<PAGE>
Filed Pursuant to
Rule 424(b)(5)
File No. 33-64183
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 17, 1996)
$27,088,323 (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1996-E
7.20% PASS-THROUGH RATE
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
OCTOBER 1996)
-----------------
The Certificates for Home Improvement Loans, Series 1996-E offered hereby
(the "Certificates") will be issued by, and evidence beneficial ownership
interests in, Home Improvement Loan Trust 1996-E (the "Trust"). The Trust will
be created by Green Tree Financial Corporation (the "Company") pursuant to a
Pooling and Servicing Agreement, dated as of September 1, 1996 (the
"Agreement") between the Company and First Trust National Association, as
Trustee (the "Trustee"). The Trust property will consist primarily of a pool
of home improvement contracts and promissory notes (the "Contracts"),
including the right to receive payments due on the Contracts on and after
September 1, 1996 (or the date of origination thereof, if later) (the "Cut-off
Date"), and amounts held for the Trust in the Certificate Account. The
Contracts are not secured by any mortgage or other lien on the related
improved real estate.
The Certificateholders will have the benefit of a limited guaranty of the
Company (the "Limited Guaranty") to protect against losses that would
otherwise be borne by the Certificateholders, subject to the limit of the
Guaranty Amount (as described herein). To the extent that funds in the
Certificate Account are insufficient to distribute to the holders of the
Certificates the Formula Distribution Amount (as described herein), the
Company will be obligated (subject to the limit of the Guaranty Amount) to pay
the Guaranty Payment (as described herein). The Guaranty Amount initially
equals $2,708,832 and will be reduced thereafter as described herein. See
"Description of the Limited Guaranty" herein.
Principal and interest with respect to the Certificates are distributable on
the fifteenth day of each month or, if such fifteenth day is not a business
day, the first business day thereafter, beginning in October 1996. The Company
will act as servicer (in such capacity, the "Servicer") of the Contracts. The
final scheduled Payment Date of the Certificates is in September 2017. See
"Description of the Certificates" herein and in the Prospectus.
(Continued on next page)
-----------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 9 OF THE
ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE COMPANY, EXCEPT TO THE LIMITED
EXTENT DESCRIBED HEREIN AND IN THE PROSPECTUS. THE CERTIFICATES DO
NOT REPRESENT OBLIGATIONS OF, AND WILL NOT BE INSURED OR
GUARANTEED BY, ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC(1) DISCOUNT COMPANY(1)(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Certificate........................... 100% .45% 99.55%
- ------------------------------------------------------------------------------------------
Total..................................... $27,088,323.00 $121,897.45 $26,966,425.55
- ------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Plus accrued interest from and including September 30, 1996.
(2) Before deducting expenses, estimated to be $170,000.
-----------------
The Certificates are offered subject to prior sale, when, as and if issued
by the Trust and accepted by the Underwriter and subject to its right to
reject orders in whole or in part. It is expected that delivery of the
Certificates will be made in book-entry form only through the Same Day Funds
Settlement system of The Depository Trust Company on or about September 30,
1996 (the actual such date being hereinafter referred to as the "Closing
Date").
-----------------
MERRILL LYNCH & CO. LEHMAN BROTHERS
-----------------
The date of the Prospectus Supplement is September 17, 1996
<PAGE>
(Continued from previous page)
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Lehman Brothers Inc. (the "Underwriters") expect, but are not
obligated, to make a market in the Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Until December 15, 1996, all dealers effecting transactions in the
Certificates, whether or not participating in this distribution, may be
required to deliver a Prospectus. This delivery requirement is in addition to
the obligation of dealers to deliver a Prospectus Supplement and a Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions. Upon receipt of a request by an investor, or his or her
representative, within the period during which there is a Prospectus delivery
obligation, the Company or the Underwriters will transmit or cause to be
transmitted promptly, without charge, and in addition to any such delivery
requirements, a paper copy of a Prospectus Supplement and a Prospectus, or a
Prospectus Supplement and a Prospectus encoded in an electronic format.
The Certificates offered hereby constitute a separate Series of Certificates
for Home Improvement Loans being offered by the Company from time to time
pursuant to the Prospectus. This Prospectus Supplement does not contain
complete information about the offering of the Certificates. Additional
information is contained in the Prospectus and purchasers are urged to read
both this Prospectus Supplement and the Prospectus in full. Sales of the
Certificates may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus. To the extent that any statements in
this Prospectus Supplement conflict with statements contained in the
Prospectus, the statements in this Prospectus Supplement shall control.
S-2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them in the
Prospectus and in Article I of the Agreement, a copy of which is available upon
request made to the Company.
Securities Offered............ Certificates for Home Improvement Loans, Series
1996-E (the "Certificates"). The Certificates
will be issued by, and evidence beneficial
ownership interests in, Home Improvement Loan
Trust 1996-E (the "Trust"), the property of
which consists primarily of the Contracts,
having an aggregate principal balance as of
the Cut-off Date (the "Cut-off Date Pool
Principal Balance") of $27,088,323.42, and all
rights, benefits, obligations and proceeds
arising therefrom or in connection therewith.
Trustee....................... First Trust National Association, St. Paul,
Minnesota.
Seller and Servicer........... Green Tree Financial Corporation.
Payment Date.................. The fifteenth day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing in October 1996.
Cut-off Date.................. September 1, 1996 (or the date of origination
of the Contract, if later).
Record Date................... The Business Day immediately preceding the
related Payment Date.
Original Series 1996-E
Certificate Principal
Balance......................
$27,088,323 (approximate).
Pass-Through Rate............. 7.20% per annum.
Description of Certificates... The Certificates are issued in a single Class
by, and are payable solely from the property
of, the Trust. The undivided percentage
interest of the holder of any Certificate in
the distributions to be made in respect of the
Certificates (the "Percentage Interest") will
be equal to the percentage obtained by
dividing the denomination specified on such
Certificate by the Original Series 1996-E
Certificate Principal Balance.
Distributions................. Holders of the Certificates will be entitled to
receive on each Payment Date, to the extent
that the Amount Available in the Certificate
Account (together with the Guaranty Payment,
as described below) is sufficient therefor,
distributions allocable to interest and
principal, as described herein. Distributions
will be made on each Payment Date to holders
of record of the Certificates on the related
Record Date, except that the final
distribution in respect of the Certificates
will be made only upon presentation and
surrender of the Certificates at the office or
agency appointed by the Trustee for that
purpose in Minneapolis or St. Paul, Minnesota.
The Amount Available for the Trust on each
Payment Date generally includes payments on
the Contracts due during the previous calendar
month (the "Due Period")
S-3
<PAGE>
and received on or prior to the Determination
Date, prepayments and other unscheduled
collections received on the Contracts during
such Due Period, any Advances (as defined
herein) made by the Servicer or the Trustee
with respect to such Due Period and any
amounts paid by the Company to repurchase a
Contract due to a breach of representation or
warranty.
Distributions on the
Certificates
Interest.................. Interest on the Certificates will be payable on
each Payment Date in an amount equal to one
month's interest at the Pass-Through Rate on
the Aggregate Certificate Principal Balance
(as defined below) immediately prior to such
Payment Date; provided that, in the case of
the first Payment Date, such interest will be
payable only for the period from the Closing
Date to but excluding October 15, 1996. The
"Aggregate Certificate Principal Balance" with
respect to any Payment Date will equal the
Original Series 1996-E Certificate Principal
Balance minus all distributions previously
made in respect of principal on the
Certificates. Accrued interest will be
computed on the basis of a 360-day year of
twelve 30-day months.
In the event that, on a particular Payment
Date, the Amount Available in the Certificate
Account, together with any Guaranty Payment,
is not sufficient to make a full distribution
of interest to the Certificateholders, the
amount of interest to be distributed in
respect of the Certificates will be allocated
among the outstanding Certificates pro rata in
accordance with their respective entitlements
to interest, and the amount of the shortfall
will be carried forward and added to the
amount such holders will be entitled to
receive on the next Payment Date. Any such
amount so carried forward will bear interest
at the Pass-Through Rate, to the extent
legally permissible. See "Description of the
Certificates."
Principal................. On each Payment Date, the Certificateholders
will be entitled to receive as distributions
of principal, to the extent of the Amount
Available in the Certificate Account after
payment of all interest payable on the
Certificates, an amount equal to the sum (such
sum being hereinafter referred to as the
"Monthly Principal") of (a) the amount of
regular principal payments on Contracts paid
or applied during the prior Due Period; (b)
the amount of Principal Prepayments received
on Contracts during the prior Due Period; (c)
the principal portion of all payments on
Contracts that were Delinquent Payments as of
the end of the prior Due Period; (d) the
unpaid principal balance of all Contracts that
became Liquidated Contracts with respect to
the prior Due Period; (e) the principal
portion of the Repurchase Price paid by the
Company to repurchase Contracts for breach of
representations and warranties with respect to
the prior Due Period, as described in this
Summary under "Repurchases by
S-4
<PAGE>
the Company;" (f) the amount of any reduction
in the principal amount deemed owed on any
Contract as a result of the Obligor's
bankruptcy; and (g) any principal amount
described in clauses (a) through (f) above
that was not previously distributed because of
an insufficient amount of funds available in
the Certificate Account and the Company either
was not obligated to or failed to pay such
amount under the Limited Guaranty.
Limited Guaranty.............. In order to mitigate the effect of liquidation
losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on
each Payment Date (subject to the limit of the
Guaranty Amount) the amount equal to the
Guaranty Payment, if any, under the Limited
Guaranty of the Company. The Guaranty Payment
for any Payment Date will equal the amount, if
any, by which the Formula Distribution Amount
(equal to one month's interest at the Pass-
Through Rate on the Aggregate Certificate
Principal Balance plus the Monthly Principal
for such Payment Date) exceeds the Amount
Available in the Certificate Account for such
Payment Date.
The "Guaranty Amount" initially equals
$2,708,832. Thereafter, on any Payment Date,
the Guaranty Amount will equal the lesser of
(i) $2,708,832 minus all Guaranty Payments
previously made by the Company, or (ii) the
Aggregate Certificate Principal Balance on
such Payment Date plus three months of
interest at the Pass-Through Rate on the
Aggregate Certificate Principal Balance as of
such Payment Date.
