accounts. Such counsel may be utilized by all levels of management to help avoid
legal problems, including those associated with consumer lending.
Servicing and charge-off policies and collection practices may change over
time in accordance with the servicer's business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations, as well as other
items.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from state
to state. Only if a delinquency cannot otherwise be cured will the servicer
decide that liquidation is the appropriate course of action. If, after
determining that purchasing a property securing a mortgage loan will minimize
the loss associated with such defaulted loan, the servicer may bid at the
foreclosure sale for such property or accept a deed in lieu of foreclosure.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the date set forth in the related Prospectus Supplement (each such date, a
"Cut-off Date"), among The Money Store, the applicable Originators and the
Trustee for the benefit of the Certificateholders of such Series. The provisions
of each Agreement will vary depending upon the nature of the Certificates to be
issued thereunder and the nature of the related Trust. A form of an Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain material
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Representative will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of a Certificate of such Series addressed to The Money Store, 2840 Morris
Avenue, Union, New Jersey 07083, Attention: Corporate Counsel.
GENERAL
The Certificates of each Series will represent fractional undivided
ownership interests in a Trust created pursuant to the related Agreement and/or
such other assets as may be described in the related Prospectus Supplement. The
Certificates will be issued in fully registered form, in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof (or such other
amounts do may be set forth in a Prospectus Supplement), except that one
Certificate of each Class may be issued in a different denomination.
Definitive Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee or, at the election of the Trustee,
at the office of a Certificate Registrar appointed by the Trustee. No service
charge will be made for any registration of exchange or transfer, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. If provided in the related Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
The Certificates will not represent obligations of the Representative, the
Originators or any affiliate thereof. The assets of each Trust will consist of
one or more of the following, as set forth in the related Prospectus Supplement,
(a) the Mortgage Loans that from time to time are subject to the related
Agreement and which are held in the related Pool; (b) the assets for the Trust
that from time to time are required by the Agreement to be deposited in certain
reserve accounts, including the Certificate Account, the Principal and Interest
Account, the Expense Account, the Letter of Credit Fee Account and the Insurance
Account (each, as defined herein), or to be invested in Permitted Investments
(as defined herein); (c) property and any proceeds thereof acquired by
foreclosure of the Mortgage Loans in such Pool, deed in lieu of foreclosure or a
comparable conversion; (d) any Primary Mortgage Insurance Policies; (e) any
Mortgage Pool Insurance Policies; (f) any Special Hazard Insurance Policies; (g)
any Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit,
guaranties of The Money Store or other credit enhancement or maturity protection
covering any Certificates, any Mortgage Loan in the related Pool or any related
Mortgaged Property which is required to be maintained pursuant to the related
Agreement.
Each Series of Certificates will be issued in one or more Classes. Each
Class of Certificates of a Series will evidence beneficial ownership of the
interest in assets of the related Trust specified in the related Prospectus
Supplement. A Class of Certificates may be divided into two or more Sub-Classes,
as specified in the related Prospectus Supplement.
A Series of Certificates may include one or more Classes of Senior
Certificates that receive certain preferential treatment with respect to one or
more Subordinated Classes of Certificates of such Series. Certain Series or
Classes of Certificates may he covered by a Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond or other insurance policies,
cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, supplemental interest payments or other forms of credit
enhancement or maturity protection, in each case as described herein and in the
related Prospectus Supplement. Distributions on one or more Classes of a Series
of Certificates may be made prior to one or more other Classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust or on a different basis, in each case, as specified in the related
Prospectus Supplement. The timing and amounts of such distributions may vary
among classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Remittance Date, in the amounts specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Certificates are registered at the close of business on the record dates
specified in the Prospectus Supplement Unless Definitive Certificates have been
issued, the registered holder of all Certificates will be Cede. Distributions
will be made by check mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (the
"Certificate Register") or, to the extent described in the related Prospectus
Supplement, by wire transfer or by such other means as are described therein,
except that the final distribution in retirement of the Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency of the Trustee or other person specified in the final distribution notice
to Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
Each Class of Certificates within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Certificates or during
specified periods; (iii) be subordinated in its right to receive distributions
of scheduled payments of principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of Certificates of such Series
throughout the lives of the Certificates or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust; (vi)
include, as to Certificates entitled to distributions allocable to interest, the
right to receive interest at a Fixed Rate or an Adjustable Rate; and (vii)
include, as to Certificates entitled to distributions allocable to interest, the
right to distributions allocable to interest only after the occurrence of events
specified in the related Prospectus Supplement, and in each case, may accrue
interest until such events occur, as specified in such Prospectus Supplement.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds available in the
related Certificate Account and other accounts to the extent described in the
related Prospectus Supplement. To the extent described in the related Prospectus
Supplement, on each Remittance Date, the Master Servicer will withdraw from the
applicable Certificate Account and such other accounts as may be described in
the related Prospectus Supplement and distribute to the Certificateholders of
each Class (other than a Series having a Class of Subordinated Certificates, as
described below), either the specified interest of such Class in the Pool times
the aggregate of all amounts on deposit in the Certificate Account as of the
Determination Date, or, in the case of Classes which have been assigned an
aggregate principal balance and Pass-Through Rate, payments of interest and
payments in reduction of such aggregate principal balance from all amounts on
deposit in the Certificate Account on the Determination Date, in the priority
and calculated in the manner set forth in the related Prospectus Supplement,
except, in each case, for (i) all payments on the Mortgage Loans that were due
on or before the Cut-off Date; (ii) all Principal Prepayments, Liquidation
Proceeds and Insurance Proceeds received after the period specified in the
related Prospectus Supplement (the "Principal Prepayment Period"); (iii) all
scheduled payments of principal and interest due on a date or dates subsequent
to the Determination Date; (iv) amounts representing reimbursement for Advances,
as specified in the related Prospectus Supplement; (v) amounts representing
reimbursement for any unpaid Servicing Fee or Contingency Fee and expenses from
Liquidation Proceeds, condemnation proceeds and proceeds of insurance policies
with respect to the related Mortgage Loans; (vi) all income from any Permitted
Investments held in the Certificate Account for the benefit of the Master
Servicer; and (vii) any Advances deposited in the Certificate Account prior to
the applicable Remittance Date.
The timing and amounts of distributions allocable to interest and principal
and, if applicable, Principal Prepayments and scheduled payments of principal,
to be made on any Remittance Date may vary among Classes, over time or otherwise
as specified in the Prospectus Supplement. Differing allocations of principal
and interest to different Classes of Certificateholders will have the effect of
accelerating the amortization of Senior Certificates while increasing the
interests evidenced by the Subordinated Certificates in the related Trust.
Distributions to any Class of Certificates will be made pro rata to all
Certificateholders of that Class, or as otherwise described in a Prospectus
Supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Certificateholders (rather than to guarantee or insure against losses) if
provided in the related Prospectus Supplement, the Master Servicer will be
required to advance to the Trustee, on or before each Remittance Date (from its
own funds), the amount, if any, by which (a) the sum of (x) 30 days' interest at
the applicable weighted average Adjusted Mortgage Loan Remittance Rate (as
defined below) on the then outstanding principal balance of the related Series
of Certificates and (y) the amount, if any, required to be deposited into the
related Reserve Account (as specified in the Prospectus Supplement) for the
related Remittance Date exceeds (b) the amount received by the Master Servicer
and any Sub-Servicers in respect of interest on the Mortgage Loans as of the
related Record Date (such excess, the "Monthly Advance"). For each Class of
Certificates, the "Adjusted Mortgage Loan Remittance Rate" will equal the sum of
the related Pass- Through Rate and the rate used in determining certain expenses
payable by the related Trust, as more specifically set forth in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each Mortgage Loan
for which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Certificate Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such Mortgage Loan as of the beginning of the
related Due Period at the applicable weighted average Adjusted Mortgage Loan
Remittance Rate, over (b) the amount of interest actually received on the
related Mortgage Loan for such Due Period (such difference, "Compensating
Interest").
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
initially will be registered in the name of Cede, the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code ("UCC") and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Certificateholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Certificates registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Certificateholders will receive all distributions of principal of and interest
on the Certificates and reports relating to the Certificates from the Trustee
through DTC and its Participants. Under a book-entry format, Certificateholders
will receive payments and reports relating to the Certificates after the related
Remittance Date because, while payments and such reports are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such
payments and reports to its Participants which thereafter will be required to
forward them to Indirect Participants or Certificateholders. Unless and until
Definitive Certificates are issued, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit reports and payments of principal of and interest on the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such reports and
payments on behalf of their respective Certificateholders. Accordingly, although
Certificateholders will not possess certificates, the rules provide a mechanism
by which Certificateholders will receive distributions and reports and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, Certificateholders who
are not Participants may transfer ownership of Certificates only through
Participants by instructing such Participants to transfer Certificates, by
book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Certificateholders
or their nominees ("Definitive Certificates"), rather than to DTC or its nominee
only under the events specified in the related Agreement and described in the
related Prospectus Supplement. Upon the occurrence of any of the events
specified in the related Agreement and Prospectus Supplement, DTC will be
required to notify all Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificates representing
the Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Remittance Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Certificates of such Series, (ii) the use of a Certificate
Guarantee Insurance Policy, Spread Amount, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts, Supplemental
Interest Payments, a letter of credit, a limited financial guaranty insurance
policy, a guaranty of The Money Store, other third party guarantees or maturity
protection, another method of credit enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature, or (iii) any
combination of the foregoing. Credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Certificates and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, holders of one or more Classes of Certificates will
bear their allocable share of deficiencies. If a form of credit enhancement
applies to several Classes of Certificates, and if principal payments equal to
the aggregate principal balances of certain Classes will be distributed prior to
such distributions to other Classes, the Classes which receive such
distributions at a later time are more likely to bear any losses which exceed
the amount covered by credit enhancement. Coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Representative if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates. The Trustee of the related Trust will have the right
to sue providers of credit enhancement if a default is made on a required
payment.
