<PAGE>
Filed Pursuant to Rule 424(b)(5)
File No. 333-20335
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 23, 1997)
$327,051,721 (APPROXIMATE)
[LOGO OF GREENTREE FINANCIAL CORPORATION APPEARS HERE]
SELLER AND SERVICER
CERTIFICATES FOR HOME EQUITY LOANS
SERIES 1997-B
$36,462,000 (APPROXIMATE) FLOATING $40,682,000 (APPROXIMATE) 7.12% CLASS
RATE CLASS A-1 ARM A-6
$27,998,000 (APPROXIMATE) 6.02% CLASS $17,988,000 (APPROXIMATE) 7.65% CLASS
A-1 M-1
$36,641,000 (APPROXIMATE) 6.28% CLASS $11,447,000 (APPROXIMATE) 7.80% CLASS
A-2 M-2
$62,724,000 (APPROXIMATE) 6.61% CLASS $11,447,000 (APPROXIMATE) 7.84% CLASS
A-3 B-1
$20,556,000 (APPROXIMATE) 6.81% CLASS $ 4,906,721 (APPROXIMATE) 8.00% CLASS
A-4 B-2
$56,200,000 (APPROXIMATE) 7.15% CLASS
A-5
--------------
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
JUNE 1997)
The Certificates for Home Equity Loans, Series 1997-B, offered hereby (the
"Certificates") will be comprised of eleven Classes, designated as the Class
A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class M-1, Class M-2, Class B-1 and Class B-2 Certificates. The Certificates
will be issued by, and evidence beneficial ownership interests in, Home Equity
Loan Trust 1997-B (the "Trust"). The Trust will be created by Green Tree
Financial Corporation (the
-------------- (Continued on next page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-25 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES 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>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 ARM Certificate.... 100% .35% 99.65%
- --------------------------------------------------------------------------------
Per Class A-1 Certificate........ 100% .265% 99.735%
- --------------------------------------------------------------------------------
Per Class A-2 Certificate........ 100% .275% 99.725%
- --------------------------------------------------------------------------------
Per Class A-3 Certificate........ 100% .3% 99.7%
- --------------------------------------------------------------------------------
Per Class A-4 Certificate........ 99.984375% .375% 99.609375%
- --------------------------------------------------------------------------------
Per Class A-5 Certificate........ 100% .45% 99.55%
- --------------------------------------------------------------------------------
Per Class A-6 Certificate........ 99.96875% .5% 99.46875%
- --------------------------------------------------------------------------------
Per Class M-1 Certificate........ 99.96875% .55% 99.41875%
- --------------------------------------------------------------------------------
Per Class M-2 Certificate........ 99.9375% .55% 99.3875%
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Per Class B-1 Certificate........ 99.96875% .65% 99.31875%
- --------------------------------------------------------------------------------
Per Class B-2 Certificate........ 99.984375% .75% 99.234375%
- --------------------------------------------------------------------------------
Total............................ $327,018,676.52 $1,297,239.86 $325,721,436.66
- --------------------------------------------------------------------------------
</TABLE>
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(1) Plus accrued interest, if any, from and including May 29, 1997.
(2) Before deducting expenses, estimated to be $250,000.
--------------
The Certificates are offered subject to prior sale, when, as and if issued
by the Trust and accepted by the Underwriters and subject to their 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 May 29, 1997
(the actual such date being hereinafter referred to as the "Closing Date").
--------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
May 23, 1997
<PAGE>
(Continued from previous page)
"Company") pursuant to a Pooling and Servicing Agreement, dated as of May 1,
1997 (the "Agreement") between the Company and First Trust National
Association, as Trustee (the "Trustee"). The Trust property will consist
primarily of a pool (the "Loan Pool") consisting of closed-end home equity
loans (the "Loans"), including the right to receive payments due on the Loans
after April 30, 1997 (or the date of origination thereof, if later) (the "Cut-
off Date"), together with liens on the related real estate and amounts held
for the Trust in the Certificate Account. The Loan Pool includes adjustable-
rate closed-end home equity loans subject to interest rate adjustments after
an initial six-month, twenty-four-month or thirty-six-month period. The Loans
subject to adjustment after an initial six months and twenty-four months, but
not the 20 Loans subject to adjustment after an initial thirty-six month
period, are referred to herein as the "Adjustable Rate Loans." Each of the
Loans is secured by a lien on the related real estate.
Distributions of principal and interest on the Certificates will be made
primarily from amounts available in respect of the Loans comprising the Loan
Pool. The rights of the holders of the Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates to receive distributions on each Payment Date will be
subordinated to such rights of the holders of the Class A-1 ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Certificates and, in
addition, to such rights of the holders of the Class M-1 Certificates (in the
case of the Class M-2, Class B-1 and Class B-2 Certificates), of the Class M-2
Certificates (in the case of the Class B-1 and Class B-2 Certificates) and of
the Class B-1 Certificates (in the case of the Class B-2 Certificates), all
to the extent described herein.
The Class B-2 Certificateholders will each have the benefit of a limited
guaranty of the Company (the "Class B-2 Limited Guaranty") to protect against
losses that would otherwise be borne by such Certificateholders. To the extent
that funds in the Certificate Account and available for distribution are
insufficient to distribute to the holders of the Class B-2 Certificates the
Class B-2 Formula Distribution Amount, or in the event that there is a Class
B-2 Liquidation Loss Principal Amount for any Payment Date (each as described
herein), the Company will be obligated to make a Class B-2 Guaranty Payment in
respect thereof (as described herein). See "Description of the Class B-2
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 June 1997. The Company
will act as servicer (in such capacity, the "Servicer") of the Loans. The
final scheduled Payment Date of the Certificates is in April 2027. See
"Description of the Certificates" herein and in the Prospectus.
An election will be made to treat the Trust as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. As described
more fully herein, the Certificates will constitute "regular interests" in the
REMIC and the Class C Certificate, which is not being offered hereby, will
constitute the "residual interest" in the REMIC. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
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. Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Salomon Brothers Inc (the "Underwriters")
expect, but are not obligated, to make a market in the Certificates.
All dollar amounts in this Prospectus Supplement and the Prospectus are
expressed in United States dollars.
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
S-2
<PAGE>
No prospectus in respect of the Certificates has been or will be prepared
and filed in the United Kingdom pursuant to the United Kingdom Public Offers
of Securities Regulations 1995. Accordingly, the Certificates being offered
hereby may not be offered or sold or re-offered or re-sold to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing and disposing of investments (as principal or
agent) for the purpose of their businesses, or otherwise in circumstances that
will not constitute or result in an offer to the public in the United Kingdom
within the meaning of the United Kingdom Public Offers of Securities
Regulations 1995. Neither this Prospectus Supplement nor the Prospectus nor
any other document inviting applications or offers to purchase Certificates or
offering Certificates for purchase may be passed to any person in the United
Kingdom who does not fall within article 11(3) of the Financial Services Act
1986 (Investment Advisements) (Exemptions) Order 1996 or who is not otherwise
a person to whom the document may lawfully be issued or passed.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Certificates
offered hereby. Such transactions may include stabilizing and the purchase of
Certificates to cover syndicate short positions. For a description of these
activities, see "Underwriting" herein.
For 90 days after the date of this Prospectus Supplement, 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 Classes of a Series of
Certificates for Home Equity 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-3
<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 Equity Loans, Series
1997-B (the "Certificates"), comprised of
eleven Classes designated as the Class A-1
ARM, Class A-1, Class A-2, Class A-3, Class A-
4, Class A-5, Class A-6, Class M-1, Class M-2,
Class B-1 and Class B-2 Certificates,
respectively. The Class A-1 ARM Certificates
are floating-rate and the Certificates of each
of the other Classes are fixed-rate. The
Certificates will be issued by, and evidence
beneficial ownership interests in, Home Equity
Loan Trust 1997-B (the "Trust"), the property
of which consists primarily of the Loans,
which are anticipated to have an aggregate
principal balance as of the Cut-off Date (the
"Cut-off Date Pool Principal Balance") of
$327,051,721.18, and all rights, benefits,
obligations and proceeds arising therefrom or
in connection therewith, including liens on
the related real estate, and the Class B-2
Limited Guaranty for the benefit of the Class
B-2 Certificateholders.
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 June 1997.