The Limited Guaranty will be an unsecured
general obligation of the Company and will not
be supported by any letter of credit or other
credit enhancement arrangement.
Registration of Certificates.. The Certificates initially will each be
represented by one or more certificates
registered in the name of Cede & Co. ("Cede")
as the nominee of The Depository Trust Company
("DTC"), and will only be available in the
form of book-entries on the records of DTC and
participating members thereof. Certificates
will otherwise be issued in definitive form
only under the limited circumstances described
herein. All references herein to the rights of
"holders" or "Certificateholders" shall
reflect the rights of beneficial owners as
they may indirectly exercise such rights
through DTC and participating members thereof,
except as otherwise specified herein. See
"Description of the Certificates--Registration
of the Certificates" herein.
Contracts..................... The Contracts consist of 5,141 conventional and
42 FHA-insured home improvement contracts and
promissory notes (the "Contracts"), including
any and all rights to receive payments due
thereunder on and after the Cut-off Date. The
obligations of the Obligor under each Contract
are unsecured and such Contracts constitute
"Unsecured Contracts" as described in the
Prospectus. The Contracts arise from loans
S-5
<PAGE>
relating to the improvement of real estate
located in 49 states and the District of
Columbia. The contractual annual percentage
rate of interest (the "Contract Rate") on the
Contracts as of the Cut-off Date ranges from
10.00% to 17.99% with a weighted average of
14.41%. The Contracts had a weighted average
term to scheduled maturity, as of origination,
of 87 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
85 months. The final scheduled payment date on
the Contract with the latest scheduled
maturity is in September 2016. See
"The Contracts" herein.
FHA Insurance................. Approximately .63% of the Contracts by
principal balance as of the Cut-Off Date are
insured by FHA against Obligor defaults
pursuant to Title I of the National Housing
Act ("FHA Insurance"). See "Description of FHA
Insurance" in the Prospectus.
Advances...................... The Servicer is obligated to make Advances each
month of any scheduled payments on the
Contracts that were due but not received
during the prior Due Period. The Servicer will
be entitled to reimbursement of an Advance
from subsequent funds available therefor in
the Certificate Account. The Servicer will be
obligated to make an Advance only to the
extent that it determines that such Advance
will be recoverable from subsequent funds
available therefor in the Certificate Account.
If the Servicer fails to make any Advance
required under the Agreement, the Trustee will
be obligated (subject to certain conditions)
to make such Advance. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Repurchase or Substitution The Company has agreed to repurchase any
Obligations.................. Contract in which the Trust's or the
Certificateholders' interest 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 of
the day it was or should have been discovered
by the Servicer or the Trustee. In lieu of
repurchasing a Contract, during the 120 day
period following the Closing Date, the Company
may, at its option, substitute another
contract for the Contract that it is otherwise
obligated to repurchase. See "Description of
the Certificates--Conveyance of Contracts"
herein and in the Prospectus.
Repurchase Option............. The Servicer will have the option to repurchase
all of the outstanding Contracts on any
Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-
off Date Pool Principal Balance. See
"Description of the Certificates--Repurchase
Option" herein and in the Prospectus.
Monthly Servicing Fee......... The Servicer will be entitled to monthly
compensation for servicing the Contracts equal
to 1/12 of the product of .75% and the Pool
Scheduled Principal Balance (the "Monthly
Servicing Fee"). See "Description of the
Certificates--Servicing Compensation and
Payment of Expenses" and "Rights upon an Event
of Termination" herein.
S-6
<PAGE>
Tax Status.................... In the opinion of counsel to the Company, the
Trust will be classified as a grantor trust
for federal income tax purposes and not as an
association which is taxable as a corporation.
Each Certificateholder will be treated for
such purposes as the owner of an undivided
interest in the Contracts. Accordingly, each
such Certificateholder must report on its
federal income tax return its share of the
income from the Contracts and, subject to
limitations on deductions by individuals,
estates and trusts, may deduct its share of
the reasonable fees paid by the Trust,
determined in accordance with such
Certificateholder's tax accounting method. See
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA Considerations.......... No transfer of any Certificates will be
permitted to be made to any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
to the Internal Revenue Code of 1986, as
amended (the "Code"), unless the opinion of
counsel described under "ERISA Considerations"
herein and in the Prospectus is delivered to
the Trustee. See "ERISA Considerations" herein
and in the Prospectus.
Rating........................ It is a condition precedent to the issuance of
the Certificates that the Certificates be
assigned a rating not lower than A- by
Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ("S&P") and
"A" by Fitch Investors Service, L.P.
("Fitch"). S&P's rating of the Certificates
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal.
The rating of the Certificates is based in
part on an assessment of the Company's ability
to make payments under the Limited Guaranty.
Fitch's rating of the Certificates addresses
the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled.
Any reduction in S&P's or Fitch's rating of
the Company's debt securities may result in a
similar reduction in the rating of the
Certificates. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal
at any time by the assigning rating agency.
See "Ratings" in the Prospectus.
The Company has not requested a rating of the
Certificates from any rating agencies other
than S&P and Fitch. There can be no assurance
as to whether any other rating agency will
rate the Certificates or, if one does, what
rating would be assigned by such rating
agency.
Legal Investment The Certificates will not constitute "mortgage
Considerations............... related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because the Contracts are not
secured by liens on real estate, 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. Investors should
consult with their own legal advisors in
determining whether and to what extent the
Certificates constitute legal investments for
them.
S-7
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Certificates:
Limited Historical Data With Respect to Home Improvement Loans. The Company
began purchasing and servicing FHA-insured home improvement contracts in April
1989, and conventional home improvement contracts in September 1992, and thus
has limited historical experience with respect to the performance, including
the rate of prepayments of home improvement loans. Accordingly, the Company's
delinquency experience and loan loss and liquidation experience set forth under
"The Contracts" herein may not be indicative of the performance of the
Contracts.
Delinquency and Loan Default Rates on Unsecured Home Improvement Loans. Based
on the Company's experience to date, home improvement loans that are not
secured by any lien on the improved real estate have experienced, and are
expected to continue to experience, a higher rate of delinquency and loan
default as compared with the Company's servicing portfolio of FHA-insured and
other secured home improvement loans. Based on the Company's experience to
date, contract defaults on unsecured home improvement contracts typically
result in chargeoffs that equal or exceed 100% of the outstanding principal
balance of the contract.
STRUCTURE OF THE TRANSACTION
On or about September 30, 1996 (the "Closing Date"), the Company will
establish the Trust pursuant to a Pooling and Servicing Agreement to be dated
as of September 1, 1996 (the "Agreement"), between the Company, as Seller and
Servicer, and the Trustee.
The Certificates will be issued by the Trust, the corpus of which will
consist primarily of the Contracts, including all rights to receive payments
due on the Contracts on and after September 1, 1996 (or the date of
origination thereof, if later) (the "Cut-off Date"), all rights under FHA
Insurance with respect to the FHA-insured Contracts, amounts held for the Trust
in the Certificate Account (as defined below), and the Limited Guaranty of the
Company described in "Description of the Limited Guaranty" herein.
Payments and recoveries in respect of principal and interest on the Contracts
will be paid into a separate trust account maintained at an Eligible
Institution (initially First Bank National Association, Minneapolis, Minnesota)
in the name of the Trust (the "Certificate Account"), no later than one
Business Day after receipt. Payments deposited in the Certificate Account in
respect of each Due Period will be applied on the fifteenth day of the next
month (or, if such day is not a business day, the next succeeding business day)
(each a "Payment Date") to make the distributions to the Certificateholders as
of the immediately preceding Record Date as described under "Description of the
Certificates--Distributions on the Certificates" herein, and to pay certain
monthly fees to the Servicer as compensation for its servicing of the Contracts
(the "Monthly Servicing Fee") and to pay any remaining amounts in the
Certificate Account to the Company as compensation for providing the Limited
Guaranty (the "Guaranty Fee").
The Servicer will be obligated to advance any scheduled payments on the
Contracts that were due but not received during the prior Due Period
("Advances"). The Servicer will be entitled to reimbursement of an Advance from
payments on or liquidation proceeds of the related Contract and then from other
funds in the Certificate Account. The Servicer will not be required to make any
Advance to the extent that it does not expect to recoup the Advance from
subsequent collections on the Contract or from liquidation proceeds thereof. If
the Servicer fails to make any Advance required under the Agreement, the
Trustee is obligated (subject to certain conditions) to make such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, and (d) the Limited Guaranty. The
Company is obligated under the Agreement to repurchase at the Repurchase Price
(as defined herein), or, at its option, to substitute another contract for, any
Contract on the first Payment Date which is more than 90 days after the Company
becomes aware, or the Company receives written notice from the Trustee, of any
breach of any such representation and warranty in the Agreement that materially
adversely affects the Certificateholders' interest in such Contract if such
breach has not been cured prior to such date. The Agreement also provides that
the Company has certain obligations to repurchase Contracts and to indemnify
the Trustee and Certificateholders with respect to certain other matters.
S-8
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and promissory notes,
providing warehouse financing for the purchase of contracts and other costs of
maintaining such contracts until they are pooled and sold to other investors.
THE CONTRACTS
Each Contract is a home improvement contract originated by a Company-approved
home improvement contractor and purchased by the Company, or a home improvement
promissory note originated by the Company directly. Each Contract finances
improvements to a one- to four-family residential property, an owner-occupied
condominium or town house or a manufactured home which either qualifies as real
estate under state law or is located in a Company-approved park. The Contracts
are not secured by any mortgage or other lien on or security interest in the
related improved real estate or any other real or personal property.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Contract is fully amortizing with a fixed
contractual rate of interest and provides for level payments over the term of
such loan, computed on the simple interest method, (b) each Contract has its
last scheduled payment due no later than September 2016 and (c) each FHA-
insured Contract was originated in accordance with applicable FHA regulations
and is insured, without set-off, surcharge or defense, by FHA Insurance. The
Contracts were originated or acquired by the Company in the ordinary course of
the Company's business. A detailed listing of the Contracts is appended to the
Agreement. See "Description of the Certificates" herein and in the Prospectus.
