<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 1994
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GREEN TREE FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MINNESOTA 41-1263905
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1100 LANDMARK TOWERS
345 ST. PETER STREET
SAINT PAUL, MINNESOTA 55102-1639
(612) 293-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DREW S. BACKSTRAND
1100 LANDMARK TOWERS
345 ST. PETER STREET
SAINT PAUL, MINNESOTA 55102-1639
(612) 293-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
CHARLES F. SAWYER JEFFREY J. MURPHY
DORSEY & WHITNEY THACHER PROFFITT & WOOD
220 SOUTH SIXTH STREET TWO WORLD TRADE CENTER
MINNEAPOLIS, MINNESOTA 55402 NEW YORK, NEW YORK 10048
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
<S> <C> <C> <C> <C>
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Home Improvement Loan
Pass-Through
Certificates............ $1,000,000 100% $1,000,000 $344.83
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Limited Guaranty of Green
Tree Financial (2) (2) (2) (2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee on the
basis of the proposed maximum aggregate offering price, pursuant to Rule
457(c).
(2) No additional consideration will be paid for the Limited Guaranty;
accordingly, no separate filing fee is being paid herewith pursuant to Rule
457(n).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--PRELIMINARY PROSPECTUS DATED MAY 3, 1994
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
HOME IMPROVEMENT LOAN PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
Home Improvement Loan Pass-Through Certificates ("Certificates") of one or
more series (each, a "Series") may be sold from time to time under this
Prospectus and a Prospectus Supplement for each such Series. The Certificates
of each Series may be issued in one or more classes or subclasses (each, a
"Class"), as further described herein. If the Certificates of a Series are
issued in more than one Class, all or less than all of such Classes may be sold
under this Prospectus, and there may be separate Prospectus Supplements for one
or more of such Classes so sold. Any reference herein to the Prospectus
Supplement relating to a Series comprised of more than one Class should be
understood to refer to each of the Prospectus Supplements relating to the
Classes sold hereunder.
The Certificates evidence specified interests in separate pools of home
improvement retail installment sales contracts and promissory notes (the
"Contracts"), as more particularly described herein, and liens on certain of
the related real estate. Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have been originated in the ordinary
course of business by Green Tree Financial Corporation (the "Company").
Specific information, to the extent available, regarding the size and
composition of the pool of Contracts relating to each Series of Certificates
will be set forth in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, a pool insurance policy, letter of credit,
surety bond, guarantee of the Company, cash reserve fund, or other form of
credit enhancement, or any combination thereof, may be provided with respect to
a Series of Certificates, or one or more Classes of such Series, evidencing
interests in the Contracts. The Company will act as Servicer (in such capacity
referred to herein as the "Servicer") of the Contracts.
Each Series of Certificates will consist of one or more Classes of
Certificates, which may include one or more senior Classes of Certificates (the
"Senior Certificates") and one or more subordinate Classes of Certificates (the
"Subordinated Certificates"). Certificates of a Series may be divided into two
or more Classes or sub-classes representing interests in specified percentages
(which may be 0%) of principal or interest, or both, in distributions on the
pool of Contracts relating to such Series, as specified in the related
Prospectus Supplement. Each Prospectus Supplement will describe the Series and
Class or Classes of Certificates offered thereby.
The Prospectus Supplement will set forth the Pass-Through Rate that will be
paid to Certificateholders of each Class or sub-class of such Series. Such
Pass-Through Rate may be fixed, variable or adjustable, as specified in the
related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of the Company with respect to a Series of Certificates will be
pursuant to certain limited representations and warranties. Except as otherwise
specified in the related Prospectus Supplement, the Servicer's obligations with
respect to the Certificates evidencing interests in a pool of Contracts are
limited to its contractual servicing obligations. If so specified in the
related Prospectus Supplement, the Servicer may be obligated, under certain
terms and conditions, to advance the amount of any delinquent payments of
principal and interest during the immediately preceding Due Period (as defined
herein), but only to the extent the Servicer determines such advances are
recoverable from future payments and collections on the Contracts or otherwise.
See "Description of the Certificates--Advances" and "--Distributions on
Certificates."
There will have been no public market for any Certificates sold hereunder
prior to the offering thereof and there is no assurance that any such market
will develop. The Underwriters named in the Prospectus Supplement relating to a
Series may from time to time buy and sell Certificates of such Series, but
there can be no assurance that an active secondary market therefor will
develop, and there is no assurance that any such market, if established, will
continue.
The Company may elect to cause the Trust Fund relating to a Series of
Certificates to be treated as a "Real Estate Mortgage Investment Conduit" (a
"REMIC") for federal income tax purposes. See "Certain Federal Income Tax
Consequences" herein.
THE CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
COMPANY OR ANY OF ITS AFFILIATES, EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN
AND THE RELATED PROSPECTUS SUPPLEMENT. THE CERTIFICATES 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
OR ENTITY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus may not be used to consummate sales of a Series of
Certificates unless accompanied by a Prospectus Supplement.
The date of this Prospectus is May , 1994.
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
The Company will cause to be provided to the holders of the Certificates of
each Series certain monthly and annual reports concerning such Certificates and
the related Trust Fund as further described in the related Prospectus
Supplement under "Description of the Certificates--Reports to
Certificateholders."
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Information concerning the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock and
rights to purchase preferred shares are listed on the New York Stock Exchange
("NYSE") and on the Pacific Stock Exchange ("PSE"). The Company's Senior
Subordinated Debentures are also listed on the NYSE and the PSE. The Company's
Senior Subordinated Notes are listed on the NYSE. Reports and other information
concerning the Company can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York and the Pacific Stock
Exchange, Inc., 310 Pine Street, San Francisco, California.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of certain material terms of certain of
the documents referred to herein and therein, but neither contains nor will
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part (the "Registration Statement"). For further
information, reference is made to such Registration Statement and the exhibits
thereto which the Company has filed with the Commission under the Securities
Act of 1933, as amended. Statements contained in this Prospectus and any
Prospectus Supplement describing a provision of any contract or other document
referred to are summaries, and if this Prospectus or such Prospectus Supplement
indicates that such contract or other document has been filed as an exhibit to
the Registration Statement, reference is made to the copy of the contract or
other document filed as an exhibit, each such statement being qualified in all
respects by reference to the actual provision being described. Copies of the
Registration Statement can be inspected and, upon payment of the Commission's
prescribed charges, copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at certain of its Regional Offices located as follows: New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048, and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
With respect to any Class of Certificates that is supported by a guarantee of
the Company, the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, which has been filed with the Commission, is hereby
incorporated by reference in this Prospectus and the related Prospectus
Supplement.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates, shall
2
<PAGE>
be deemed to be incorporated by reference into this Prospectus and the
Prospectus Supplement relating to a Class of Certificates that is supported by
a guarantee of the Company, and to be a part thereof from the respective dates
of filing of such documents. Any statement contained herein or in a document
all or any portion of which is 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 any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this Prospectus
is delivered, upon the written or oral request of such person, a copy of any or
all of the foregoing documents incorporated herein by reference (other than
certain exhibits to such documents). Requests for such copies should be
directed to Drew S. Backstrand, 1100 Landmark Towers, 345 St. Peter Street, St.
Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
3
<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 accompanying
Prospectus Supplement.
Title of Securities.......... Home Improvement Loan Pass-Through Certificates
(Issuable in Series) (the "Certificates").
Seller....................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Company").
Servicer..................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Servicer").
Special Considerations....... Certain special considerations are particularly
relevant to a decision to invest in any Certif-
icates sold hereunder. See "Special Considera-
tions" herein.
Securities Offered........... Certificates evidencing interests in pools of
Contracts (as defined herein) may be issued
from time to time in Series pursuant to sepa-
rate Pooling and Servicing Agreements (each, an
"Agreement") between the Company, as Seller and
Servicer, and the Trustee specified in the re-
lated Prospectus Supplement for such Series of
Certificates (the "Trustee").
The Contracts................ The Contracts evidenced by a Series of Certifi-
cates (the "Contract Pool") will be fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus Supplement,
will consist of home improvement retail in-
stallment sales contracts and promissory notes
and will be either conventional contracts or
contracts insured by the Federal Housing Admin-
istration ("FHA") pursuant to Title I of the
National Housing Act ("Title I"). Contracts may
either be secured by the related real estate
(each a "Secured Contract") or unsecured (each
an "Unsecured Contract").
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Contracts com-
prising the Contract Pool, as of the date spec-
ified in the Prospectus Supplement (the "Cut-
off Date"); (ii) the contractual rates of in-
terest (each a "Contract Rate") on the Con-
tracts and the weighted average Contract Rate;
(iii) the weighted average and ranges of terms
to scheduled maturity as of origination and as
of the Cut-off Date; (iv) the percentage of
Contracts that are FHA-insured, and the per-
centage of Contracts that are Secured Contracts
and Unsecured Contracts; (v) the average out-
standing principal balance of the Contracts as
of the Cut-off Date; (vi) the range of Loan-to-
Value Ratios; and (vii) the geographic location
of improved real estate securing the Secured
Contracts. In addition, if so specified in the
related Prospectus Supplement, additional Con-
tracts may be purchased from the Company during
the Pre-Funding Period specified in the related
Prospectus Supplement, from funds on deposit in
a Pre-Funding Account.
4
<PAGE>
Except as otherwise specified in the related
Prospectus Sup-plement, the Contracts will have
been originated by the Company on an individual
basis in the ordinary course of its business.
Description of Certificates.. Each Class of Certificates within a Series will
evidence the interest specified in the related
Prospectus Supplement in the Contract Pool and
certain other property held in trust for the
benefit of the Certificateholders (the "Trust
Fund").
Each Series of Certificates may consist of one
or more Classes, one or more of which ("Subor-
dinated Certificates") may be subordinated in
right of distribution to one or more other
Classes ("Senior Certificates"). A Class of
Certificates of a Series may be divided into
two or more sub-classes, as and on the terms
specified in the related Prospectus Supplement.
Each Class or sub-class of a Series may evi-
dence the right to receive a specified portion
(which may be 0%) of each distribution of prin-
cipal or interest, or both, on the Contracts.
Each Class or sub-class of a Series may be as-
signed a principal balance (the "Stated Bal-
ance") based on the cash flow from the assets
in the Trust Fund, and a fixed, variable or ad-
justable stated annual interest rate, and may
be entitled to receive distributions in reduc-
tion of Stated Balance to the extent available
therefor in the manner, priority and amounts
specified in the related Prospectus Supplement.
A Class or sub-class of Certificates may be
Compound Interest Certificates on which inter-
est will accrue, but not be paid, for the pe-
riod set forth in the related Prospectus Sup-
plement. The Certificates will be issuable in
fully registered form in the authorized denomi-
nations specified in the related Prospectus
Supplement. See "Description of the Certifi-
cates." The Certificates will not be guaranteed
or insured by any government agency or, unless
otherwise specified in the related Prospectus
Supplement, other insurer and, except as de-
scribed below and in the related Prospectus
Supplement, the Contracts will not be guaran-
teed or insured by any government agency or
other insurer.
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Contracts will be subordinated
to the rights of Senior Certificateholders to
the extent and in the manner specified in the
related Prospectus Supplement. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and
losses will be allocated among such classes in
the manner specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders, to the extent not subordi-
nated, may be on a parity with those of the Se-
nior Certificateholders. This subordination is
intended to enhance the likelihood of regular
receipt by Senior Certificateholders of
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<PAGE>
the full amount of scheduled monthly payments
of principal and interest due them and to pro-
tect the Senior Certificateholders against
losses.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement
with respect to a Series of Certificates may be
provided by pool insurance, letters of credit,
surety bonds, a guarantee of the Company, cash
reserve funds or other forms of enhancement ac-
ceptable to each nationally recognized rating
agency rating a Series of Certificates, in each
case as described in the related Prospectus
Supplement.
Interest..................... Except as otherwise set forth in the related
Prospectus Supplement, interest on the Certifi-
cates will be paid on the dates specified in
the related Prospectus Supplement (each a "Pay-
ment Date"), commencing on the date specified
in the related Prospectus Supplement. The re-
lated Prospectus Supplement will set forth for
each Class or sub-class of Certificates the in-
terest rate, if any, for each such Class or
sub-class or the method of determining such in-
terest rate. See "Yield Considerations" and
"Description of the Certificates." As specified
in the related Prospectus Supplement, Classes
of a Series of Certificates or sub-classes
within a Class may be entitled to receive no
interest or interest which is not proportionate
to the principal allocable to such Certifi-
cates.
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Con-
tract, including any principal prepayments,
will be passed through on each Payment Date.
See "Maturity and Prepayment Considerations"
and "Description of the Certificates." If so
specified in the Prospectus Supplement with re-
spect to a Class or sub-class of a Series hav-
ing a Stated Balance, such distributions may be
made in reduction of the Stated Balance in an
amount equal to the Certificate Remittance
Amount or such other amounts as are specified
in the related Prospectus Supplement. See "Ma-
turity and Prepayment Considerations" and "De-
scription of the Certificates--Distributions on
Certificates" and "--Payments on Contracts."
Optional Termination......... If so specified in the related Prospectus Sup-
plement, each of the Company or the Servicer
may at its option repurchase all Contracts re-
lating to a Series of Certificates remaining
outstanding at such time and under the circum-
stances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued interest from the first day
of the month of repurchase to the first day of
the next succeeding month at the Contract Rates
borne by such Contracts. See "Description of
the Certificates--Termination of the Agree-
ment."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will
6
<PAGE>
be issuable in the form of one or more global
certificates (each, a "Global Certificate") to
be held by a depositary (each, a "Depositary")
on behalf of the beneficial owners of the Cer-
tificates, as described herein under "Descrip-
tion of the Certificates--Global Certificates."
The description of the Certificates in this
Prospectus assumes that the Certificates of a
Series will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or substitute for the affected Con-
tract, in each case under the conditions fur-
ther described herein. See "Description of the
Certificates--Conveyance of Contracts" herein.
Federal Income Tax If an election (a "REMIC Election") is made to
Considerations.............. treat the Trust Fund represented by a Series of
Certificates or a segregated portion thereof as
a "real estate mortgage investment conduit" (a
"REMIC") under the Internal Revenue Code of
1986, as amended (the "Code"), each Class of
Certificates which are offered hereby may con-
stitute "regular interests" or "residual inter-
ests" in such REMIC under the Code, with the
tax consequences under the Code described
herein and in such Prospectus Supplement. If so
specified in the applicable Prospectus Supple-
ment, a Class of Certificates offered hereby
may represent interests in a "two-tier" REMIC,
but all interests in the first and second tier
REMIC will be created under the same Pooling
and Servicing Agreement. See "Certain Federal
Income Tax Consequences--REMIC Series."
If a REMIC Election is not made with respect to
a Series of Certificates, the Trust Fund repre-
sented by such Certificates will be treated as
a grantor trust for federal income tax purposes
and will not be classified as an association
taxable as a corporation. In such event, each
Certificateholder will be treated as the owner
of an undivided pro rata interest in income and
corpus attributable to the related Contract
Pool and
7
<PAGE>
any other assets held by the Trust Fund and
will be considered the equitable owner of an
undivided interest in the Contracts included in
such Contract Pool. See "Certain Federal Income
Tax Consequences--Non-REMIC Series."
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Code,
should review carefully with its legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Code. See "ERISA Considerations" herein.
Legal Investment............. Unless otherwise indicated in the applicable
Prospectus Supplement, the Certificates will
not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement
Act of 1984, as amended. See "Legal Investment"
herein.
Ratings...................... It is a condition precedent to the issuance of
any Class of Certificates sold under this Pro-
spectus that they be rated in one of the four
highest rating categories (within which there
may be sub-categories or gradations indicating
relative standing) of at least one nationally
recognized statistical rating organization. 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 as-
signing rating agency. See "Ratings" herein.