Cut-off Date.................. April 30, 1997 (or the date of origination of
the Loan, if later).
Record Date................... The Business Day immediately preceding the
related Payment Date.
Original Certificate
Principal Balance............ $327,051,721 (approximate).
Original Class A-1 ARM
Principal Balance.......... $ 36,462,000 (approximate).
Original Class A-1
Principal Balance.......... $27,998,000 (approximate).
Original Class A-2
Principal Balance.......... $ 36,641,000 (approximate).
Original Class A-3
Principal Balance.......... $ 62,724,000 (approximate).
Original Class A-4
Principal Balance.......... $ 20,556,000 (approximate).
Original Class A-5
Principal Balance.......... $56,200,000 (approximate).
S-4
<PAGE>
Original Class A-6
Principal Balance........ $ 40,682,000 (approximate)
Original Class M-1
Principal Balance........ $ 17,988,000 (approximate).
Original Class M-2
Principal Balance........ $ 11,447,000 (approximate).
Original Class B-1
Principal Balance........ $ 11,447,000 (approximate).
Original Class B-2
Principal Balance........ $ 4,906,721 (approximate).
Class A-1 ARM Pass-Through
Rate......................... A floating rate equal to the lesser of one-
month LIBOR plus the Pass-Through Margin or
the Available Funds Pass-Through Rate, but in
no case more than 14%. The Pass-Through Margin
will equal 0.23% per annum on each Payment
Date on which the Pool Scheduled Principal
Balance of the Loan Pool is 10% or more of the
Cut-off Date Pool Principal Balance of the
Loan Pool, and 0.46% per annum on each Payment
Date on which the Pool Scheduled Principal
Balance of the Loan Pool is less than 10% of
the Cut-off Date Pool Principal Balance of the
Loan Pool. The Available Funds Pass-Through
Rate for any Payment Date will be a rate per
annum equal to the weighted average of the
Expense Adjusted Loan Rates on the then
outstanding Adjustable Rate Loans. The Expense
Adjusted Loan Rate on any Adjustable Rate Loan
is equal to the then applicable Mortgage Rate
thereon, minus the Expense Fee Rate. The
Expense Fee Rate is .75%. One-month LIBOR with
respect to any monthly interest period will
equal the offered rate for United States
dollar deposits for one month that appears on
Telerate Page 3750 as of 11:00 A.M., London
time, on the second LIBOR business day prior
to such monthly interest period. For a
description of the method used to calculate
one-month LIBOR, see "Description of the
Certificates--Calculation of One-Month LIBOR."
Class A-1 Pass-Through Rate... 6.02% per annum.
Class A-2 Pass-Through Rate... 6.28% per annum.
Class A-3 Pass-Through Rate... 6.61% per annum.
Class A-4 Pass-Through Rate... 6.81% per annum.
Class A-5 Pass-Through Rate... 7.15% per annum.
Class A-6 Pass-Through Rate... 7.12% per annum.
Class M-1 Pass-Through Rate... 7.65% per annum.,
Class M-2 Pass-Through Rate... 7.80% per annum, subject to a maximum rate
equal to the weighted average of the Loan
Rates on each Fixed-Rate Loan in the Loan
Pool.
Class B-1 Pass-Through Rate... 7.84% per annum, subject to a maximum rate
equal to the weighted average of the Loan
Rates on each Fixed-Rate Loan in the Loan
Pool.
S-5
<PAGE>
Class B-2 Pass-Through Rate... 8.00% per annum, subject to a maximum rate
equal to the weighted average of the Loan
Rates on each Fixed-Rate Loan in the Loan
Pool.
Description of Certificates... The Class A-1 ARM, Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-6 Cer-
tificates (the "Class A Certificates") are Se-
nior Certificates and the Class M-1 and Class
M-2 Certificates (the "Class M Certificates"),
and the Class B-1 and Class B-2 Certificates
(the "Class B Certificates") are Subordinated
Certificates, all as described herein, and are
issued by, and payable solely from the prop-
erty of, the Trust. The undivided percentage
interest of the holder of any Certificate in
the distributions to be made to the related
Class (the "Percentage Interest") will be
equal to the percentage obtained by dividing
the denomination specified on such Certificate
by the Original Principal Balance of such
Class. The "Principal Balance" of a Class of
Certificates as of any Payment Date is the
Original Principal Balance of such Class of
Certificates less all amounts previously dis-
tributed to such Class on account of princi-
pal.
Distributions on the
Certificates................ On each Payment Date, distributions on the Cer-
tificates will be made first to the holders of
the Class A Certificates, then to the holders
of the Class M Certificates, and then to the
holders of the Class B Certificates, in the
manner described below.
Distributions of interest and principal to the
holders of a Class of Class A Certificates will
be made, to the extent that the Amount Avail-
able in the Certificate Account is sufficient
therefor, in an amount equal to the sum of (i)
their respective Percentage Interests of the
amount of interest calculated as described be-
low under "A. Class A Interest," (ii) with re-
spect to the Class A-1 ARM Certificates, their
respective Percentage Interests of the Class A-
1 ARM Formula Principal Distribution Amount (as
defined below) and (iii) with respect to each
other Class of Class A Certificates, their re-
spective Percentage Interests of the Senior
Percentage of the Formula Principal Distribu-
tion Amount (each as defined below) for the re-
lated Payment Date, in the order of priority
described below under "B. Class A Principal."
Distributions of interest and principal to the
Class M-1 Certificateholders will be made in an
amount equal to their respective Percentage In-
terests multiplied by the Class M-1 Distribu-
tion Amount (as described below). Distributions
of interest and principal to the Class M-2
Certificateholders will be made in an amount
equal to their respective Percentage Interests
multiplied by the Class M-2 Distribution Amount
(as described below). Distributions of interest
and principal to the Class B-1
Certificateholders will be made in an amount
equal to their respective Percentage Interests
multiplied by the Class B-1 Distribution Amount
(as described below). Distributions of interest
and principal to the Class B-2
Certificateholders will be made in
S-6
<PAGE>
an amount equal to their respective Percentage
Interests of the Class B-2 Distribution Amount
and any Class B-2 Guaranty Payment (each as de-
scribed below). The rights of the Class M and
Class B Certificateholders to receive distribu-
tions in respect of the Amount Available are
subordinated to the rights of the Class A
Certificateholders; the rights of the Class M-2
and Class B Certificateholders to receive such
distributions are subordinated to the rights of
the Class A Certificateholders and the Class M-
1 Certificateholders; the rights of the Class B
Certificateholders to receive such distribu-
tions are subordinated to the rights of the
Class A and Class M Certificateholders; and the
rights of the Class B-2 Certificateholders to
receive such distributions are subordinated to
the rights of the Class A, Class M and Class B-
1 Certificateholders. Distributions will be
made on each Payment Date commencing in June
1997 to holders of record on the related Record
Date, except that the final distribution in re-
spect of the Certificates will only be made
upon presentation and surrender of the Certifi-
cates at the office or agency appointed by the
Trustee for that purpose in Minneapolis or St.
Paul, Minnesota.
The "Class M-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "C. Class M-1 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "D. Class M-1 Prin-
cipal" below. The "Class M-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-1
Certificateholders (after giving effect to the
distribution made to Class A Certificate-
holders) on such Payment Date (the "Class M-1
Remaining Amount Available").
The "Class M-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "E. Class M-2 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "F. Class M-2 Prin-
cipal" below. The "Class M-2 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-2 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-2
Certificateholders (after giving effect to the
distribution made to Class A and Class M-1
Certificateholders) on such Payment Date (the
"Class M-2 Remaining Amount Available").
The "Class B-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest
S-7
<PAGE>
calculated as described under "G. Class B-1 In-
terest" below and (ii) an amount of principal
calculated as described under "H. Class B-1
Principal" below. The "Class B-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class B-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class B-1
Certificateholders (after giving effect to the
distribution made to Class A and Class M
Certificateholders) on such Payment Date (the
"Class B-1 Remaining Amount Available").
The "Class B-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "I. Class B-2 Inter-
est" below and (ii) the amount of principal
calculated as described in the first paragraph
under "J. Class B-2 Principal" below. The
"Class B-2 Distribution Amount" for any Payment
Date will equal the lesser of (i) the Class B-2
Formula Distribution Amount for such Payment
Date or (ii) the Amount Available in the Cer-
tificate Account available for distribution to
the Class B-2 Certificateholders (after giving
effect to the distribution made to Class A,
Class M and Class B-1 Certificateholders) on
such Payment Date (the "Class B-2 Remaining
Amount Available").