Each of the Contracts has a Contract Rate of at least 10.00% per annum and not
more than 17.99% and the weighted average of the Contract Rates of the
Contracts as of the Cut-off Date is 14.41%. As of the Cut-off Date, the
Contracts had remaining maturities of at least 19 months but not more than 240
months and original maturities of at least 24 months but not more than 240
months. The Contracts had a weighted average term to scheduled maturity, as of
origination, of 87 months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of 85 months. The average principal balance per
Contract as of the Cut-off Date was $5,226.38 and the principal balances on the
Contracts as of the Cut-off Date ranged from $1,089.28 to $15,000.00. The
Contracts arise from loans relating to real property located in 49 states and
the District of Columbia. By principal balance as of the Cut-off Date,
approximately 15.78% of the Contracts financed improvements to real estate
located in California. No other state represented 10% or more of the Cut-off
Date Pool Principal Balance. Substantially none of the Contracts provide for
recourse to the originating contractor in the event of a default by the
Obligor.
S-9
<PAGE>
Set forth below is a description of certain additional characteristics of the
Contracts.
GEOGRAPHICAL DISTRIBUTION OF IMPROVED REAL ESTATE
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
% OF CONTRACT POOL BY AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Alabama................. 23 .44% $ 110,174.89 .41%
Alaska.................. 5 .10 24,164.36 .09
Arizona................. 278 5.36 1,350,840.13 4.99
Arkansas................ 38 .73 136,103.36 .50
California.............. 848 16.37 4,276,609.30 15.78
Colorado................ 151 2.91 741,442.94 2.74
Connecticut............. 146 2.82 780,570.57 2.88
Delaware................ 24 .46 137,157.60 .51
District of Columbia.... 4 .08 28,193.83 .10
Florida................. 179 3.45 849,388.77 3.14
Georgia................. 71 1.37 354,661.57 1.31
Idaho................... 10 .19 47,813.17 .18
Illinois................ 99 1.91 459,734.92 1.70
Indiana................. 59 1.14 333,235.24 1.23
Iowa.................... 39 .75 185,700.37 .69
Kansas.................. 46 .89 225,969.57 .83
Kentucky................ 44 .85 302,795.22 1.12
Louisiana............... 22 .42 129,792.76 .48
Maine................... 87 1.68 418,913.94 1.55
Maryland................ 77 1.49 391,269.21 1.44
Massachusetts........... 235 4.53 1,702,247.95 6.27
Michigan................ 198 3.82 960,621.42 3.55
Minnesota............... 86 1.66 446,449.75 1.65
Mississippi............. 27 .52 140,100.96 .52
Missouri................ 106 2.05 451,505.42 1.67
Montana................. 47 .91 197,685.04 .73
Nebraska................ 30 .58 135,262.60 .50
Nevada.................. 164 3.16 840,112.82 3.10
New Hampshire........... 53 1.02 271,211.64 1.00
New Jersey.............. 210 4.05 1,186,915.28 4.38
New Mexico.............. 41 .79 243,191.10 .90
New York................ 193 3.72 1,181,579.73 4.36
North Carolina.......... 97 1.87 563,973.03 2.08
North Dakota............ 13 .25 64,481.97 .24
Ohio.................... 105 2.03 580,282.18 2.14
Oklahoma................ 62 1.20 304,645.32 1.12
Oregon.................. 79 1.52 361,927.69 1.34
Pennsylvania............ 172 3.32 1,063,717.19 3.93
Rhode Island............ 29 .56 180,956.99 .67
South Carolina.......... 39 .75 209,895.86 .77
South Dakota............ 28 .54 121,425.50 .45
Tennessee............... 126 2.43 594,943.00 2.20
Texas................... 445 8.60 2,326,112.80 8.58
Utah.................... 19 .37 85,885.83 .32
Vermont................. 44 .85 222,111.89 .82
Virginia................ 94 1.81 451,900.11 1.67
Washington.............. 93 1.79 437,177.73 1.61
West Virginia........... 27 .52 146,677.69 .54
Wisconsin............... 47 .91 210,252.31 .78
Wyoming................. 24 .46 120,540.90 .44
----- ------- -------------- ------
Total............... 5,183 100.00% $27,088,323.42 100.00%
===== ======= ============== ======
</TABLE>
S-10
<PAGE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
1993.................... 1 $ 8,767.69 .03%
1995.................... 76 400,729.11 1.48
1996.................... 5,106 26,678,826.62 98.49
----- -------------- ------
Total............... 5,183 $27,088,323.42 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ------------------- ------------------- ----------------------
<S> <C> <C> <C>
Less than $10,000....... 4,893 $23,613,512.05 87.17%
$10,000-$19,999......... 290 3,474,811.37 12.83
----- -------------- ------
Total............... 5,183 $27,088,323.42 100.00%
===== ============== ======
</TABLE>
CONTRACT RATES
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
BY CONTRACT RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ ------------------- ------------------- ----------------------
<S> <C> <C> <C>
9.00001%-10.00000%..... 29 $ 95,358.61 .35%
10.00001%-11.00000%..... 1 9,847.99 .04
11.00001%-12.00000%..... 1 8,187.04 .03
12.00001%-13.00000%..... 1,584 7,739,908.18 28.57
13.00001%-14.00000%..... 1,152 5,877,830.89 21.70
14.00001%-15.00000%..... 1,247 7,139,270.85 26.36
15.00001%-16.00000%..... 968 5,365,850.64 19.81
16.00001%-17.00000%..... 112 531,881.52 1.96
Over 17.00000%.......... 89 320,187.70 1.18
----- -------------- ------
Total............... 5,183 $27,088,323.42 100.00%
===== ============== ======
</TABLE>
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
MONTHS REMAINING TO AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
Less than 31............ 283 $ 875,439.55 3.23%
31 to 60................ 2,512 10,636,983.96 39.27
61 to 90................ 482 2,374,932.07 8.77
91 to 120............... 1,893 13,078,340.97 48.28
121 to 150.............. 4 29,891.71 .11
151 to 180.............. 8 82,322.16 .30
181 to 210.............. 0 0 .00
211 to 240.............. 1 10,413.00 .04
----- -------------- ------
Total............... 5,183 $27,088,323.42 100.00%
===== ============== ======
</TABLE>
S-11
<PAGE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following table sets forth the delinquency experience for the periods
indicated of the portfolio of unsecured home improvement loans serviced by the
Company (other than Contracts already in liquidation).
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ---------------------
1996 1995 1994 1993
----------- ------ ------ -----
<S> <C> <C> <C> <C>
Number of Contracts Outstanding(1).......... 20,999 18,411 10,397 3,148
Number of Contracts Delinquent(2)(3)
30-59 Days................................ 165 115 50 12
60-89 Days................................ 63 44 18 0
90 Days or More........................... 42 14 4 5
------ ------ ------ -----
Total Contracts Delinquent.................. 270 173 72 17
Delinquencies as a Percent of Contracts Out-
standing(4)................................ 1.29% .94% .69% .54%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
The following table sets forth the loan default and loss experience for the
periods indicated of the portfolio of unsecured home improvement loans
serviced by the Company.
LOAN DEFAULT AND LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
SIX MONTHS ENDED DECEMBER 31,
ENDED JUNE 30, ----------------------------------
1996 1995 1994 1993
-------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1)....... $105,534 $97,544 $59,329 $19,111
Contract Defaults(2)......... 1.02% 1.38% .89% .00%
Net Losses:
Dollars(3)................. $ 1,316 $ 1,710 $ 578 $ 0
Percentage(4).............. 1.25% 1.75% .97% 0%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has submitted a claim to FHA (in the case of FHA-insured contracts), the
Company has commenced foreclosure or enforcement proceedings, or the
contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. The calculation of net loss on FHA-insured contracts includes
unpaid interest to the date of FHA claim submission and all expenses of
liquidation, and reflects proceeds of FHA Insurance claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
S-12
<PAGE>
The data presented in the foregoing tables are for illustrative purposes only
and there is no assurance that the delinquency, loan default and loss
experience of the Contracts will be similar to that set forth above. Moreover,
because the Company began originating and purchasing unsecured home improvement
contracts in September 1992, it is likely that the Company's portfolio is not
yet sufficiently seasoned to show the delinquencies and losses that would be
experienced if such data were collected over a longer period of time. The
delinquency, loan default and loss experience of home improvement loans may be
adversely affected by a downturn in regional or local economic conditions.
Regional and local economic conditions are often volatile, and no predictions
can be made regarding future economic conditions in any particular area.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Contract, to reduce the outstanding principal balance on the
Contracts) will increase the yield on Certificates purchased at a price less
than the undivided ownership interest in the aggregate principal balance of the
Contracts represented by such Certificates and will decrease the yield on
Certificates purchased at a price greater than the undivided ownership interest
in the aggregate principal balance of the Contracts represented by such
Certificates. Because the Contracts have scheduled due dates throughout the
calendar month, and because all Principal Prepayments are passed through to
Certificateholders 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" herein) will affect the timing of principal distributions on
the Certificates. Prepayments on mortgage loans and other consumer installment
obligations are commonly measured relative to a prepayment standard or model.
The Constant Prepayment Rate ("CPR") model assumes that the outstanding
principal balance of a pool of loans prepays each month at a specified constant
annual rate. The Certificates were priced using a prepayment assumption of 20%
CPR. 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.
The amount of interest to which the Certificateholders are entitled on any
Payment Date will be the product of the Pass-Through Rate and the Aggregate
Certificate Principal Balance immediately following the preceding Payment Date,
based on a 360-day year consisting of 12 months of 30 days each.
Certificateholders will receive payments in respect of principal on each
Payment Date to the extent that funds available in the Certificate Account are
sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on the Certificates." As required by applicable
state laws, interest paid by Obligors on the Contracts is computed according to
the simple interest method. Principal and interest payable on the Certificates
will be computed according to the actuarial method.
The final scheduled payment date on the Contract with the latest maturity is
in September 2016.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average life of the Certificates
under the stated assumptions and is not a prediction of the prepayment rate
that might actually be experienced by the Contracts.
S-13
<PAGE>
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the Contracts is paid. Principal
payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
Prepayments on Contracts may be measured by a prepayment standard or model.
The model used in this Prospectus Supplement, the Constant Prepayment Rate
model, is described above.
As used in the following table, "0% CPR" assumes that none of the Contracts
are prepaid before maturity, "20% CPR" assumes the Contracts will prepay at a
CPR of 20%, and so forth.