8
<PAGE>
SPECIAL CONSIDERATIONS
Prospective investors in Certificates should consider, among other things,
the following factors in connection with the purchase of the Certificates:
1. Limitations on Availability of FHA Insurance. The related Prospectus
Supplement will specify the number and percentage of the Contracts included
in the Contract Pool that are insured by FHA. The availability of FHA
Insurance following a default on an FHA-insured Contract is subject to a
number of conditions, including strict compliance by the Company with FHA
regulations in originating and servicing the Contract. Although the Company
is an FHA-approved lender and believes, and will represent and warrant in
the Agreement, that it has complied with FHA regulations, such regulations
are susceptible to substantial interpretation. The Company is not required
to obtain, and has not obtained, approval from 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 FHA's
enforcement of its regulations will not become stricter in the future. From
time to time the Company is engaged in disputes with FHA over the validity
of claims submitted and the Company's compliance with FHA regulations in
servicing loans insured by FHA, such as the FHA-insured Contracts. In
addition, any insurance claim paid by FHA will cover only 90% of the sum of
the unpaid principal on the Contract, up to nine months unpaid interest
thereon (computed at 7% per annum) and certain liquidation costs.
The amount of FHA Insurance available with respect to a Series of
Certificates at any given time with respect to the FHA-insured Contracts
included in a Contract Pool is limited to the balance of a reserve amount
determined with respect to all FHA Title I loans originated and reported
for insurance by the Company and not sold, or sold with recourse, by the
Company, including manufactured housing contracts as well as home
improvement loans. Such reserve amount, as of December 31, 1993, was equal
to approximately $134,383,000, but will be reduced by the amount of all FHA
Insurance claims paid and by an annual reduction in the reserve amount
equal to 10% of the reserve amount, and will be increased by an amount
equal to 10% of the unpaid principal balance of FHA Title I loans
subsequently originated and reported for insurance by the Company. Severe
losses on the Company's FHA-insured manufactured housing contracts, or on
other FHA-insured home improvement loans originated by the Company, could
reduce or eliminate the Company's FHA Insurance reserves, in which event
FHA Insurance would not be available to cover losses on FHA-insured
Contracts. In the event the Company were terminated as Servicer due to its
bankruptcy or otherwise, it is anticipated that a proportionate amount of
the Company's FHA Insurance reserves would be transferred to the reserve
account of the Trustee or other successor servicer, but there can be no
assurance of the amount, if any, that would be so transferred. See
"Description of FHA Insurance."
2. Limited Obligations. Except as otherwise specified in the related
Prospectus Supplement, the Certificates of a Series will not represent an
interest in or obligation of the Company. The Certificates of any Series
will not be insured or guaranteed by any governmental agency or
instrumentality, any Underwriter or its affiliates, the Servicer or (except
as otherwise specified in the related Prospectus Supplement) any other
party.
3. Junior Mortgage Liens; Value of Mortgaged Property. The related
Prospectus Supplement will specify the number and percentage of Contracts
included in the Contract Pool that are secured by a lien on the improved
real estate. The Company expects that a substantial number of such liens
will be junior to other liens on such real estate. The rights of the Trust
Fund (and therefore the Certificateholders of such Series), as beneficiary
under a conventional junior deed of trust or as mortgagee under a
conventional junior mortgage, are subordinate to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to cause the property
securing the Contract to be sold upon default of the mortgagor or trustor,
thereby extinguishing the junior mortgagee's or junior beneficiary's lien
unless the Servicer on behalf of the Trust Fund asserts its subordinate
interest in the property in foreclosure litigation and, possibly, satisfies
the defaulted senior loan or loans. See "Certain Legal Aspects of the
Contracts--Repurchase Obligations."
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A substantial portion of the Secured Contracts included in a Contract
Pool are expected to have loan-to-value ratios of 90% or more, based on the
aggregate of the outstanding principal balances of all senior mortgages or
deeds of trust and of the Secured Contract on the one hand, and the value
of the home and an estimate of the value of the financed improvement, on
the other. See "Green Tree Financial Corporation--Contract Origination." An
overall decline in the residential real estate market, the general
condition of a property securing a Contract or other factors could
adversely affect the value of the property securing a conventional (i.e.,
not insured by FHA) Contract such that the remaining balance of the
conventional Contract, together with that of any senior liens on the
related property, could equal or exceed the value of the property. While
the same economic decline could affect the value of property securing an
FHA-insured Contract, assuming compliance with other FHA regulations, an
FHA claim would still be payable to the Company, notwithstanding the
decline in property value below the aggregate outstanding principal
balances of the Contract and of all senior liens on the property.
4. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop,
that it will provide the holders of any of the Certificates with liquidity
of investment or that it will remain for the term of any Series of
Certificates.
5. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company will not record the
assignment to the Trustee of the mortgage or deed of trust securing any
Secured Contract. In some states, in the absence of such recordation the
assignment to the related Trustee of the mortgage or deed of trust securing
a Secured Contract may not be effective against creditors of or purchasers
from the Company or a trustee in bankruptcy of the Company.
6. Unsecured Contracts. The obligations of the Obligor under any
Unsecured Contract included in a Contract 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 Contract, will be a general unsecured creditor
as to such obligations. As a consequence, in the event of a default under
an Unsecured Contract, the related Trust Fund will have recourse only
against the Obligor's assets generally, along with all other general
unsecured creditors of the Obligor. In a bankruptcy or insolvency
proceeding relating to an Obligor on an Unsecured Contract, the obligations
of the Obligor under such Unsecured Contract may be discharged in their
entirety, notwithstanding the fact that the portion of such Obligor'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. An Obligor on an Unsecured Contract may not demonstrate
the same degree of concern over performance of the Obligor's obligations
under such Contract as if such obligations were secured by the real estate
owned by such Obligor.
7. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Contracts to the related Trust Fund constitute a sale, rather
than a pledge of the Contracts to secure indebtedness of the Company.
However, if the Company were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in bankruptcy of
the Company or the Company as debtor-in-possession may argue that the sale
of the Contracts by the Company was a pledge of the Contracts rather than a
sale. This position, if presented to or accepted by a court, could result
in a delay in or reduction of distributions to the Certificateholders.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Contract included in the Contract Pool), (iv) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing payment of all or part of a Series of
Certificates, and (v) such other property as may be specified in the related
Prospectus Supplement.
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Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool comprised
of Contracts having the aggregate principal balance as of the specified day of
the month of the creation of the pool (the "Cut-off Date") specified in the
related Prospectus Supplement. Holders of Certificates of a Series will have
interests only in such Contract Pool and will have no interest in the Contract
Pool created with respect to any other Series of Certificates. If so specified
in the related Prospectus Supplement, the Trust Fund may include a Pre-Funding
Account which would be used to purchase additional Contracts ("Subsequent
Contracts") from the Company during the Pre-Funding Period specified in the
related Prospectus Supplement. The related Prospectus Supplement will specify
the conditions that must be satisfied prior to any transfer of Subsequent
Contracts, including the requisite characteristics of the Subsequent Contracts.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in each
Trust Fund will be provided in the related Prospectus Supplement and, to the
extent not contained in the related Prospectus Supplement, in a report on Form
8-K to be filed with the Commission within fifteen days after the initial
issuance of the Certificates. 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 Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and Trust
Fund, each Agreement and the Pass-Through Rate applicable to the related Series
of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement retail installment sales
contracts and promissory notes (collectively, the "Contracts") originated by
the Company on an individual basis in the ordinary course of business. The
Contracts may be conventional home improvement contracts or contracts insured
by the FHA. Conventional contracts may either be Secured Contracts or Unsecured
Contracts. FHA-insured Contracts are secured by the related real estate. Except
as otherwise specified in the related Prospectus Supplement, the Contracts will
be fully amortizing and will bear interest at a fixed or variable annual
percentage rate (the "Contract Rate") or at a Contract Rate which steps up on a
particular date (a "step-up rate").
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity referred
to herein as the "Servicer"), will service the Contracts pursuant to the
Agreement. See "Description of the Certificates--Servicing." Unless otherwise
specified in the related Prospectus Supplement, the Contract documents will be
held by the Trustee or a custodian on its behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
annual fixed or variable Contract Rates specified in the Prospectus Supplement.
Unless otherwise stated in the related Prospectus Supplement, each registered
holder of a Certificate will be entitled to receive periodic distributions,
which will be monthly unless otherwise specified in the related Prospectus
Supplement, of all or a portion of principal on the underlying Contracts or
interest on the principal balance of such Certificate (or on some other
principal balance unrelated to that of such Certificate) at the Pass-Through
Rate, or both.
The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the range of Loan-to-Value Ratios; the minimum and
maximum outstanding principal balances and the average outstanding principal
balance as of the Cut-off Date; the
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aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and the
geographic location of improved real estate securing the Secured Contracts. If
the Trust Fund includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Contract, the Company will be obligated to cure
the breach in all material respects, or to repurchase the Contract as described
below. This repurchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of representation or warranty by
the Company. See "Description of the Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the purchase of the Contracts, costs of carrying the
Contracts until sale of the related Certificates and to pay other expenses
connected with pooling the Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Minnesota corporation which, as of December 31, 1993, had
total assets of approximately $1,739,502,000 and stockholders' equity of
approximately $549,429,000. The Company purchases, pools, sells and services
conditional sales contracts for manufactured homes and other consumer
installment sales contracts. The Company is currently the largest servicer of
government-insured manufactured housing contracts, and is one of the largest
servicers of conventional manufactured housing contracts, in the United States.
The Company began financing FHA-insured home improvement loans in April 1989
and conventional home improvement loans in September 1992. Currently, the
Company also purchases, pools and services installment sales contracts for
motorcycles and continues to service recreational vehicle installment sales
contracts previously originated. It also finances certain recreational sports
vehicles manufactured by Polaris Industries, L.P., Limited Partnership, and
horse trailers produced by other manufacturers. The Company's principal
executive offices are located at 1100 Landmark Towers, 345 St. Peter Street,
St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400). The Company's
quarterly and annual reports are available from the Company upon written
request made to the Company.
CONTRACT ORIGINATION
Through its centralized loan processing operations, the Company arranges to
purchase certain contracts from home improvement contractors located throughout
the United States. The Company's business development managers contact home
improvement contractors and explain the Company's available financing plans,
terms, prevailing rates and credit and financing policies. If the contractor
wishes to utilize the Company's available customer financing, the contractor
must make an application for contractor approval. The Company has a contractor
approval process pursuant to which the financial condition, business experience
and qualifications of the contractor are reviewed prior to his or her approval
to sell Contracts to the Company. In addition, the Company has a centralized
compliance group which reviews and updates contractor financial condition and
reviews contractors on an annual basis to determine whether such contractor's
approval will be continued. The Company also reviews monthly contractor trend
reports which show the default and delinquency trends of the particular
contractor with respect to contracts sold to the Company. The Company
occasionally will originate directly a home improvement promissory note
involving a home improvement transaction.
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All contracts that the Company originates are written on forms provided by
the Company and are purchased on an individually approved basis in accordance
with the Company's guidelines. The contractor submits the customer's credit
application and construction contract to the Company's office where an analysis
of the creditworthiness of the customer is made. The analysis includes a review
of the customer's paying habits, length and likelihood of continued employment
and certain other procedures, including the percentage of the customer's
monthly payments on long term debts to gross monthly income, which may not
exceed 45%. Senior management may approve deviations from the Company's
guidelines on a case-by-case basis.
The original principal amount of a single FHA-insured home improvement
contract currently may not exceed $25,000 without specific FHA approval, with a
maximum term of 20 years. FHA will insure loans of up to $17,500 for
manufactured homes which qualify as real estate under applicable state law and
loans of up to $12,000 per unit or a $48,000 limit for four units of owner-
occupied multiple-family homes. The original principal amount of a conventional
secured home improvement loan may not exceed $30,000 for the Company's secured
"no equity" program, and $100,000 for the Company's secured lien program,
unless a higher amount financed is approved by senior management. The original
principal amount of a conventional home improvement loan may not exceed
$100,000 for the Company's secured lien program, unless a higher amount
financed is approved by senior management. The original principal amount of a
conventional unsecured home improvement loan may not exceed $10,000. The
Company requires that any secured home improvement contract be secured by a
recorded lien (which may be a first, second or (with respect to FHA-insured
contracts or conventional contracts of $15,000 or less) third lien) on the
improved real estate. Certain other criteria for home improvement contracts
eligible for FHA Insurance are described under the caption "Description of FHA
Insurance." If the Company determines that the application meets the Company's
underwriting guidelines and applicable FHA regulations (for FHA-insured
contracts) and the credit is approved, the Company purchases the contract from
the contractor when the customer verifies satisfactory completion of the work,
or, in the case of staged funding, the Company follows up with the customer for
the completion certificate 60 days after funding.
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. Many of the
conventional Secured Contracts in the Trust are either secured 90% loan-to-
value Contracts or secured 80% loan-to-value Contracts. The Company also has a
special secured program for certain types of larger remodeling projects. The
secured lien program generally allows a maximum loan amount of up to $100,000
on an owner-occupied one-to four-family residence, with a first, second or
third lien on the real estate. The value of the home is determined by an
appraisal as described below, with an additional 70% of the loan amount added
to the appraisal to reflect the value of the improvement financed for loans up
to $50,000. An appraisal is required for all secured contracts; for loan
amounts over $30,000, a full Uniform Residential Appraisal Report is required.
Title insurance is required on all loan amounts of $30,000 or more.
The "no equity" program allows an amount financed from $5,000 to $30,000, or
higher with senior management approval. Eligible property includes an owner-
occupied single family home, with a first or second lien on the real estate,
and only certain types of improvements may be financed.
The unsecured conventional program allows for an amount financed from $2,500
to $10,000. The allowable term of unsecured contracts is 24 to 120 months.
Eligible property includes an owner-occupied single family home, up to four
unit multiple-family dwelling, owner-occupied condominium or town houses, or an
owner-occupied manufactured home located in a Company-approved park or attached
to the real estate.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each Series of
Certificates will be set forth in the related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement, each monthly
accrual of interest on a Contract will be calculated according to the simple
interest method, as required by state law. Unless otherwise specified in the
related Prospectus Supplement, the interest payable with respect to each
Certificate will be the product of the applicable Pass-Through Rate and the
principal balance immediately following the preceding Payment Date, based on a
360-day year of 12 months of 30 days each.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class or sub-class of Certificates that is offered at a
discount to its principal amount, and a higher rate of principal prepayments
than anticipated would negatively affect the total return to investors of any
such Class or sub-class of Certificates that is offered at a premium to its
principal amount or without any principal amount.
If a Series of Certificates contains Classes or sub-classes of Certificates
entitled to receive distributions of principal or interest or both, in a
specified order other than as a specified percentage of each distribution of
principal or interest or both, the Prospectus Supplement will set forth
information, measured relative to a prepayment standard or model specified in
such Prospectus Supplement, with respect to the projected weighted average life
of each such Class or sub-class and the percentage of the original Stated
Balance of each such Class or sub-class that would be outstanding on specified
Payment Dates for such Series based on the assumptions stated in such
Prospectus Supplement, including assumptions that prepayments on the Contracts
in the related Trust Fund are made at rates corresponding to the various
percentages of such prepayment standard or model.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 10 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. The Company has
no significant experience with respect to the rate of Principal Prepayments on
home improvement contracts. Because the Contracts have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement) all Principal Prepayments will be passed through
to Certificateholders of the related Series on the Payment Date following the
Due Period in which such Principal Prepayment occurred, prepayments on the
Contracts would affect the amount of funds available to make distributions on
the Certificates on any Payment Date only if a substantial portion of the
Contracts prepaid prior to their respective due dates in a particular month
(thus paying less than 30 days' interest for that Due Period) while very few
Contracts prepaid after their respective due dates in that month. In addition,
liquidations of Defaulted Contracts or the Servicer's exercise of its option to
repurchase the entire remaining pool of Contracts (see "Description of the
Certificates--Repurchase Option") will affect the timing of principal
distributions on the Certificates of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Certificates, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of the
Contracts will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description of
the Company's or Servicer's option to repurchase the Contracts comprising part
of a Trust Fund when the aggregate
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outstanding principal balance of such Contracts is less than a specified
percentage of the initial aggregate outstanding principal balance of such
Contracts as of the related Cut-off Date. See also "The Trust Fund--The
Contract Pools" for a description of the obligations of the Company to
repurchase a Contract in case of a breach of a representation or warranty
relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling and
servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
GENERAL
The Certificates may be issued in one or more Classes or sub-classes. If the
Certificates of a Series are issued in more than one Class, the Certificates of
all or less than all of such Classes may be sold pursuant to this Prospectus,
and there may be separate Prospectus Supplements relating to one or more of
such Classes so sold. Any reference herein to the Prospectus Supplement
relating to a Series comprised of more than one Class should be understood as a
reference to each of the Prospectus Supplements relating to the Classes sold
hereunder. Any reference herein to the Certificates of a Class should be
understood to refer to the Certificates of a Class within a Series, the
Certificates of a sub-class within a Class or all of the Certificates of a
single-Class Series, as the context may require.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate trust fund (the "Trust Fund") created pursuant to the related
Agreement. The Trust Fund will be held by the Trustee for the benefit of the
Certificateholders. Each Trust Fund, to the extent specified in the related
Prospectus Supplement, will include (i) Contracts (the "Contract Pool") which
are subject to the Agreement from time to time, (ii) the amounts held in the
Certificate Account from time to time, (iii) proceeds from certain hazard
insurance on the related real estate, (iv) any letter of credit, guarantee,
surety bond, insurance policy, cash reserve fund or other credit enhancement
securing payment of all or part of a Series of Certificates and (v) such other
property as may be specified in the related Prospectus Supplement. Except as
otherwise specified in the related Prospectus Supplement, the Certificates will
be freely transferable and exchangeable at the corporate trust office of the
Trustee at the address set forth in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. One or more Classes of Certificates
evidencing interests in Contracts may be Subordinated Certificates, evidencing
the right
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of the Holders thereof to receive any or a portion of distributions of
principal or interest or both on the Contracts subordinate to the rights of the
Holders of other Classes of Certificates ("Senior Certificates") as provided in
the related Prospectus Supplement. If a Series of Certificates contains more
than one Class of Subordinated Certificates, losses will be allocated among
such Classes in the manner described in the Prospectus Supplement.