See "Description of the Certificates" for a de-
tailed description of the amounts on deposit in
the Certificate Account that will constitute
the Amount Available on each Payment Date. The
Amount Available will consist primarily of pay-
ments made on or in respect of the Loans and
will include amounts otherwise payable to the
Class M Certificateholders, to the Class B
Certificateholders, to the Company as the Class
B-2 Guaranty Fee, to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) as the related
Monthly Servicing Fee and to the Class C
Certificateholder. The Class M-1 Remaining
Amount Available will include amounts otherwise
payable to the holders of the Class M-2 Certif-
icates, to the Class B Certificates, to the
Company as the Class B-2 Guaranty Fee, to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer) as the related Monthly Servicing Fee,
and to the Class C Certificateholder. The Class
M-2 Remaining Amount Available will include
amounts otherwise payable to the holders of the
Class B Certificates, to the Company as the
Class B-2 Guaranty Fee, to the Servicer (so
long as the Company or any wholly owned subsid-
iary of the Company is the Servicer) as the re-
lated Monthly Servicing Fee, and to the Class C
Certificateholder. The Class B-1 Remaining
Amount Available will include amounts otherwise
payable to the Class B-2 Certificateholders, to
the Company as the Class B-2 Guaranty Fee, to
the Servicer (so long as the Company or any
wholly owned subsidiary of the
S-8
<PAGE>
Company is the Servicer) as the related Monthly
Servicing Fee and to the Class C
Certificateholder. The Class B-2 Remaining
Amount Available will include amounts otherwise
payable to the Company as the Class B-2 Guar-
anty Fee, to the Servicer (so long as the Com-
pany or any wholly owned subsidiary of the Com-
pany is the Servicer) as the related Monthly
Servicing Fee and to the Class C
Certificateholder.
The "Class A Principal Balance" as of any Pay-
ment Date is the sum of the Class A-1 ARM Prin-
cipal Balance, the Class A-1 Principal Balance,
the Class A-2 Principal Balance, the Class A-3
Principal Balance, the Class A-4 Principal Bal-
ance, the Class A-5 Principal Balance and the
Class A-6 Principal Balance. The Class M Prin-
cipal Balance as of any Payment Date is the sum
of the Class M-1 Principal Balance and the
Class M-2 Principal Balance. The Class B Prin-
cipal Balance as of any Payment Date is the sum
of the Class B-1 Principal Balance and the
Class B-2 Principal Balance.
A portion of the interest otherwise payable on a
Payment Date to the Class M and Class B
Certificateholders will be subordinated to
other amounts payable to Certificateholders on
that Payment Date if on the preceding Payment
Date the Principal Balance of the Loans is less
than the sum of the Class A, Class M and Class
B Principal Balances, as further described be-
low in the sections describing interest payable
on the Class M and Class B Certificates.
A. Class A Interest.......... Interest on the outstanding Principal Balance of
each Class of Class A Certificates will accrue
from May 29, 1997, or from the most recent Pay-
ment Date on which interest has been paid, to
but excluding the following Payment Date. In-
terest on each Class of A Certificates, other
than the Class A-1 ARM Certificates, will be
computed on the basis of a 360-day year of
twelve 30-day months. Interest on the Class A-l
ARM Certificates will be computed on the basis
of actual days elapsed in a 360-day year.
Interest will be paid concurrently on each Class
of Class A Certificates on each Payment Date,
to the extent of the Amount Available for such
date in the Certificate Account, at the related
Pass-Through Rate on the then outstanding
Class A-1 ARM Principal Balance, Class A-1
Principal Balance, Class A-2 Principal Balance,
Class A-3 Principal Balance, Class A-4 Princi-
pal Balance, Class A-5 Principal Balance and
Class A-6 Principal Balance.
In the event that, on a particular Payment Date,
the Amount Available in the Certificate Account
is not sufficient to make a full distribution
of interest to the holders of outstanding Class
A Certificates, the amount of interest to be
distributed in respect of
S-9
<PAGE>
the Class A Certificates will be allocated
among each Class thereof (and within a Class
among the Certificates of such Class) pro rata
in accordance with their respective entitle-
ments to interest, and the amount of the
shortfall will be carried forward and added to
the amount such holders will be entitled to re-
ceive on the next Payment Date. Any such amount
so carried forward will bear interest at the
related Pass-Through Rate, to the extent le-
gally permissible. See "Description of the Cer-
tificates--Distributions on the Certificates--
Class A Interest."
B. Class A Principal......... Holders of a Class of Class A Certificates will
be entitled to receive payments of principal on
each Payment Date in the order of priority set
forth below and to the extent of the Amount
Available in the Certificate Account after pay-
ment of all interest payable on each Class of
Class A Certificates. Holders of the Class A-1
ARM Certificates will be entitled to receive,
as payments of principal, an amount equal to
the Class A-1 ARM Formula Principal Distribu-
tion Amount. The "Class A-1 ARM Formula Princi-
pal Distribution Amount" on or before the Pay-
ment Date on which the Class A-1 ARM Certifi-
cates have been paid in full will generally be
equal to the lesser of (A) the Class A-1 ARM
Principal Balance or (B) the sum of the follow-
ing: (i) all scheduled payments of principal
due on each outstanding Adjustable Rate Loan
during the preceding month; (ii) all partial
Principal Prepayments and Principal Prepayments
in Full received on each Adjustable Rate Loan
during the preceding month; (iii) the scheduled
principal balance of each Adjustable Rate Loan
that became a Liquidated Loan during the pre-
ceding month; (iv) the Scheduled Principal Bal-
ance of each Adjustable Rate Loan purchased by
the Company during the preceding month pursuant
to the Agreement; and (v) on any Payment Date
which is on or after the Payment Date on which
the Class A-1, A-2, A-3, A-4, A-5 and A-6 Cer-
tificates have been paid in full, (a) the Se-
nior Percentage times (x) the sum of the
amounts described in clauses (i) through (v) of
the definition of the Formula Principal Distri-
bution Amount less (y) the sum of the amounts
described in clauses (i) through (iv) of the
definition of the A-1 ARM Formula Principal
Distribution Amount less (b) the amount, if
any, distributed in payment of principal on the
Class A-1, A-2, A-3, A-4, A-5 and A-6 Certifi-
cates on such Payment Date.
Holders of the Class A Certificates (other than
the Class A-1 ARM Certificates) will be enti-
tled to receive, as payments of principal, an
amount equal to the Senior Percentage of the
Formula Principal Distribution Amount. The For-
mula Principal Distribution Amount is (A) the
sum of (i) all scheduled payments of principal
due on each outstanding Loan during the month
preceding the month in which the Payment Date
occurs, (ii) the Scheduled Principal Balance of
each Home Equity Loan which, during the month
preceding the month of such Payment Date, was
pur-
S-10
<PAGE>
chased by the Company pursuant to the Agreement
on account of certain breaches of its represen-
tations and warranties, (iii) all partial Prin-
cipal Prepayments applied and all Principal
Prepayments in Full received during such pre-
ceding month in respect of the Loans, (iv) the
Scheduled Principal Balance of each Loan that
became a Liquidated Loan during such preceding
month and (v) any amount described in clauses
(i) through (iv) above that was not previously
distributed because of an insufficient amount
of funds available in the Certificate Account
if (a) the Payment Date occurs on or after the
Payment Date on which the Class B-2 Principal
Balance has been reduced to zero, or (b) such
amount was not covered by a Class B-2 Guaranty
Payment and corresponding reduction in the
Class B-2 Principal Balance, minus (B) the
Class A-1 ARM Formula Principal Distribution
Amount. When the Principal Balance of a Class
of Class A Certificates is reduced to zero, no
further distributions of principal will be made
to the holders of such Class.
The Senior Percentage for any Payment Date prior
to the Class B Cross-over Date (as described
below), and for any Payment Date on or after
the Class B Cross-over Date on which any Class
B Principal Distribution Test (as described be-
low) has not been satisfied, will equal 100%.