There is no assurance, however, that prepayment of the Contracts will
conform to any level of the CPR, and no representation is made that the
Contracts will prepay at the prepayment rates shown or any other prepayment
rate. The rate of principal payments on pools of home improvement contracts is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates and the rate at which homeowners sell
their homes or default on their contracts. Other factors affecting prepayment
of contracts include changes in obligors' housing needs, job transfers,
unemployment and obligors' net equity in their homes. In the case of home
improvement contracts secured by real estate, in general, if prevailing
interest rates fall significantly below the interest rates on such home
improvement contracts, the home improvement contracts are likely to be subject
to higher prepayment rates than if prevailing interest rates remained at or
above the rates borne by such home improvement contracts. Conversely, if
prevailing interest rates rise above the interest rates on such home
improvement contracts, the rate of prepayment would be expected to decrease.
The percentages and weighted average lives in the following table were
determined assuming that: (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the CPR set forth in the table; (ii) the Servicer
exercises its option to repurchase the Contracts, as described under
"Description of the Certificates--Repurchase Option"; (iii) the Contracts
will, as of the Cut-off Date, be grouped into four pools having the additional
characteristics set forth below under "Assumed Contract Characteristics"; (iv)
the Certificates have an Original Series 1996-E Certificate Principal Balance
of $27,088,323 and a Pass-Through Rate of 7.20%; (v) no interest shortfalls
will arise in connection with prepayments in full of the Contracts; (vi) no
delinquencies or losses are experienced on the Contracts; (vii) distributions
are made on the Certificates on the 15th day of each month, commencing in
October 1996; and (viii) the Certificates are issued on September 30, 1996. No
representation is made that the Contracts will not experience delinquencies or
losses.
ASSUMED CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
CUT-OFF DATE REMAINING TERM ORIGINAL TERM
POOL PRINCIPAL WEIGHTED AVERAGE TO MATURITY TO MATURITY
POOL BALANCE CONTRACT RATE (MONTHS) (MONTHS)
---- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1............ $ 2,762,489.21 14.45% 30 32
2............ 10,122,359.90 14.32 58 59
3............ 14,080,847.44 14.47 114 116
4............ 122,626.87 14.79 173 175
</TABLE>
It is not likely that the Contracts will prepay at any constant percentage
of the CPR to maturity or that all of the Contracts will prepay at the same
rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
S-14
<PAGE>
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of the Certificates and sets forth the
percentages of the Original Series 1996-E Certificate Principal Balance that
would be outstanding after each of the dates shown, at the indicated
percentages of the CPR.
PERCENTAGE OF THE ORIGINAL SERIES 1996-E CERTIFICATE PRINCIPAL BALANCE AT
THERESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 10% 15% 20% 25% 30%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
September 15, 1997................................ 79 75 70 66 61
September 15, 1998................................ 60 53 47 41 36
September 15, 1999................................ 44 37 31 25 21
September 15, 2000................................ 31 25 19 15 11
September 15, 2001................................ 20 15 11 0 0
September 15, 2002................................ 15 11 0 0 0
September 15, 2003................................ 10 0 0 0 0
September 15, 2004................................ 0 0 0 0 0
Weighted Average Life (1) (years)................. 3.02 2.59 2.23 1.95 1.73
</TABLE>
- --------
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of cash distributions in reduction of the principal balance of
such Certificate by the number of years from the date of issuance of such
Certificate to the stated Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial principal balance of such Certificate.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1995, had
stockholders' equity of approximately $925,022,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and servicing centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989 and conventional home improvement
loans in September 1992. The Company also purchases, pools and services
installment sales contracts for various consumer products. 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, which are incorporated by reference in
this Prospectus Supplement and in the Prospectus, are available from the
Company upon written request made to the Company.
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
S-15
<PAGE>
GENERAL
The Certificates will be issued in fully registered, certificated form only
in denominations of $1,000 or any integral multiple in excess thereof, except
for one Certificate with a denomination representing the remainder of the
Original Principal Balance. The Certificates initially will be represented by
one or more certificates registered in the name of Cede & Co. as the nominee of
DTC, and will only be available in the form of book-entries on the records of
DTC and participating members thereof. See "Description of the Certificates--
Registration of the Certificates" herein. The Trust consists primarily of the
Contracts and the rights, benefits, obligations and proceeds arising therefrom
or in connection therewith, all rights under FHA Insurance with respect to the
FHA-insured Contracts, amounts held in the Certificate Account and the Limited
Guaranty of the Company.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in October 1996. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of the Trust may request payment by wire transfer). Final payments
will be made only upon tender of the Certificates to the Trustee for
cancellation.
CONVEYANCE OF CONTRACTS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Contracts, including all principal and interest
received on or with respect to such Contracts (other than receipts of principal
and interest due on such Contracts before the Cut-off Date). On behalf of the
Trust, as the issuer of the Certificates offered hereby, the Trustee,
concurrently with such conveyance, will execute and deliver the Certificates to
or upon the order of the Company. The Contracts are described on a list
delivered to the Trustee and certified by a duly authorized officer of the
Company. Such list includes 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. The list will be attached as
an exhibit to the Agreement and will be available for inspection by any
Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company's internal audit
department will have completed a review of all the Contract files, confirming
the accuracy of each item on 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
Certificate Account in an amount sufficient to offset such discrepancy.
The Trustee 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 conveyance and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such conveyance and assignment.
Briggs and Morgan, Professional Association, counsel to the Company, will
render an opinion to the Trustee that the transfer of the Contracts from the
Company to the Trust 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 were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust 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.
S-16
<PAGE>
The Company will make certain representations and warranties in the Agreement
with respect to each Contract, 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 contractor's 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 or
rescinded; (j) all parties to each Contract had full legal capacity to execute
such Contract; (k) 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; (l) 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; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level monthly payments over the term of such Contract; (n) the description
of each Contract set forth in the list delivered to the Trustee is true and
correct; (o) there is only one original of each Contract; and (p) each Contract
was originated or purchased in accordance with the Company's then-current
underwriting guidelines.
The Company will also make certain representations and warranties with
respect to the Contracts in the aggregate, including that (i) the Cut-off Date
Pool Principal Balance equals at least the Original Series 1996-E Certificate
Principal Balance, and each Contract has a contractual rate of interest of at
least 10.00%; (ii) no Contract had a remaining term to maturity at origination
of more than 240 months; (iii) no more than 5% of the Contracts, by principal
balance as of the Cut-off Date, related to properties located in an area with
the same zip code; and (iv) no adverse selection procedures were employed in
selecting the Contracts from the Company's portfolio.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed 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 of the day it was or should have been discovered by the
Servicer or the Trustee. The "Repurchase Price," with respect to any Contract
to be so repurchased or with respect to a Liquidated Contract, means the
outstanding principal balance of such Contract (without giving effect to any
Advances made by the Servicer or the Trustee), plus interest on such Contract
at the Pass-Through Rate 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 date of such repurchase or
liquidation. This repurchase obligation constitutes the sole remedy available
to the Trust 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).
In lieu of purchasing a Contract as specified in the preceding paragraph,
during the 120 day period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Contract (as defined below) for the
Contract that it is otherwise obligated to repurchase (referred to herein as
the "Replaced Contract"). An Eligible Substitute Contract is a Contract that
satisfies, as of the date of its
S-17
<PAGE>
substitution, the representations and warranties specified in Article III of
the Agreement, has a Scheduled Principal Balance that is not greater than the
Scheduled Principal Balance of the Replaced Contract, has a Contract Rate that
is at least equal to the Contract Rate of the Replaced Contract and has a
remaining term to scheduled maturity that is not greater than the remaining
term to scheduled maturity of the Replaced Contract. The Company will be
required to deposit in the Certificate Account cash in the amount, if any, by
which the Scheduled Principal Balance of the Replaced Contract exceeds the
Scheduled Principal Balance of the Contract being substituted. Such deposit
will be deemed to be a Partial Principal Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
PAYMENTS ON CONTRACTS
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a depository
institution (initially First Bank National Association, Minneapolis, Minnesota)
with trust powers organized under the laws of the United States or any state,
the deposits of which are insured to the full extent permitted by law by the
Federal Deposit Insurance Corpora-tion (the "FDIC"), whose short-term deposits
have been rated A-1 by S&P and F-1 by Fitch (if rated by Fitch) or whose
unsecured long-term debt has been rated in one of the two highest rating
categories by S&P and Fitch, and which is subject to supervision and
examination by federal or state authorities (an "Eligible Institution").
"Eligible Account" means, at any time, an account which is any of the
following: (i) an account maintained with an Eligible Institution; (ii) an
account or accounts the deposits in which are fully insured by either the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC; (iii) a
segregated trust account maintained with the corporate trust department of a
federal or state chartered depository institution or trust company with trust
powers and acting in its fiduciary capacity for the benefit of the Trustee,
which depository institution or trust company has capital and surplus of not
less than $50,000,000; or (iv) an account that will not cause S&P or Fitch to
downgrade or withdraw its then-current rating assigned to the Certificates, as
evidenced in writing by S&P and Fitch. The Servicer may authorize the Trustee
to invest the funds in the Certificate Account in Eligible Investments (as
defined in the Agreement) that will mature not later than the business day
preceding the applicable monthly Payment Date. Such Eligible Investments
include, among other investments, obligations of the United States or of any
agency thereof backed by the full faith and credit of the United States,
federal funds, certificates of deposit, time deposits and bankers acceptances
sold by eligible commercial banks; any other demand or time deposit or
certificate of deposit fully insured by the FDIC; investments in certain money-
market funds; certain repurchase agreements of United States government
securities with eligible commercial banks; securities bearing interest or sold
at a discount issued by a corporation which has a credit rating of at least
"AA" from S&P and Fitch (if rated by Fitch) not in excess of 10% of amounts in
the Certificate Account at the time of such investment; and commercial paper
assigned a rating of at least A-1+ by S&P and F-1+ by Fitch (if rated by
Fitch). Any losses on such investments will be deducted from other investment
earnings or from other funds in the Certificate Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into the
Certificate Account no later than one business day following receipt thereof,
except amounts received as extension fees or assumption fees not allocated to
regular installments due on Contracts, which are retained by the Servicer as
part of its servicing fees and are not paid into the Certificate Account and
except for certain proceeds from Liquidated Contracts which are used to
reimburse the Servicer for customary out-of-pocket liquidation expenses. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses" herein. In addition, all payments under FHA Insurance received by the
Servicer, any Advances by the Servicer or the Trustee as described under
"Description of the Certificates--Advances," amounts paid by the Company for
Contracts repurchased as a result of breach of warranties under the Agreement,
and amounts required to be deposited upon substitution of a Contract because of
breach of
S-18
<PAGE>
warranties under the Agreement, as described under "Description of the
Certificates--Conveyance of Contracts," shall be paid into the Certificate
Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the Amount Available in the Certificate Account and the
amount of funds necessary to make all payments to be made on the next Payment
Date from the Certificate Account. Not later than one Business Day after the
Determination Date, the Company will deposit in the Certificate Account the
Repurchase Price of any Contracts required to be repurchased on such Payment
Date and any amounts required to be deposited therein due to the substitution
of a Contract, as a result of a breach of representations and warranties.