SUBORDINATION
To enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which they would be entitled to
receive in the absence of any losses or delinquencies, if so specified in the
related Prospectus Supplement, distributions of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series will
instead be payable to holders of one or more Classes of Senior Certificates,
under the circumstances and to the extent specified in the Prospectus
Supplement. If specified in the related Prospectus Supplement, the holders of
Senior Certificates will receive the amounts of principal and/or interest due to
them on each Remittance Date, out of the funds available for distribution on
such date in the related Certificate Account, prior to any such distribution
being made to holders of the related Subordinated Certificates, in each case
under the circumstances and subject to the limitations specified in the
Prospectus Supplement. The protection afforded to the holders of Senior
Certificates through subordination also may be accomplished by first allocating
certain types of losses or delinquencies to the related Subordinated
Certificates, to the extent described in the related Prospectus Supplement. If
aggregate losses and delinquencies in respect of such Mortgage Loans were to
exceed the total amounts payable and available for distribution to holders of
Subordinated Certificates or, if applicable, were to exceed the specified
maximum amount, holders of Senior Certificates would experience losses on the
Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into one or more Reserve Accounts established and maintained with the
Trustee. If so specified in the Prospectus Supplement, such deposits may be made
on each Remittance Date, on each Remittance Date for specified periods or until
the balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the Class of
Certificates specified in the Prospectus Supplement at the times and under the
circumstances specified in the Prospectus Supplement. See "--Reserve Accounts"
below.
If so specified in the related Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the related Prospectus Supplement, various
Classes of Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other Classes of
Senior and Subordinated Certificates, respectively, through a cross support
mechanism or otherwise. As between Classes of Senior Certificates and as between
Classes of Subordinated Certificates, distributions may be allocated among such
Classes (i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a Class or Classes of Subordinated
Certificates in a Series, the circumstances in which such subordination will be
applicable, the manner, if any, in which the amount of subordination will
decrease over time, the manner of funding any Reserve Account, and the
conditions under which amounts in any such Reserve Account will be used to make
distributions to Senior Certificateholders or released to Subordinated
Certificateholders from the related Trust.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy may be obtained and maintained for any Class or Series
of Certificates. The issuer of any Certificate Guaranty Insurance Policy (a
"Certificate Guaranty Insurer") will be described in the related Prospectus
Supplement. A copy of any such Certificate Guaranty Insurance Policy will be
attached as an exhibit to the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy will unconditionally and irrevocably guarantee to
Certificateholders that an amount equal to each full and complete Insured
Payment will be received by an agent of the Trustee (an "Insurance Paying
Agent") on behalf of Certificateholders, for distribution by the Trustee to each
Certificateholder. The "Insured Payment" will equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement.
The specific terms of any Certificate Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Certificate Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the Master Servicer's obligation to repurchase
or substitute for any Mortgage Loans, to guarantee any specified rate of
prepayments or to provide funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Certificate Guaranty
Insurer may be subrogated to the rights of each Certificateholder to receive
payments under the Certificates to the extent of any payments by such
Certificate Guaranty Insurer under the related Certificate Guaranty Insurance
Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Certificates may be entitled to receive limited acceleration of principal
relative to the amortization of the related Mortgage Assets. The accelerated
amortization will be achieved by applying certain excess interest collected on
the Mortgage Assets to the payment of principal on such Classes of Certificates.
This acceleration feature is intended to create an amount (the "Spread Amount"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Mortgage Assets over the principal balances of the
applicable Classes of Certificates. Once the required Spread Amount is reached,
and subject to the provisions described in the next sentence and in the related
Prospectus Supplement, the acceleration feature will cease, unless necessary to
maintain the required level of the Spread Amount. The applicable Agreement will
provide that, subject to certain floors, caps and triggers, the required level
of the Spread Amount may increase or decrease over time. An increase would
result in a temporary period of accelerated amortization of the applicable
Classes of Certificates to increase the actual level of the Spread Amount to its
required level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of the Spread Amount to its required
level. An Agreement also may provide that after one or more Classes of
Certificates have been paid to the required level of the Spread Amount, excess
interest, together with certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other Classes of Certificates.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of Mortgage
Loans, a Mortgage Pool Insurance Policy issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement will be obtained and maintained
for each Series pertaining to Mortgage Loans. Each Mortgage Pool Insurance
Policy will, subject to the limitations described below or in the related
Prospectus Supplement, cover loss by reason of default in payment on the related
Mortgage Loans in the Pool in an amount initially equal to a specified
percentage of the aggregate principal balance of all Mortgage Loans included in
the Pool as of the Cut-off Date or such other date as is specified in such
Prospectus Supplement. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. The Mortgage Pool Insurance
Policies generally will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
Primary Mortgage Insurance Policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to the Mortgage Pool Insurance Policy, a bond or other credit
support may cover fraud in connection with the origination of Mortgage Loans. If
so specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted Mortgage Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted
Mortgage Loan occurring when the servicer of such Mortgage Loan, at the time of
default or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will include certain expenses incurred by the Master Servicer as
well as accrued interest on delinquent Mortgage Loans to the date of payment of
the claim. Accordingly, if aggregate net claims paid under any Mortgage Pool
Insurance Policy reach the original policy limit, coverage under that Mortgage
Pool Insurance Policy will be exhausted and any further losses will be borne by
the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Pool and will be issued by the
insurer (the "Special Hazard Insurer") named in such Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Certificates from (i) loss by reason of damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage) not insured against under
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreement-- Hazard Insurance." No Special
Hazard Insurance Policy will cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, flood (if the Mortgaged
Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
Since each Special Hazard Insurance Policy will be designed to permit full
recovery under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Agreement will provide that, if the related Mortgage Pool
Insurance Policy shall have been terminated or been exhausted through payment of
claims, the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a combination
thereof in the aggregate amount specified in the Prospectus Supplement may be
deposited by the Master Servicer or Representative on the date specified in the
Prospectus Supplement in one or more Reserve Accounts established with the
Trustee. In addition to or in lieu of the foregoing, if so specified in such
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into such Reserve Accounts. Such deposits may be made on the date
specified in the Prospectus Supplement, which may include each Remittance Date,
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount. See "--Subordination" above.
The cash and other assets in the Reserve Accounts will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement. Any
cash in a Reserve Account and the proceeds upon maturity or liquidation of any
other asset or instrument therein will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Any asset or instrument deposited in
the Reserve Account generally will name the Trustee, in its capacity as trustee
for the Certificateholders, as beneficiary and will be issued by an entity
acceptable to the applicable Rating Agency. Additional information with respect
to such instruments deposited in the Reserve Accounts will be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments deposited
in a Reserve Account will be available for withdrawal from such Reserve Account
for distribution to Certificateholders for the purposes, in the manner and at
the times specified in the Prospectus Supplement.
SUPPLEMENTAL INTEREST PAYMENTS
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to receive supplemental interest payments under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Certificates on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Mortgage Assets.
Such differences may result if the interest rates on the applicable Classes of
Certificates are based upon an index that differs from the index used in
determining the interest rates on the Mortgage Assets. Except as otherwise
provided in a Prospectus Supplement, supplemental interest payments will not be
available to fund shortfalls resulting from delinquencies or defaults on the
Mortgage Assets.
MATURITY PROTECTION
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to third-party payments to help provide that the
holders of such Certificates receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto letters of credit,
financial guaranty insurance policies, a guaranty of The Money Store, other
third party guarantees, limited guarantees or insurance from agencies or
instrumentalities of the United States, and other arrangements for maintaining
timely payments or providing additional protection against losses on the assets
included in such Trust, paying administrative expenses, or accomplishing such
other purpose as may be described in the Prospectus Supplement. The Trust may
include a guaranteed investment contract or reinvestment agreement pursuant to
which funds held in one or more accounts will be invested at a specified rate.
If any Class of Certificates has a floating interest rate, or if any of the
Mortgage Assets has a floating interest rate, the Trust may include an interest
rate swap contract, an interest rate cap agreement or similar contract providing
limited protection against interest rate risks.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust may be evidenced by separate
Classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trusts, the allocation of available funds to various
Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Pool. Single Family Loans, Cooperative Loans
and Contracts generally may be prepaid without penalty in full or in part at any
time, although a prepayment fee or penalty may be imposed in connection
therewith. Multifamily Loans may prohibit prepayment for a specified period
after origination, may prohibit partial prepayments entirely, and may require
the payment of a prepayment fee or penalty upon prepayment in full or in part.
In general, prepayment of Mortgage Loans is likely to increase when the
level of prevailing interest rates declines significantly, although the
prepayment rate is influenced by a number of other factors, some of which are
described below. Similarly, when the level of prevailing interest rates rises,
prepayment rates may decrease. No prediction can be made as to the prepayment
rate that the Mortgage Loans will actually experience.
Generally, junior mortgage loans have smaller average principal balances
than senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than Mortgage Loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on Mortgage Loans for Federal income tax purposes may result
in a higher rate of prepayment of the Mortgage Loans. The obligation of the
Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. The prepayment experience of the
Pools may be affected by a wide variety of factors, including general and local
economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Representative is unaware of
any reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of The Money Store's and its affiliates'
portfolios of Mortgage Loans.