On each Payment Date on or after the Class B
Cross-over Date, if each Class B Principal Dis-
tribution Test has been satisfied on such Pay-
ment Date, the Senior Percentage will equal a
fraction, expressed as a percentage, the numer-
ator of which is the sum of the Class A Princi-
pal Balance (excluding the Class A-1 ARM Prin-
cipal Balance) and the Class M Principal Bal-
ance for such Payment Date and the denominator
of which is the Pool Scheduled Principal Bal-
ance of the Loans other than the Adjustable
Rate Loans for the immediately preceding Pay-
ment Date.
The Senior Percentage of the Formula Principal
Distribution Amount will be distributed, to the
extent of the Amount Available after payment of
interest on each Class of Class A Certificates,
as follows: (i) that portion, if any, of the
Senior Percentage of the Formula Principal Dis-
tribution Amount equal to the Class A-6 Lockout
Pro Rata Distribution Amount will be distrib-
uted to the Class A-6 Certificateholders; and
(ii) the remainder of the Senior Percentage of
the Formula Principal Distribution Amount will
be distributed in the following order: first,
to the Class A-1 Certificateholders until the
Class A-1 Principal Balance has been reduced to
zero, then to the Class A-2 Certificateholders
until the Class A-2 Principal Balance has been
reduced to zero, then to the Class A-3
Certificateholders until the Class A-3 Princi-
pal Balance has been reduced to zero, then to
the Class A-4 Certificateholders until the
Class A-4 Principal Balance has been reduced to
zero, and then to the Class A-5
Certificateholders until the Class A-5 Princi-
pal Balance has been reduced to zero. After the
Class A-5 Principal Balance has been
S-11
<PAGE>
reduced to zero, Holders of the Class A-6 Cer-
tificates will be entitled to receive the en-
tire Senior Percentage of the Formula Principal
Distribution Amount, up to the amount necessary
to reduce the Class A-6 Principal Balance to
zero, to the extent the remaining Amount Avail-
able is sufficient therefor.
The "Class A-6 Lockout Pro Rata Distribution
Amount," as to any Payment Date, is an amount
equal to the lesser of:
(a) the product of (1) the Class A-6 Lockout
Percentage, and (2) the product of (A) a
fraction, the numerator of which is the
Class A-6 Principal Balance immediately
preceding such Payment Date and the
denominator of which is the Class A
Principal Balance less the Class A-1 ARM
Principal Balance immediately preceding such
Payment Date, and (B) the Senior Percentage
of the Formula Principal Distribution Amount
for such Payment Date, and
(b) the Class A-6 Principal Balance immediately
preceding such Payment Date.
The "Class A-6 Lockout Percentage," as to any
Payment Date occurring during the periods set
forth below, is the percentage designated as
such as follows
<TABLE>
<CAPTION>
CLASS A-6
PERIOD (DATES INCLUSIVE) LOCKOUT PERCENTAGE
------------------------ ------------------
<S> <C>
June 1997 through May 2000............... 0%
June 2000 through May 2002............... 20%
June 2002 through May 2003............... 80%
June 2003 through May 2004............... 100%
June 2004 and thereafter................. 300%
</TABLE>
On any Payment Date as to which there is a Class
A Liquidation Loss Principal Amount (which is
the amount, if any, by which the Pool Scheduled
Principal Balance is less than the Class A
Principal Balance), the remaining Amount Avail-
able will be distributed pro rata to each Class
of Class A Certificates based on the Class
Principal Balance of each Class (but in no
event will such amount exceed the Class Princi-
pal Balance of any such Class).
If, as to any Payment Date, the Amount Available
remaining after distributions of interest on
the Class A Certificates is less than the sum
of the Senior Percentage of the Formula Princi-
pal Distribution Amount and the Class A-1 ARM
Formula Principal Distribution Amount, the
amounts to be distributed to the Class A
Certificateholders (including the Class A-1 ARM
Certificateholders) will be allocated pro rata
based upon the respective portions of the
Amount Available that would have been distrib-
uted to the Class A Certificateholders, as de-
scribed above, had the remaining Amount Avail-
able been sufficient therefor.
C. Class M-1 Interest........ Interest on the outstanding Class M-1 Principal
Balance will accrue from May 29, 1997, or from
the most recent Payment Date
S-12
<PAGE>
on which interest has been paid, to but exclud-
ing the following Payment Date, and will be
computed on the basis of a 360-day year of
twelve 30-day months.
To the extent of the Class M-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount for
such date, interest will be paid to the Class
M-1 Certificateholders on such Payment Date in
an amount (the "Class M-1 Interest Payment
Amount") equal to the product of (a) the Class
M-1 Pass-Through Rate and (b) the then out-
standing Class M-1 Principal Balance less the
Class M-1 Liquidation Loss Principal Amount, if
any. The "Class M-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Liquidation
Loss Principal Amount over the aggregate of the
Principal Balances of the Class M-2 Certifi-
cates, the Class B-1 Certificates and the Class
B-2 Certificates. The "Aggregate Liquidation
Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of (i) the sum
of the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal
Balance as of the preceding Payment Date (after
giving effect to distributions of principal
thereon) over (ii) the Pool Scheduled Principal
Balance for such preceding Payment Date.
In the event that, on a particular Payment Date,
the Class M-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class M-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-1 Certif-
icates will be allocated among the Class M-1
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class M-1
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on the Certificates--Class
M-1 Interest."
D. Class M-1 Principal....... Payments of principal on the Class M-1 Certifi-
cates will not commence until the Class A Prin-
cipal Balance has been reduced to zero. On each
Payment Date on or after the date on which the
Class A Principal Balance has been reduced to
zero, holders of Class M-1 Certificates will be
entitled to receive the Senior Percentage of
the Formula Principal Distribution Amount, un-
til the Class M-1 Principal Balance has been
reduced to zero.
E. Class M-2 Interest........ Interest on the outstanding Class M-2 Principal
Balance will accrue from May 29, 1997, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class M-2 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribu-
S-13
<PAGE>
tion Amount and the Class M-1 Distribution
Amount for such date, interest will be paid to
the Class M-2 Certificateholders on such Pay-
ment Date in an amount (the "Class M-2 Interest
Payment Amount") equal to the product of (a)
the Class M-2 Pass-Through Rate and (b) the
then outstanding Class M-2 Principal Balance
less the Class M-2 Liquidation Loss Principal
Amount, if any. The "Class M-2 Liquidation Loss
Principal Amount" as of any Payment Date will
equal the excess, if any, of the Aggregate Liq-
uidation Loss Principal Amount over the Class B
Principal Balance.
In the event that, on a particular Payment Date,
the Class M-2 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class M-2 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-2 Certif-
icates will be allocated among the Class M-2
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class M-2
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on the Certificates--Class
M-2 Interest."
F. Class M-2 Principal....... Payments of principal on the Class M-2 Certifi-
cates will not commence until the Class A Prin-
cipal Balance and the Class M-1 Principal Bal-
ance have been reduced to zero. On each Payment
Date on or after the date on which the Class A
Principal Balance and the Class M-1 Principal
Balance have been reduced to zero, holders of
Class M-2 Certificates will be entitled to re-
ceive the Senior Percentage of the Formula
Principal Distribution Amount, until the Class
M-2 Principal Balance has been reduced to zero.
G. Class B-1 Interest........ Interest on the outstanding Class B-1 Principal
Balance will accrue from May 29, 1997, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class B-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount, the
Class M-1 Distribution Amount and the Class M-2
Distribution Amount for such date, interest
will be paid to the Class B-1
Certificateholders on such Payment Date in an
amount (the "Class B-1 Interest Payment
Amount") equal to the product of (a) the Class
B-1 Pass-Through Rate and (b) the then out-
standing Class B-1 Principal Balance less the
Class B-1 Liquidation Loss Principal Amount, if
any. The "Class B-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Liquidation
Loss Principal Amount over the Class B-2 Prin-
cipal Balance.
S-14
<PAGE>
In the event that, on a particular Payment Date,
the Class B-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class B-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class B-1 Certif-
icates will be allocated among the Class B-1
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class B-1
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class B-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on the Certificates--Class
B-1 Interest."