DISTRIBUTIONS
Holders of the Certificates will be entitled to receive on the Payment Date,
to the extent that the Amount Available (together with any Guaranty Payment, as
described below) in the Certificate Account is sufficient therefor,
distributions allocable to interest and principal, as described herein.
Distributions will be made on each Payment Date to holders of record of the
Certificates on the related Record Date, except that the final distribution in
respect of the Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency appointed by the Trustee for that
purpose in Minneapolis or St. Paul, Minnesota. The Amount Available on each
Payment Date generally includes scheduled payments on the Contracts due during
the previous calendar month (the "Due Period") and received on or prior to the
related Determination Date, prepayments and other unscheduled collections
received on the Contracts during such Due Period, any Advances (as defined
herein) made by the Servicer or the Trustee with respect to such Due Period and
any amounts paid by the Company to repurchase a Contract due to a breach of
representation or warranty.
DISTRIBUTIONS ON THE CERTIFICATES
Interest. Interest on the Certificates will be payable on each Payment Date
in an amount (such amount being hereinafter referred to as the "Monthly
Interest") equal to one month's interest at the Pass-Through Rate on the
Aggregate Certificate Principal Balance immediately prior to such Payment Date;
provided that, in the case of the first Payment Date, such interest will be
payable only for the period from the Closing Date to but excluding October 15,
1996. The "Aggregate Certificate Principal Balance" with respect to any Payment
Date will equal the Original Series 1996-E Certificate Principal Balance minus
all distributions previously made in respect of principal on the Certificates.
Accrued interest will be computed on the basis of a 360-day year of twelve 30-
day months.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account, together with any Guaranty Payment, is not sufficient to
make a full distribution of interest to the Certificateholders, the amount of
interest to be distributed in respect of the Certificates will be allocated
among the outstanding Certificates pro rata in accordance with their respective
entitlements to interest, and the amount of the shortfall will be carried
forward and added to the amount such holders will be entitled to receive on the
next Payment Date. Any such amount so carried forward will bear interest at the
Pass-Through Rate, to the extent legally permissible.
Principal. On each Payment Date, the Certificateholders will be entitled to
receive as distributions of principal, to the extent of the Amount Available in
the Certificate Account after payment of all interest payable on the
Certificates, an amount equal to the sum (such sum being hereinafter referred
to as the "Monthly Principal") of (a) the amount of regular principal payments
on the Contracts paid or applied during the prior Due Period; (b) the amount of
Principal Prepayments received on the Contracts during the prior Due Period;
(c) the principal portion of all payments on Contracts that were Delinquent
Payments with respect to the prior Due Period; (d) the unpaid principal balance
of all Contracts that became Liquidated Contracts during the prior Due Period;
(e) the principal portion of the Repurchase Price paid by the Company to
repurchase Contracts for breach of representations and warranties during the
prior Due Period, as described below under "Repurchases by the Company"; (f)
the amount of any reduction in the principal
S-19
<PAGE>
amount deemed owed on any Contract as a result of the Obligor's bankruptcy; and
(g) any principal amount described in clauses (a) through (f) above that was
not previously distributed because of an insufficient amount of funds available
in the Certificate Account and the Company either was not obligated to or
failed to pay such amount under the Limited Guaranty.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(ii) to pay interest on the Certificates;
(iii) to pay principal on the Certificates;
(iv) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made in respect of current or prior Payment Dates;
and
(vi) to pay the remainder, if any, of the Amount Available to the Company
as the fee for providing the Limited Guaranty.
ADVANCES
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a Delinquent Payment on a Contract only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the Certificate
Account, or (ii) the Trustee determines that it is not legally able to make
such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will include with each distribution to a Certificateholder a
statement as of such Payment Date setting forth, with respect to the
Certificates and Trust:
(a) the amount of interest being paid to Certificateholders;
(b) the amount of Monthly Principal, specifying the amounts constituting
scheduled payments by Obligors, Principal Prepayments on the Contracts, and
other payments with respect to the Contracts;
(c) the amount of principal being distributed to Certificateholders;
(d) the Aggregate Certificate Principal Balance;
(e) the amount of fees paid out of the Trust;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Aggregate Certificate Principal Balance and the
denominator of which is the Original Series 1996-E Certificate Principal
Balance) immediately before and immediately after such Payment Date;
(g) the amount of any Guaranty Payment being distributed on such Payment
Date;
(h) the remaining Guaranty Amount (after giving effect to the
distribution on such Payment Date);
(i) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
S-20
<PAGE>
(j) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(k) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(l) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Contracts at a price sufficient to pay the
Aggregate Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such price will be distributed on such Payment Date.
The "Scheduled Principal Balance" of a Contract for any month is its
principal balance as specified in its amortization schedule, after giving
effect to any previous Partial Principal Prepayments and to the scheduled
payment due on its scheduled payment date (the "Due Date") in that month, but
without giving effect to any adjustments due to bankruptcy or similar
proceedings. The "Pool Scheduled Principal Balance" with respect to any Payment
Date is the aggregate of the Scheduled Principal Balances of the Contracts
outstanding at the end of the prior calendar month.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by the FHA and
otherwise consistent with the highest degree of skill and care that the
Servicer exercises with respect to similar contracts (including manufactured
housing contracts) serviced by the Servicer. The Servicer will not be required
to cause to be maintained, or otherwise monitor the maintenance of, hazard
insurance on the improved properties.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) equal to one-twelfth of the product of
.75% and the remaining Pool Scheduled Principal Balance of the Contracts.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of a
Liquidated Contract (including FHA Insurance proceeds) for customary out-of-
pocket liquidation expenses incurred by it.
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
Servicer from its 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 (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.
S-21
<PAGE>
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each 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, beginning in 1997, the Servicer will deliver to the
Trustee a report of KPMG Peat Marwick LLP, or another nationally recognized
accounting firm, stating that such firm has examined certain documents and
records relating to the servicing of loans serviced by the Servicer and stating
that, on the basis of such examination, such servicing has been conducted in
compliance with the Agreement, except for any exceptions set forth in such
report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the interests in the Trust will have the same
rights of inspection as the Trustee and may upon written request to the
Servicer receive copies of all reports provided to the Trustee.
TRANSFERABILITY
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and in
the Prospectus.
CERTAIN MATTERS RELATING TO THE COMPANY
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of Termination
as discussed below.
EVENTS OF TERMINATION
An Event of Termination under the 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 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.
S-22
<PAGE>
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Trust may terminate
all of the Servicer's management, administrative, servicing and collection
functions under the Agreement. Upon such termination, the Trustee or its
designee will succeed to all the responsibilities, duties and liabilities of
the Company as 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 accrued obligation of the prior servicer or
any obligation of the Company to repurchase Contracts for breach of
representations and warranties, and the Trustee will not be liable for any acts
or omissions of the Servicer occurring prior to a transfer of the Servicer's
servicing and related functions or for any breach by the Servicer of any of its
representations and warranties contained in the Agreement or any related
document or agreement. In addition, the Trustee will notify FHA of the
Servicer's termination as Servicer of the FHA-insured Contracts and will
request that the portion of the Servicer's FHA Insurance reserves allocable to
the FHA-insured Contracts be transferred to the Trustee or a successor
Servicer. See "Description of FHA Insurance" in the Prospectus. 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 of the Company as Servicer will affect in any
manner the Company's obligation to repurchase certain Contracts for breaches of
warranties under the Agreement. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, an Eligible Servicer to act as successor to the
Servicer under the Agreement. The Trustee and such successor may agree upon the
servicing compensation to be paid (after receiving comparable bids from other
Eligible Servicers), which may not be greater than the Monthly Servicing Fee
payable to the Company under the Agreement without the consent of all of the
Certificateholders.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment Date
on which the Aggregate Certificate Principal Balance is reduced to zero; or (b)
the Payment Date occurring in the month following the Servicer's repurchase of
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.
AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
Agreement, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any material respect the interests of
any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
S&P and Fitch shall have confirmed that the ratings of the Certificates will
not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Trust, the Servicer and holders of
Certificates representing 51% or more of the Trust may vote to waive any Event
of Termination, provided that no such amendment or waiver shall (a) reduce in
any manner the amount of, or delay the timing of, collections of payments on
Contracts or distributions which are required to be made on any Certificate, or
(b) reduce the aggregate amount of Certificates required for any amendment of
the Agreement, without unanimous consent of the Certificateholders.
S-23
<PAGE>
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) 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 (but not including
any federal, state or other tax arising out of the creation of the Trust and
the issuance of the Certificates), and (b) with respect to certain other tax
matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) 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
Company as Servicer with respect to any Contract.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or 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 in consideration of the conveyance of
the Contracts, or deposited into 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.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time 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); (b) to reimburse the
Trustee upon its request 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 its negligence or bad faith; and (c) 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 and its 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 its powers
or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustee's office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company, the Servicer and the Certificateholders of any change
thereof.
THE TRUSTEE
First Trust National Association has its corporate trust offices at 180 East
Fifth Street, St. Paul, Minnesota 55101.