A Series of Certificates may consist of Classes of Certificates evidencing
the right to receive distributions of principal or interest or both in the
order specified in the related Prospectus Supplement. A Class of Certificates
of a Series may be divided into two or more sub-classes. The related Prospectus
Supplement will specify whether a Class has been so divided and the terms of
each sub-class. The Holders of each sub-class of a Class of Certificates will
be entitled to the percentages (which may be 0%) of principal or interest
payments or both on the related Contracts as specified in the related
Prospectus Supplement. The related Prospectus Supplement will specify the
minimum denomination or initial principal amount of Contracts evidenced by a
single Certificate of each Class of Certificates of a Series (a "Single
Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Agreement, by
wire transfer, except that the final distribution in retirement of Certificates
will be made only upon presentation and surrender of the Certificates at the
office or agency of the Trustee specified in the final distribution notice to
Certificateholders.
GLOBAL CERTIFICATES
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description of the Certificates contained in this Prospectus assumes that
the Certificates will be issued in definitive form. If the Certificates of a
Class are issued in the form of one or more Global Certificates, the term
"Certificateholder" should be understood to refer to the beneficial owners of
the Global Certificates, and the rights of such Certificateholders will be
limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the Depositary for such
Global Certificate to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
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So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates of
such Series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed by
or on behalf of the Company within the time period specified in the Agreement,
the Company will cause to be issued Certificates of such Class in definitive
form in exchange for the related Global Certificate or Certificates. In
addition, the Company may at any time and in its sole discretion determine not
to have any Certificates of a Class represented by one or more Global
Certificates and, in such event, will cause to be issued Certificates of such
Class in definitive form in exchange for the related Global Certificate or
Certificates. Further, if the Company so specifies with respect to the
Certificates of a Class, an owner of a beneficial interest in a Global
Certificate representing Certificates of such Class may, on terms acceptable to
the Company and the Depositary for such Global Certificate, receive
Certificates of such Class in definitive form. In any such instance, an owner
of a beneficial interest in a Global Certificate will be entitled to physical
delivery in definitive form of Certificates of the Class represented by such
Global Certificate equal in denominations to such beneficial interest and to
have such Certificates registered in its name.
CONVEYANCE OF CONTRACTS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related Series of Certificates, the Trustee, concurrently with such conveyance,
will execute and deliver the Certificates to the order of the Company. The
Contracts will be as described on a list attached to the Agreement. Such list
will include the amount of monthly payments due on each Contract as of the date
of issuance of the Certificates, the Contract Rate on each Contract and the
maturity date of each Contract. Such list will be available for inspection by
any Certificateholder at the principal executive office of the Servicer. Prior
to the conveyance of the Contracts to the Trust Fund, the Company's internal
audit department will complete a review of all of the Contract files confirming
the
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accuracy of the list of Contracts delivered to the Trustee. Any Contract
discovered not to agree with such list in a manner that is materially adverse
to the interests of the Certificateholders will be repurchased by the Company,
or, if the discrepancy relates to the unpaid principal balance of a Contract,
the Company may deposit cash in the separate account maintained at an Eligible
Institution in the name of the Trustee (the "Certificate Account") in an amount
sufficient to offset such discrepancy. If the Trust Fund includes a Pre-Funding
Account, the related Prospectus Supplement will specify the conditions that
must be satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such sale and assignment.
Dorsey & Whitney, counsel to the Company, will render an opinion to the
Trustee that the transfer of the Contracts from the Company to the related
Trust Fund would, in the event the Company became a debtor under the United
States Bankruptcy Code, be treated as a true sale and not as a pledge to secure
borrowings. If, however, the transfer of the Contracts from the Company to the
Trust Fund were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust Fund might be subject to
the automatic stay provisions of the United States Bankruptcy Code, which would
delay the distribution of such proceeds for an uncertain period of time. In
addition, a bankruptcy trustee would have the power to sell the Contracts if
the proceeds of such sale could satisfy the amount of the debt deemed owed by
the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Contracts to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a) as
of the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Contract has been waived,
altered or modified in any respect, except by instruments or documents included
in the Contract file and reflected on the list of Contracts delivered to the
Trustee; (c) each Contract is a legal, valid and binding obligation of the
Obligor and is enforceable in accordance with its terms (except as may be
limited by laws affecting creditors rights generally); (d) no Contract is
subject to any right of rescission, set-off, counterclaim or defense; (e) each
Contract (if an FHA-insured Contract) was originated in accordance with
applicable FHA regulations and is insured, without set-off, surcharge or
defense, by FHA Insurance; (f) each Contract was originated by a home
improvement contractor in the ordinary course of such contractors business or
was originated by the Company directly; (g) no Contract was originated in or is
subject to the laws of any jurisdiction whose laws would make the transfer of
the Contract or an interest therein pursuant to the Agreement or the
Certificates unlawful; (h) each Contract complies with all requirements of law;
(i) no Contract has been satisfied, subordinated to a lower lien ranking than
its original position (if any) (if a Secured Contract) or rescinded; (j) each
Secured Contract creates a valid and perfected lien on the related improved
real estate; (k) all parties to each Contract had full legal capacity to
execute such Contract; (l) no Contract has been sold, conveyed and assigned or
pledged to any other person and the Company has good and marketable title to
each Contract free and clear of any encumbrance, equity, loan, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trustee; (m) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clause (a) above), no event that
with notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and the Company has not waived any of the foregoing; (n) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (o) each Secured Contract
contains customary
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and enforceable provisions such as to render the rights and remedies of the
holder thereof adequate for realization against the collateral; (p) the
description of each Contract set forth in the list delivered to the Trustee is
true and correct; (q) there is only one original of each Contract; and (r) each
Contract was originated or purchased in accordance with the Company's then-
current underwriting guidelines.
Under the terms of the Agreement, the Company will be obligated to
repurchase, at the Repurchase Price, any Contract that is materially and
adversely affected by a breach of a representation and warranty with respect to
such Contract made in the Agreement if such breach has not been cured within 90
days. This repurchase obligation will constitute the sole remedy available to
the Trust Fund and the Certificateholders for a breach of a representation or
warranty under the Agreement with respect to the Contracts (but not with
respect to any other breach by the Company of its obligations under the
Agreement). If a prohibited transaction tax under the REMIC provisions of the
Code is incurred in connection with such repurchase, distributions otherwise
payable to Residual Certificateholders will be applied to pay such tax. The
Company will be required to pay the amount of such tax that is not funded out
of such distributions.
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the Pass-Through Rate on such
Contract from the end of the Due Period with respect to which the Obligor last
made a payment (without giving effect to any Advances made by the Servicer or
the Trustee) through the end of the immediately preceding Due Period.
PAYMENTS ON CONTRACTS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories or such other rating category as will not adversely affect the
ratings assigned to the Certificates by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national bank,
(iii) in an account or accounts the deposits in which are fully insured by the
FDIC, (iv) in an account or accounts the deposits in which are insured by the
FDIC (to the limits established by the FDIC), the uninsured deposits in which
are otherwise secured such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Certificate
Account is maintained or (v) otherwise acceptable to the rating agency without
reduction or withdrawal of the rating assigned to the relevant Certificates.
The collateral eligible to secure amounts in the Certificate Account is limited
to United States government securities and certain other high-quality
investments specified in the applicable Agreement ("Eligible Investments"). A
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit in the Certificate Account on a daily basis all proceeds and
collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all payments received under FHA Insurance received by the Servicer;
(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
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(v) any Advances made as described under "Advances" and certain other
amounts required under the Agreement to be deposited in the Certificate
Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date, the Trustee will withdraw from the applicable Certificate Account
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 Contract Pool times the aggregate of
all amounts on deposit in the Certificate Account as of the seventh Business
Day following the end of the related Due Period or such other date as may be
specified in the related Prospectus Supplement (the "Determination Date"), or,
in the case of a Series of Certificates comprised of Classes which have been
assigned a Stated Balance, payments of interest and payments in reduction of
the Stated 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: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest due
on a date or dates subsequent to the Due Period preceding the Determination
Date; (iv) amounts representing reimbursement for Advances, such reimbursement
being limited, if so specified in the related Prospectus Supplement, to amounts
received on particular Contracts as late collections of principal or interest
as to which the Servicer has made an unreimbursed Advance; and (v) amounts
representing reimbursement for any unpaid Servicing Fee. The amount of
principal and interest specified in the related Prospectus Supplement to be
distributed to Certificateholders is referred to herein as the "Certificate
Distribution Amount." The amounts on deposit in the Certificate Account on a
Determination Date, less the amounts specified in (i) through (v) above, are
referred to herein as the "Amount Available."
Unless otherwise specified in the related Prospectus Supplement, with respect
to a Series of Certificates having a Class of Subordinated Certificates, on
each Payment Date, the Trustee will withdraw from the applicable Certificate
Account and distribute to the Holders of Senior Certificates, in the aggregate,
the lesser of (i) the Senior Distribution Amount plus the Outstanding Senior
Shortfall (each defined below), or (ii) the percentage interest (which may vary
as specified in the related Prospectus Supplement) of the Classes of Senior
Certificates times the Amount Available plus (a) the percentage interest (which
may vary as specified in the related Prospectus Supplement) of the Classes of
Subordinated Certificates times the Amount Available, not to exceed the
Available Subordination Amount, if any, as defined in the related Prospectus
Supplement, and (b) Advances, if any, made by the Servicer. The distribution
made to the Certificateholders of each Class or sub-class of Senior
Certificates shall be calculated as described in the related Prospectus
Supplement and may vary as to the allocation of principal or interest or both.
Unless otherwise specified in the related Prospectus Supplement, the Senior
Distribution Amount is an amount equal to the percentage interest of the
Classes of Senior Certificates times:
(i) all regularly scheduled payments of principal of and interest which
were due on Contracts during the related Due Period, whether or not
received, with the interest portions thereof adjusted to the Pass-Through
Rate;
(ii) all Principal Prepayments made by the Obligor during the prior Due
Period;
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(iii) all FHA Insurance proceeds and any other cash proceeds from a
source other than the Obligor, to the extent required to be deposited in
the Certificate Account, which were received during the prior Due Period,
net of related unreimbursed Advances and net of any portion thereof which,
as to any Contract, constitutes late collections; and
(iv) with respect to each Contract repurchased by the Company for which
the repurchase price was not distributed previously, an amount equal to the
principal amount of the Contract outstanding on the date of such repurchase
reduced by the principal portion of any unpaid payments due on or before
such date (but only to the extent advanced against or otherwise received by
the Certificateholders), plus interest thereon to the most recent Due Date.
The Outstanding Senior Shortfall for any Class or sub-class of Senior
Certificates means as of any date, to the extent not previously paid, the
aggregate of the amounts by which the Senior Distribution Amount for such Class
or sub-class for any Payment Date exceeded the amount actually paid on such
Remittance Date plus interest at the Pass-Through Rate.
Unless otherwise specified in the related Prospectus Supplement, on each
Payment Date, the Trustee shall distribute to the Classes of Subordinated
Certificateholders, in the order set forth in the related Prospectus
Supplement, the balance of the Amount Available, if any, after the payment to
the Senior Certificateholders, as described above.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates, one or more Classes or sub-classes of which have been assigned
a Stated Balance, distributions in reduction of the Stated Balance of such
Certificates will be made on each Payment Date to the Certificateholders of the
Class or sub-class then entitled to receive such Certificate distributions
until the aggregate amount of such distributions have reduced the Stated
Balance of the Certificates of such Class or sub-class to zero or a specified
percentage. Allocation of distributions in reduction of Stated Balance will be
made to each Class or sub-class of such Certificates in the order specified in
the related Prospectus Supplement, which, if so specified in such Prospectus
Supplement, may be concurrently. Unless otherwise specified in the related
Prospectus Supplement, distributions in reduction of the Stated Balance of each
Certificate of a Class or sub-class then entitled to receive such distributions
will be made pro rata among the Certificates of such Class or sub-class.
Unless otherwise specified in the related Prospectus Supplement, the maximum
amount which will be distributed in reduction of Stated Balance to holders of
Certificates of a Class or Sub-class then entitled thereto on any Payment Date
will equal, to the extent funds are available, the sum of (i) the amount of the
interest, if any, that has accrued but is not yet payable on the Compound
Interest Certificates of such Series, if any, from the prior Payment Date (or
since the date specified in the related Prospectus Supplement in the case of
first Payment Date) (the "Accrual Remittance Amount"); (ii) the Certificate
Remittance Amount; and (iii) the applicable percentage of the Excess Cash Flow,
if any, specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificate Remittance Amount with respect to a Payment Date will equal the
amount, if any, by which the then outstanding Stated Balance of the
Certificates of the related Classes or sub-classes of such Series (before
taking into account the amount of interest accrued on any Class or sub-class of
Compound Interest Certificates of such Series to be added to the Stated Balance
thereof on such Payment Date) exceeds the Asset Value, as defined in the
related Prospectus Supplement, of the Contracts in the Contract Pool underlying
such Series as of the end of the applicable Due Period specified in the related
Prospectus Supplement. For purposes of determining the Certificate Remittance
Amount with respect to a Payment Date, the Asset Value of the Contracts will be
reduced to take into account the interest evidenced by such Classes or sub-
classes of Certificates in the principal distributions on or with respect to
such Contracts received by the Trustee during the preceding Due Period.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates, one or more Classes or sub-classes of which have been assigned
a Stated Balance, Excess Cash Flow represents the excess
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of (i) the interest evidenced by such Classes or sub-classes of Certificates in
the distributions received on the Contracts underlying such Series in the Due
Period preceding a Payment Date for such Series (and, in the case of the first
Due Period, the amount deposited in the Certificate Account on the closing date
for the sale of such Certificates), together with income from the reinvestment
thereof, (ii) the sum of all interest accrued, whether or not then payable, on
the Certificates of such Classes or sub-classes since the preceding Payment
Date (or since the date specified in the related Prospectus Supplement in the
case of the first Payment Date), the Certificate Remittance Amount for the then
current Payment Date and, if applicable, any payments made on any Certificates
of such Class or sub-class pursuant to any special distributions in reduction
of Stated Balance during such Due Period.
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
If there are not sufficient funds in the Certificate Account to make the full
distribution to Certificateholders described above on any Payment Date, the
Servicer will distribute the funds available for distribution to the
Certificateholders of each Class in accordance with the respective interests
therein, except that Subordinated Certificateholders, if any, will not, subject
to the limitations described in the related Prospectus Supplement, receive any
distributions until Senior Certificateholders receive the Senior Distribution
Amount plus the Outstanding Senior Shortfall. The difference between the amount
which the Certificateholders would have received if there had been sufficient
eligible funds in the Certificate Account and the amount actually distributed,
plus interest at the Pass-Through Rates of the respective Contracts to which
such shortfall is attributable, will be added to the amount which the
Certificateholders are entitled to receive on the next Payment Date.