H. Class B-1 Principal....... Payments of principal on the Class B-1 Certifi-
cates will not commence until the Class B
Cross-over Date, and will be made on that Pay-
ment Date and each Payment Date thereafter only
if each Class B Principal Distribution Test is
satisfied on such Payment Date (unless the
Class A Principal Balance and the Class M Prin-
cipal Balance have been reduced to zero). The
Class B Cross-over Date will be the earlier of
(A) the Payment Date on which the Class M-2
Principal Balance is reduced to zero and (B)
the first Payment Date on or after the Payment
Date in June 2000 on which the fraction, ex-
pressed as a percentage, the numerator of which
is the Class B Principal Balance as of such
Payment Date and the denominator of which is
the Pool Scheduled Principal Balance as of the
immediately preceding Payment Date, is equal to
or greater than 10%. The Class B Principal Dis-
tribution Tests on each Payment Date relate to
losses and delinquencies on the Loans, and are
described under "Description of the Certifi-
cates--Distributions on the Certificates--Class
B-1 Principal."
On each Payment Date on or after the Class B
Cross-over Date, the Class B Percentage of the
Formula Principal Distribution Amount will be
paid to the Class B-1 Certificateholders to the
extent of the Class B-1 Remaining Amount Avail-
able after payment of interest on the Class B-1
Certificates, until the Class B-1 Principal
Balance has been reduced to zero.
The Class B Percentage for any Payment Date will
be equal to 100% minus the Senior Percentage.
The Class B Percentage for each Payment Date,
if any, after the Class A Principal Balance and
the Class M Principal Balance have been reduced
to zero will be equal to 100%.
I. Class B-2 Interest........ Interest on the outstanding Class B-2 Principal
Balance will accrue from May 29, 1997, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
S-15
<PAGE>
To the extent of (i) the Class B-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class A Distribution
Amount, the Class M-1 Distribution Amount, the
Class M-2 Distribution Amount and the Class B-1
Distribution Amount for such date, and (ii) the
Class B-2 Guaranty Payment, if any, for such
date, interest will be paid to the Class B-2
Certificateholders on such Payment Date in an
amount (the "Class B-2 Interest Payment
Amount") equal to the product of (a) the Class
B-2 Pass-Through Rate and (b) the then out-
standing Class B-2 Principal Balance less the
Class B-2 Liquidation Loss Principal Amount, if
any. The "Class B-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
lesser of the Aggregate Liquidation Loss Prin-
cipal Amount and the Class B-2 Principal Bal-
ance.
In the event that, on a particular Payment Date,
the Class B-2 Remaining Amount Available in the
Certificate Account plus any amounts actually
paid under the Class B-2 Limited Guaranty are
not sufficient to make a full distribution of
the Class B-2 Interest Payment Amount, the
amount of interest to be distributed in respect
of the Class B-2 Certificates will be allocated
among the Class B-2 Certificates pro rata in
accordance with their respective entitlements
to interest, and the amount of the deficiency
will be carried forward as an amount that the
Class B-2 Certificateholders are entitled to
receive on the next Payment Date. Any amount so
carried forward will, to the extent legally
permissible, bear interest at the Class B-2
Pass-Through Rate. See "Description of the Cer-
tificates-- Distributions on the Certificates--
Class B-2 Interest."
J. Class B-2 Principal....... Except for payments of the Class B-2 Liquidation
Loss Principal Amount, payments of principal on
the Class B-2 Certificates will not commence
until the Payment Date on which the Class B-1
Principal Balance has been reduced to zero (the
"Class B-1 Cross-over Date"), and will be made
on that Payment Date and each Payment Date
thereafter only if each Class B Principal Dis-
tribution Test is satisfied on such Payment
Date (unless the Class A Principal Balance and
the Class M Principal Balance have been reduced
to zero). On any such Payment Date, the Class B
Percentage of the Formula Principal Distribu-
tion Amount will be distributed, to the extent
of the Class B-2 Remaining Amount Available and
any amounts actually paid under the Class B-2
Limited Guaranty after payment of interest on
the Class B-2 Certificates, to the Class B-2
Certificateholders until the Class B-2 Princi-
pal Balance has been reduced to zero. See "De-
scription of the Certificates--Distributions on
the Certificates--Class B-2 Principal."
On each Payment Date, the Class B-2
Certificateholders will be entitled to receive,
pursuant to the Class B-2 Limited Guaranty, the
Class B-2 Liquidation Loss Principal Amount un-
til the Class B-2 Principal Balance has been
reduced to zero.
S-16
<PAGE>
Subordination of Class M and
Class B Certificates........ The rights of the holders of the Class M Certif-
icates and Class B Certificates to receive dis-
tributions with respect to the Loans, as well
as any other amounts constituting the Amount
Available, will be subordinated, to the extent
described herein, to such rights of the holders
of the Class A Certificates. This subordination
is intended to enhance the likelihood of regu-
lar receipt by the holders of the Class A Cer-
tificates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Loans.
The protection afforded to the holders of the
Class A Certificates by means of the subordina-
tion of the Class M and Class B Certificates
will be accomplished by the preferential right
of the Class A Certificateholders to receive,
prior to any distribution being made on a Pay-
ment Date in respect of the Class M and Class B
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Amount Available on such date in the Certifi-
cate Account and, if necessary, by the right of
such Class A Certificateholders to receive fu-
ture distributions of Amounts Available that
would otherwise be payable to the holders of
the Class M and Class B Certificates.
In addition, the rights of the holders of the
Class M-2 Certificates and Class B Certificates
to receive distributions with respect to the
Loans, as well as any other amounts constitut-
ing Amount Available, will be subordinated, to
the extent described herein, to such rights of
the holders of the Class M-1 Certificates. This
subordination is intended to enhance the like-
lihood of regular receipt by the holders of the
Class M-1 Certificates of the full amount of
their scheduled monthly payments of interest
and principal and to afford such holders pro-
tection against losses on Liquidated Loans.
The protection afforded to the holders of the
Class M-1 Certificates by means of the subordi-
nation of the Class M-2 and Class B Certifi-
cates will be accomplished by the preferential
right of the Class M-1 Certificateholders to
receive, prior to any distribution being made
on a Payment Date in respect of the Class M-2
and Class B Certificates, the amounts of inter-
est and principal due them on each Payment Date
out of the Class M-1 Remaining Amount Available
on such date in the Certificate Account and, if
necessary, by the right of such Class M-1
Certificateholders to receive future distribu-
tions of Class M-1 Remaining Amounts Available
that would otherwise be payable to the holders
of the Class M-2 and Class B Certificates.
In addition, the rights of the holders of the
Class B Certificates to receive distributions
with respect to the Loans, as well as any other
amounts constituting Class Amount Available,
will be subordinated, to the extent described
herein, to such rights of the holders of the
Class M-2 Certificates. This subordination is
in-
S-17
<PAGE>
tended to enhance the likelihood of regular re-
ceipt by the holders of the Class M-2 Certifi-
cates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Loans.
The protection afforded to the holders of the
Class M-2 Certificates by means of the subordi-
nation of the Class B Certificates will be ac-
complished by the preferential right of the
Class M-2 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B Certificates,
the amounts of interest and principal due them
on each Payment Date out of the Class M-2 Re-
maining Amount Available on such date in the
Certificate Account and, if necessary, by the
right of such Class M-2 Certificateholders to
receive future distributions of Class M-2 Re-
maining Amounts Available that would otherwise
be payable to the holders of the Class B Cer-
tificates.
In addition, the rights of the holders of the
Class B-2 Certificates to receive distributions
with respect to the Loans, as well as any other
amounts constituting Amount Available, will be
subordinated, to the extent described herein,
to such rights of the holders of the Class B-1
Certificates. This subordination is intended to
enhance the likelihood of regular receipt by
the holders of the Class B-1 Certificates of
the full amount of their scheduled monthly pay-
ments of interest and principal and to afford
such holders protection against losses on
Liquidated.
The protection afforded to the holders of the
Class B-1 Certificates by means of the subordi-
nation of the Class B-2 Certificates will be
accomplished by the preferential right of the
Class B-1 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B-2 Certificates,
the amounts of interest and principal due them
on each Payment Date out of the Class B-1 Re-
maining Amount Available on such date in the
Certificate Account and, if necessary, by the
right of such Class B-1 Certificateholders to
receive future distributions of Class B-1 Re-
maining Amounts Available that would otherwise
be payable to the holders of the Class B-2 Cer-
tificates.