The secured conventional Mortgage Loans and Contracts generally will
contain due-on-sale provisions permitting the mortgagee or holder of the
Contract to accelerate the maturity of the Mortgage Loan or Contract upon sale
or certain transfers by the borrower of the underlying Mortgaged Property. The
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreement--Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
Greater than anticipated prepayments of principal will increase the yield
on Certificates purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the Mortgage Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Certificates may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Mortgage Loans and foreclosed Mortgaged Properties result in principal
payments on the Mortgage Loans faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Mortgage Loan, the
Mortgagor will be charged interest on the principal amount of the Mortgage Loan
so prepaid only for the number of days in the month actually elapsed up to the
date of the prepayment rather than for a full month. Interest shortfalls also
could result from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), as described under "Certain Legal
Aspects of the Mortgage Loans-- Soldiers' and Sailors' Civil Relief Act" herein.
If so specified in the related Prospectus Supplement, in the event that less
than 30 days' interest is collected on a Mortgage Loan during a Due Period,
whether due to prepayment in full or a Curtailment, the Master Servicer will be
obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such shortfalls exceed the amount of Compensating
Interest that the Master Servicer is obligated to pay, and are not otherwise
covered by Insured Payments, the yield on the Certificates could be adversely
affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Certificates. See "The Agreement--Termination; Purchase of
Mortgage Loans."
If so specified in the related Prospectus Supplement, the effective yield
to certain Certificateholders may be slightly lower than the yield otherwise
produced by the applicable Remittance Rate and purchase price, because while
interest generally will accrue on such Certificates from the first day of each
month, the distribution of such interest will not be made earlier than a
specified date in the month following the month of accrual.
In addition, if so specified in the related Prospectus Supplement,
prepayments may result from amounts on deposit, if any, in the Pre-Funding
Account at the end of the Funding Period being applied to the payment of
principal of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Certificates. Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Certificates.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
SALE OF MORTGAGE LOANS
Pursuant to each Agreement, at the time of issuance of Certificates of a
Series the Originators and/or The Money Store will sell to the related Trust,
without recourse, all interest of the Originators and/or The Money Store in each
of the Mortgage Assets comprising the assets of such Trust and all interest in
all actual payments collected after the Cut-off Date with respect to such
Mortgage Assets.
In addition, to the extent specified in the related Prospectus Supplement,
the net proceeds received from the sale of the Certificates of a given Series
will be applied to the deposit of the Pre-Funded Amount into the Pre-Funding
Account. The aggregate principal balance of additional Mortgage Assets to be
purchased for the related Trust generally will be equal to the Pre-Funded Amount
on the date of the issuance of the related Series. On each applicable purchase
date, the Originators and/or The Money Store will sell to the related Trust,
without recourse, the entire interest of the Originators and/or The Money Store
in the additional Mortgage Assets identified in a schedule attached to a
supplemental conveyance relating to such additional Mortgage Assets executed on
such date by the Originators and/or The Money Store. In connection with each
purchase of additional Mortgage Assets, the related Trust will be required to
pay to the Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Mortgage Asset as of its
related Cut-off Date. The purchase price will be withdrawn from the Pre-Funding
Account and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in "--Representations and Warranties"
below apply to each additional Mortgage Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied. The
Originators and/or The Money Store will convey the additional Mortgage Assets to
the related Trust on the applicable purchase date pursuant to the Agreement.
Any conveyance of additional Mortgage Assets will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Mortgage Asset must satisfy the eligibility
criteria specified in the preceding paragraph as of its applicable Cut-off Date
and such additional criteria as may be specified in the related Prospectus
Supplement; (ii) if and to the extent specified in the related Prospectus
Supplement, the third-party credit enhancement provider, if any, shall have
approved the transfer of such additional Mortgage Assets to the related Trust;
(iii) neither the Originator nor The Money Store will have selected such
additional Mortgage Assets in a manner that either believes is adverse to the
interests of Certificateholders; and (iv) the Originator and The Money Store
will deliver certain opinions of counsel to the Trustee(s) and the Rating
Agencies with respect to the validity of the conveyance of such additional
Mortgage Assets.
In connection with such sales of the Mortgage Loans, the Representative
will be required to deliver to the Trustee certain specified items (collectively
with respect to each Mortgage Loan, the "Trustee's Mortgage File") with respect
to each Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, each Trustee's Mortgage File will be required to include the
following, together with certain other specified items: (a) The original
Mortgage Note; (b) either: (i) the original Mortgage, with evidence of recording
thereon or (ii) a certified copy of the Mortgage where the original has been
transmitted for recording or has been lost; and (c) an assignment of the
Mortgage Loan from the applicable Originator to either the related Trustee or
Initial Co-Trustee under the Agreement with evidence of recording thereon.
The Trustee will be required to review each such Trustee's Mortgage File to
ascertain that all required documents have been executed and received. If the
Certificate Guaranty Insurer, if any, or the Trustee finds any document
constituting a part of a Trustee's Mortgage File which is not properly executed,
has not been received, is unrelated to the Mortgage Loans of the related Trust
or does not conform in a material respect to the description thereof provided on
behalf of the Representative, the Certificate Guaranty Insurer, if any, or the
Trustee is required promptly to notify the Master Servicer, The Money Store, and
the Trustee or the Certificate Guaranty Insurer, if any, respectively. The Money
Store is required to use reasonable efforts to remedy a material defect in a
document constituting part of a Trustee's Mortgage File of which it is so
notified. If, however, within 60 days after the Trustee's notice to it
respecting such defect The Money Store has not remedied the defect and the
defect materially and adversely affects the interest of the Trust in the related
Mortgage Loan or the interests of the Certificate Guaranty Insurer, if any, The
Money Store is required to (i) substitute in lieu of such Mortgage Loan a
substitute Mortgage Loan which qualifies for substitution under the Agreement (a
"Qualified Substitute Mortgage Loan") and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution, deposit in
the related Principal and Interest Account (as defined herein under "--Payments
on the Mortgage Loans") the amount of such shortfall in principal balance
arising from such substitution (the "Substitution Adjustment") or (ii) purchase
such Mortgage Loan at a price equal to the principal balance of such Mortgage
Loan as of the date of purchase, plus 30 days' interest on such principal
balance, computed at the Adjusted Mortgage Loan Remittance Rate (as defined in
the related Prospectus Supplement) as of the next succeeding Determination Date,
plus any accrued unpaid Servicing Fees and Contingency Fees (each as defined
herein under "--Servicing and Other Compensation and Payment of Expenses") and
certain other amounts advanced by and reimbursable to the Master Servicer, plus
the interest portion of any unreimbursed Insured Payments made by the
Certificate Guaranty Insurer, if any, related to such Mortgage Loan, which
purchase price will be deposited in the Principal and Interest Account and
delivered to the Trustee on the next succeeding Determination Date, except for
the amount described above relating to unreimbursed Insured Payments, if any,
which shall be paid directly to the Certificate Guaranty Insurer; provided,
however, that, if a REMIC election has been made for the related Trust, The
Money Store may not take any such action unless it has theretofore caused to be
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters (an "Opinion of Counsel") which states that such a purchase or
substitution would not constitute a "prohibited transaction," as defined in
Section 860F of the Code (a "Prohibited Transaction").
REPRESENTATIONS AND WARRANTIES
The Representative will represent, among other things, that as of the
related Cut-off Date as to each Mortgage Loan sold to the related Trust, the
information provided with respect to such Mortgage Loan was true and correct;
all of the original or certified documentation constituting the Trustee's
Mortgage Files (including all material documents related thereto) has been or
will be delivered to the Trustee or a custodian on its behalf (the "Custodian");
each Mortgage was a valid and subsisting lien of record on the Mortgaged
Property; immediately prior to such transfer and assignment, the Originators
were the sole owners of each Mortgage Loan conveyed by them; and as of the
related Cut-off Date, no Mortgage Loan will be 59 days or more delinquent in
payment, no Mortgage Loan originated within 12 months of the related Cut-off
Date will be delinquent 59 days or more as measured at the end of any month
during the 12 months immediately preceding such Cut-off Date, and with respect
to Mortgage Loans originated more than 12 months before such Cut-off Date, no
more than the percentage of Mortgage Loans specified in the related Prospectus
Supplement (measured by outstanding principal balance as of such Cut-off Date)
will have been on up to two occasions 60 days delinquent as measured at the end
of any month since the inception of each such Mortgage Loan.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Servicer, any Subservicer, the Custodian, the Certificate Guaranty Insurer, if
any, or the Trustee that any of the representations and warranties contained in
the Agreement have been breached in any material respect as of the related
Cut-off Date, with the result that the interests of the related Trust in the
related Mortgage Loan or the interests of the Certificate Guaranty Insurer, if
any, were materially and adversely affected, notwithstanding that such
representation and warranty was made to The Money Store's best knowledge, the
party discovering such breach is required to give prompt written notice to the
other parties. Within 60 days of the earlier to occur of The Money Store's
discovery or its receipt of notice of any such breach, The Money Store will be
required to cure promptly such breach in all material respects, or (i) remove
such Mortgage Loan and substitute one or more Qualified Substitute Mortgage
Loans or (ii) purchase such Mortgage Loan, in each case on the same terms and on
the same conditions as described above under "Sale of Mortgage Loans." The
obligation of The Money Store to so substitute or purchase any Mortgage Loan
will constitute the sole remedy respecting a material breach of any such
representation or warranty available to the Certificateholders or the Trustee.
PAYMENTS ON THE MORTGAGE LOANS
The Agreement will require the Master Servicer to establish and maintain
one or more principal and interest accounts (each a "Principal and Interest
Account") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer will be required to deposit or cause to be deposited in
the related Principal and Interest Account (within 24 hours of receipt) all
payments received after the related Cut-off Date on account of principal and
interest on the related Mortgage Loans (but net of the Servicing Fee and the
Contingency Fee with respect to each Mortgage Loan and other servicing
compensation payable to the Master Servicer as permitted by the Agreement).