S-24
<PAGE>
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer 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. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. 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. Any successor Trustee must be an FHA Title I approved
lender.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The Certificates may be held by investors only through the
book-entry facilities of DTC. DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilitates the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and interest
on, the Certificates from the Trustee through DTC and Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
S-25
<PAGE>
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
DESCRIPTION OF THE LIMITED GUARANTY
In order to mitigate the effect of liquidation losses and delinquencies on
the Contracts, the Certificateholders are entitled to receive on each Payment
Date (subject to the limit of the Guaranty Amount) the amount equal to the
Guaranty Payment, if any, under the Limited Guaranty of the Company. The
Guaranty Payment for any Payment Date will equal the amount, if any, by which
the Formula Distribution Amount (equal to one month's interest at the Pass-
Through Rate on the Aggregate Certificate Principal Balance plus the Monthly
Principal for such Payment Date) exceeds the Amount Available in the
Certificate Account for such Payment Date.
The "Guaranty Amount" initially equals $2,708,832. Thereafter, on any Payment
Date, the Guaranty Amount will equal the lesser of (i) $2,708,832 minus all
Guaranty Payments previously made by the Company, or (ii) the Aggregate
Certificate Principal Balance as of such Payment Date plus three months of
interest at the Pass-Through Rate on the Aggregate Certificate Principal
Balance as of such Payment Date.
The Limited Guaranty will be an unsecured general obligation of the Company
and will not be supported by any letter of credit or other credit enhancement
arrangement.
As compensation for providing the Limited Guaranty, the Company will be
entitled to receive a Guaranty Fee on each Payment Date equal to the Amount
Available in the Certificate Account less the amounts distributed to the
Certificateholders, the Monthly Servicing Fee and certain amounts required to
reimburse the Trustee or the Servicer, as described under "Description of the
Certificates--Distributions on the Certificates."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Briggs and Morgan, Professional Association, counsel to the Company, will
deliver its opinion that, assuming ongoing compliance with the terms of the
Agreement, the Trust will be classified as a grantor trust for federal income
tax purposes and not as an association which is taxable as a corporation. The
Company does not intend to treat the Certificates as Stripped Certificates for
federal income tax reporting purposes. If, however, any fees paid to the
Company are deemed to exceed a reasonable amount, the Certificates may be
required to be treated as Stripped Certificates, which would require any
discount at which a Certificate is purchased to be treated as original issue
discount. See "Certain Federal Income Tax Consequences--Stripped Certificates"
in the Prospectus.
The Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
not represent interests in "qualifying real property loans," "loans secured by
an interest in real property" or "real estate assets" for purposes of Sections
593(d), 7701(a)(19)(C) or 856(c)(5) of the Code, respectively. Furthermore,
interest paid with respect to Certificates
S-26
<PAGE>
held by a real estate investment trust will not be considered to be "interest
on obligations secured by mortgages on real property or on interests in real
property" for purposes of Section 856(c)(3) of the Code.
For purposes of the exemption from United States withholding tax described in
the Prospectus, potential foreign investors are advised that all of the
Contracts were originated after July 18, 1984.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
Non-REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
No transfer of any Certificates will be permitted to be made to any employee
benefit plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (a "Plan") unless such Plan, at
its expense, delivers to the Trustee and the Company an opinion of counsel (in
form satisfactory to the Trustee and the Company) to the effect that the
purchase or holding of any Certificates by such Plan will not result in the
assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring a Certificate will be deemed to represent to
the Trustee, the Company and the Servicer that such person is neither a Plan,
nor acting on behalf of a Plan, subject to ERISA or to Section 4975 of the
Code.
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF CERTIFICATES
----------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... $13,588,323
Lehman Brothers Inc...................................... $13,500,000
-----------
Total................................................ $27,088,323
===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Underwriters propose to offer the Certificates in part directly to
purchasers at the initial public offering price set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
price less concessions not to exceed .35% of the Original Series 1996-E
Certificate Principal Balance. The Underwriters may allow, and such dealers may
reallow, concessions not to exceed .125% of the Original Series 1996-E
Certificate Principal Balance to certain brokers and dealers. After the
Certificates are released for sale to the public, the offering price and other
selling terms may be varied by the Underwriters.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
S-27
<PAGE>
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract pass-through certificates without the consent of the
Underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by Briggs and Morgan, Professional
Association, St. Paul and Minneapolis, Minnesota, and for the Underwriters by
Thacher Proffitt & Wood, New York, New York. The material federal income tax
consequences of the Certificates will be passed upon for the Company by Briggs
and Morgan, Professional Association.
S-28
<PAGE>
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
(ISSUABLE IN SERIES)
Certificates for Home Improvement Loans ("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 contracts and promissory notes (the "Contracts"), as more
particularly described herein. No Contract will be secured by an interest in
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 may include one or more senior Classes of
Certificates (the "Senior Certificates") and one or more subordinate Classes
of Certificates (the "Subordinated Certificates"). A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. Certificates of a
Series may be divided into two or more Classes which (i) represent 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, and/or (ii) are entitled to
receive distributions in respect of principal before or after specified
principal distributions have been made on one or more other Classes within
such Series, or on a planned or targeted amortization schedule or upon the
occurrence of other specified events. 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 of a given 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
delinquent Contracts. 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.
---------------
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.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
This Prospectus may not be used to consummate sales of all or a portion of
any Series of Certificates unless accompanied by a Prospectus Supplement
relating to those particular Classes of Certificates.
The date of this Prospectus is September 17, 1996.
<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, 1995 and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31 and June 30, 1996, all of which have been filed with
the Commission, are 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 John Dolphin, Vice President and Director of Investor Relations,
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.......... Certificates for Home Improvement Loans (Issua-
ble 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," which
term shall include any successor to Green Tree
Financial Corporation in such capacity under
the applicable Agreement (as defined herein)).
Risk Factors................. Certain special considerations are particularly
relevant to a decision to invest in any Certif-
icates sold hereunder. See "Risk Factors" here-
in.
Securities Offered........... Certificates evidencing interests in pools of
Contracts (as defined herein) may be issued
from time to time in one or more series (each,
a "Series") pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement") be-
tween the Company, as Seller and Servicer, and
the Trustee specified in the related Prospectus
Supplement for such Series of Certificates (the
"Trustee").
The Contracts................ The Contracts underlying 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 contracts and
promissory notes and will be either conven-
tional contracts or contracts insured by the
Federal Housing Administration ("FHA") pursuant
to Title I of the National Housing Act ("Title
I"). No Contract will be secured by an interest
in the related real estate.
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 weighted average and range
of contractual rates of interest (each, a "Con-
tract Rate") on the Contracts; (iii) the
weighted average and ranges of terms to sched-
uled maturity of the Contracts as of origina-
tion and as of the Cut-off Date; (iv) the aver-
age outstanding principal balance of the Con-
tracts as of the Cut-off Date; (v) the percent-
age of the Contracts that are FHA-issued; and
(vi) the geographic location of improved real
estate underlying the Contracts. In addition,
if so specified in the related Prospectus Sup-
plement, additional Contracts 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.. The Certificates of each Series may be issued in
one or more Classes or subclasses as and on the
terms specified in the related Prospectus Sup-
plement, each of which will evidence the inter-
est specified in the related Prospectus Supple-
ment in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). For con-
venience of description, any reference in this
Prospectus to a "Class" of Certificates in-
cludes a reference to any subclasses of such
Class. If so specified in a Prospectus Supple-
ment, a Series of Certificates may include one
or more Classes which (i) are entitled to re-
ceive distributions only in respect of princi-
pal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combina-
tion thereof, or in specified proportions in
respect of such payments, and/or (ii) are enti-
tled to receive distributions in respect of
principal before or after specified principal
distributions have been made on one or more
other Classes within such Series ("Fast
Pay/Slow Pay Certificates"), or on a planned
amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certifi-
cates") or upon the occurrence of other speci-
fied events. See "Description of Certificates."
The Prospectus Supplement will set forth the
rate at which interest will be paid to
Certificateholders of each Class of a given Se-
ries (the "Pass-Through Rate"). Such Pass-
Through Rate may be fixed, variable or adjust-
able, as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or
more Classes ("Subordinated Certificates")
which are subordinated in right of distribution
to one or more other Classes ("Senior Certifi-
cates"). Certificates of a Series which in-
cludes Senior and Subordinated Certificates are
referred to herein collectively as
"Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include
one or more Classes ("Mezzanine Certificates")
which are subordinated to one or more Classes
of Certificates and are senior to one or more
Classes of Certificates.
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The Cer-
tificates will not be guaranteed or insured by
any government agency or, unless otherwise
specified in the related Prospectus Supplement,
other insurer and, except as described herein
and in the related Prospectus Supplement, the
Contracts will not be guaranteed or insured by
any government agency or other insurer.
5
<PAGE>
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 the
full amount of scheduled monthly payments of
principal and interest due them and to protect
the Senior Certificateholders against losses.
If so specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be en-
titled to the benefits of other forms of credit
enhancement and may, if rated in one of the
four highest rating categories by a nationally
recognized statistical rating organization, be
offered pursuant to this Prospectus and such
Prospectus Supplement.
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
"Payment Date"). The related Prospectus Supple-
ment will set forth for each Class of Certifi-
cates the Pass-Through Rate, if any, for each
such Class or the method of determining such
Pass-Through Rate. See "Yield Considerations"
and "Description of the Certificates." As spec-
ified in the related Prospectus Supplement,
Classes of a Series of Certificates may be en-
titled to receive no interest or interest which
is not proportionate to the principal allocable
to such Certificates.
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."
6
<PAGE>
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances 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 and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
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 be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries 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, if so provided in the related
Prospectus Supplement, substitute for the af-
fected Contract, in each case under the condi-
tions further described herein and in the Pro-
spectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
Federal Income Tax The Trust Fund represented by a Series of Cer-
Considerations.............. tificates may be treated as a grantor trust for
federal income tax purposes and not as an asso-
ciation 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 re-
lated Contract Pool and 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 Contact Pool. If the
Trust Fund represented by a Series of Certifi-
cates will not be treated as a grantor trust,
the federal income tax
7
<PAGE>
consequences of ownership of such Certificates
will be described in the related Prospectus
Supplement. See "Certain Federal Income Tax
Consequences."
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Internal
Revenue Code of 1986, as amended (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."
Legal Investment............. The Certificates will not constitute "mortgage
related securities" under the Secondary Mort-
gage Market Enhancement Act of 1984, as amend-
ed. See "Legal Investment."
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."
8
<PAGE>
RISK FACTORS
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 pursuant to Title I of the
National Housing Act ("Title I"). 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, 1995, was equal
to approximately $105,831,000, but will be reduced by the amount of all FHA
Insurance claims paid, 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. 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 if such a secondary market develops that it will
continue to exist for the term of any Series of Certificates.