Special Distributions. To the extent specified in the Prospectus Supplement
relating to a Series of Certificates, one or more Classes or sub-classes of
which have been assigned a Stated Balance and having less frequent than monthly
Payment Dates, such Classes or sub-classes may receive Special Distributions in
reduction of Stated Balance ("Special Distributions") in any month, other than
a month in which a Payment Date occurs, if, as a result of principal
prepayments on the Contracts in the related Contract Pool or low reinvestment
yields, the Trustee determines, based on assumptions specified in the related
Agreement, that the amount of cash anticipated to be on deposit in the
Certificate Account on the next Payment Date for such Series and available to
be distributed to the Holders of the Certificates of such Classes or sub-
classes may be less than the sum of (i) the interest scheduled to be
distributed to holders of the Certificates of such Classes or sub-classes and
(ii) the amount to be distributed in reduction of Stated Balance of such
Certificates on such Payment Date. Any such Special Distributions will be made
in the same priority and manner as distributions in reduction of Stated Balance
would be made on the next Payment Date.
Subordinated Certificates. The rights of a Class of Certificateholders of a
Series to receive any or a specified portion of distributions of principal or
interest or both with respect to the Contracts, to the extent specified in the
related Agreement and described in the related Prospectus Supplement, may be
subordinated to such rights of other Certificateholders. The Prospectus
Supplement with respect to a Series of Certificates having a Class of
Subordinated Certificates will set forth, among other things, the extent to
which such Class is subordinated (which may include a formula for determining
the subordinated amount or for determining the allocation of the Amount
Available among Senior Certificates and Subordinated Certificates), the
allocation of losses among the Classes of Subordinated Certificates, the period
or periods of such subordination, the minimum subordinated amount, if any, and
any distributions or payments which will not be affected by such subordination.
The protection afforded to the Senior Certificateholders from the subordination
feature described above will be effected by the preferential right of such
Certificateholders to receive current distributions from the Contract Pool.
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ADVANCES
To the extent provided in the related Prospectus Supplement, the Servicer
will be obligated to make periodic Advances of cash from its own funds or, if
so specified in the related Prospectus Supplement, from excess funds in the
Certificate Account not then required to be distributed to Certificateholders,
for distribution to the Certificateholders (other than Subordinated
Certificateholders) in an amount equal to the difference between the amount due
to them and the amount in the Certificate Account eligible for distribution to
them pursuant to the Agreement, but only to the extent such difference is due
to delinquent payments of principal and interest for the preceding Due Period
and only to the extent the Servicer determines such advances are recoverable
from future payments and collections on the delinquent Contracts. The
Servicer's obligation to make Advances, if any, may, as specified in the
related Prospectus Supplement, be limited in amount. If so specified in the
related Prospectus Supplement, the Servicer will not be obligated to make
Advances until all or a specified portion of the Reserve Fund, if any, is
depleted. Advances are intended to maintain a regular flow of scheduled
interest and principal payments to the Senior Certificateholders, not to
guarantee or insure against losses. Accordingly, any funds so advanced are
recoverable by the Servicer out of amounts received on particular Contracts
which represent late recoveries of principal or interest respecting which any
such Advance was made.
EXAMPLE OF DISTRIBUTIONS
The following is an example of the flow of funds as it would relate to a
hypothetical series of Certificates issued, and with a Cut-off Date occurring,
in May 1994 (all days are assumed to be business days):
<TABLE>
<S> <C> <C>
May 1........................................... (1) Cut-off Date.
May 1-31........................................ (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
Principal Prepayments made
by Obligors and applicable
interest thereon.
May 31.......................................... (3) Record Date.
June 9.......................................... (4) Determination Date.
Distribution amount
determined.
June 15......................................... (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date, which,
together with corresponding interest payments, are not part of the Contract
Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and Principal Prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is prepaid
in full, interest on the amount prepaid is collected from the Obligor only
to the date of payment.
(3) Distributions on June 15 will be made to Certificateholders of record at
the close of business on the last Business Day of the month immediately
preceding the month of distribution.
(4) On June 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on June 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on June 15 will include the full amounts of principal
and interest due during May. The Servicer will also calculate any changes
in the relative interests evidenced by the Senior Certificates and the
Subordinated Certificates in the Trust Fund.
(5) On June 15, the amounts determined on June 9 will be distributed to
Certificateholders.
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INDEMNIFICATION
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Contracts) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Secured Contract and (b) for any taxes which may at any time be asserted with
respect to, and as of the date of, the conveyance of the Contracts to the Trust
Fund (but not including any federal, state or other tax arising out of the
creation of the Trust Fund and the issuance of the Certificates). (Article X).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Contract while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement, in
the same manner as prudent lending institutions of home improvement contracts
of the same type as the Contracts in those jurisdictions where the related real
properties are located or as otherwise specified in the Agreement. The duties
to be performed by the Servicer will include collection and remittance of
principal and interest payments, collection of insurance claims and, if
necessary, repossession.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to Secured Contracts as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the Certificates of such Series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement. On
or before May 1 of each year, the Servicer will deliver to the Trustee a report
of a nationally recognized accounting firm stating that such firm has examined
certain documents and records relating to the servicing of home improvement
contracts serviced by the Servicer under pooling and servicing agreements
similar to the Agreement and stating that, on the basis of such procedures,
such servicing has been conducted in compliance with the Agreement, except for
any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer pursuant to an Event of Termination as
discussed below.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will also provide that neither the Servicer, nor any director,
officer, employee or agent of the Servicer, will be under any liability to the
Trust Fund or the Certificateholders for any action taken or for restraining
from the taking of any action
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in good faith pursuant to the Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected
against any liability which would otherwise be imposed by reason of the failure
to perform its obligations in strict compliance with the standards of care set
forth in the Agreement. The Servicer may, in its discretion, undertake any such
action which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home
improvement contracts having an aggregate principal amount of $100 million or
more and which are generally regarded as servicers acceptable to institutional
investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of 0.75% and the Pool Scheduled Principal Balance for such Payment
Date. As long as the Company is the Servicer the Trustee will pay the Company
its Monthly Servicing Fee from any monies remaining after the
Certificateholders have received all payments of principal and interest for
such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Contracts and paid by the
Company from its Monthly Servicing Fees include payment of FHA Insurance
premiums, payment of fees and expenses of accountants, payments of all fees and
expenses incurred in connection with the enforcement of Contracts or (in the
case of Secured Contracts) foreclosure on collateral relating thereto
(including submission of FHA Insurance claims, if applicable), payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders, except that the Servicer shall
be reimbursed out of the liquidation proceeds of a Liquidated Contract
(including FHA Insurance proceeds) for customary out-of-pocket liquidation
expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur if
(a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation; (d)
a court having jurisdiction in the premises enters a decree or order for relief
in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an
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involuntary case under any such law, or consents to the appointment of or
taking possession by a receiver, liquidator, assignee, trustee, custodian or
its creditors, or fails to, or admits in writing its inability to, pay its
debts as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) the
Servicer's seller-servicer contract with GNMA is terminated. The Servicer will
be required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of the
Certificateholders of a Series evidencing interests aggregating 25% or more of
the related Trust Fund, shall, terminate all of the rights and obligations of
the Servicer under the related Agreement and in and to the Contracts, and the
proceeds thereof, whereupon (subject to applicable law regarding the Trustee's
ability to make advances) the Trustee or a successor Servicer under the
Agreement will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements; provided, however, that neither the Trustee nor any successor
Servicer will assume any obligation of the Company to repurchase Contracts for
breaches of representations or warranties, and the Trustee and such successor
Servicer will not be liable for any acts or omissions of the prior Servicer
occurring prior to a transfer of the Servicer's servicing and related functions
or for any breach by such Servicer of any of its obligations contained in the
Agreement. In addition, the Trustee will notify FHA of the Company's
termination as Servicer of the Contracts and will request that the portion of
the Company's FHA Insurance reserves allocable to the FHA-insured Contracts be
transferred to the Trustee or a successor Servicer. See "Description of FHA
Insurance." Notwithstanding such termination, the Servicer shall be entitled to
payment of certain amounts payable to it prior to such termination, for
services rendered prior to such termination. No such termination will affect in
any manner the Company's obligation to repurchase certain Contracts for
breaches of representations or warranties under the Agreement. In the event
that the Trustee would be obligated to succeed the Servicer but is unwilling or
unable so to act, it may appoint, or petition to a court of competent
jurisdiction for the appointment of a Servicer. Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the Servicer under the Agreement.
No Certificateholder will have any right under an Agreement to institute any
proceeding with respect to such Agreement unless such Holder previously has
given to the Trustee written notice of default and unless the Holders of
Certificates evidencing interests aggregating not less than 25% of the related
Trust Fund requested the Trustee in writing to institute such proceeding in its
own name as Trustee and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding. The Trustee will be under no obligation to take any action or
institute, conduct or defend any litigation under the Agreement at the request,
order or direction of any of the Holders of Certificates, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
Principal Prepayments on the Contracts, and other payments with respect to
the Contracts;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
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(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the Certificates and the
denominator of which is the Initial Principal Amount of the Certificates)
immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
In addition, to the extent applicable, such report shall include:
(i) in the case of Certificates which are assigned a Stated Balance, the
amount of the distribution being made in reduction of Stated Balance
specified in the related Prospectus Supplement, and the Stated Balance of
each such Class of Certificates and a Single Certificate of the Holder's
Class after giving effect to the distribution in reduction of Stated
Balance made on such Payment Date and after giving effect to all Special
Distributions since the preceding Payment Date or since the Closing Date in
the case of the first Payment Date; and
(ii) with respect to Compound Interest Certificates (but only if the
Holders thereof shall not have received on such Payment Date a distribution
of interest equal to the entire amount of interest accrued on such
Certificate during the related Due Period with respect to such Payment
Date):
(a) the interest accrued on such Class of Compound Interest
Certificates and on a Single Certificate of such Class during the Due
Period (or specified interest accrual period) with respect to such
Payment Date and added to the principal of such Compound Interest
Certificates; and
(b) the Stated Balance of such Class of Compound Interest
Certificates and of a Single Certificate of such Class after giving
effect to the addition thereto of all interest accrued thereon during
the Due Period (or specified interest accrual period) with respect to
such Payment Date.
REPURCHASE OPTION
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Principal Balance
is less than 10% of the Initial Principal Amount of the Certificates, the
Company or the Servicer will have the option to repurchase, on 20 days' prior
written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the principal balance of the Contracts on the
prior Payment Date plus 30 days' accrued interest thereon and any delinquent
payments of interest thereon, plus the fair market value (as determined by the
Servicer) of any acquired properties. Such price will be paid on the Payment
Date to the Certificateholders of record on the last Business Day of the
immediately preceding Due Period in immediately available funds against the
Trustee's delivery of the Contracts to the Servicer.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Internal Revenue Code of 1986, as amended, to maintain the REMIC status of
the Trust Fund and to avoid the imposition of certain taxes on the REMIC or
(iv) to make any other provisions with respect to matters or questions arising
under such Agreement that are not inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of the
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Certificateholders of the related Series. Unless otherwise specified in the
related Prospectus Supplement, the Agreement may also be amended by the
Company, the Servicer and the Trustee with the consent of the
Certificateholders (other than holders of Residual Certificates) evidencing
interests aggregating not less than 66 2/3% of the Trust Fund 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 the rights of the
Certificateholders; provided, however, that no such amendment that reduces in
any manner the amount of, or delay the timing of, any payment received on or
with respect to Contracts which are required to be distributed on any
Certificate may be effective without the consent of the Holders of each such
Certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Contract or the disposition of all
property acquired upon foreclosure of any Secured Contract; or (b) the Payment
Date on which the Company or the Servicer repurchases the Contracts as
described under "Description of the Certificates--Repurchase Option." However,
the Company's representations, warranties and indemnities will survive any
termination of the Agreement.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have normal banking
relationships with the Company or its affiliates and the Servicer or its
affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company 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 Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates, any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as Seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has occurred,
the Trustee will be required to perform only those duties specifically required
of it under the Agreement. However, upon receipt of the various certificates,
reports or other instruments required to be furnished to it, the Trustee will
be required to examine them to determine whether they conform as to form to the
requirements of the Agreement. Whether or not an Event of Termination has
occurred, the Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of its duties or the
exercise of its powers if it has reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
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DESCRIPTION OF FHA INSURANCE
Certain of the Contracts may be FHA-insured, the payments upon which, subject
to the following discussion, are insured by the FHA under Title I of the
National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the Company,
which amount will be reduced by all FHA Insurance claims paid to the Company
and by an annual reduction in the reserve amount of 10% of the reserve amount,
and which will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may also be reduced by 10% of the principal balance of any loans reported to
FHA as sold without recourse by the Company. In the Agreement, the Company will
agree to pay all FHA Insurance premiums required by FHA Regulations. If the
Company fails to pay any such premium, the Trustee or the successor Servicer
(if any) with respect to each Series is obligated to pay such premium and is
entitled to be reimbursed by the Company and from collections on the related
Contracts.
As of December 31, 1993, the Company's FHA Insurance reserve amount was equal
to approximately $134,383,000. These insurance reserves were available to cover
losses on approximately $1,783,263,000 of FHA-insured manufactured housing
contracts and approximately $237,800,000 of FHA-insured home improvement loans,
including the FHA-insured Contracts that may be owned by a Trust Fund. If an
Event of Termination (as defined under "Description of the Certificates--Events
of Termination") occurs, each Trustee will notify FHA of the Company's
termination as Servicer of the related FHA-insured Contracts and will request
that the portion of the Company's FHA Insurance reserves allocable to the FHA-
insured Contracts be transferred to the Trustee or a successor Servicer.
Although each Trustee will request such a transfer of reserves, FHA is not
obligated to comply with such a request, and may determine that it is not in
FHA's interest to permit such transfer of reserves. In addition, FHA has not
specified how insurance reserves might be allocated in such event, and there
can be no assurance that any reserve amount, if transferred to the Trustee or a
successor Servicer, would not be substantially less than 10% of the outstanding
principal amount of the FHA-insured Contracts. It is likely that the Trustee or
any successor Servicer would be the lender of record on other FHA Title I
loans, so that any reserves that are so permitted to be transferred would
become commingled with reserves available for other FHA Title I loans. FHA also
reserves the right to transfer reserves with "earmarking" (segregating such
reserves so that they will not be commingled with the reserves of the
transferee) if it is in FHA's interest to do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full Uniform Residential Appraisal Report dated within 12 months of
the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds must
be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The Secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured Contract the Servicer may, subject to
certain conditions, either commence foreclosure proceedings against the
improved property securing the loan or submit a claim to FHA, but may submit a
claim to FHA after proceeding against the improved property only with the prior
approval of the Secretary of HUD. The availability of FHA Insurance following a
default on an FHA-insured Contract is subject to a number of conditions,
including strict compliance by the Company with FHA
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regulations in originating and servicing the Contract. Failure to comply with
FHA regulations may result in a denial of or surcharge on the FHA Insurance
claim. Prior to declaring an FHA-insured Contract in default and submitting a
claim to FHA, the Servicer must take certain steps to attempt to cure the
default, including personal contact with the borrower either by telephone or in
a meeting and providing the borrower with 30 day's written notice prior to
declaration of default. FHA may deny insurance coverage if the borrower's
nonpayment is related to a valid objection to faulty contractor performance. In
such event, the Company will seek to obtain payment by or a judgment against
the borrower, and may resubmit the claim to FHA following such a judgment. As
described under "Green Tree Financial Corporation--Contract Origination," the
Company does not purchase a Contract until the customer verifies satisfactory
completion of the work.