If a Class B-2 Guaranty Payment is required for
any Payment Date and the Company fails to pay
such amount pursuant to the Class B-2 Limited
Guaranty, the Class B-2 Certificateholders may
incur losses on their investment in the Class
B-2 Certificates to the extent such losses are
not made up from future payments on the Loans.
See "Description of the Certificates--Subordi-
nation of Class M Certificates and Class B Cer-
tificates."
Losses on Liquidated Loans... As described above, the distribution of princi-
pal to the Class A Certificateholders is in-
tended to include the Senior Percentage of
S-18
<PAGE>
the Scheduled Principal Balance of each Loan
(other than the Adjustable Rate Loans) that be-
came a Liquidated Loan during the preceding Due
Period and the Scheduled Principal Balance of
each Adjustable Rate Loan that became a Liqui-
dated Loan during the preceding Due Period. If
the Net Liquidation Proceeds from such Liqui-
dated Loans are less than the Scheduled Princi-
pal Balance of such Liquidated Loans plus ac-
crued and unpaid interest thereon, the defi-
ciency will, in effect, be absorbed by the
Class C Certificateholder, then the Class B-2
Guaranty Fee otherwise payable to the Company,
then the related Monthly Servicing Fee other-
wise payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer), then the Class B-2
Certificateholders, then the Class B-1
Certificateholders, then the Class M-2 Certifi-
cateholders and then the Class M-1
Certificateholders, since a portion of the
Amount Available equal to such deficiency and
otherwise distributable to them will be paid to
the Class A Certificateholders. Likewise, to
the extent the Class M-1 Certificateholders or
the Class M-2 Certificateholders are entitled
to receive distributions of principal, similar
deficiencies could result for each Class of
Certificates with a lower payment priority.
If the Amount Available is not sufficient to
cover the entire amount distributable to the
Class A Certificateholders, the Class M-1
Certificateholders or the Class M-2 Certifi-
cateholders on a particular Payment Date, then
the Senior Percentage on future Payment Dates
may be increased and the Class B Percentage on
future Payment Dates may be reduced as a result
of such deficiency.
But for the effect of the subordination of the
Class M-2, Class B and Class C Certificates,
the Class B-2 Guaranty Fee otherwise payable to
the Company and the related Monthly Servicing
Fee otherwise payable to the Servicer (so long
as the Company or any wholly owned subsidiary
of the Company is the Servicer), the Class M-1
Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its
Net Liquidation Proceeds are less than its un-
paid principal balance plus accrued and unpaid
interest thereon less the related Monthly Ser-
vicing Fee. See "Description of the Certifi-
cates--Subordination of Class M Certificates
and Class B Certificates."
But for the effect of the subordination of the
Class B and Class C Certificates, the Class B-2
Guaranty Fee otherwise payable to the Company
and the related Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer), the Class M-2 Certificate-
holders will absorb all losses on each Liqui-
dated Loan in the amount by which its Net Liq-
uidation Proceeds are less than its unpaid
principal balance plus accrued and unpaid
S-19
<PAGE>
interest thereon less the related Monthly Ser-
vicing Fee. See "Description of the Certifi-
cates--Subordination of Class M Certificates
and Class B Certificates."
But for the effect of the subordination of the
Class B-2 and Class C Certificates, the Class
B-2 Guaranty Fee otherwise payable to the Com-
pany and the related Monthly Servicing Fee oth-
erwise payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer), the Class B-1
Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its
Net Liquidation Proceeds are less than its un-
paid principal balance plus accrued and unpaid
interest thereon less the related Monthly Ser-
vicing Fee. See "Description of the Certifi-
cates--Subordination of Class M Certificates
and Class B Certificates."
But for the payments under the Class B-2 Limited
Guaranty described below and the subordination
of the Class C Certificate, the Class B-2 Guar-
anty Fee otherwise payable to the Company and
the related Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer), the Class B-2
Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its
Net Liquidation Proceeds are less than its un-
paid principal balance plus accrued and unpaid
interest thereon less the related Monthly Ser-
vicing Fee. See "Description of the Certifi-
cates--Subordination of Class M Certificates
and Class B Certificates."
Class B-2 Limited Guaranty... In order to mitigate the effect of the subordi-
nation of the Class B-2 Certificates and liqui-
dation losses and delinquencies on the Loans in
the Loan Pool, the Class B-2 Certificateholders
are entitled to receive on each Payment Date an
amount equal to the Class B-2 Guaranty Payment,
if any, under the Class B-2 Limited Guaranty of
the Company. Prior to the Class B-1 Cross-over
Date, and on any Payment Date on or after the
Class B-1 Cross-over Date on which any Class B
Principal Distribution Test is not satisfied
(unless the Class A Principal Balance and the
Class M Principal Balance have been reduced to
zero), the Class B-2 Guaranty Payment will
equal the amount, if any, by which (a) the sum
of (i) the Class B-2 Formula Distribution
Amount (which will be equal to accrued and un-
paid interest on the Class B-2 Certificates)
for such Payment Date and (ii) the Class B-2
Liquidation Loss Principal Amount, if any, for
such Payment Date, exceeds (b) the Class B-2
Distribution Amount for such Payment Date. On
each Payment Date on or after the Class B-1
Cross-over Date on which each Class B Principal
Distribution Test is satisfied (or on which the
Class A Principal Balance and the Class M Prin-
cipal Balance have been reduced to zero), the
Class B-2 Guaranty Payment will equal the
amount, if any, by which (a) the sum of (i) the
Class B-2 Formula Distribution
S-20
<PAGE>
Amount (which will include both interest and
principal) for such Payment Date and (ii) the
Class B-2 Liquidation Loss Principal Amount, if
any, exceeds (b) the Class B-2 Distribution
Amount for such Payment Date.
The Class B-2 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 repre-
sented by one or more certificates registered
in the name of Cede & Co. ("Cede") as the nomi-
nee 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. Holders of the Class A-1 ARM
Certificates may elect to hold their Certifi-
cate interests in Europe through Centrale de
Livraison de Valeurs Mobilieres S.A. ("CEDEL")
or the Euroclear System ("Euroclear"). Certifi-
cates will otherwise be issued in definitive
form only under the limited circumstances de-
scribed 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 "De-
scription of the Certificates--Registration of
the Certificates" herein.
The Loans (other than the
Adjustable Rate Loans)...... The Fixed-Rate Loans (meaning all Loans other
than the Adjustable Rate Loans) consist of
5,575 closed-end home equity loans (of which
1,399 are Balloon Loans), including any and all
rights to receive payments due thereunder on
and after the Cut-off Date. The Fixed-Rate
Loans are secured by real estate located in 47
states and the District of Columbia. The Loan
Rates on the Fixed-Rate Loans as of the Cut-off
Date ranged from 6.00% to 18.00% with a
weighted average of 12.16%. The Fixed-Rate
Loans had a weighted average term to scheduled
maturity, as of origination, of 242 months, and
a weighted average term to scheduled maturity,
as of the Cut-off Date, of 241 months. The
weighted average Loan Rate on the Balloon Loans
is 12.13%. The Balloon Loans had a weighted av-
erage term to scheduled maturity, as of origi-
nation, of 180 months, and a weighted average
term to scheduled maturity, as of the Cut-off
Date, of 178 months. The Fixed-Rate Loans in-
clude 20 Loans, with an aggregate principal
balance as of the Cut-off Date of
$1,676,250.65, that accrue interest at a fixed
rate for an initial thirty-six month period and
thereafter provide for adjustments to the Loan
Rate annually or semiannually. The final sched-
uled payment date on the Loan with the latest
scheduled maturity is in June 2027. See "The
Loans" herein.
Adjustable Rate Loans........ The Adjustable Rate Loans consist of 327 closed-
end home equity loans, including any and all
rights to receive payments due
S-21
<PAGE>
thereunder on and after the Cut-off Date. The
Adjustable Rate Loans accrue interest at a
fixed rate for an initial six-month or twenty-
four month period and thereafter, the interest
rate adjusts annually or semiannually to equal
the sum of the Six-Month LIBOR Index and the
Gross Margin specified in the related Loan. The
Adjustable Rate Loans are secured by real es-
tate located in 33 states and the District of
Columbia. The Loan Rate on the Adjustable Rate
Loans as of the Cut-off Date ranges from 7.69%
to 14.40% with a weighted average of 9.87%. The
Adjustable Rate Loans had a weighted average
term to scheduled maturity, as of origination,
of 356 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
355 months. The final scheduled payment date on
the Adjustable Rate Loan with the latest sched-
uled maturity is in June 2027. See "The Loans--
Adjustable Rate Loans" herein.