Not later than the day of each month which is the later of (i) the third
Business Day prior to the 15th day of such month and (ii) the seventh Business
Day of such month (each such day a "Determination Date"), the Master Servicer
will be required to wire transfer to the Trustee the Available Remittance Amount
for deposit in the segregated trust accounts to be maintained with the Trustee
for such purpose (each a "Certificate Account").
Unless otherwise specified in the related Prospectus Supplement, the
"Available Remittance Amount" will be defined in the Agreement to include, with
respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Master Servicer or
any Sub-Servicer on the Mortgage Loans (including amounts paid by the
Master Servicer and the Representative and excluding amounts required
to be deposited into any related Reserve Account, amounts paid as
reimbursement to the Master Servicer of advances and amounts recovered
as voidable preferences) during the immediately preceding calendar
month (the "Due Period"), plus
(ii) the amount of any Monthly Advance and Compensating
Interest payments with respect to the Mortgage Loans remitted by the
Master Servicer for such Remittance Date.
The term Available Remittance Amounts will not include Insured Payments, if
any.
GENERAL SERVICING STANDARDS
The Master Servicer will agree to master service the Mortgage Loans in
accordance with the related Agreement and, where applicable, prudent mortgage
servicing standards. "Prudent mortgage servicing standards" generally will
require the Master Servicer to exercise collection and foreclosure procedures
with respect to the Mortgage Loans with the same degree of care and skill that
it would use in master servicing mortgage loans for its own account. Pursuant to
each Agreement, the Master Servicer will be required to make reasonable efforts
to collect all payments called for under the terms of the related Mortgage Loan.
Nonetheless, the Master Servicer, in determining the type of action that is
reasonable to pursue may consider, among other things, the unpaid principal
balance of a Mortgage Loan against the estimated cost of collection or
foreclosure action, the unpaid balance of the related prior mortgage, if any,
the condition and estimated market value ("as is" and "if repaired"), the
estimated marketability of the related Mortgaged Property and the borrower's
ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "Servicing
Fee") and a contingency fee (the "Contingency Fee") equal to the percentage per
annum specified in the related Prospectus Supplement of the principal balance of
each Mortgage Loan. The Contingency Fee is meant to provide additional servicing
compensation to a successor servicer if The Money Store is replaced as Master
Servicer under the related Agreement. However, as long as The Money Store acts
as Master Servicer, it will be entitled to receive the Contingency Fee, although
such amount is not deemed servicing compensation. Unless otherwise specified in
the related Prospectus Supplement, the Servicing Fee and Contingency Fee will
each be calculated and payable monthly from the interest portion of scheduled
monthly payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, prepayment penalties and premiums, late payment charges,
interest paid on funds in the Principal and Interest Account, interest paid on
earnings realized on Permitted Instruments, and certain other excess amounts.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of the Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage Loan. Such expenditures may include costs of collection
efforts, reappraisals when a loan is 90 days past due, forced placement of
hazard insurance if a borrower allows his hazard policy to lapse, legal fees in
connection with foreclosure actions, advancing payments on the related senior
mortgage, if any, advances of delinquent property taxes, upkeep and maintenance
of the property if it is acquired through foreclosure and similar types of
expenses. Each such expenditure constitutes a "Servicing Advance." The Master
Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Master Servicer will be entitled
to recover Servicing Advances to the extent permitted by the Mortgage Loans or,
if not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan.
Servicing Advances will be reimbursable to the Servicer from the sources
described above out of the funds on deposit in the Principal and Interest
Account.
HAZARD INSURANCE
The Master Servicer will be required to cause to be maintained fire and
hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located, in an amount which is at least equal to the least
of (i) the outstanding principal balance owing on the Mortgage Loan and the
related senior mortgage, if any, (ii) the full insurable value of the premises
securing the Mortgage Loan, and (iii) the minimum amount required to compensate
for damage or loss on a replacement cost basis. If the Mortgaged Property is in
an area identified in the Federal Register by the Flood Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), the Master Servicer will be required to cause to be purchased a
flood insurance policy with a generally acceptable insurance carrier, in an
amount representing coverage not less than the least of (a) the outstanding
principal balance of the Mortgage Loan and the senior lien, if any, (b) the full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended.
The Master Servicer will also be required to maintain, to the extent such
insurance is available, on REO Property, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, flood insurance in an amount equal to that required above. Any amounts
collected by the Master Servicer or any Sub-Servicer under any such policies
(other than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary first
or second mortgage servicing procedures) are required to be deposited in the
Principal and Interest Account.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire and hazards of extended coverage on all of the
Mortgage Loans, then, to the extent such policy names the Trustee as loss payee
and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without individual fire and hazard insurance, and
otherwise complies with the requirements of the preceding paragraph, the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
ENFORCEMENT OF DUE ON SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer, on behalf of the Trustee, will, to the extent it
has knowledge of such conveyance or prospective conveyance, be required to
enforce the rights of the Trustee as the mortgagee of record to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Master
Servicer will not be required to exercise any such right if the "due-on-sale"
clause, in the reasonable belief of the Master Servicer, is not enforceable
under applicable law or if such enforcement would materially increase the risk
of default or delinquency on, or materially decrease the security for, such
Mortgage Loan. In such event, the Master Servicer will attempt to enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, unless prohibited by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Certificate Guaranty Insurer, if
any, to enter into a substitution of liability agreement with such person,
pursuant to which the original Mortgagor is released from liability and such
person is substituted as Mortgagor and becomes liable under the Mortgage Note.
REALIZATION UPON DEFAULTED MORTGAGE
The Master Servicer generally will foreclose upon or otherwise comparably
convert the ownership in the name of the Trustee of Mortgaged Properties
relating to defaulted Mortgage Loans as to which no satisfactory arrangements
can be made for collection of delinquent payments. However, the Master Servicer
will be required to take into account the existence of any hazardous substances,
hazardous wastes or solid wastes on a Mortgaged Property in determining whether
to foreclose upon or otherwise comparably convert the ownership of such
Mortgaged Property.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable efforts
to collect all payments called for under the terms and provisions of the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any late payment charge, prepayment charge, assumption fee or
any penalty interest in connection with the prepayment of a Mortgage Loan or any
other fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Mortgage
Loan or consent to the postponement of strict compliance with any such term or
in any matter grant indulgence to any Mortgagor, subject to the limitations set
forth in the Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will nonetheless make payment of any required Monthly Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to enter
into sub-servicing arrangements with sub-servicers meeting the requirements of
the related Agreement (each, a "Sub-Servicer"). Such sub-servicing arrangements
will not relieve the Master Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
REMOVAL AND RESIGNATION OF MASTER SERVICER
With respect to each Series of Certificates, the Certificate Guaranty
Insurer, if any, or the Holders of not less than 50 percent of each Class of
Certificates of the related Series, other than the Class R Certificates (the
"Majority Certificateholders"), by notice in writing to the Master Servicer and
with the prior written consent of the Certificate Guaranty Insurer, if any,
which consent may not be unreasonably withheld, may, pursuant to the related
Agreement, remove the Master Servicer upon the occurrence of any of the
following events:
(i) (A) an Event of Nonpayment (as defined below); (B) the
failure by the Master Servicer to make any required Servicing Advance
to the extent such failure materially or adversely affects the
interests of the Certificate Guaranty Insurer, if any, or the
Certificateholders; (C) the failure by the Master Servicer to make any
required Monthly Advance; (D) the failure by the Master Servicer to
remit any Compensating Interest; or (E) any failure by the Master
Servicer to remit to the Trustee any payment required to be made under
the terms of the related Agreement, which in each case continues
unremedied (in the case of the events described in clauses (i)(A),
(i)(B), (i)(D) and (i)(E) for 30 days) after the date upon which
written notice of such failure, requiring the same to be remedied,
shall have been given to the Master Servicer by the Trustee or to the
Master Servicer and the Trustee by any Certificateholder or the
Certificate Guaranty Insurer, if any; or
(ii) failure by the Master Servicer or The Money Store (so
long as The Money Store is the Master Servicer) duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the Master Servicer or the Representative, as set forth
in the related Agreement, which failure continues unremedied for a
period of 60 days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Master Servicer or The Money Store, as the case may be, by the
Trustee or to the Master Servicer or The Money Store, as the case may
be, and the Trustee by any Certificateholder or the Certificate
Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Master Servicer and such decree or order shall have
remained in force, undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Master Servicer or of or relating to all or
substantially all of the Master Servicer's property; or
(v) the Master Servicer shall admit in writing its inability
to pay its debts as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations.
An "Event of Nonpayment" will generally be defined in the Agreements as a
shortfall on any Remittance Date in moneys (excluding any amounts representing
Insured Payments) available to fund the full amount of the Distribution Amounts
due on such Remittance Date.
The Master Servicer may not assign its obligations under the Agreement nor
resign from the obligations and duties thereby imposed on it except by mutual
consent of the Master Servicer, the Certificate Guaranty Insurer, if any, the
Trustee and the Majority Certificateholders, or upon the determination that the
Master Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Master Servicer. No such
resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the Majority
Certificateholders or the Certificate Guaranty Insurer, if any, so request, the
Trustee may appoint, or petition a court of competent jurisdiction to appoint,
any established mortgage loan servicing institution acceptable to the
Certificate Guaranty Insurer, if any, having a net worth of not less than
$15,000,000 and which is approved as a servicer by FNMA and FHLMC as the
Successor Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee, the
Contingency Fee and such other compensation as is described under "--Servicing
and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust established under each Agreement will terminate upon notice to
the Trustee following the earlier to occur of (i) the final payment or other
liquidation of such last Mortgage Loan remaining in the related Trust or the
disposition of all REO Property, (ii) the optional purchase of the assets of the
Trust by the Servicer or the Certificate Guaranty Insurer, if any, as described
below, (iii) mutual consent of the Master Servicer, the Certificate Guaranty
Insurer, if any, and all Certificateholders in writing, or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the Trust, as permitted by the REMIC provisions of the Code as
described below; provided, however, that in no event will any Trust terminate
later than twenty-one years after the death of the last survivor of the person
named in the related Agreement.
Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Mortgage Loans are less than 10% of the Original Pool Principal Balance (or
such other percentage as may be specified in the related Prospectus Supplement),
the Master Servicer may, at its option, and in the absence of the exercise
thereof by the Master Servicer, the Certificate Guaranty Insurer, if any, may,
at its option, purchase, on the next succeeding Remittance Date, all of the
Mortgage Loans and any related REO Properties at a price equal to the
Termination Price.
On any Remittance Date on or after the Cross-Over Date on which Mortgage
Loans with an aggregate principal balance as of the Cut-off Date that equals or
exceeds 25% of the Original Pool Principal Balance (or such other percentage as
may be specified in the related Prospectus Supplement) have become liquidated
Mortgage Loans, the Certificate Guaranty Insurer, if any, may determine to
purchase and may cause the purchase from the Trust of all Mortgage Loans and REO
Properties in the Pool at a price equal to the sum of the Termination Price and
the outstanding and unpaid fees and expenses of the Trustee and the Master
Servicer.
If a REMIC election is made for a Series of Certificates, following a final
determination by the Internal Revenue Service (the "IRS") or by a court of
competent jurisdiction, in either case from which no appeal is taken within the
permitted time for such appeal, or if any appeal is taken, following a final
determination of such appeal from which no further appeal can be taken, to the
effect that the REMIC does not and will no longer qualify as a REMIC pursuant to
Section 860D of the Code (the "Final Determination"), at any time on or after
the date which is 30 calendar days following such Final Determination (i) the
Majority Certificateholders may direct the Trustee on behalf of such Trust to
adopt a "plan of complete liquidation" (within the meaning of Section
860F(a)(4)(B)(i) of the Code) with respect to such REMIC and (ii) the
Certificate Guaranty Insurer, if any, may notify the Trustee of the Certificate
Guaranty Insurer's determination to purchase from the Trust all Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan, then remaining in
such REMIC at a price (the "Termination Price") equal to the sum of (x) 100% of
the aggregate principal balances of such Mortgage Loans as of the day of
purchase minus amounts remitted from the Principal and Interest Account to the
Certificate Account representing collections of principal on such Mortgage Loans
during the current Due Period, (y) 30 days' interest on such amount computed at
the applicable weighted average of the Adjusted Mortgage Loan Remittance Rates,
and (z) the interest portion of any unreimbursed insured payment made by the
Certificate Guaranty Insurer, if any. Upon receipt of such direction by the
Majority Certificateholders or of such notice from the Certificate Guaranty
Insurer, the Trustee will notify the holders of the Class R Certificates of such
election to liquidate or such determination to purchase, as the case may be (the
"Termination Notice"). The Holders of a majority of the percentage interest of
the Class R Certificates then outstanding may, within 60 days from the date of
receipt of the Termination Notice (the "Purchase Option Period"), at their
option, purchase from the related Trust all Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the REMIC at a purchase price
equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Certificateholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
Mortgage Loans and such other property in the REMIC and distribute the proceeds
of the liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Certificateholders shall permit
or direct in writing, after the expiration of the Purchase Option Period and
(ii) in the event that the Certificate Guaranty Insurer has given the Trustee
notice of the Certificate Guaranty Insurer's determination to purchase the
assets described in clause (ii) preceding, the Certificate Guaranty Insurer
shall so purchase such assets within 60 days after the expiration of the
Purchase Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and the Certificate Guaranty Insurer, if
any, of an opinion of nationally recognized tax counsel selected by the Holders
of such Class R Certificates, which opinion shall be reasonably satisfactory in
form and substance to the Majority Certificateholders and the Certificate
Guaranty Insurer, if any, that the effect of the Final Determination is to
increase substantially the probability that the gross income of the REMIC will
be subject to federal taxation, purchase from the Trust all Mortgage Loans and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure,
or otherwise in respect of any Mortgage Loan then remaining in the applicable
REMIC at a purchase price equal to the Termination Price. The foregoing opinion
shall be deemed satisfactory unless the Majority Certificateholders give the
holders of a majority of percentage interests in the Class R Certificates notice
that such opinion is not satisfactory within thirty days after receipt of such
opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Certificate-holders may
exercise any trust or power conferred on the Trustee with respect to the
Certificates or the Trusts, upon satisfaction of certain conditions set forth in
the Agreements; provided, however, that with respect to any action or event
affecting only one or more Classes of Certificates, only Holders of such Class
or Classes may exercise such trust or power.
AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer and
the Trustee by written agreement, upon the prior written consent of the
Certificate Guaranty Insurer, if any, without the notice to, or consent of, the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions of such Agreement, or any
agreement for the retention of each Trustee's Mortgage File; provided, however,
that such action shall not, as evidenced by an Opinion of Counsel delivered to
the Trustee, adversely affect the interest of any Certificateholder or any other
party and further provided that no such amendment shall reduce in any manner the
amount of, or delay the timing of, any amounts which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party thereto
without the consent of such party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer and the Trustee with the consent of the Certificate Guaranty
Insurer, if any, and the Holders of the majority of the percentage interest in
each Class of Certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner any provisions thereof; provided,
however, that if a REMIC election is made for the applicable Trust, no such
amendment shall be made unless the Trustee receives an Opinion of Counsel, at
the expense of the party requesting the change, that such change will not
adversely affect the status of the Trust as a REMIC or cause a tax to be imposed
on the REMIC, and provided further, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, any amounts which are required to
be distributed on any Certificates without the consent of the Holders of 100% of
each Class of Certificates affected thereby.
Each Agreement may be amended from time to time by the Master Servicer, The
Money Store and the Trustee by written agreement, upon the prior written consent
of the Certificate Guaranty Insurer, if any, without the notice to or consent of
the Certificateholders, in connection with the substitution of cash, a letter of
credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
<PAGE>
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Laws and practices
relating to the legal effects and enforcement of mortgages and deeds of trust
vary somewhat from state to state. In general, however, the most significant
applicable legal principles are similar in all states. The following discussion
addresses the more significant legal principles applicable to mortgages and
deeds of trust in all states. It should be noted that some of the Mortgage Loans
may relate to Mortgaged Properties located in California, which has enacted
various laws, not common to most other states, which impose special limitations
on the remedies available to the holders of mortgages and deeds of trust. These
laws, called "anti-deficiency laws," are discussed below.
NATURE OF THE MORTGAGE ASSETS
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. The Single Family Loans, FHA Loans, Secured Conventional
Home Improvement Loans and Multifamily Loans generally will be secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property subject to the
loan is located. A mortgage creates a lien upon the real property encumbered by
the mortgage, which lien is generally not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of recording with a state or county office. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. The mortgagor delivers
to the mortgagee a note or bond and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a security
deed or deed to secure debt are governed by law and, with respect to some deeds
of trust, the directions of the beneficiary.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the Cooperative and/or
underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the UCC in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Unless otherwise specified
in the Prospectus Supplement, under the Agreement, the Representative will
transfer or cause the transfer of physical possession of the Contracts to the
Trustee or its custodian. In addition, the Representative will make or cause to
be made an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Representative.
The Representative will assign or cause to be assigned a security interest
in the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Representative, the Master Servicer nor the Trustee will amend the certificates
of title to identify the Trustee, on behalf of the Certificateholders, as the
new secured party and, accordingly, the Representative or the Seller will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the
Representative's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest might not be held effective against
creditors of the Representative or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Representative and the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Representative will represent that it has no knowledge of any such liens with
respect to any Manufactured Home securing a Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Certificateholders in the event such a lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sales take place, typically a notice of
sale must be posted in a public place and published during a specific period of
time in one or more newspapers, posted on the property, and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the mortgage is not reinstated, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the Mortgage Assets (by
principal balance) will be secured by properties located in California.