Upon submission of a claim to FHA, the related Trust Fund must assign its
entire interest in the Contract to the United States. In general, the claim
payment will equal 90% of the sum of (i) the unpaid principal amount of the
Contract at the date of default and uncollected interest computed at the
Contract rate earned to the date of default, (ii) accrued and unpaid interest
on the unpaid amount of the Contract from the date of default to the date of
submission of the claim plus 15 calendar days (but in no event more than nine
months) computed at a rate of 7% per annum, (iii) uncollected court costs, (iv)
legal fees, not to exceed $500, and (v) expenses for recording the assignment
of the lien on the improved property to the United States.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Contracts
to a Trust Fund, the Certificateholders of such Series, as the beneficial
owners of the Trust Fund, will succeed collectively to all of the rights
thereunder (including the right to receive payment on the Contracts). The
following discussion contains summaries of certain legal aspects of home
improvement contracts which are general in nature. These legal aspects are in
addition to the requirements of FHA regulations described in "Description of
FHA Insurance" with respect to the FHA-insured Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the real estate securing the Secured Contracts may be situated. The summaries
are qualified in their entirety by reference to the applicable federal and
state laws governing the Contracts. Much of the following discussion relates to
home improvement contracts which are secured by a lien on the improved property
and, as a consequence, while of significance to the Secured Contracts, will
have little applicability to the Unsecured Contracts.
MORTGAGES AND DEEDS OF TRUST
The Secured Contracts will be secured by either mortgages or deeds of trust,
depending upon the prevailing practice in the state in which the underlying
property is located, and may have first, second or third priority. A mortgage
creates a lien upon the real property described in the mortgage or deed of
trust. There are two parties to a mortgage: the mortgagor, who is the borrower,
and the mortgagee, who is the lender. In a mortgage state, the mortgagor
delivers to the mortgagee a note or retail installment contract evidencing the
loan and the mortgage. Although a deed of trust is similar to a mortgage, a
deed of trust has three parties: the borrower, or trustor, the lender as
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 repayment of
the loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary. Some states use a security deed or deed to secure debt which is
similar to a deed of trust except that it has only two parties: a grantor
(similar to a mortgagor) and a grantee (similar to a mortgagee). Mortgages,
deeds of trust and deeds to secure debt are not prior to liens for real estate
taxes and assessments and other charges imposed under governmental
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police powers. Priority between mortgages, deeds of trust and deeds to secure
debt and other encumbrances depends on their terms in some cases and generally
on the order of recordation of the mortgage, deed of trust or the deed to
secure debt in the appropriate recording office.
SUBORDINATE MORTGAGES; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
A substantial number of the mortgages and deeds of trust securing the
Secured Contracts in any Contract Pool are expected to be second or third
mortgages or deeds of trust which are junior to mortgages or deeds of trust
held by other lenders or institutional investors. The rights of the related
Trust Fund (and therefore the Certificateholders), as beneficiary under a
junior deed of trust or as mortgagee under a junior mortgage, are subordinate
to those of the mortgagee or beneficiary under the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive hazard insurance and condemnation proceeds and to cause the property
securing the Secured Contract to be sold upon default of the mortgagor or
trustor, thereby extinguishing the junior mortgagee's or junior beneficiary's
lien unless the Servicer on behalf of the Trust Fund asserts its subordinate
interest in the property in foreclosure litigation and, possibly, satisfies
the defaulted senior loan or loans. As discussed more fully below, a junior
mortgagee or beneficiary may satisfy a defaulted senior loan in full, or in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan.
Although the Company generally does not cure defaults under a senior mortgage
or deed of trust, it is the Company's standard practice to protect its
interest by attending any foreclosure sale and bidding for property only if it
is in the Company's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of the Company, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first mortgage or deed of trust. Proceeds in
excess of the amount of first mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such
intervening junior mortgages or deeds of trust and other liens at the time of
the advance. Where the mortgagee or beneficiary is not obligated to advance
additional amounts or, in some states, has actual knowledge of the intervening
junior mortgages or deeds of trust and other liens, the advance will be
subordinate to such intervening junior mortgages or deeds of trust and other
liens. Priority of advances under the clause rests, in some states, on state
statutes giving priority to all advances made under the loan agreement to a
"credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property
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and, when due, all encumbrances, charges and liens on the property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or
permit any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or beneficiary
under the mortgage or deed of trust. Upon a failure of the mortgagor or trustor
to perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary become part of the indebtedness secured by the senior mortgage or
deed of trust.
FORECLOSURE
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, or security deed. Foreclosure of a mortgage is
generally accomplished by judicial action. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of record
in the real property. Delays in completion of the foreclosure occasionally may
result from difficulties in locating necessary parties defendant. 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 may issue a judgment of foreclosure and
appoint a referee or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement, pursuant to a power
of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust that authorizes the trustee to sell the property to a third party
upon any default by the borrower under the terms of the note, deed of trust, or
deed to secure debt. In certain states, such foreclosure also may be
accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states the trustee must record a notice of default and send
a copy to the borrower trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a specified
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 of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property
may have deteriorated during the foreclosure proceedings, it is not common for
a third party to purchase the property at the foreclosure sale. In some states,
potential buyers may further be unwilling to purchase a property at a
foreclosure sale as a result of the 1980 decision of the United States Court of
Appeals for the Fifth Circuit in Durrett v. Washington National Insurance
Company. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under section 67d of the
former Bankruptcy Act (section 548 of the current United States Bankruptcy
Code) and, therefore, could be
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rescinded in favor of the bankrupts estate, if (i) the foreclosure sale was
held while the debtor was insolvent and not more than one year prior to the
filing of the bankruptcy petition, and (ii) the price paid for the foreclosed
property did not represent "fair consideration" ("reasonably equivalent value"
under the United States Bankruptcy Code). Therefore, the lender generally
purchases the property from the trustee or referee for an amount equal to the
unpaid principal amount of the note, accrued and unpaid interest and the
expenses of foreclosure. Thereafter, subject to the right of the borrower in
some states to remain in possession during the redemption period, the lender
will assume the burdens 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 commonly will obtain the services of a real
estate broker and pay the broker a 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.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages or make payments on the senior
mortgages in the event the mortgagor is in default thereunder, in either event
adding the amounts expended to the balance due on the junior loan, and may be
subrogated to the rights of the senior mortgagees. In addition, in the event
that the foreclosure by a junior mortgagee triggers the enforcement of a "due-
on-sale" clause in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgages to the senior mortgagees.
Accordingly, with respect to those Contracts which are second or third mortgage
loans, if the lender purchases the property, the lender's title will be subject
to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Contract,
and any such taxes or fees imposed may reduce liquidation proceeds with respect
to such property, as well as distributions payable to the Certificateholders.
SECOND OR THIRD MORTGAGES
The Secured Contracts may be secured by second or third mortgages or deeds of
trust, which are junior to first or second mortgages or deeds of trust held by
other lenders. The rights of the Certificateholders as the holders of a junior
deed of trust, junior mortgage, or junior security deed are subordinate in lien
and in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or beneficiary
to receive and apply hazard insurance and condemnation
proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the senior deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. Such extinguishment will
eliminate access to the collateral for the Secured Contract. See "--
Foreclosure" herein.
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Furthermore, the terms of the junior mortgage, deed of trust, or security
deed are subordinate to the terms of the first mortgage, deed of trust, or
security deed. In the event of a conflict between the terms of the first
mortgage, deed of trust, or security deed and the junior mortgage, deed of
trust, or security deed, the terms of the first mortgage, deed of trust, or
security deed will govern generally. Upon a failure of the mortgagor or trustor
to perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under a junior mortgage, deed of
trust or security deed.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that 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 is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender
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to realize upon its security. For example, in a Chapter 13 proceeding, the
holder may not be able to obtain a lift of the automatic stay to foreclose if
the borrower has equity and the home is necessary to the bankruptcy
reorganization. A bankruptcy court may also grant the debtor a reasonable time
to cure a payment default, and in the case of a mortgage loan not secured by
the debtor's principal residence, may also reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule.
The Internal Revenue Code of 1986, as amended, provides priority to certain
federal tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of a Contract to all claims and defenses which the debtor could assert
against the home improvement contractor. Liability under this rule is limited
to amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the Trust against such Obligor.
The obligations of the Obligor under each Unsecured Contract are not secured
by an interest in the related real estate or otherwise, and the related Trust
Fund, as the owner of an Unsecured Contract, will be a general unsecured
creditor as to such obligations. As a consequence, in the event of a default
under an Unsecured Contract, the related Trust Fund will have recourse only
against the Obligor's assets generally, along with all other general unsecured
creditors of the Obligor. In a bankruptcy or insolvency proceeding relating to
an Obligor on an Unsecured Contract, the obligations of the Obligor under such
Unsecured Contract may be discharged in their entirety, notwithstanding the
fact that the portion of such Obligor's assets made available to the Trust Fund
as a general unsecured creditor to pay amounts due and owing thereunder are
insufficient to pay all such amounts.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In addition to limitations imposed by FHA regulations with respect
to FHA-insured Contracts, in certain states there are or may be specific
limitations upon late charges which a lender may collect from a borrower for
delinquent payments. Under the Agreement, late charges (to the extent permitted
by law and not waived by the Company) will be retained by the Company as
additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some
cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a junior mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue
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whether federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under mortgages or the
deeds of trust receive notices in addition to statutorily-prescribed minimum
requirements. 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 or under a mortgage having a power of sale does not involve sufficient
state action to afford constitutional protection to the borrower.
It is the Company's practice with some of the Contracts to defer the first
payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days
interest on the first payment on these deferred payment contracts.
"DUE-ON-SALE" CLAUSES
All of the Secured Contract documents contain due-on-sale clauses. These
clauses permit the Servicer to accelerate the maturity of the loan on notice,
which is usually thirty days, if the borrower sells, transfers or conveys the
property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Act"), which, after a 3-year
grace period, preempts state laws which prohibit the enforcement of due-on-sale
clauses by providing, among other matters, that "due-on-sale" clauses in
certain loans (including the Secured Contracts) made after the effective date
of the Act are enforceable within certain limitations as set forth in the Act
and the regulations promulgated thereunder.
By virtue of the Act, the Servicer generally may be permitted to accelerate
any Secured Contract which contains a "due-on-sale" clause upon transfer of an
interest in the mortgaged property. This ability to accelerate will not apply
to certain types of transfers, including (i) the granting of a leasehold
interest which has a term of three years or less and which does not contain an
option to purchase, (ii) a transfer to a relative resulting from the death of a
mortgagor or trustor, or a transfer where the spouse or child(ren) becomes an
owner of the mortgaged property in each case where the transferee(s) will
occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Act and
the regulations thereunder. As a result, a lesser number of Secured Contracts
which contain "due-on-sale" clauses may extend to full maturity than earlier
experience would indicate with respect to single-family mortgage loans. The
extent of the effect of the Act on the average lives and delinquency rates of
the Secured Contracts, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Secured Contracts
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Secured Contracts and the number of Secured Contracts which
may be outstanding until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to FHA-insured loans and to
first mortgage secured conventional contracts if the contract is defined as a
"federally related mortgage loan," a number of states have adopted legislation
overriding Title V's exemptions, as permitted by Title V. The Company will
represent and warrant in each Agreement that all Contracts comply with any
applicable usury limitations.
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ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens,
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale 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 lender secured by residential property (such as the Trust
Fund). In the event that title to a property securing a Secured Contract was
acquired by the related Trust Fund and cleanup costs were incurred in respect
of the mortgaged property, the Holders of the related Certificates might incur
a loss if such costs were required to be paid by the Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Contracts. Any shortfall in interest collections resulting from
the application of the Relief Act or similar legislation, which would not be
recoverable from the related Contracts, would result in a reduction of the
amounts distributable to the Certificateholders. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected mortgage, deed of trust or security deed during the mortgagor's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that the Relief
Act or similar legislation applies to any Contract which goes into default,
there may be delays in payment on the Certificates in connection therewith. Any
other interest shortfalls, deferrals or forgiveness of payments on the
Contracts resulting from similar legislation or regulations may result in
delays in payments or losses to Certificateholders.
REPURCHASE OBLIGATIONS
Under the Agreement, the Company will represent and warrant that each FHA-
insured Contract was originated in compliance with FHA regulations and is
covered by FHA Insurance. In the event FHA were to deny insurance coverage on
an FHA-insured Contract due to a violation of FHA regulations in originating or
servicing such Contracts, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
of the Company to repurchase such Contract unless the breach is cured. See
"Description of the Certificates--Conveyance of Contracts."
In addition, the Company will also represent and warrant under each Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust Fund for violation of any law and
such claim materially adversely affects the Trust Fund's interest in a
Contract, such violation would constitute a breach of a representation and
warranty under the Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Certificates--
Conveyance of Contracts."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain requirements on employee benefit plans subject to ERISA
("Plans") and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by such Plans. Among other
requirements, ERISA mandates that the assets of Plans be held in trust and that
the trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of such Plans. Under ERISA, any
person
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who exercises any authority or control with respect to the management or
disposition of the assets of a Plan is considered to be a fiduciary of such
Plan, subject to the standards of fiduciary conduct under ERISA. These
standards include the requirements that the assets of Plans be invested and
managed for the exclusive benefit of Plan participants and beneficiaries, a
determination by the Plan fiduciary that any such investment is permitted under
the governing Plan instruments and is prudent and appropriate for the Plan in
view of its overall investment policy and the composition and diversification
of its portfolio. Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and certain church plans (as defined in
ERISA Section 3(33)), are not subject to ERISA. Accordingly, assets of such
plans may be invested in Certificates without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit 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. An investment in the
Certificates by a Plan might constitute prohibited transactions under the
foregoing provisions unless an administrative exemption applies. In addition,
if an investing Plan's assets were deemed to include an interest in the assets
of the Contract Pool and not merely an interest in the Certificates,
transactions occurring in the operation of the Contract Pool 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 and operation of the Contract Pool are noted
below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) (the "Regulation") concerning the definition of what constitutes
the assets of a Plan. This regulation 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. However, the Regulation provides that, generally, the assets
of a corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined under the Regulation, is a security that is widely held, freely
transferable, and registered under the Securities Exchange Act of 1934, as
amended. The Certificates are not expected to be publicly-offered securities
under the terms of the Regulation.
Relief from the prohibited transaction rules of Section 406 and 407 of ERISA
(and from the prohibited transaction excise provisions of Section 4975 of the
Code) may be found under the provisions of specific statutory or administrative
exemptive relief authorized under Section 408 of ERISA. In Prohibited
Transaction Exemption 83-1 ("PTE 83-1"), which amended Prohibited Transaction
Exemption 81-7, the DOL exempted from ERISA's prohibited transaction rules
certain transactions relating to the operation of residential mortgage pool
investment trusts and the purchase, sale and holding of "mortgage pool pass-
through certificates" in the initial issuance of such certificates. PTE 83-1
permits, subject to certain conditions, transactions which might otherwise be
prohibited between Plans and parties in interest with respect to those Plans
related to the origination, maintenance and termination of mortgage pools
consisting of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition and holding of
certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions of PTE 83-1 are
satisfied, investments by a Plan in certificates that represent interests in a
mortgage pool consisting of single family loans will be exempt from the
prohibitions of Sections 406(a) and 407 of ERISA (relating generally to
transactions with parties in interest who are not fiduciaries) if the Plan
purchases such certificates at no more than fair market value, and will be
exempt from the prohibitions of Section 406(b)(1) and (2) of ERISA (relating
generally to transactions
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with fiduciaries) if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25 percent of such certificates, and at least 50 percent of
all such certificates are purchased by persons independent of the pool sponsor
or pool trustee. However, PTE 83-1 does not provide an exemption for
transactions involving subordinate certificates.
There can be no assurance that any of the exceptions set forth in the
Regulation, PTE 83-1 or any other administrative exemption under ERISA, will
apply to the purchase of Certificates offered hereby, and, as a result, an
investing Plan's assets could be considered to include an undivided interest in
the Contracts and any other assets held in the Contract Pool. In the event that
assets of a Contract Pool are considered assets of an investing Plan, the
Company, the Servicer, the Trustee and other persons, in providing services
with respect to the Contracts, may be considered fiduciaries to such Plan and
subject to the fiduciary responsibility provisions of Title I of ERISA and the
prohibited transaction provisions of Section 4975 of the Code with respect to
transactions involving such assets unless a statutory or administrative
exemption applies.
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after November
12, 1991 (the "REMIC Regulations"), all of which are subject to change or
possibly differing interpretations. The discussion does not purport to deal
with federal income tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors should consult their
own tax advisors to determine the federal, state, local, and any other tax
consequences of the purchase, ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made to
treat the Trust Fund or a segregated portion thereof evidenced by a particular
Series or sub-series of Certificates as a REMIC within the meaning of Section
860D(a) of the Code. The Prospectus Supplement for each series will indicate
whether or not an election to be treated as a REMIC has been or will be made
with respect thereto. The following discussion deals first with Series with
respect to which a REMIC Election is made and then with Series with respect to
which a REMIC Election is not made.