Advances..................... The Servicer is obligated to make Advances each
month of any scheduled payments on the Loans
that were due but not received during the prior
Due Period. The Servicer will be entitled to
reimbursement of an Advance from funds avail-
able 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 Ac-
count. If the Servicer fails to make any Ad-
vance required under the Agreement, the Trustee
will be obligated (subject to certain condi-
tions) 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 Loan in
Obligations................. 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 Loan made in the Agreement
if such breach has not been cured within 90
days of the day it was or should have been dis-
covered by the Servicer or the Trustee. In lieu
of repurchasing a Loan, during the two-year pe-
riod following the Closing Date, the Company
may, at its option, substitute another home eq-
uity loan for the Loan that it is otherwise ob-
ligated to repurchase. See "Description of the
Certificates--Conveyance of Loans" herein and
in the Prospectus.
Repurchase Option............ The Servicer will have the option to repurchase
all of the outstanding Loans on any Payment
Date on which the Pool Scheduled Principal Bal-
ance of the Loan Pool is less than 10% of the
Cut-off Date Pool Principal Balance. See "De-
scription of the Certificates--Repurchase Op-
tion" herein and in the Prospectus.
Monthly Servicing Fee........ The Servicer will be entitled to monthly compen-
sation for servicing the Loans 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" here-
in.
S-22
<PAGE>
Tax Status................... In the opinion of counsel to the Company, for
federal income tax purposes, the Trust will be
treated as a real estate mortgage investment
conduit ("REMIC"). Each Class of Certificates
will constitute "regular interests" in such
REMIC and generally will be treated as debt in-
struments of the Trust for federal income tax
purposes with payment terms equivalent to the
terms of such Certificates. The Class C Certif-
icate, which is not being offered hereby,
will constitute the "residual interest" in the
REMIC. The holders of Certificates will be re-
quired to include in income interest on such
Certificates (including any original issue
discount) in accordance with the accrual method
of accounting. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations......... Subject to the conditions described herein, the
Class A-1 ARM, Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Certificates
may be purchased by employee benefit plans that
are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). No
transfer of any other Certificates will be per-
mitted to be made to any employee benefit plan
subject to 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 Considera-
tions" herein and in the Prospectus.
Rating....................... It is a condition precedent to the issuance of
the Certificates that the Class A-1 ARM, Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5
and Class A-6 Certificates each be rated at
least "AAA" by S&P and "AAA" by Fitch. It is a
condition precedent to the issuance of the
Class M-1 Certificates that they be rated at
least "AA" by S&P and "AA+" by Fitch. It is a
condition precedent to the issuance of the
Class M-2 Certificates that they be rated at
least "A" by S&P and "A+" by Fitch. It is a
condition precedent to the issuance of the
Class B-1 Certificates that they be rated at
least "BBB" by S&P and "BBB+" by Fitch. It is a
condition precedent to the issuance of the
Class B-2 Certificates that they be rated at
least "A-" by S&P and "A" by Fitch.
The rating of each Class of Certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each Class of Certificates by Fitch
addresses the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled. The
ratings of the Class B-2 Certificates are based
in part on an assessment of the Company's abil-
ity to make payments under the Class B-2 Lim-
ited Guaranty. 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 Class B-2 Certificates. A security rat-
ing is not a recommendation to buy, sell or
hold
S-23
<PAGE>
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
Considerations.............. The Certificates will not constitute "mortgage
related securities" for purposes of the Second-
ary Mortgage Market Enhancement Act of 1984
("SMMEA") because a substantial number of Loans
are secured by liens on real estate that are
not first liens, as required by SMMEA. Accord-
ingly, many institutions with legal authority
to invest in "mortgage related securities" may
not be legally authorized to invest in the Cer-
tificates. Investors should consult with their
own legal advisors to determine whether and to
what extent the Certificates constitute legal
investments for them.
S-24
<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 Equity Loans. The Company began
originating, purchasing and servicing home equity loans in January 1996, and
thus has no significant historical experience with respect to the performance,
including the rate of prepayments, of such loans. Accordingly, no information
has been included herein with respect to the Company's loan loss or
liquidation experience for home equity loans, inasmuch as such information as
is available would likely not be indicative of the performance of the Loans.
Balloon Loans. A substantial number of the Loans provide for the payment of
the unamortized principal balance of the loan in a single payment at the
maturity of the loan that is greater than the preceding monthly payment (the
"Balloon Loans"). All of the Balloon Loans provide for equal monthly payments,
consisting of principal and interest, based on a stated amortization schedule,
and a single payment of the remaining principal balance of the Balloon Loan at
the end of a specified period following origination. The remainder of the
Loans provide for a schedule of substantially equal payments that are, if
timely paid, sufficient to amortize fully the principal balance of the loan on
or before its maturity date. Because borrowers under Balloon Loans are
required to make a relatively large single payment upon maturity, it is
possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing Loans.
Certain Truth-In-Lending Considerations. It is likely that some Loans
included in the Loan Pool will be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Protection Act"). The Home Protection Act
adds certain additional provisions to Regulation Z, the implementing
regulation of the Federal Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to non-
purchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage loans within the purview of the Home
Protection Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the Home
Protection Act apply on a mandatory basis to all mortgage loans originated on
or after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation, the
right to rescind the mortgage loan. The Company will represent and warrant in
the Agreement that each of the Loans was originated in compliance with all
applicable laws, including the Truth-In-Lending Act, as amended. The Company,
upon breaching any such representation and warranty, will be required by the
Agreement to repurchase the related Loan at a price equal to the principal
amount thereof plus accrued interest thereon. The amount of such purchase
price will be treated as a Principal Prepayment in Full of the related Loan.
In lieu of purchasing a Loan, the Company may under certain circumstances
substitute another home equity loan.
S-25
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about May 29, 1997 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of May
1, 1997 (the "Agreement"), between the Company, as Seller and Servicer, and
the Trustee.
The Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class M-1, Class M-2, Class B-1 and Class B-2 Certificates (the
"Certificates") will be issued by the Trust, the corpus of which will consist
primarily of the Loans, including all rights to receive payments due on such
Loans after April 30, 1997 (or the date of origination thereof, if later) (the
"Cut-off Date"), liens on the related real estate, amounts held for the Trust
in the Certificate Account (as defined below), and the Class B-2 Limited
Guaranty of the Company for the benefit of the Class B-2 Certificates, as
described in "Description of the Class B-2 Limited Guaranty" herein.
Payments and recoveries in respect of principal and interest on the Loans
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 on deposit in the Certificate Account
and constituting the Amount Available will be applied on the fifteenth day of
each 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 Certificates" herein,
to pay certain monthly fees to the Servicer as compensation for its servicing
of the Loans (the "Monthly Servicing Fee") and to pay certain monthly fees to
the Company as compensation for providing the Class B-2 Limited Guaranty (the
"Class B-2 Guaranty Fee").
The Servicer will be obligated to advance any scheduled payments on the
Loans that were due but not received during the prior Due Period ("Advances").
The Servicer will be entitled to reimbursement of an Advance from funds
available therefor 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 funds available therefor in the Certificate
Account. 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 Loans from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Loans, (b) certain representations and warranties in the Agreement
as described under "Description of the Certificates--Conveyance of Loans"
herein, (c) certain indemnities and (d) the Class B-2 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 home equity loan
for, any Loan 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 Loan if such breach has not been cured prior to such date. The
Agreement also provides that the Company has certain obligations to repurchase
Loans and to indemnify the Trustee and Certificateholders with respect to
certain other matters.
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 equity loans, providing warehouse financing for
the purchase of home equity loans and other costs of maintaining such loans
until they are pooled and sold to other investors.
S-26
<PAGE>
THE LOANS
The Loans (other than the Adjustable Rate Loans, which are described
separately below) consist of closed-end home equity loans originated through
April 30, 1997. The information for each Loan is as of the Cut-off Date for
such Loan.
FIXED-RATE LOANS
The Fixed-Rate Loans have an aggregate principal balance of $290,588,998.21.
Each Fixed-Rate Loan is a closed-end home equity loan originated by the
Company or by a Company-approved correspondent lender and purchased by the
Company.