4. Contracts Unsecured. The obligations of the Obligor under the 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 a 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 a
Contract, the obligations of the Obligor under such Contract may be
discharged in their entirety, notwithstanding the fact that the
9
<PAGE>
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 a 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.
5. 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.
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, except with
respect to FHA Insurance reserves. 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 each Pass-Through Rate applicable to the related Class
of Certificates.
10
<PAGE>
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement contracts and promissory notes
(collectively, the "Contracts") originated by the Company on an individual
basis in the ordinary course of business. The Contracts will be conventional
home improvement contracts or contracts insured by FHA. No Contract will be
secured by an interest in 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").
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", which term shall include any successor to the
Company in such capacity under the applicable Agreement), 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
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 minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
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; and the range of
original maturities of the Contracts and the last maturity date of any
Contract. 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 or substitute for
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 the related 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 origination or acquisition of additional home
improvement loan contracts, costs of carrying such contracts until sale of the
related certificates and to pay other expenses connected with pooling the
Contracts and issuing the Certificates.
11
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1995, had
stockholders' equity of approximately $925,022,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing
FHA-insured home improvement loans in April 1989 and conventional home
improvement loans in September 1992. The Company also purchases, pools and
services installment sales contracts for various consumer products. 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 in St. Paul, Minnesota,
the Company arranges to purchase certain contracts from home improvement
contractors located throughout the United States. The Company's regional sales
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.
All contracts that the Company originates are written on forms provided or
approved 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 using a proprietary
credit scoring system that was implemented by the Company in June 1993. 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 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond the
purchase price of the home improvement for the purpose of debt consolidation.
The original principal amount of an unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement contracts
eligible for FHA Insurance are described under the caption "Description of FHA
Insurance."
12
<PAGE>
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The unsecured
conventional program allows for an amount financed from $2,500 to $15,000
(except in Massachusetts where the loan limit may be $20,000). The allowable
term of unsecured contracts is 24 to 120 months. The Company's underwriting
standards with respect to unsecured home improvement contracts are, in general,
more stringent than its underwriting standards with respect to secured home
improvement contracts with similar terms. Eligible property includes an owner-
occupied single family home, up to four unit multiple-family dwelling, owner-
occupied condominium or town house, 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.
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 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 of
Certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Contracts. If so stated in the related
Prospectus Supplement, the yield on some types of Certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of Certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the Contracts
included in a Contract Pool may significantly affect an investor's actual yield
to maturity, even if the average prepayment rate over time is consistent with
the investor's expectations. In general, the earlier that prepayments on
Contracts occur, the greater the effect on the investor's yield to maturity.
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 25 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
13
<PAGE>
prepaid after their respective due dates in that month. In addition,
liquidations of defaulted Contracts or the Servicer's or the Company'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 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. 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 or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
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
14
<PAGE>
"Contract Pool") which are subject to the Agreement, (ii) the amounts held in
the Certificate Account from time to time, (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. 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. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) 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. 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. If so specified in the
applicable Prospectus Supplement, Mezzanine Certificates or other Classes of
Subordinated Certificates may be entitled to the benefits of other forms of
credit enhancement and may, if rated in one of the four highest rating
categories by a nationally recognized statistical rating organization, be
offered pursuant to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, 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 Prospectus
Supplement, 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.
15
<PAGE>
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.
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.
16
<PAGE>
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 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 or substituted
for 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.
The counsel to the Company identified in the applicable Prospectus Supplement
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.
17
<PAGE>
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
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 either (i) entered into by a home improvement
contractor in the ordinary course of such contractor's business and,
immediately upon funding, assigned to the Company or (ii) 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 or rescinded; (j) all parties to each Contract had full legal
capacity to execute such Contract; (k) 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; (l) 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; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (n) the description of each
Contract set forth in the list delivered to the Trustee is true and correct;
(o) there is only one original of each Contract; and (p) each Contract was
originated or purchased in accordance with the Company's then-current
underwriting guidelines.
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, if so provided in the related Prospectus
Supplement, substitute for the affected Contract, in each case under the
conditions further described herein and in the Prospectus Supplement. 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).
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 applicable 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
18
<PAGE>
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 FHA Insurance payments 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");
(v) any Advances made as described under "Advances" below 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 for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of such
Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for a
Payment Date is an amount equal to 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") except: (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. In the case of a
Series of Certificates which includes only one Class, the Amount Available for
each Payment Date will be distributed pro rata to the holders of such
Certificates. In the case of any other Series of Certificates, the Amount
Available for each Payment Date will be allocated and distributed to holders of
the Certificates of such Series pursuant to the method and in the order of
priority specified in the applicable Prospectus Supplement. 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."
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.
19
<PAGE>
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Contract in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a delinquent payment on a Contract only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Contract or from liquidation proceeds thereof.
The Servicer will deposit any Advances in the Certificate Account no later than
one Business Day before the following Payment Date. The Servicer will be
entitled to recoup its advances on a Contract from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including FHA Insurance
payments, if applicable), if any, of the Contract, and will release its right
to reimbursements in conjunction with the purchase of the Contract by the
Company for breach of representations and warranties. If the Servicer
determines in good faith that an amount previously advanced will not ultimately
be recoverable from payments by or on behalf of the Obligor or from liquidation
proceeds (including FHA Insurance payments, if applicable), if any, of the
Contract (an "Uncollectible Advance"), the Servicer will be entitled to
reimbursement from payments on other Contracts or from other funds available
therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not legally
able to make such Advance.
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 March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 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 April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
20
<PAGE>
(4) On April 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 April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. 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 April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
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 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).
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, as well as submission of FHA Insurance claims
where applicable.
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 the Contracts as it
follows with respect to 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 upon the occurrence of an Event of
Termination as discussed below.
21
<PAGE>
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 $10 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 the annual servicing fee rate described in the applicable Prospectus
Supplement 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 Fund 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 (including submission of FHA
Insurance claims, if applicable) or 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 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) if the Company is the
Servicer, the Company's receiving rights under its master seller-servicer
contract with GNMA are 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.
22
<PAGE>
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 Certificateholders
representing 25% or more of the Aggregate Certificate Principal Balance of a
Series 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 without the consent
of all of the Certificateholders.
The Trustee will be under no obligation to take any action or to 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;
(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.
23
<PAGE>
REPURCHASE OPTION
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i) the principal balance of
the Contracts on the prior Payment Date plus 30 days' accrued interest thereon
at the applicable Pass-Through Rate and any delinquent payments of interest
thereon, plus the fair market value (as determined by the Servicer) of any
acquired properties, (ii) the fair market value of all of the assets of the
Trust Fund, and (iii) an amount equal to the Aggregate Certificate Principal
Balance of the related Certificates plus interest on such Certificates payable
on and prior to the Payment Date occurring in the month following such
repurchase (less amounts on deposit in the Certificate Account and available to
pay such principal and interest). Such price will be paid on the Payment Date
on which such purchase occurs 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 and any acquired
properties to the Servicer. The distribution of such purchase price to
Certificateholders will be in lieu of any other distribution to be made on such
Payment Date with respect to the related Contracts.
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 or (iii) 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 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) representing 66 2/3% or more of the Aggregate
Certificate Principal Balance of a Series 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 delays 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 final payment or
other liquidation of the last 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 customary commercial
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.
24
<PAGE>
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or 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.
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 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 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 June 30, 1996, the Company's FHA Insurance reserve amount was equal to
approximately $103,163,000. These insurance reserves were available to cover
losses on approximately $1,212,523,000 of FHA-insured manufactured housing
contracts and approximately $178,284,000 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
25
<PAGE>
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 unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. 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, submit a claim to 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. 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 days' 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 data 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, and
(iv) legal fees, not to exceed $500.
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 improved real estate is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Contracts.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the contract.
26
<PAGE>
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 Fund against such Obligor.
The obligations of the Obligor under each Contract are not secured by an
interest in the related real estate or otherwise, and the related Trust Fund,
as the owner of a Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under a 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 a Contract, the
obligations of the Obligor under such 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 form of note generally contains 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.
The standard form of note also includes a debt-acceleration clause, which
permits the lender to accelerate the debt upon a monetary default of the
borrower, after the applicable cure period. Courts will generally enforce
clauses providing for acceleration in the event of a material payment default.
However, courts, exercising equity jurisdiction, may refuse to allow a lender
to accelerate when an acceleration of the indebtedness would be inequitable or
unjust and the circumstances would render the acceleration unconscionable.
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 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.
27
<PAGE>
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 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.
The Company will 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."
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 fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
28
<PAGE>
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving the "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets of
the Plan. An investment of Plan Assets (as defined below) in Certificates may
cause the underlying assets included in the Trust to be deemed "plan assets" of
such Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations
at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as the Trust Fund), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of the Trust Fund or may be
deemed merely to include its interest in the Certificates. Therefore, neither
Plans nor such entities should acquire or hold Certificates in reliance upon
the availability of any exception under the DOL Regulations. For purposes of
this Section the term "Plan Assets" or assets of a Plan has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests. The prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code may
apply to the Trust Fund and cause the Company, the Trust Fund, the Trustee, any
successor, or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan (or of a
Plan holding an interest in such an entity). If so, the acquisition or holding
of Certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would be
assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially if,
with respect to such assets, the Company, the Trust Fund, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel
29
<PAGE>
(satisfactory to the Trustee, the Servicer and the Company) that the purchase
and holding of a Certificate by, on behalf of, or with Plan Assets of such Plan
is permissible under applicable law, will not result in the assets of the Trust
Fund being deemed to be Plan Assets and subject to the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee, the Trust
Fund, the Company or the Servicer to any obligation or liability in addition to
those undertaken in the Agreement. Unless such opinion is delivered, each
person acquiring a Certificate will be deemed to represent to the Trustee, the
Company and the Servicer that such person is neither a Plan, nor acting on
behalf of a Plan, nor purchasing with Plan Assets of any Plan.
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
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, all of which are subject to change (which change may
be retroactive) 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.