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election is
made, Dorsey & Whitney or other counsel to the Company identified in the
applicable Prospectus Supplement will have advised the Company that in its
opinion, assuming (i) the making of that election in accordance with the
requirements of the Code and (ii) ongoing compliance with the applicable
Agreement, at the initial issuance of the Certificates in such series the Trust
Fund will qualify as a REMIC and the Certificates in such a Series ("REMIC
Certificates") will be treated either as regular interests in the REMIC within
the meaning of Section 860G(a)(1) of the Code ("Regular Certificates") or as
residual interests in the REMIC within the meaning of Section 860G(a)(2) of the
Code ("Residual Certificates").
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Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day if such purchase is pursuant to a fixed price contract in
effect on the Startup Day. The REMIC Regulations provide that a Contract is
principally secured by an interest in real property if the fair market value of
the real property securing the Contract is at least equal to either (i) 80% of
the issue price (generally, the principal balance) of the Contract at the time
it was originated or (ii) 80% of the adjusted issue price (the then-outstanding
principal balance, with certain adjustments) of the Contract at the time it is
contributed to a REMIC. The fair market value of the underlying real property
is to be determined after taking into account other liens encumbering that real
property. Alternatively, a Contract is principally secured by an interest in
real property if substantially all of the proceeds of the Contract were used to
acquire or to improve or protect an interest in real property that, at the
origination date, is the only security for the Contract (other than the
personal liability of the obligor). A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage
within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash received
under qualified mortgages before distribution to holders of interests in the
REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund, if any,
reasonably required to provide for full payment of expenses of the REMIC, the
principal and interest due on regular or residual interests in the event of
defaults on qualified mortgages, lower than expected returns on cash-flow
investments, prepayment interest shortfalls or certain other contingencies
("qualified reserve assets"), and (c) certain property acquired as a result of
foreclosure of defaulted qualified mortgages ("foreclosure property"). A
reserve fund will not be qualified if more than 30% of the gross income from
the assets in the reserve fund is derived from the sale or other disposition of
property held for three months or less, unless such sale is necessary to
prevent a default in payment of principal or interest on Regular Certificates.
In accordance with Section 860G(a)(7) of the Code, a reserve fund must be
"promptly and appropriately" reduced as payments on contracts are received.
Foreclosure property will be a permitted investment only to the extent that
such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and
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thereafter unless the Service determines, in its discretion, that such failure
was inadvertent (in which case, the Service may require any adjustments which
it deems appropriate). If the ownership interests in the assets of the Trust
Fund consist of multiple classes, failure to treat the Trust Fund as a REMIC
may cause the Trust Fund to be treated as an association taxable as a
corporation. Such treatment could result in income of the Trust Fund being
subject to corporate tax in the hands of the Trust Fund and in a reduced amount
being available for distribution to Certificateholders as a result of the
payment of such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder. Solely
for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the stated
principal amount with respect to that Regular Certificate may be zero. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of interest or a qualified variable rate on some or all of the
qualified mortgages. Stated interest on a Regular Certificate will be taxable
as ordinary income. Holders of Regular Certificates that would otherwise report
income under a cash method of accounting will be required to report income with
respect to such Regular Certificates under the accrual method. Under Temporary
Treasury Regulations, if a Trust Fund, with respect to which a REMIC Election
is made, is considered to be a "single-class REMIC," a portion of the REMIC's
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company, will be
allocated as a separate item to those Regular Certificateholders that are
"pass-through interest holders." Generally, a single-class REMIC is defined as
a REMIC that would be treated as a fixed investment trust under applicable law
but for its qualification as a REMIC, or a REMIC that is substantially similar
to an investment trust but is structured with the principal purpose of avoiding
this allocation requirement imposed by the Temporary Treasury Regulations.
Generally, a pass-through interest holder refers to individuals, entities taxed
as individuals, such as certain trusts and estates, and regulated investment
companies. An individual, an estate, or a trust that holds a Regular
Certificate in such a REMIC will be allowed to deduct the foregoing expenses
under Section 212 of the Code only to the extent that, in the aggregate and
combined with certain other itemized deductions, they exceed 2% of the adjusted
gross income of the holder. In addition, Section 68 of the Code provides that
the amount of itemized deductions (including those provided for in Section 212
of the Code) otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a threshold amount specified in the Code
($100,000 in the case of a joint return) will be reduced by the lesser of (i)
3% of the excess of adjusted gross income over the specified threshold amount
or (ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. As a result of the foregoing limitations, certain holders of
Regular Certificates in "single-class REMICs" may not be entitled to deduct all
or any part of the foregoing expenses.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a financial institution as described in Section 593(a) of the Code will
represent interests in "qualifying real property loans" within the meaning of
Section 593(d) of the Code; (ii) Regular Certificates held by a thrift
institution taxed as a "domestic building and loan association" within the
meaning of Section 7701(a)(19) of the Code will constitute "a regular ...
interest in a REMIC" within the meaning of Section 7701(a)(19)(C)(xi) of the
Code;
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and (iii) Regular Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and interest thereon will be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. If less than 95% of the average adjusted basis of the
assets comprising the REMIC are assets qualifying under any of the foregoing
Sections of the Code (including assets described in Section 7701(a)(19)(C) of
the Code), then the Regular Certificates will be qualifying assets only to the
extent that the assets comprising the REMIC are qualifying assets. Furthermore,
interest paid with respect to Certificates held by a real estate investment
trust will be considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code to the same extent that the Certificates themselves
are treated as real estate assets. Regular Certificates held by a regulated
investment company or a real estate investment trust will not constitute
"Government securities" within the meaning of Sections 851(b)(4)(A)(i) and
856(c)(5)(A) of the Code, respectively. In addition, the REMIC Regulations
provide that payments on Contracts held and reinvested pending distribution to
Certificateholders will be considered to be "qualifying real property loans"
within the meaning of Section 593(b) of the Code and "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code. Entities affected by
the foregoing provisions of the Code that are considering the purchase of
Certificates should consult their own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994, but which generally may be relied upon for
debt instruments issued after December 21, 1992. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have not yet been finalized. Certificateholders also should be
aware that the OID Regulations do not address certain issues relevant to
prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. It is possible that the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption") will be required to be used in determining the
weighted average maturity of the Regular Certificates. In the absence of
authority to the contrary, the Company expects to apply the de minimis rule
applicable to installment obligations by using the Prepayment Assumption. The
OID Regulations provide a further special de minimis rule applicable to any
Regular Certificates that are "self-amortizing installment obligations," i.e.,
Regular Certificates that provide for equal payments composed of principal and
qualified stated interest payable unconditionally at least annually during its
entire term, with no significant additional payment required at maturity. Under
this special rule, original issue discount on a self-amortizing installment
obligation is generally considered to be zero if it is less than .167% of the
principal amount of the obligation multiplied by the number of complete years
from the date of issue of such a Regular Certificate to its maturity date.
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Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount includes that original issue discount
in income as principal payments are made. The amount includable in income with
respect to each principal payment equals a pro rata portion of the entire
amount of de minimis original issue discount with respect to that Regular
Certificate. Any de minimis amount of original issue discount includable in
income by a holder of a Regular Certificate is generally treated as a capital
gain if the Regular Certificate is a capital asset in the hands of the holder
thereof. Pursuant to the OID Regulations, a holder of a Regular Certificate
that uses the accrual method of tax accounting or that acquired such Regular
Certificate on or after April 4, 1994, may, however, elect to include in gross
income all interest that accrues on a Regular Certificate, including any de
minimis original issue discount and market discount, by using the constant
yield method described below with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate of interest (or, under certain circumstances, a variable rate tied to an
objective index) during the entire term of the Regular Certificate (including
short periods). Under the OID Regulations, certain variable interest rates
payable on Regular Certificates, including rates based upon the weighted
average interest rate of a Pool of Contracts, may not be treated as qualified
stated interest. In such case, the OID Regulations would treat interest under
such rates as contingent interest which generally must be included in income by
the Regular Certificateholder when the interest becomes fixed, as opposed to
when it accrues. Until further guidance is issued concerning the treatment of
such interest payable on Regular Certificates, the REMIC will treat such
interest as being payable at a variable rate tied to a single objective index
of market rates. Prospective investors should consult their tax advisors
regarding the treatment of such interest under the OID Regulations. In the
absence of authority to the contrary and if otherwise appropriate, the Company
expects to determine the stated redemption price at maturity of a Regular
Certificate by assuming that the anticipated rate of prepayment for all
Contracts will occur in such a manner that the initial Pass-Through Rate for a
Certificate will not change. Accordingly, interest at the initial Pass-Through
Rate will constitute qualified stated interest payments for purposes of
applying the original issue discount provisions of the Code. In general, the
issue price of a Regular Certificate is the first price at which a substantial
amount of the Regular Certificates of such class are sold for money to the
public (excluding bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers). If a
portion of the initial offering price of a Regular Certificate is allocable to
interest that has accrued prior to its date of issue, the issue price of such a
Regular Certificate includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a Regular
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Code and the OID Regulations. Under such Section and the OID Regulations,
original issue discount accrues on a daily basis under a constant yield method
that takes into account the compounding of interest. The amount of original
issue discount to be included in income by a holder of a debt instrument, such
as a Regular Certificate, under which principal payments may be subject to
acceleration because of prepayments of other debt obligations securing such
instruments, is computed by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the "accrual
period" and
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(ii) the payments during the "accrual period" of amounts included in the stated
redemption price of the Regular Certificate over the "adjusted issue price" of
the Regular Certificate at the beginning of the "accrual period." Generally,
the "accrual period" for the Regular Certificates corresponds to the intervals
at which amounts are paid or compounded with respect to such Regular
Certificate, beginning with their date of issuance and ending with the maturity
date. The "adjusted issue price" of a Regular Certificate at the beginning of
any accrual period is the sum of the issue price and accrued original issue
discount for each prior accrual period reduced by the amount of payments other
than payments of qualified stated interest made during each prior accrual
period. The Code requires the present value of the remaining payments to be
determined on the bases of (a) the original yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period), (b) events, including actual
prepayments, which have occurred before the close of the accrual period, and
(c) the assumption that the remaining payments will be made in accordance with
the original Prepayment Assumption. The effect of this method is to increase
the portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the
Contracts held by the Trust Fund that occur at a rate that exceeds the
Prepayment Assumption and to decrease (but not below zero for any period) the
portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the
Contracts that occur at a rate that is slower than the Prepayment Assumption.
Although original issue discount will be reported to Regular Certificateholders
based on the Prepayment Assumption, no representation is made to Regular
Certificateholders that the Contracts will be prepaid at that rate or at any
other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's outstanding principal amount. If the price paid exceeds the sum
of the Regular Certificate's issue price plus the aggregate amount of original
issue discount accrued with respect to the Regular Certificate, but does not
equal or exceed the outstanding principal amount of the Regular Certificate,
the amount of original issue discount to be accrued will be reduced in
accordance with a formula set forth in Section 1272(a)(7)(B) of the Code.
The Company believes that the holder of a Regular Certificate determined to
be issued with non-de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal income
tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Variable Rate Regular Certificates. Regular Certificates may bear interest at
a variable rate. Under the OID Regulations, if a variable rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on such a Regular Certificate is computed and accrued under the
same methodology that applies to Regular Certificates paying qualified stated
interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." Accordingly, if the issue price of such a Regular
Certificate is equal to its stated redemption price at maturity, the Regular
Certificate will not have any original issue discount.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to a variable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the variable rate of interest is
subject to one or more minimum or maximum rate floors or ceilings which are not
fixed throughout the term of the Regular Certificate and which are reasonably
expected as of the issue date to cause the rate in certain accrual periods to
be significantly higher or lower than the overall expected return on the
Regular Certificate determined without such floor or ceiling; (ii) if it is
reasonably expected that the average value of the variable rate during the
first half of the term of the Regular Certificate will be either significantly
less than or significantly greater than the average value of the rate during
the final half of the term of the Regular Certificate; or (iii) if interest
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is not payable in all circumstances. In these situations, as well as others, it
is unclear under the OID Regulations whether such interest payments constitute
qualified stated interest payments, or must be treated either as part of a
Regular Certificate's stated redemption price at maturity resulting in original
issue discount, or represent contingent payments which are recognized as
ordinary gross income for federal income tax purposes only as the interest
payments become fixed in each accrual period.
If a variable rate Regular Certificate is deemed to have been issued with
original issue discount, as described above, the amount of original issue
discount accrues on a daily basis under a constant yield method that takes into
account the compounding of interest; provided, however, that the interest
associated with such a Regular Certificate generally is assumed to remain
constant throughout the term of the Regular Certificate at a rate that, in the
case of a qualified floating rate, equals the value of such qualified floating
rate as of the issue date of the Regular Certificate, or, in the case of an
objective rate, at a fixed rate that reflects the yield that is reasonably
expected for the Regular Certificate. A holder of such a Regular Certificate
would then recognize original issue discount during each accrual period which
is calculated based upon such Regular Certificate's assumed yield to maturity,
adjusted to reflect the difference between the assumed and actual interest
rate.
The OID Regulations either do not address or are subject to varying
interpretations with respect to several issues concerning the computation of
original issue discount with respect to the Regular Certificates, including
variable rate Regular Certificates. Additional information regarding the manner
of reporting original issue discount to the Service and to holders of variable
rate Regular Certificates will be set forth in the Prospectus Supplement
relating to the issuance of such Regular Certificates.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its original issue price plus any
accrued original issue discount, if any, as described above) will be required
to recognize accrued market discount as ordinary income as payments of
principal are received on such Regular Certificate or upon the sale or exchange
of the Regular Certificate. In general, the holder of a Regular Certificate may
elect to treat market discount as accruing either (i) under a constant yield
method that is similar to the method for the accrual of original issue discount
or (ii) in proportion to accruals of original issue discount (or, if there is
no original issue discount, in proportion to accruals of stated interest), in
each case computed taking into account the Prepayment Assumption.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would be
allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
such a Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on such a
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
The Code grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments
such as the Regular Certificates. Until such time as regulations are issued,
rules described in the legislative history for these provisions of the Code
will apply. Under those rules, as described above, the holder of a Regular
Certificate with market discount may
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elect to accrue market discount either on the basis of a constant interest rate
or according to certain other methods. Certificateholders who acquire a Regular
Certificate at a market discount should consult their tax advisors concerning
various methods which are available for accruing that market discount.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted basis
of a Regular Certificate subject to such election will be increased to reflect
market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its outstanding principal amount will be considered to have
purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which
apply to the accrual of market discount on installment obligations are intended
to apply in computing the amortizable bond premium deduction with respect to a
Regular Certificate. It is not clear, however, (i) whether the alternatives to
the constant-yield method which may be available for the accrual of market
discount are available for amortizing premium on Regular Certificates and (ii)
whether the Prepayment Assumption should be taken into account in determining
the term of a Regular Certificate for this purpose. Certificateholders who pay
a premium for a Regular Certificate should consult their tax advisors
concerning such an election and rules for determining the method for amortizing
bond premium.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in such Regular Certificate. The
adjusted basis generally will equal the cost of such Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payments) and
any amortizable premium. Similarly, a Regular Certificateholder who receives a
principal payment with respect to a Regular Certificate will recognize gain or
loss equal to the difference between the amount of the payment and the holder's
allocable portion of his or her adjusted basis in the Regular Certificate.
Except as discussed below or with respect to market discount, any gain or loss
recognized upon a sale, exchange, retirement, or other disposition of a Regular
Certificate will be capital gain if the Regular Certificate is held as a
capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount, will be treated as ordinary income to the extent of the excess, if
any, of (i) the amount that would have been includable in the holder's income
if the yield on such Regular Certificate had equaled 110% of the applicable
federal rate determined as of the beginning of such holder's holding period,
over (ii) the amount of ordinary income actually recognized by the holder with
respect to such Regular Certificate.