Foreclosure of a deed of trust in California may be effected by a judicial or
nonjudicial foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. However, in the case of certain
purchase money mortgage loans, a lender may be prohibited by statute from
obtaining a deficiency judgment. California law also requires the deed of trust
beneficiary to exhaust all real property security in a single action (i.e. in a
judicial foreclosure) before a deficiency judgment may be sought against the
borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of the
real property sold at the foreclosure sale. As a result of these prohibitions,
it is anticipated that in many instances the Master Servicer will not seek
deficiency judgments against defaulting mortgagors. Under the laws applicable in
most states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws (including California law) affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon collateral and/or enforce a deficiency judgment. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the court determines
that the value of the Mortgaged Property is less than the principal balance of
the mortgage loan, for the reduction of the secured indebtedness to the value of
the Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments. Some states also have homestead exemption
laws which would protect a principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the seller of such Contract had or should have had knowledge of
such claim or defense, the Master Servicer will have the right to require the
seller to repurchase the Contract because of a breach of such seller's
representation and warranty that no claims or defenses exist which would affect
the obligor's obligation to make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgager
or secured party. The Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of mortgage loans with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APR's,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts. Legal restrictions, if any, on prepayment of Multifamily
Loans will be described in the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted alleging
personal injury or property damage from the existence of certain chemical
substances which may be present in building materials. For example, formaldehyde
and asbestos have been and in some cases are incorporated into many building
materials utilized in manufactured and other housing. As a consequence, lawsuits
may arise from time to time asserting claims against manufacturers or builders
of the housing, suppliers of component parts, and related persons in the
distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by a
Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Seller, and the Certificateholders would
suffer a loss only to the extent that (i) the Seller breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Seller, the Representative or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Certificateholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages. Typical products liability
insurance policies held by manufacturers and component suppliers of manufactured
homes may not cover liabilities arising from formaldehyde and certain other
chemicals in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against a
Trust.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Certificateholders if a Mortgaged Property securing a
Mortgage Loan became the property of such Trust in certain circumstances and if
such Cleanup Costs were incurred. Moreover, certain states by statute impose a
lien for any Cleanup Costs incurred by such state on the property that is the
subject of such Cleanup Costs (a "Superlien"). All subsequent liens on such
property are subordinated to such Superlien and, in some states, even prior
recorded liens are subordinated to such Superliens. In the latter states, the
security interest of the Trustee in a property that is subject to such a
Superlien could be adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special Federal tax
counsel, ("Federal Tax Counsel"), the following are the material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
offered hereby. The discussion, and the opinions referred to below, are based on
laws, regulations, rulings and decisions now in effect (or, in the case of
certain regulations, proposed), all of which are subject to change or possibly
differing interpretations. Because tax consequences may vary based on the status
or tax attributes of the owner of a Certificate, prospective investors should
consult their own tax advisors in determining the federal, state, local and
other tax consequences to them of the purchase, ownership and disposition of
Certificates. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), the terms
"Certificateholder" and "holder" mean the beneficial owner of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election will be made
with respect to the related Trust. In addition, if the related Prospectus
Supplement so provides, the transaction documents for a Trust may provide that
an election will be made on or after September 1, 1997 to qualify such trust as
a Financial Asset Securitization Investment Trust pursuant to new provisions of
the Code which will be effective as of such date. To the extent provided in the
Prospectus Supplement for a series, Certificateholders may also have the benefit
of a Reserve Account and of certain agreements (each, a "Yield Supplement
Agreement") under which payment will be made from the Reserve Account in the
event that interest accrued on the Mortgage Loans at their Mortgage Interest
Rates is insufficient to pay interest on the Certificates of such Series (a
"Basis Risk Shortfall"). If a REMIC election is to be made, the Prospectus
Supplement will designate the Certificates of such series as "regular interests"
("REMIC Regular Certificates") in the REMIC (within the meaning of Section
860G(a)(1) of the Code) or as the "residual interest" ("REMIC Residual
Certificates") in the REMIC (within the meaning of Section 860G(a)(2) of the
Code). The terms "REMIC Certificates" and "Non-REMIC Certificates" denote,
respectively, Certificates of a series with respect to which a REMIC election
will, or will not, be made. The discussion below is divided into two parts, the
first part applying only to REMIC Certificates and the second part applying only
to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust or certain assets of such
Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations, the related Trust or
certain assets of such Trust will be a REMIC and the REMIC Certificates will be
considered to evidence ownership of "regular interests" or "residual interests"
within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Account
in the event of a Basis Risk Shortfall will be required to allocate their
purchase price between their beneficial ownership interests in the related REMIC
regular interests and Yield Supplement Agreements, and will be required to
report their income realized with respect to each, calculated taking into
account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. REMIC Regular Certificateholders
are advised to consult their own tax advisors concerning the determination of
such fair market values. Under the Agreement, holders of applicable classes of
REMIC Regular Certificates will agree that, for federal income tax purposes,
they will be treated as owners of the respective class of regular interests and
of the corresponding Yield Supplement Agreement.
Status of REMIC Certificates. The REMIC Certificates will be "real estate
assets" for purposes of Section 856(c)(5)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets, but not to the extent that the
REMIC's assets consist of Yield Supplement Agreements. However, if at least 95
percent of the REMIC's assets are qualifying assets, then 100 percent of the
REMIC Certificates will be qualifying assets. Similarly, income on the REMIC
Certificates will be treated as "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code, subject
to the limitations of the preceding two sentences. In addition to Mortgage
Assets, the REMIC's assets will include payments on Mortgage Assets held pending
distribution to holders of REMIC Certificates, amounts in reserve accounts (if
any), other credit enhancements (if any) and possibly buydown funds ("Buydown
Funds"). The Mortgage Assets generally will be qualifying assets under the
foregoing sections of the Code except to the extent provided in the Prospectus
Supplement. However, Mortgage Assets that are not secured by residential real
property or real property used primarily for church purposes may not constitute
qualifying assets under Section 7701(a)(19)(C)(v) of the Code. In addition, to
the extent that the principal amount of a Mortgage Asset exceeds the value of
the property securing the Mortgage Asset, it is unclear and Federal Tax Counsel
is unable to opine whether the loans will be qualifying assets. The regulations
under Sections 860A through 860G of the Code (the "REMIC Regulations") treat
credit enhancements as part of the mortgage or pool of mortgages to which they
relate, and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Mortgage Assets and held pending distribution to holders of
Certificates ("cash flow investments") will be treated as qualifying assets. It
is unclear whether amounts in a Reserve Account or Buydown Funds would also
constitute qualifying assets under any of those provisions. The Prospectus
Supplement for each series will indicate (if applicable) that it has Buydown
Funds. The REMIC Certificates will not be "residential loans" for the purposes
of the residential loan requirement of Section 593(g)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Federal Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount---Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such as
a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includible in the stated redemption price at maturity of
the REMIC Regular Certificate. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. Interest payments will not
qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Assets underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered. Accordingly, Federal Tax Counsel is unable to opine whether interest
payments on REMIC Regular Certificates that otherwise would not be treated as
having original issue discount would be considered to have original issue
discount because there are not reasonable remedies to compel timely payment of
interest or terms or conditions that would make the likelihood of late payment
or nonpayment remote.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "Variable Rate REMIC
Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate REMIC
Regular Certificate will not constitute an objective rate if it is reasonably
expected that the average value of such rate during the first half of the
Variable Rate REMIC Regular Certificate's term will be either significantly less
than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates- Current Income
on REMIC Regular Certificates--Original Issue Discount" based on the following:
(i) stated interest on the Single Variable Rate REMIC Regular Certificate which
is unconditionally payable in cash or property (other than debt instruments of
the issuer) at least annually will constitute qualified stated interest; (ii) by
assuming that the variable rate on the Single Variable Rate REMIC Certificate is
a fixed rate equal to: (a) in the case of a Single Variable Rate REMIC Regular
Certificate with a qualified floating rate or a qualified inverse floating rate,
the value of, as of the issue date, of the qualified floating rate or the
qualified inverse floating rate or (b) in the case of a Single Variable Rate
REMIC Regular Certificate with an objective rate (other than a qualified inverse
floating rate), a fixed rate which reflects the reasonably expected yield for
such Single Variable Rate REMIC Regular Certificate; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted into
an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. Federal Tax Counsel is unable to opine how a Variable Rate REMIC
Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation, since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
Interest-Only REMIC Regular Certificates. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that all holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate shortly following the REMIC's receipt
of the final payment in respect of the Mortgage Assets. The last distribution on
a REMIC Regular Certificate should be treated as a payment in full retirement of
a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Assets or as principal on the Mortgage Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and discount income (or deductions for amortization of
premium) with respect to Mortgage Assets, on the one hand, and the timing of
deductions for interest (including original issue discount) on the REMIC Regular
Certificates, on the other. In the case of multiple classes of REMIC Regular
Certificates issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Assets may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Assets (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a Mortgage Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Mortgage Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would cause it to be subject to such tax. This provision will not affect the
REMIC's ability to accept substitute Mortgage Loans or to sell defective
Mortgage Loans in accordance with the Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust initially would be borne by the REMIC Residual Certificates in the
related REMIC rather than by the REMIC Regular Certificateholders, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark-to-Market REMIC Residual Certificates. Treasury
regulations provide that all REMIC Residual Certificates acquired on or after
January 4, 1995, and similar interests or arrangements acquired on or after
January 4, 1995 that are determined by the Commissioner to have substantially
the same economic effect as a REMIC Residual Certificate, are not securities and
cannot be marked to market pursuant to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear and Federal Tax Counsel is unable to opine with
respect to this issue. The preamble to the REMIC Regulations indicates that the
Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity
cannot qualify as a REMIC absent reasonable arrangements designed to ensure that
(1) residual interests in such entity are not held by disqualified organizations
and (2) information necessary to calculate the tax due on transfers to
disqualified organizations (i.e., a computation of the present value of the
excess inclusions) is made available by the REMIC. The governing instruments of
a Trust will contain provisions designed to ensure the foregoing, and any
transferee of a REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC Residual Certificate is a disqualified
organization. In addition, as to the requirement that reasonable arrangements be
made to ensure that disqualified organizations do not hold a residual interest
in the REMIC, the REMIC Regulations require that notice of the prohibition be
provided either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below, on pass-through
entities, interests in which are held by disqualified organizations), the REMIC
Regulations further require that such information also be provided to the
Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Expenses" below. No prediction can be made regarding
whether such legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "Foreign Investors"
below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trusts with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts), the deductibility of such expenses
will be subject to the limitations described above. The reduction or
disallowance of these deductions may have a significant impact on the yield of
REMIC Regular Certificates to such a holder. In general terms, a single- class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single- class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (a) a citizen or resident of the United States, (b) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (c) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (d) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (d), above, unless the trust elects to have its United
States status determined under the criteria set forth in (d) above for tax years
ending after August 20, 1996. Proposed Treasury regulations, which would be
effective with respect to payments made after December 31, 1997 if adopted in
their current form, would provide alternative certification requirements and
means by which a holder of REMIC Certificates could claim the exemption from
federal income and withholding tax.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act of
1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC Residual
Certificate will not be entitled to the portfolio interest exception from the
30% withholding tax (or to any treaty exemption or rate reduction) for that
portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Assets from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
Gain on Transfers of Certificates. A Certificateholder that is a
nonresident alien or foreign corporation will not be subject to United States
federal income tax on gain realized on the sale, exchange, or redemption of a
REMIC Certificate, provided that (i) such gain is not effectively connected with
a trade or business carried on by the Certificateholder in the United States,
(ii) in the case of a Certificateholder that is an individual, such
Certificateholder is not present in the United States for 183 days or more
during the taxable year in which such sale, exchange or redemption occurs and
(iii) in the case of gain representing accrued interest, the Certificateholder
complies to the extent necessary with certain identification requirements,
including timely delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such holder.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Representative or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made.