Tax Status of the Trust Fund. Counsel will, unless otherwise specified in the
related Prospectus Supplement, 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 Certificates will be issued to
Certificateholders will not be classified as an association taxable as a
corporation or a "taxable mortgage pool," within the meaning of Section 7701(i)
of the Internal Revenue Code of 1986, as amended (the "Code"), but rather will
be classified as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code. In such event, each 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. The following
discussion assumes the Trust Fund will be so classified as a grantor trust.
Tax Status of Certificates. In general, (i) Certificates held by a financial
institution taxed as described in Section 593(a) of the Code will not 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 will not be
considered to represent "loans secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code; and (iii) Certificates
held by a real estate investment trust will not constitute "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code and interest thereon
will not be considered "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code. Investors
affected by the foregoing provisions of the Code should consult with their own
tax advisors with respect to these matters.
Tax Treatment of Certificates. Subject to the discussion below of the
"stripped bond" rules of the Code, 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, market or original issue discount, if any,
30
<PAGE>
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, the term "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 Certificate.) Subject to the discussion below
of certain limitations on itemized deductions, 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 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
($117,950 for 1996, 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. Furthermore, in determining the alternative
minimum taxable income of an individual, trust, estate or pass-through entity
that is a holder of a Certificate, no deduction will be allowed for such
holder's allocable portion of the foregoing expenses, even though an amount
equal to the total of such expenses will be included in such holder's gross
income for alternative minimum tax purposes. To the extent that a
Certificateholder is not permitted to deduct servicing fees allocable to a
Certificate, the taxable income of the Certificateholder attributable to that
Certificate will exceed the net cash distributions related to such income.
Certificateholders may deduct any loss on disposition of the Contracts to the
extent permitted under the Code.
A Certificateholder will be treated as purchasing an interest in each
Contract comprising the Contract Pool at a price determined by allocating the
purchase price paid for the Certificate among all such Contracts in proportion
to their fair market values at the time of purchase of the Certificate. To the
extent that the portion of the purchase price of a Certificate allocated to a
Contract is greater than or less than the portion of the principal balance of
the Contract allocable to the Certificate, that interest in the Contract will
be deemed to have been acquired with premium or discount, respectively.
Market Discount. A Certificateholder generally will be treated as having
acquired an interest in a Contract at a market discount if, at the time the
Certificate is acquired, the unpaid principal balance on such Contract
allocable to the Certificate exceeds the portion of the price paid for the
Certificate by such Certificateholder that is allocated to that Contract. A
Certificateholder who acquires an interest in a Contract at a market discount
will be required to recognize accrued market discount as ordinary income as
payments of principal are received on such Contract or upon the sale or
exchange of the Certificate. Section 1276(b)(3) of the Code authorizes the
issuance of regulations providing for the method for accruing market discount
on debt instruments, the principal of which is payable in more than one
installment, such as a Contract. Until such regulations are issued, the
legislative history associated with this provision indicates certain methods
which are to be used. In general, the holder of a 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)
under a ratable accrual method (pursuant to which the market discount is
treated as accruing in equal daily installments during the period the
Certificate is held by the purchaser), in each case computed taking into
account the prepayment assumption used in pricing the initial offering of such
Certificate (the "Prepayment Assumption"). Because the regulations referred to
above have not been issued, it is not possible to predict what effect, if any,
such regulations, when issued, might have on the tax treatment of an interest
in a Contract purchased at a discount.
The Code provides that the market discount in respect of a Contract will be
considered to be zero if the amount of discount allocable to the Contract is
less than 0.25% of the Contract's stated redemption price at maturity
multiplied by the number of complete years remaining to its maturity after the
holder acquired the
31
<PAGE>
obligation. If market discount is treated as de minimis under this rule, the
actual discount would be allocated among a portion of each scheduled payment
representing the stated redemption price of such Contract and that portion of
the discount allocable to such payment would be reported as income when such
payment occurs or is due.
The Code further provides that any principal payment with respect to a
Contract acquired with market discount or any gain on disposition of such a
Contract 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 Contract is to be
reduced by the amount previously treated as ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of an interest in a
Contract having market discount to defer a portion of the interest deductions
attributable to any indebtedness incurred or continued to purchase or carry
such Contract. Alternatively, a holder of an interest in a Contract 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 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.
The treatment of any discount will depend upon whether the discount
represents market discount or original issue discount. It is not anticipated
that the Contracts will have original issue discount, unless they are subject
to the "stripped bond" rules of the Code described below. If the Contracts are
subject to the stripped bond rules of the Code, the market discount rules
discussed above may not apply.
Amortizable Premium. A holder of a Certificate who holds the Certificate as a
capital asset and who is treated as having purchased an interest in a Contract
at a cost greater than its stated redemption price will be considered to have
purchased the interest in the Contract at a premium. In general, the
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Certificateholder's tax basis in the
Certificate will be reduced by the amount of the amortizable bond premium
deducted. It appears that the Prepayment Assumption should be taken into
account in determining the term of a Contract for this purpose. Amortizable
bond premium with respect to an interest in a Contract will be treated as an
offset to interest income on such Contract, and a Certificateholder's deduction
for amortizable bond premium will be limited in each year to the amount of
interest income derived with respect to such Contract for such year. Any
election to deduct amortizable bond premium will apply to all debt instruments
(other than instruments the interest on which is excludable from gross income)
held by the Certificateholder at the beginning of the first taxable year to
which the election applies or thereafter acquired, and may be revoked only with
the consent of the Service. Bond premium on an interest in a Contract held by a
Certificateholder who does not elect to deduct the premium will decrease the
gain or increase the loss otherwise recognized on the disposition of the
Certificate. Certificateholders who pay a premium for a Certificate should
consult their tax advisors concerning such an election and rules for
determining the method for amortizing bond premium.
Stripped Certificates. Certain classes of 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. 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 portion
of the payments to be made under the Contracts comprising a Contract Pool;
(iii) if two or more classes of Certificates are issued representing the right
to non-pro rata percentages of the interest or principal payments on the
Contracts; or (iv) if Certificates are issued which represent the right to
interest only payments or principal only payments.
32
<PAGE>
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. Rules governing original issue
discount are set forth in Sections 1271-1273 and 1275 of the Code and the
Treasury Regulations issued thereunder (the "OID Regulations"). In general, in
the hands of the original holder of a Stripped Certificate, original issue
discount, if any, is the difference between the "stated redemption price at
maturity" of the Certificate and its "issue price." 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 if it is less than .25% of the principal amount of the
Certificate multiplied by the weighted average maturity of the Certificate as
defined in the OID Regulations. A purchaser of a Stripped Certificate may 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 "Market Discount"
above.
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 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
Stripped Certificateholder's ordinary gross income 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. Although the OID Regulations suggest that
a prepayment assumption is not to be used in computing the yield on the
underlying assets of a Trust Fund, the Code appears to require that such a
prepayment assumption be used in computing yield with respect to Stripped
Certificates. In the absence of authority to the contrary, the Company intends
to base information reports and returns to the Service and the holders of
Stripped Certificates taking into account an appropriate prepayment assumption.
Holders of Stripped Certificates should refer to the related Prospectus
Supplement to determine whether and in what manner the original issue discount
rules will apply thereto.
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.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, 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.
33
<PAGE>
Gain or Loss on Disposition. Upon sale or exchange of a Certificate, a
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 Certificate. Generally, the aggregate adjusted
basis will equal the Certificateholder's cost for the Certificate increased by
the amount of any previously reported income or gain with respect to the
Certificate and decreased by the amount of any losses previously reported with
respect to the Certificate and the amount of any distributions received
thereon. 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 Certificate was held as a capital asset.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a 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 Certificate is effectively
connected with the conduct by the Foreign Holder of a trade or business within
the United States, the Foreign Holder is not subject to federal income or
withholding tax on interest (or original issue discount, if any) on a
Certificate (subject to possible backup withholding of tax, discussed below).
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. If the interest on a 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. In addition, the foregoing rules will not apply
to exempt a U.S. shareholder of a controlled foreign corporation from taxation
on such U.S. shareholder's allocable portion of the interest income received by
such controlled foreign corporation. Foreign Holders should consult their own
tax advisors regarding the specific tax consequences of their owning a
Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a 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 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.
It appears that a Certificate will not be included in the estate of a Foreign
Holder and will not be subject to United States estate taxes. However, Foreign
Holders should consult their own tax advisors regarding estate tax
consequences.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. Backup withholding may apply to
a 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 Certificateholder who is a foreign person if the
Certificateholder fails to provide the Trustee or the Certificateholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the 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. 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.
34
<PAGE>
Tax Administration and Reporting. The Company will furnish to each
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 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 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.
LEGAL INVESTMENT CONSIDERATIONS
No Certificates offered hereby will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because none of the Contracts will be secured 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.
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.
35
<PAGE>
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.
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 "Securities 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 Securities 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 and material federal income tax consequences of the Certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
36
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUP-
PLEMENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER-
WRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OF-
FER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY JU-
RISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE AFFAIRS OF THE TRUST
SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Terms of the Certificates................................... S-3
Risk Factors............................................................... S-8
Structure of the Transaction............................................... S-8
Use of Proceeds............................................................ S-9
The Contracts.............................................................. S-9
Yield and Prepayment Considerations........................................ S-13
Green Tree Financial Corporation........................................... S-15
Description of the Certificates............................................ S-15
Description of the Limited Guaranty........................................ S-26
Certain Federal Income Tax Consequences.................................... S-26
ERISA Considerations....................................................... S-27
Underwriting............................................................... S-27
Legal Matters.............................................................. S-28
PROSPECTUS
Reports to Certificateholders.............................................. 2
Available Information...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary of Terms........................................................... 4
Risk Factors............................................................... 9
The Trust Fund............................................................. 10
Use of Proceeds............................................................ 11
Green Tree Financial Corporation........................................... 12
Yield Considerations....................................................... 13
Maturity and Prepayment Considerations..................................... 13
Description of the Certificates............................................ 14
Description of FHA Insurance............................................... 25
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 26
ERISA Considerations....................................................... 28
Certain Federal Income Tax Consequences.................................... 30
Legal Investment Considerations............................................ 35
Ratings.................................................................... 35
Underwriting............................................................... 35
Legal Matters.............................................................. 36
Experts.................................................................... 36
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$27,088,323 (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1996-E
7.20% PASS-THROUGH RATE
------------------
PROSPECTUS SUPPLEMENT
------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
SEPTEMBER 17, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