If the Company is determined to have intended on the date of issue of the
Regular Certificates to call all or any portion of the Regular Certificates
prior to their stated maturity within the meaning of Section 1271(a)(2)(A) of
the Code, any gain realized upon a sale, exchange, retirement, or other
disposition of a Regular Certificate would be considered ordinary income to the
extent it does not exceed the unrecognized portion of the original issue
discount, if any, with respect to the Regular Certificate. The OID Regulations
provide that the intention to call rule will not be applied to mortgage-backed
securities such as the Regular Certificates. In addition, under the OID
Regulations, a mandatory sinking fund or call option is not evidence of an
intention to call.
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Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by allocating
such daily portion among the Residual Holders in proportion to their respective
holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means a REMIC's gross income, including interest, original
issue discount income, and market discount income, if any, on the Contracts,
plus income on reinvestment of cash flows and reserve assets, minus deductions,
including interest and original issue discount expense on the Regular
Certificates, servicing fees on the Contracts, other administrative expenses of
a REMIC, and amortization of premium, if any, with respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization of
premium with respect to the Contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the Contracts
is acquired by a REMIC at a discount, and one or more of such Contracts is
prepaid, the Residual Holder may recognize taxable income without being
entitled to receive a corresponding cash distribution because (i) the
prepayment may be used in whole or in part to make distributions on Regular
Certificates, and (ii) the discount on the Contracts which is includable in a
REMIC's income may exceed its deduction with respect to the distributions on
those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely to
occur in the early years following issuance of the Regular Certificates, when
distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable income may also be greater in
earlier years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
Regular Certificates, may increase over time as distributions are made on the
lower yielding classes of Regular Certificates, whereas interest income with
respect to any given Contract will remain constant over time as a percentage of
the outstanding principal amount of that loan (assuming it bears interest at a
fixed rate). Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching, or such holders must have unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "REMIC Series--Limitations on Offset or Exemption of REMIC Income." The
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse effect
upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate as
of the close of the quarter (or time of disposition of the Residual Certificate
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Certificate is
the amount paid for such Residual Certificate. Such adjusted basis will be
increased by the amount of taxable income of the REMIC reportable by the
Residual Holder and decreased by the amount of loss of the REMIC reportable by
the Residual Holder. A cash distribution from the REMIC also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely by the Residual Holder for
whom
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such loss was disallowed and may be used by such Residual Holder only to offset
any income generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC's basis in its assets. The REMIC Regulations imply
that residual interests cannot have a negative basis or a negative issue price.
However, the preamble to the REMIC Regulations indicates that, while existing
tax rules do not accommodate such concepts, the Service is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of such a residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, the Company does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC's basis in the Contracts, the Residual
Holder will not recover a portion of such basis until termination of the REMIC
unless Treasury Regulations yet to be issued provide for periodic adjustments
to the REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner as
original issue discount income on Regular Certificates as described above under
"REMIC Series--Original Issue Discount" and "--Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
The REMIC will have market discount income in respect of the Contracts if, in
general, the basis of the REMIC in such Contracts is exceeded by their unpaid
principal balances. The REMIC's basis in such Contracts is generally the fair
market value of the Contracts immediately after the transfer thereof to the
REMIC (which may equal a proportionate part of the aggregate fair market value
of the REMIC Certificates). In respect of the Contracts that have market
discount to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income. Market
discount income generally should accrue in the manner described above under
"REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Contracts exceeds the unpaid
principal balances thereof, the REMIC will be considered to have acquired such
Contracts at a premium equal to the amount of such excess. As stated above, the
REMIC's basis in the Contracts is the fair market value of the Contracts
immediately after the transfer thereof to the REMIC. Generally, a person that
holds a Contract as a capital asset may elect to amortize premium on the
Contracts under a constant interest method. See the discussion under "REMIC
Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. If the aggregate value of
the Residual Certificates relative to the aggregate value of the Regular
Certificates and Residual Certificates is considered to be "significant," as
described below, then a portion (but not all) of the REMIC taxable income
includable in determining the federal income tax liability of a Residual Holder
will be subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Certificate over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that
would have applied to the Residual Certificate (if it were a debt instrument)
on the Startup Day under Section 1274(d) of the Code, multiplied by (ii) the
adjusted issue price of such Residual Certificate at the beginning of such
quarterly period. For this purpose, the adjusted issue price of a Residual
Certificate at the beginning of a quarter is the issue price of the Residual
Certificate, plus the amount of such daily accruals of REMIC income described
in this paragraph for all prior quarters, decreased by any distributions made
with respect to such Residual Certificate prior to the beginning of such
quarterly period. The value of the Residual Certificates would be considered
significant in cases where the
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aggregate issue price of the Residual Certificates is at least 2% of the
aggregate issue price of the Regular Certificates and Residual Certificates,
and the anticipated weighted average life of the Residual Certificates is at
least 20% of the anticipated weighted average life of the REMIC.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions on such
Residual Holder's tax return, including net operating loss carry forwards.
Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the Residual
Holder's excess inclusions will be treated as unrelated business taxable income
of such Residual Holder for purposes of Section 511. Finally, if a real estate
investment trust or regulated investment company owns a Residual Certificate, a
portion (allocated under Treasury Regulations yet to be issued) of dividends
paid by such real estate investment trust or regulated investment company could
not be offset by net operating losses of its shareholders, would constitute
unrelated business taxable income for tax-exempt shareholders, and would be
ineligible for reduction of withholding to certain persons who are not U.S.
persons.
An exception to the inability of a Residual Holder to offset excess
inclusions with unrelated deductions and net operating losses applies to
certain financial institutions described in Section 593 of the Code ("thrift
institutions"). For purposes of applying this rule, all members of an
affiliated group filing a consolidated return are treated as one taxpayer,
except that thrift institutions to which Section 593 applies and each of their
subsidiaries formed to issue REMICs are treated as separate corporations.
Furthermore, the Code provides that regulations may be issued to disallow the
ability of a thrift institution to use deductions to offset excess inclusions
if necessary or appropriate to prevent the avoidance of tax. A thrift
institution may not so offset its excess inclusions unless the Residual
Certificates have "significant value," which requires that (i) the Residual
Certificates have an issue price that is at least equal to 2% of the aggregate
of the issue prices of all Residual Certificates and Regular Certificates with
respect to the REMIC, and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20% of the anticipated weighted average life
of the REMIC. The anticipated weighted average life of the Residual
Certificates is based on all anticipated payments to be received with respect
thereto (using the Prepayment Assumption). The anticipated weighted average
life of the REMIC is the weighted average of the anticipated weighted average
lives of all classes of Certificates in the REMIC (computed using all
anticipated payments on a Regular Certificate with nominal or no principal).
Finally, an ordering rule under the REMIC Regulations provides that a thrift
institution may only offset its excess inclusion income with deductions after
it has first applied its deductions against income that is not excess inclusion
income. If applicable, the Prospectus Supplement with respect to a series will
set forth whether the Residual Certificates are expected to have "significant
value."
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual Certificate
may not be transferred to a Disqualified Organization. If any legal or
beneficial interest in a Residual Certificate is, nonetheless, transferred to a
Disqualified Organization, a tax would be imposed in an amount equal to the
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer, and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Section 1274(d) of the Code as of the date of the transfer for a term ending on
the close of the last quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit, under penalties of perjury, that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also
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may be waived by the Treasury Department if the Disqualified Organization
promptly disposes of the residual interest and the transferor pays such amount
of tax as the Treasury Department may require (presumably, a corporate tax on
the excess inclusion for the period the residual interest is actually held by
the Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury Regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
(as defined below) to a Residual Holder is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above. The REMIC
Regulations explain that 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 that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, and (ii) the transferee
represents to the transferor that it understands that, as the holder of a non-
economic residual interest, the transferee may incur tax liabilities in excess
of any cash flows generated by the interest and that the transferee intends to
pay taxes associated with holding the residual interest as they become due. The
Agreement with respect to each series of REMIC Certificates will require the
transferee of a Residual Certificate to certify to the statements in clause
(ii) of the preceding sentence as part of the affidavit described above under
"Restrictions on Transfer of Residual Certificates."
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such Residual Holder in such Residual Certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
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Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
The Conference Committee Report to the Tax Reform Act of 1986 provides that,
except as provided in Treasury Regulations, the wash sale rules of Code Section
1091 will apply to dispositions of Residual Certificates where the seller of
the Residual Certificate, during the period beginning six months before the
sale or disposition of the Residual Certificate and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of
a defective obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the REMIC, or a
qualified liquidation of the REMIC; (ii) the receipt of income from assets
other than qualified mortgages and permitted investments; (iii) the receipt of
compensation for services; and (iv) the receipt of gain from the dispositions
of cash flow investments. The REMIC Regulations provide that the modification
of the terms of a Contract occasioned by default or a reasonably foreseeable
default of the Contract, the assumption of the Contract, the waiver of a due-
on-sale clause or the conversion of an interest rate by an Obligor pursuant to
the terms of a convertible adjustable-rate Contract will not be treated as a
disposition of the Contract. In the event that a REMIC holds Convertible ARM
Loans which are convertible at the option of the Obligor into fixed-rate, fully
amortizing, level payment Contracts, a sale of such Contracts by the REMIC
pursuant to a purchase agreement or other contract with the Company or other
party, if and when the Obligor elects to so convert the terms of the Contract,
is not expected to result in a prohibited transaction for the REMIC. The Code
also imposes a 100% tax on contributions to a REMIC made after the Startup Day,
unless such contributions are payments made to facilitate a cleanup call or a
qualified liquidation of the REMIC, payments in the nature of a guaranty,
contributions during the three-month period beginning on the Startup Day or
contributions to a qualified reserve fund of the REMIC by a holder of a
residual interest in the REMIC. The Code also imposes a tax on a REMIC at the
highest corporate rate on certain net income from foreclosure property that the
REMIC derives from the management, sale, or disposition of any real property,
or any personal property incident thereto, acquired by the REMIC in connection
with the default or imminent default of a loan. Generally, it is not
anticipated that a REMIC will generate a significant amount of such income.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which
such adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the date of the adoption of the plan
of liquidation, provided that it distributes to holders of Regular or Residual
Certificates, on or before the last day of the ninety-day liquidation period,
all the proceeds of the liquidation (including all cash), less amounts retained
to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and who
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes
regardless of its source. Unless the interest on a Regular Certificate is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States, the Foreign Holder
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is not subject to federal income or withholding tax on interest (or original
issue discount, if any) on a Regular Certificate (subject to possible backup
withholding of tax, discussed below), provided the Foreign Holder is not a
controlled foreign corporation related to the Company and does not own actually
or constructively 10% or more of the voting stock of the Company. To qualify
for this tax exemption, the Foreign Holder will be required to provide
periodically a statement signed under penalties of perjury certifying that the
Foreign Holder meets the requirements for treatment as a Foreign Holder and
providing the Foreign Holder's name and address. The statement, which may be
made on a Form W-8 or substantially similar substitute form, generally must be
provided in the year a payment occurs or in either of the two preceding years.
The statement must be provided, either directly or through clearing
organization or financial institution intermediaries, to the person that
otherwise would withhold tax. This exemption may not apply to a Foreign Holder
that owns both Regular Certificates and Residual Certificates. If the interest
on a Regular Certificate is effectively connected with the conduct by a Foreign
Holder of a trade or business within the United States, then the Foreign Holder
will be subject to tax at regular graduated rates. Foreign Holders should
consult their own tax advisors regarding the specific tax consequences of their
owning a Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii) the
gain is effectively connected with the conduct by the Foreign Holder of a trade
or business within the United States.
A Regular Certificate will not be includible in the estate of a Foreign
Holder who does not own actually or constructively 10% or more of the voting
stock of the Company.
Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the holder,
among other circumstances, fails to furnish his Social Security number or other
taxpayer identification number to the Trustee. Backup withholding may apply,
under certain circumstances, to a REMIC Certificateholder who is a foreign
person if the REMIC Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to establish
the exemption from federal income and withholding tax on interest on the REMIC
Certificate. Backup withholding, however, does not apply to payments on a
Certificate made to certain exempt recipients, such as corporations and tax-
exempt organizations, and to certain foreign persons. REMIC Certificateholders
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that are
not excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid
or accrued on the Regular Certificates, original issue discount, if any,
accruing on the Regular Certificates and information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMICs "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
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NON-REMIC SERIES
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series or sub-series of Certificates, or a segregated portion thereof, with
respect to which a REMIC Election is not made ("Non-REMIC Certificates"),
Counsel will have advised the Company that, in their opinion, each Contract
Pool and the arrangement to be administered by the Company under which the
Trustee will hold and the Company will be obligated to service the Contracts
and pursuant to which Non-REMIC Certificates will be issued to Non-REMIC
Certificateholders will not be classified as an association taxable as a
corporation or a "taxable mortgage pool, within the meaning of Code Section
7701(i), but rather will be classified as a grantor trust under Subpart E, Part
1 of Subchapter J of the Code. Each Non-REMIC Certificateholder will be treated
as the owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the Contract Pool in which its
Certificate evidences an ownership interest and will be considered the
equitable owner of a pro rata undivided interest in each of the Contracts
included therein.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
financial institution taxed as described in Section 593(a) of the Code may
represent interests in "qualifying real property loans" within the meaning of
Section 593(d) of the Code; (ii) Certificates held by a "domestic building and
loan association" within the meaning of Section 7701(a)(19) of the Code may be
considered to represent "qualifying real property loans" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; and (iii) Certificates held by a real
estate investment trust may constitute "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code and interest thereon may be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code. See the discussions of such Code
provisions above under "REMIC Series Tax Status of REMIC Certificates."
Investors should review the related Prospectus Supplement for a discussion of
the treatment of Non-REMIC Certificates and Contracts under these Code sections
and should, in addition, consult with their own tax advisors with respect to
these matters.
Tax Treatment of Non-REMIC Certificates. Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share of
the entire income arising from the Contracts comprising such Contract Pool,
including interest, original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any gain
upon disposition of such Contracts. (For purposes of this discussion, theterm
"disposition," when used with respect to the Contracts, includes scheduled or
prepaid collections with respect to the Contracts, as well as the sale or
exchange of a Non-REMIC Certificate.) Non-REMIC Certificateholders will be
entitled under Section 162 or 212 of the Code to deduct their pro rata share of
related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($100,000 in the case of a joint return) will be reduced by the lesser
of (i) 3% of the excess of adjusted gross income over the specified threshold
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. To the extent that a Non-REMIC Certificateholder is not
permitted to deduct servicing fees allocable to a Non-REMIC Certificate, the
taxable income of the Non-REMIC Certificateholder attributable to that Non-
REMIC Certificate will exceed the net cash distributions related to such
income. Non-REMIC Certificateholders may deduct any loss on disposition of the
Contracts to the extent permitted under the Code.
Under current Service interpretations of applicable Treasury Regulations the
Company would be able to sell or otherwise dispose of any subordinated Non-
REMIC Certificates. Accordingly, the Company expects to offer subordinated Non-
REMIC Certificates for sale to investors. In general, such subordination should
not affect the federal income tax treatment of either the subordinated or
senior Certificates. Holders of
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subordinated classes of Certificates should be able to recognize any losses
allocated to such class when and if losses are realized.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report annually
an amount of additional interest income attributable to such discount in such
Contracts prior to receipt of cash related to such discount. See the discussion
above under "REMIC Series--Original Issue Discount." Similarly, Code provisions
concerning market discount and amortizable premium will apply to the Contracts
comprising a Contract Pool to the extent that the loans were originated after
July 18, 1984 and September 27, 1985, respectively. See the discussions above
under "REMIC Series--Market Discount" and "REMIC Series--Amortizable Premium."
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code,
the issue price of a Stripped Certificate will be the purchase price paid by
each holder thereof and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Stripped Certificate may be treated as zero
under the original issue discount de minimis rules described above. A purchaser
of a Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Contracts. See "REMIC Series--Market Discount" above.
When an investor purchases more than one class of Stripped Certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
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Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported gain 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.
Except as provided above with respect to the original issue discount and market
discount rules, any such gain or loss would be capital gain or loss if the Non-
REMIC Certificate was held as a capital asset.
Recharacterization of Servicing Fees. The servicing compensation to be
received by the Company may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules. See the discussion above under "Non-REMIC Series--
Stripped Non-REMIC Certificates."