Tax Status of the Trust. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel, will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Mortgage Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Mortgage Assets that is allocable to such
Non-REMIC Certificate and may deduct the portion of the expenses incurred by the
Trust that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Assets and received
directly its share of the payments on the Mortgage Assets and incurred directly
its share of expenses incurred by the Trust when those amounts are received or
incurred by the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the "applicable amount" ($100,000 (or
$50,000 in the case of a separate return by a married individual), adjusted for
changes in the cost of living subsequent to 1990) will be reduced by the lesser
of (i) 3 percent of the excess of adjusted gross income over the applicable
amount, or (ii) 80 percent of the amount of itemized deductions otherwise
allowable for such taxable year. Moreover, a holder of a Non-REMIC Certificate
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Loans. As
a result, individuals, estates, or trusts holding Non-REMIC Certificates may
have taxable income in excess of the cash received.
Status of the Non-REMIC Certificates. The Non-REMIC Certificates generally
will be "real estate assets" for purposes of Section 856(c)(5)(A) of the Code
and "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, and interest income on the Non-REMIC
Certificates generally will be "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code. However,
the Non-REMIC Certificates may not be qualifying assets under any of the
foregoing sections of the Code to the extent that the Trust's assets include
Buydown Funds, amounts in a Reserve Account, or payments on mortgages held
pending distribution to Certificateholders. Further, the Non-Remic Certificates
may not be "real estate assets" to the extent loans held by the trust are not
secured by real property, and may not be "loans . . . secured by an interest in
real property" to the extent loans held by the trust are not secured by
residential real property or real property used primarily for church purposes.
In addition, to the extent that the principal amount of a loan exceeds the value
of the property securing the loan, it is unclear and Federal Tax Counsel is
unable to opine whether the loan will be a qualifying asset. The Non-REMIC
Certificates should not be "residential loans made by the taxpayer" for purposes
of the residential loan requirement of Section 593(g)(4)(B) of the Code.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Mortgage Loans and
should be characterized for federal income tax purposes as an ownership interest
in the Mortgage Loans. The Internal Revenue Service has taken the position in
Revenue Ruling 91-46 that retained interest in excess of reasonable compensation
for servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate (other than an interest treated as a "stripped coupon") as market
discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount de minimis rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Asset underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Mortgage Assets,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. It is unclear whether such regulations
would apply this rule to the Non-REMIC Certificates, whether Section 1272(a)(6)
might apply to the Non-REMIC Certificates in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles and Federal Tax Counsel
is unable to opine with respect to these issues. If required to report interest
income on the Non-REMIC Certificates to the Internal Revenue Service under the
stripped bond rules, it is anticipated that the Trustee will calculate the yield
of the Non-REMIC Certificates based on a representative initial offering price
of the Non-REMIC Certificates and a reasonable assumed rate of prepayment of the
Mortgage Assets (although such yield may differ from the yield to any particular
holder that would be used in calculating the interest income of such holder).
The Prospectus Supplement for each series of Non-REMIC Certificates will
describe the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Assets will prepay at that rate or at
any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption would not have any significant
effect on the yield used in calculating accruals of interest income. In the
case, however, of a Non-REMIC Certificate acquired at a discount or premium
(that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "Sales of Non-REMIC Certificates" below) that is allocable to the Mortgage
Loan. The method of allocating such basis among the Mortgage Loans may differ
depending on whether a reasonable prepayment assumption is used in calculating
the yield of the Non-REMIC Certificates for purposes of accruing original issue
discount. It is not clear whether any other adjustments would be required to
reflect differences between the prepayment rate that was assumed in calculating
yield and the actual rate of prepayments.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Assets held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-REMIC
Certificate that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Non-REMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Assets in accordance with its tax accounting method. In addition, if
the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below. The treatment of any discount will depend on whether the
discount is original issue discount as defined in the Code and, in the case of
discount other than original issue discount, whether such other discount exceeds
a de minimis amount. In the case of original issue discount, the holder (whether
a cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Mortgage Assets. However, original issue discount could arise with respect
to a Mortgage Loan ("ARM") that provides for interest at a rate equal to the sum
of an index of market interest rates and a fixed number. The original issue
discount for ARMs generally will be determined under the principles discussed in
"REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount---Variable Rate REMIC Regular
Certificates."
If discount other than original issue discount exceeds a de minimis amount
(described below), the holder will also generally be required to include in
income in each month the amount of such discount accrued through such month and
not previously included in income, but limited, with respect to the portion of
such discount allocable to any Mortgage Asset, to the amount of principal on
such Mortgage Asset received by the Trust in that month. Because the Mortgage
Assets will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues (and therefore at a rate not
significantly slower than the rate at which such discount would be included in
income if it were original issue discount). The holder may elect to accrue such
discount under a constant yield method based on the yield of the Non-REMIC
Certificate to such holder. In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method. Under
the de minimis rule, market discount with respect to a Non-REMIC Certificate
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate
and (ii) the weighted average life (in complete years) of the Mortgage Assets
remaining at the time of purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Mortgage Loan under a constant yield method based on the yield
of the Mortgage Loan to such holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage Loan and allowed as an ordinary deduction as principal
payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan. The
method of allocating such basis among the Mortgage Loans may differ depending on
whether a reasonable prepayment assumption is used in calculating the yield of
the Non-REMIC Certificates for purposes of accruing original issue discount.
Other adjustments might be required to reflect differences between the
prepayment rate that was assumed in accounting for discount or premium and the
actual rate of prepayments.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a de
minimis amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a "United
States person" (as defined below) and is not subject to federal income tax as a
result of any direct or indirect connection to the United States other than its
ownership of a Non-REMIC Certificate generally will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-REMIC Certificate to the extent attributable to Mortgage
Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Proposed Treasury Regulations, which would be effective with respect to payments
made after December 31, 1997 if adopted in their current form, would provide
alternative certification requirements and means by which a holder of Non-REMIC
Certificates could claim an exemption from federal income and withholding tax.
Interest or original issue discount on a Non-REMIC Certificate attributable to
Mortgage Loans that were originated prior to July 19, 1984 will be subject to a
30% withholding tax (unless such tax is reduced or eliminated by an applicable
tax treaty). For these purposes, the term "United States person" means a citizen
or a resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, and a trust for
which one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term "United States person" shall include a trust whose
income is includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts just described, unless the trust elects
to have its United States status determined under the criteria described in the
previous sentence for tax years ending after August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "taxable
mortgage pool" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC, (ii) substantially all of the
assets of the entity are debt obligations, and more than 50 percent of such debt
obligations consist of real estate mortgages (or interests therein), (iii) the
entity is the obligor under debt obligations with two or more maturities, and
(iv) payments on the debt obligations on which the entity is the obligor bear a
relationship to the payments on the debt obligations which the entity holds as
assets. With respect to requirement (iii), the Code authorizes the Internal
Revenue Service to provide by regulations that equity interests may be treated
as debt for purposes of determining whether there are two or more maturities. If
a Series of Non-REMIC Certificates were treated as obligations of a taxable
mortgage pool, the Trust would be ineligible to file consolidated returns with
any other corporation and could be liable for corporate tax. Treasury
regulations do not provide for the recharacterization of equity as debt for
purposes of determining whether an entity has issued debt with two maturities,
except in the case of transactions structured to avoid the taxable mortgage pool
rules.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds, separate accounts and insurance company general accounts in
which such plans or arrangements are invested to which it applies and on those
persons who are fiduciaries with respect to such benefit plans. Certain employee
benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA)
and certain church plans (as defined in Section 3(33) of ERISA), are not subject
to ERISA. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a benefit plan fiduciary should determine whether
such an investment is permitted under the governing benefit plan instruments and
is appropriate for the benefit plan in view of its overall investment policy and
the composition and diversification of its portfolio and is prudent.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Representative, the Originators, the Certificate Guaranty Insurer, the
Underwriter and the Trustee and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition or holding or transfer of Certificates by or on behalf of such
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulations"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the Mortgage Loans and any other assets of the Trust and not merely
an interest in the Certificates, the assets of the Trust would become subject to
the fiduciary investment standards of ERISA, and transactions occurring between
the Representative, the Trustee, the Servicer, the Certificate Guaranty Insurer
or any of their affiliates might constitute prohibited transactions, unless an
administrative exemption applies. Certain such exemptions which may be
applicable to the acquisition and holding of the Certificates or to the
servicing of the Mortgage Loans are noted below.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Representative
and the Trustee maintain a system of insurance or other protection for the
Mortgage Loans and the property securing such Mortgage Loans, and for
indemnifying holders of Class A Certificates against reductions in pass-through
payments due to defaults in loan payments or property damage in an amount at
least equal to the greater of 1% of the aggregate principal balance of the
Mortgage Loans, or 1% of the principal balance of the largest covered pooled
Mortgage Loan; (ii) the Trustee may not be an affiliate of the Representative;
and (iii) the payments made to and retained by the Representative in connection
with the Trust, together with all funds inuring to its benefit for administering
the Trust, represent no more than "adequate consideration" for selling the
Mortgage Loans, plus reasonable compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Representative, the Certificate Guaranty Insurer, the
Servicer, or the Trustee is a party in interest if the Plan does not pay more
than fair market value for such Certificates and the rights and interests
evidenced by such Certificates are not subordinated to the rights and interests
evidenced by other Certificates of the same pool. PTCE 83-1 also exempts from
the prohibited transaction rules and transactions in connection with the
servicing and operation of the Pool, provided that any payments made to the
Servicer in connection with the servicing of the Trust are made in accordance
with a binding agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Representative, the
Servicer, the Certificate Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to the other requirements: (i) the initial
sale, exchange or transfer of Certificates is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Certificates; (ii) the Plan pays no more for the Certificates
than would be paid in an arm's length transaction; (iii) no investment
management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Representative with regard to the sale, exchange or
transfer of Certificates to the Plan; (iv) the total value of the Certificates
purchased by such Plan does not exceed 25% of the amount issued; and (v) at
least 50% of the aggregate amount of Certificates is acquired by persons
independent of the Representative, the Trustee, the Servicer, and the
Certificate Guaranty Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Certificates constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including but not limited to:
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds and PTCE
95-60, regarding investments by insurance company general accounts. However,
even if the conditions specified in the Exemption or one or more of these other
exemptions are met, the scope of the relief provided might or might not cover
all acts which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Certificate should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
Each Prospectus Supplement will describe the extent, if any, to which the
Classes of Certificates offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Certificates will constitute legal investments for any entity under
any applicable statute, law, rule, regulation or order. Prospective purchasers
are urged to consult with their counsel concerning the status of the
Certificates as legal investments for such purchasers prior to investing in any
Class of Certificates.
PLAN OF DISTRIBUTION
The Certificates offered hereby will be offered in Series, either directly
by the Representative or through one or more underwriters or underwriting
syndicates ("Underwriters"). The Prospectus Supplement for each Series will set
forth the terms of the offering of such Series and of each Class within such
Series, including the name or names of the Underwriters, the proceeds to and
their use by the Representative and the Originators, and either the initial
public offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Certificates will be
determined.
The Certificates in a Series may be acquired by Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
Underwriters will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all of a Series of
Certificates described in the related Prospectus Supplement, if they are
purchased. If Certificates of a Series are offered other than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Certificates of such Series.
The place and time of delivery for the Certificates of a Series in respect
of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Certificates of each Series will be passed upon for the Representative by Eric
R. Elwin, Esq., Corporate Counsel of the Representative and certain legal
matters relating to the validity of the issuance of the Certificates of each
Series will be passed upon for the Underwriters of the Certificates of each
Series by Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock &
Lavan LLP has performed legal services for the Representative and it is expected
that it will continue to perform such services in the future.
EXPERTS
The consolidated financial statements of The Money Store Inc. as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 incorporated by reference herein have been audited by KPMG
Peat Marwick LLP, independent accountants, as stated in their opinion given upon
their authority as experts in accounting and auditing.
FINANCIAL INFORMATION
A new Trust will be formed to own the Mortgage Assets and to issue each
Series of Certificates. Each such Trust will have no assets or obligations prior
to the issuance of the Certificates and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts are included in this Prospectus.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in extreme cases might fail to recoup their
underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
Adjustable Rate.................................................... 6
Adjusted Mortgage Loan Remittance Rate............................. 42
Agency Securities.................................................. 6
Agreement.......................................................... 5
APR................................................................ 8
ARM................................................................ 85
Available Remittance Amount........................................ 53
Balloon Loans...................................................... 19
Bankruptcy Bond.................................................... 13
Basis Risk Shortfall............................................... 68
Buydown Funds...................................................... 69
Cede............................................................... 17
Certificate Account................................................ 53
Certificate Guaranty Insurance Policy.............................. 12
Certificate Guaranty Insurer....................................... 45
Certificate Register............................................... 41
Certificateholders................................................. 2
Certificates....................................................... 1
Class.............................................................. 1
Cleanup Costs...................................................... 67
CMO................................................................ 9
Code............................................................... 15
Commission......................................................... 3
Compensating Interest.............................................. 15
Contingency Fees................................................... 53
Contracts.......................................................... 6
Conventional Loans................................................. 5
Cooperative Loans.................................................. 5
Cooperatives....................................................... 5
Curtailment........................................................ 15
Custodian.......................................................... 52
Cut-off Date....................................................... 40
Definitive Certificates............................................ 43
Designated Depository Institution.................................. 52
Detailed Description............................................... 23
Determination Date................................................. 14
DTC................................................................ 17
Due Period......................................................... 53
ERISA.............................................................. 17
Event of Nonpayment................................................ 56
Federal Tax Counsel................................................ 16
FHA................................................................ 5
FHA Loans.......................................................... 6
FHLMC.............................................................. 6
Final Determination................................................ 57
Fixed Rate......................................................... 6
FNMA............................................................... 6
FTC Rule........................................................... 65
Funding Period..................................................... 10
Garn-St. Germain Act............................................... 65
GNMA............................................................... 6
Home Equity Loans.................................................. 25
HUD................................................................ 7
Index.............................................................. 90
Indirect Participant............................................... 42
Insurance Proceeds................................................. 15
Insurance Paying Agent............................................. 45
Insured Payment.................................................... 45
IRS................................................................ 57
Liquidation Proceeds............................................... 15
Loan-to-Value Ratio................................................ 25
Lockout Periods.................................................... 7
Lower Tier REMIC................................................... 77
Majority Certificateholders........................................ 55
Manufactured Homes................................................. 27
Manufacturer's Invoice Price....................................... 25
Master Servicer.................................................... 1
Monthly Advance.................................................... 14
Mortgage Asset Schedule............................................ 23
Mortgage Assets.................................................... 1
Mortgage Interest Rate............................................. 6
Mortgage Loans..................................................... 6
Mortgage Pool Insurance Policy..................................... 13
Mortgaged Properties............................................... 6
Multifamily Loans.................................................. 5
NHA Act............................................................ 28
1933 Act........................................................... 3
Non-REMIC Certificates............................................. 16
Opinion of Counsel................................................. 52
Originators........................................................ 1
Participants....................................................... 42
Pass-Through Rate.................................................. 2
Permitted Instruments.............................................. 53
Permitted Investments.............................................. 47
Plan............................................................... 86
PMBS............................................................... 6
PMBS Agreement..................................................... 34
PMBS Issuer........................................................ 9
PMBS Servicer...................................................... 9
PMBS Trustee....................................................... 9
Pool............................................................... 1
Pool Insurer....................................................... 46
Pre-Funding Account................................................ 10
Prepayment Assumption.............................................. 70
Principal and Interest Account..................................... 52
Principal Prepayment Period........................................ 42
Principal Prepayment............................................... 15
Private Mortgage-Backed Securities................................. 6
Prohibited Transaction............................................. 52
Qualified Substitute Mortgage Loan................................. 52
Rating Agency...................................................... 14
REIT .............................................................. 77
Released Mortgage Property Proceeds................................ 15
Relief Act......................................................... 22
REMIC.............................................................. 2
REMIC Certificates................................................. 68
REMIC Regular Certificates......................................... 16
REMIC Residual Certificates........................................ 16
REMIC Regulations.................................................. 69
Remittance Date.................................................... 2
Representative..................................................... 1
Reserve Account.................................................... 12
Secured Conventional Home Improvement Loans........................ 6
Senior Certificates................................................ 10
Servicing Advance.................................................. 53
Servicing Fees..................................................... 53
Single Family Loans................................................ 5
SMMEA.............................................................. 17
Special Hazard Insurance Policy.................................... 13
Special Hazard Insurer............................................. 46
Spread Amount...................................................... 12
Standard Hazard Insurance Policies................................. 7
Subordinated Certificates.......................................... 10
Sub-Servicer....................................................... 55
Substitution Adjustment............................................ 52
Successor Servicer................................................. 56
Superlien.......................................................... 68
Supplemental Interest Payments..................................... 14
Termination Notice................................................. 57
Termination Price.................................................. 57
Tiered REMICs...................................................... 69
Title I Loan Program............................................... 7
Title I Property Improvement Loans................................. 28
Title V............................................................ 66
Trust ............................................................. 1
Trustee............................................................ 15
Trustee's Mortgage File............................................ 51
UCC................................................................ 42
Underwriters....................................................... 88
United States person............................................... 81
Unsecured Home Improvement Loans................................... 6
VA................................................................. 5
Variable Rate Non-REMIC Certificates............................... 84
Variable Rate REMIC Regular Certificate............................ 72
Yield Supplement Agreement......................................... 68
<PAGE>
<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 OFFERED 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
Summary of Terms S-4
Risk Factors S-36
Lending Programs S-37
The Representative and the Originators S-41
The Loan Pools S-45
Maturity, Prepayment and Yield Considerations S-47
Description of the Certificates S-54
The Agreement S-70
Federal Income Tax Considerations S-75
ERISA Considerations S-76
Legal Investment Considerations S-79
Underwriting S-80
Legal Matters S-80
Rating of the Offered Certificates S-80
Financial Information S-81
Index of Principal Terms S-82
Annex I - Global Clearance, Settlement and Tax
Documentation Procedures I-1
PROSPECTUS
Prospectus Supplement 3
Available Information 3
Reports to Certificateholders 3
Incorporation of Certain Documents by Reference 3
Summary of Terms 5
Risk Factors 18
The Trusts 23
Use of Proceeds 35
The Representative and the Originators 35
The Single Family Loan Lending Program 36
Description of the Certificates 40
Credit Enhancement 44
Maturity, Prepayment and Yield Considerations 49
The Agreements 50
Certain Legal Aspects of the Mortgage Loans 59
Federal Income Tax Considerations 67
ERISA Considerations 86
Legal Investment Considerations 88
Plan of Distribution 88
Legal Matters 88
Experts 89
Financial Information 89
Rating 89
Index of Principal Terms 90
$250,000
[THE MONEY STORE LOGO]
THE MONEY STORE
HOME IMPROVEMENT TRUST
1997-II
PROSPECTUS SUPPLEMENT
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
June 26, 1997