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined in "REMIC Series--
Taxation of Certain Foreign Investors") will be treated as "portfolio interest"
and therefore will be exempt from the 30% withholding tax. Such Non-REMIC
Certificateholder will be entitled to receive interest payments and original
issue discount on the Non-REMIC Certificates free of United States federal
income tax, but only to the extent the Contracts were originated after July 18,
1984 and provided that such Non-REMIC Certificateholder periodically provides
the Trustee (or other person who would otherwise be required to withhold tax)
with a statement certifying under penalty of perjury that such Non-REMIC
Certificateholder is not a United States person and providing the name and
address of such Non-REMIC Certificateholder. For additional information
concerning interest or original issue discount paid by the Company to a Foreign
Holder and the treatment of a sale or exchange of a Non-REMIC Certificate by a
Foreign Holder, which will generally have the same tax consequences as the sale
of a Regular Certificate, see the discussion above under "REMIC Series--
Taxation of Certain Foreign Investors".
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect to
interest and original issue discount, if any, with respect to the Non-REMIC
Certificates.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal property,
or other taxation in any state or locality, or as to the tax effect of
ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
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LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that are
either unsecured or secured by liens on real estate that are not first liens,
as required by SMMEA. Accordingly, many institutions with legal authority to
invest in "mortgage related securities" may not be legally authorized to invest
in the Certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests, including
securities previously purchased. There may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). 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. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular Series of Certificates may be made through
a combination of such methods.
The distribution of the Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
56
<PAGE>
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of 1933,
as amended (the "Act"). Any such Underwriters or agents will be identified, and
any such compensation received from the Company will be described, in the
Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality of the Certificates will be passed upon for the Company by
Dorsey & Whitney, Minneapolis, Minnesota. The material federal income tax
consequences of the Certificates will be passed upon for the Company by Dorsey
& Whitney.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1991,
1992 and 1993 and for each of the three years in the period ended December 31,
1993 incorporated by reference herein have been audited by KPMG Peat Marwick,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
57
<PAGE>
GLOSSARY
There follows abbreviated definitions of certain capitalized terms used in
this Prospectus and the Prospectus Supplement. The Agreement may contain a more
complete definition of certain of the terms defined herein and reference should
be made to the Agreement for a more complete definition of all such terms.
"Accrual Remittance Amount" means, with respect to the Compound Interest
Certificates of a Series of Certificates providing for sequential distributions
in reduction of the Stated Balance of the Classes of such Series, as of any
Payment Date, the amount of interest, calculated at the Interest Rate, which
has accrued on such Compound Interest Certificates from the prior Payment Date.
"Adjustable Rate Certificates" means Certificates which evidence the right to
receive distributions of income at a variable Pass-Through Rate.
"Advances" means the advances made by a Servicer (including from advances
made by a Sub-servicer) on any Payment Date pursuant to an Agreement.
"Agreement" means each Pooling and Servicing Agreement by and among the
Company, the Trustee and any other party specified in the related Prospectus
Supplement.
"Asset Value" means the Asset Value of the Contracts included in a Trust
Fund, determined in the manner set forth in the related Agreement.
"Amount Available" means, with respect to each Series of Certificates,
certain amounts on deposit in the Certificate Account on a Determination Date.
"Available Subordination Amount" means, with respect to a Series of
Certificates having a Class of Subordinated Certificates, unless otherwise
provided in the related Prospectus Supplement, as of any Payment Date, the
excess, if any, of the then applicable Maximum Subordination Amount over the
Cumulative Subordination Payments as of the preceding Payment Date.
"Certificate Account" means the account maintained by the Servicer or the
Trustee, as specified in the related Prospectus Supplement.
"Certificate Distribution Amount" means, unless otherwise specified in the
related Prospectus Supplement, with respect to a Series of Certificates
evidencing an interest in a Contract Pool, the amount of interest (calculated
as specified in such Prospectus Supplement) and the amount of Principal
(calculated as specified in such Prospectus Supplement) to be distributed to
Certificateholders on each Payment Date.
"Certificate Remittance Amount" means, unless otherwise specified in the
related Prospectus Supplement, with respect to a Series of Certificates
providing for sequential distributions in reduction of the Stated Balance of
the Classes of such Series, as of any Payment Date, the amount, if any, by
which the then outstanding Stated Balance of the Classes of Certificates of
such Series (before taking into account the amount of interest accrued on any
Class of Compound Interest Certificates to be added to the Stated Balance
thereof on such Payment Date) exceeds the Asset Value (as defined in the
related Prospectus Supplement) of the Contracts included in the Trust Fund for
such Series as of the end of the related Due Period.
"Certificates" means the Home Improvement Loan Pass-Through Certificates
issued pursuant to an Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder.
58
<PAGE>
"Company" means Green Tree Financial Corporation.
"Compound Interest Certificates" means Certificates on which interest may
accrue but not be paid for the period described in the related Prospectus
Supplement.
"Contract Pool" means, with respect to each Series of Certificates, the pool
of home improvement installment sales contracts and related promissory notes
transferred by the Company to the Trustee.
"Contract Rate" means, with respect to each Contract, the interest rate
specified in the Contract.
"Contracts" means home improvement installment sales contracts and related
promissory notes, including any and all rights to receive payments due
thereunder on and after the Cut-off Date and security interests in Manufactured
Homes purchased with the proceeds of such contracts.
"Cumulative Subordination Payments" means, with respect to a Series of
Certificates having a class of Subordinated Certificates, unless otherwise
provided in the related Prospectus Supplement as of any Payment Date, the
cumulative amount equal to (i) the total of all amounts distributed to the
Senior Certificateholders, exclusive of Advances made by the Servicer and the
Initial Deposit to the Reserve Fund, up to and including such Payment Date
minus (ii) the Senior Percentage times the Available Distribution Amount for
all Payment Dates up to and including such Payment Date.
"Cut-off Date" means the date specified in the related Prospectus Supplement
as the date from which principal and interest payments on the Contracts are
included in the Trust Fund.
"Determination Date" means, unless otherwise specified in the related
Prospectus Supplement, the third Business Day immediately preceding the related
Payment Date.
"Due Period" means, unless otherwise provided in a related Prospectus
Supplement, with respect to any Payment Date, the period beginning on the
second day of the month preceding the month of the Payment Date and ending on
the first day of the month of the Payment Date.
"Eligible Investments" means one or more of the investments specified in the
Agreement in which moneys in the Certificate Account and certain other accounts
are permitted to be invested.
"Excess Interest or Excess Interest Rate" means, with respect to any
Contract, the per annum percentage of the principal balance from time to time
outstanding, which may be retained by a seller, the Company or the Servicer or
allocated to a designated Class of Certificates, as specified in the related
Prospectus Supplement.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"Final Scheduled Remittance Date" means, with respect to a Series of
Certificates providing for sequential distributions in reduction of the Stated
Balance of the Classes of each Series, the date, based on the assumptions set
forth in the related Prospectus Supplement, on which the Stated Balance of all
Certificates of each Class shall have been reduced to zero.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means individual mortgage pass-through securities issued
or guaranteed by GNMA.
59
<PAGE>
"HUD" means the United States Department of Housing and Urban Development.
"Initial Deposit" means, with respect to a Series of Certificates, the
amount, if any, deposited into the Reserve Fund on the date of the initial
issuance of the Certificates.
"Interest Rate" means, with respect to a Series of Certificates providing for
sequential distributions in reduction of the Stated Balance of the Classes of
such Series, the interest payable on the Principal Balance outstanding of each
such Class.
"Late Collections" means, with respect to any Contract, amounts received
during any Due Period, whether as late payments of Monthly Payments, or as
Liquidation Proceeds, condemnation awards, proceeds of insurance policies or
otherwise, which represent late payments or collections of Monthly Payments due
but delinquent for a previous Due Period and not previously recovered.
"Liquidation Proceeds" means cash (including insurance proceeds) received in
connection with the foreclosure of a mortgage or deed of trust relating to the
real property securing a Contract.
"Loan-to-Value Ratio" means the loan-to-value ratio at the time of
origination of the Contract.
"Maximum Subordination Amount" means, with respect to a Series of
Certificates having a Class of Subordinated Certificates, the amount specified
in the related Prospectus Supplement, representing the maximum amount of
Cumulative Subordination Payments which may be required to be made over the
term of the related Agreement.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Contract.
"Obligor" means each person who is indebted under a Contract.
"Pass-Through Rate" means, as to a Certificate, the rate or rates of interest
thereon specified in the related Prospectus Supplement.
"Payment Date" means the date specified in the related Prospectus Supplement
for payments on the Certificates.
"Record Date" means the date specified in the related Prospectus Supplement
for the list of Certificateholders entitled to distributions on the
Certificates.
"REMIC" means a "real estate mortgage investment conduit" as defined in the
Code.
"Senior Certificates" means, with respect to each Series of Certificates, the
Class or Classes which have rights senior to another Class or Classes in such
Series.
"Senior Distribution Amount" means, with respect to a Series of Certificates
having Subordinated Certificates, as of each Payment Date and for each Class of
Senior Certificates, the amount due the holders of such Class of Senior
Certificates.
"Senior Percentage" means, with respect to a Series of Certificates having
Subordinated Certificates, the percentage specified in the related Prospectus
Supplement.
"Senior Shortfall" means, with respect to a Series of Certificates having
Subordinated Certificates, as of any date, to the extent not previously paid,
the aggregate of the amounts by which the Senior Distribution Amount for any
Payment Date exceeds the amount actually paid on such date.
60
<PAGE>
"Servicer" means, with respect to each Series of Certificates evidencing
interests in Contracts, the Servicer specified in the related Prospectus
Supplement.
"Servicing Fee" means the amount of the annual fee paid to the Servicer or
the Trustee as specified in the related Prospectus Supplement.
"Single Certificate" means, unless otherwise specified in the related
Prospectus Supplement, for each Class of Certificates of any Series, the
initial principal amount of Contracts evidenced by a single Certificate of such
Class.
"Stated Balance" means, with respect to a Series of Certificates providing
for sequential distributions in reduction of Stated Balance of the Classes of
such Series, the maximum specified dollar amount (exclusive of interest at the
related Pass-Through Rate) to which the Holder thereof is entitled from the
cash flow of the Trust Fund.
"Subordinated Certificates" means, with respect to each Series of
Certificates, the Class or Classes with rights subordinate to another Class or
Classes of such Series.
"Subordinated Percentage" means, with respect to a Series of Certificates
having Subordinated Certificates, the percentage specified in the related
Prospectus Supplement.
"Trust Fund" means, with respect to each Series of Certificates, the corpus
of the trust created by the related Agreement, to the extent described in such
Agreement, consisting of, among other things, Contracts, such assets as shall
from time to time be identified as deposited in the Certificate Account, FHA
Insurance proceeds, a reserve fund and other forms of credit enhancement, if
any.
"Trustee" means the Trustee for a Series of Certificates specified in the
related Prospectus Supplement.
"Variable Rate Certificates" means Certificates which evidence the right to
receive distributions of income at a variable Pass-Through Rate.
61
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
SEC registration fee.................................................... $345
Blue Sky fees and expenses.............................................. *
Accountant's fee and expenses........................................... *
Attorneys' fees and expenses............................................ *
Trustee's fees and expenses............................................. *
Printing and engraving expenses......................................... *
Rating Agency fee....................................................... *
Miscellaneous........................................................... *
----
Total............................................................... *
====
</TABLE>
- --------
* To be filed by amendment.
ITEM 15. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Statutes requires the Company to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person with respect to the Company,
against judgments, penalties, fines, including reasonable expenses, if such
person (1) has not been indemnified by another organization or employee benefit
plan for the same judgments, penalties, fines, including without limitations,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions; (2) acted in good faith; (3) received no
improper personal benefit, and statutory procedure has been followed in the
case of any conflict of interest by a director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in the person's performance in
the official capacity of director or, for a person not a director, in the
official capacity of officer, committee member, employee or agent, reasonably
believed that the conduct was in the best interests of the Company, or, in the
case of performance by a director, officer, employee or agent of the Company as
a director, officer, partner, trustee, employee or agent of another
organization or employee benefit plan, reasonably believed that the conduct was
not opposed to be best interests of the Company, unless otherwise limited by
the Articles of Incorporation or Bylaws of the Company. In addition, Section
302A.521, subd. 3, requires payment by the Company, upon written request, of
reasonable expenses in advance of final disposition in certain instances, upon
receipt of a written undertaking by the person to repay all amounts so paid if
it is ultimately determined that the person is not entitled to indemnification,
unless otherwise limited by the Articles of Incorporation or Bylaws of the
Company. A decision as to required indemnification is made by a disinterested
majority of the Board of Directors present at a meeting at which a
disinterested quorum is present, or by a designated committee of the Board, by
special legal counsel, by the shareholders, or by a court.
The Company's Articles of Incorporation provide that a director is not liable
to the Company or its shareholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its shareholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law; (iii) under Sections 302A.559 or 80A.23 of the
Minnesota Statutes; (iv) for any transaction from which the director derived an
improper personal benefit; or (v) for any act or omission occurring prior to
the date such indemnification provision became effective.
The Company maintains a directors' and officers' insurance policy.
II-1
<PAGE>
Pursuant to the form of Underwriting Agreement, a copy of which is included
as Exhibit 1.1 hereto, the Underwriters will agree, subject to certain
conditions, to indemnify the Company, its directors, certain of its officers
and persons who control the Company within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), against certain liabilities.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
*1.1 Proposed form of Underwriting Agreement
**4.1 Form of Pooling and Servicing Agreement
***5.1 Opinion and consent of Dorsey & Whitney as to legality
***8.1 Opinion of Dorsey & Whitney as to tax matters
****12.1 Computation of Ratio of Earnings to Fixed Charges
***23.1 Consent of KPMG Peat Marwick
***23.2 Consent of Dorsey & Whitney (included as part of Exhibit 5.1)
24.1 Power of attorney from officers and directors of the Registrant
signed by an attorney-in-fact
</TABLE>
- --------
* Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form S-
3 (File No. 33-52177), as amended, which became effective on March 31,
1994.
** Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Current Report on Form 8-K dated
April , 1994.
*** To be filed by amendment.
**** Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change to such information in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change in the information set forth in the registration
statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SAINT PAUL, STATE OF MINNESOTA, ON MAY 3, 1994.
Green Tree Financial Corporation
By /s/ John W. Brink
-----------------------------------
JOHN W. BRINK
Executive Vice President, Treasurer
and Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
* Chairman of the May 3, 1994
- ------------------------------------- Board and Chief
LAWRENCE M. COSS Executive Officer
(Principal
Executive Officer)
and Director
/s/ John W. Brink Executive Vice May 3, 1994
- ------------------------------------- President,
JOHN W. BRINK Treasurer and Chief
Financial Officer
(Principal
Financial Officer)
* Vice President and May 3, 1994
- ------------------------------------- Controller
ROBLEY D. EVANS (Principal
Accounting Officer)
* Director May 3, 1994
- -------------------------------------
RICHARD G. EVANS
Director May 3, 1994
- -------------------------------------
C. THOMAS MAY, JR.
* Director May 3, 1994
- -------------------------------------
W. MAX MCGEE
* Director May 3, 1994
- -------------------------------------
ROBERT S. NICKOLOFF
Director May 3, 1994
- -------------------------------------
ROBERT D. POTTS
Director May 3, 1994
- -------------------------------------
KENNETH S. ROBERTS
*By /s/ John W. Brink Attorney-in-fact May 3, 1994
----------------------------------
JOHN W. BRINK
II-4
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Richard G. Evans and John W. Brink,
with full power to each to act without the other, his true and lawful
attorney-in-fact and agent with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-3 relating to the registration of Home Improvement Loan
Pass-Through Certificates, and any or all amendments or post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, and to file the same with such state commissions and other
agencies as necessary, granting unto each such attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that each such attorney-in-fact and agent, or his substitute,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on this
3rd day of May, 1994, by the following persons.
/s/ Lawrence M. Coss /s/ W. Max McGee
- ---------------------------------- -----------------------------------
Lawrence M. Coss W. Max McGee
/s/ John W. Brink /s/ Robert S. Nickoloff
- ---------------------------------- -----------------------------------
John W. Brink Robert S. Nickoloff
/s/ Robley D. Evans /s/ Robert D. Potts
- ---------------------------------- -----------------------------------
Robley D. Evans Robert D. Potts
/s/ Richard G. Evans
- ----------------------------------
Richard G. Evans