A total of $1,650,056.28, or .57% by aggregate principal amount, of the
Fixed-Rate Loans are step-up rate Loans. The Loan Rate of a step-up rate Loan
steps up on a particular date from its initial Loan Rate. Of such step-up rate
Loans, all are still bearing interest at their initial Loan Rate (the period
during which such Loans bear interest at their initial Loan Rate being
referred to herein as the "Low Rate Period"). During the Low Rate Period, the
total amount and the principal portion of each scheduled payment is determined
on a basis that would cause the Loan to be fully amortized over its term if
the Loan were to bear interest during its entire term at its initial Loan Rate
and were to have level payments over its entire term. The total amount and
principal portion of each scheduled payment due after the end of the
applicable Low Rate Period is determined on a basis that would cause the Loan
(which would then be bearing interest at a stepped-up rate) to be fully
amortized over its remaining term on a level-payment basis. The Low Rate
Periods for the step-up rate Loans will end no earlier than September 1997 and
no later than May 1998. The Loan Rates for such step-up rate Loans will
increase by either 0.0%, 1.25%, 1.50%, 1.75%, 1.76%, 2.00%, 2.05%, 6.75% or
7.05%. The increases in scheduled payments for all step-up rate Loans range
from $0.00 to $369.23 per month. The statistical information concerning the
Loans which is set forth below, to the extent it relates to the Loan Rates of
the step-up rate Loans, takes into account only their Loan Rates as of the
Cut-Off Date.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Fixed-Rate Loan is fully amortizing and
provides for level monthly payments over the term of such loan, computed on
the simple interest method (except for the Balloon Loans, the step-up rate
loans and the 20 Loans that bear a fixed Loan Rate for an initial thirty-six
month period with annual or semiannual adjustments thereafter), (b) each
Fixed-Rate Loan has its last scheduled payment due no later than June 2027,
and (c) each Fixed-Rate Loan is secured by a lien on the related real estate.
The Fixed-Rate Loans were originated or acquired by the Company in the
ordinary course of the Company's business. A detailed listing of the Fixed-
Rate Loans is appended to the Agreement. See "Description of the Certificates"
herein and in the Prospectus. Each of the Fixed-Rate Loans has a Loan Rate of
at least 6.00% per annum and not more than 18.00% and the weighted average of
the Loan Rates of the Fixed-Rate Loans as of the Cut-off Date is 12.16%. As of
the Cut-off Date, the Fixed-Rate Loans had remaining maturities of at least 36
months but not more than 360 months and original maturities of at least 36
months but not more than 360 months. The Fixed-Rate Loans had a weighted
average term to scheduled maturity, as of origination, of 242 months, and a
weighted average term to scheduled maturity, as of the Cut-off Date, of 241
months. The average principal balance per Fixed-Rate Loan as of the Cut-off
Date was $46,059.49 and the principal balances on the Fixed-Rate Loans as of
the Cut-off Date ranged from $3,250.00 to $499,332.97. The Balloon Fixed-Rate
Loans consist of 1,399 closed-end home equity loans and have a principal
balance as of the Cut-off Date of $98,244,553.13. The weighted average of the
Loan Rates of the Balloon Fixed-Rate Loans as of the Cut-off Date is 12.13%.
The Balloon Fixed-Rate Loans had a weighted average term to scheduled
maturity, as of origination, of 180 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of 178 months. The Fixed-Rate
Loans arise from loans relating to real property located in 47 states and the
District of Columbia. By principal balance as of the Cut-off Date,
approximately 8.65% of the Loans were secured by real property located in
North Carolina, 8.12% in Georgia, 7.64% in Ohio, 5.86% in Florida, 5.82% in
Michigan, 5.78% in Pennsylvania, 5.78% in Illinois, 5.68% in Virginia, 5.64%
in Maryland and 5.47% in Alabama. No other state represented 5% or more of the
Cut-off Date Pool Principal Balance.
S-27
<PAGE>
Set forth below is a description of certain additional characteristics of the
Fixed-Rate Loans.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF
% OF FIXED-RATE
FIXED-RATE LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
LOANS AS OF LOANS 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................. 336 6.03% $ 15,890,204.80 5.47%
Arizona................. 12 .22 531,100.20 .18
Arkansas................ 4 .07 206,034.80 .07
California.............. 33 .59 2,552,648.33 .88
Colorado................ 18 .32 928,259.71 .32
Connecticut............. 71 1.27 3,364,009.66 1.16
Delaware................ 28 .50 1,059,159.90 .36
District of Columbia.... 26 .47 1,598,407.24 .55
Florida................. 332 5.96 17,032,998.73 5.86
Georgia................. 437 7.85 23,575,144.10 8.12
Illinois................ 309 5.54 16,805,694.19 5.78
Indiana................. 172 3.09 8,244,925.05 2.84
Iowa.................... 122 2.19 4,917,249.61 1.69
Kansas.................. 58 1.04 2,625,251.16 .90
Kentucky................ 29 .52 1,453,677.19 .50
Louisiana............... 94 1.69 3,910,466.63 1.35
Maine................... 6 .11 366,158.86 .13
Maryland................ 297 5.33 16,383,889.15 5.64
Massachusetts........... 37 .66 1,903,646.65 .66
Michigan................ 271 4.86 16,911,353.01 5.82
Minnesota............... 115 2.06 5,382,564.59 1.85
Mississippi............. 52 .93 2,105,352.18 .72
Missouri................ 253 4.54 11,303,736.54 3.89
Montana................. 3 .05 98,858.12 .03
Nebraska................ 66 1.18 2,400,305.10 .83
Nevada.................. 3 .05 223,997.41 .08
New Hampshire........... 3 .05 78,900.00 .03
New Jersey.............. 85 1.52 4,429,669.52 1.52
New Mexico.............. 4 .07 408,871.09 .14
New York................ 187 3.35 10,768,466.29 3.71
North Carolina.......... 469 8.42 25,093,207.52 8.65
North Dakota............ 5 .09 180,090.62 .06
Ohio.................... 399 7.17 22,168,583.98 7.64
Oklahoma................ 38 .68 1,466,192.57 .50
Oregon.................. 9 .16 474,138.88 .16
Pennsylvania............ 304 5.45 16,810,039.77 5.78
Rhode Island............ 17 .30 870,023.91 .30
South Carolina.......... 245 4.39 11,416,779.99 3.93
South Dakota............ 12 .22 736,740.77 .25
Tennessee............... 135 2.42 8,472,420.39 2.92
Texas................... 29 .52 2,248,827.67 .77
Utah.................... 9 .16 419,651.81 .14
Vermont................. 2 .04 127,900.00 .04
Virginia................ 292 5.24 16,500,992.88 5.68
Washington.............. 14 .25 646,230.73 .22
West Virginia........... 18 .32 794,615.71 .27
Wisconsin............... 114 2.04 4,631,111.20 1.59
Wyoming................. 1 .02 70,450.00 .02
----- ----- --------------- -----
Total............... 5,575 100.0% $290,588,998.21 100.0%
===== ===== =============== =====
</TABLE>
S-28
<PAGE>
YEARS OF ORIGINATION--FIXED RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE
NUMBER OF LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1994...................... 2 $ 142,992.51 .05%
1995...................... 7 296,071.71 .10
1996...................... 185 9,459,952.74 3.26
1997...................... 5,381 280,689,981.25 96.59
----- --------------- ------
Total................. 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL LOAN AMOUNTS--FIXED RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE
NUMBER OF LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL LOAN AMOUNT (IN AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------------ ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $ 10,000....... 45 $ 326,893.53 .11%
Between$ 10,000--
$ 19,999................ 848 12,765,430.47 4.39
Between$ 20,000--
$ 29,999................ 952 23,221,305.75 7.99
Between$ 30,000--
$ 39,999................ 809 27,832,561.58 9.58
Between$ 40,000--
$ 49,999................ 665 29,800,885.71 10.27
Between$ 50,000--
$ 59,999................ 533 29,280,371.44 10.08
Between$ 60,000--
$ 69,999................ 422 27,202,240.23 9.36
Between$ 70,000--
$ 79,999................ 322 23,934,165.41 8.24
Between$ 80,000--
$ 89,999................ 243 20,511,016.96 7.06
Between$ 90,000--
$ 99,999................ 171 16,185,705.05 5.57
Between$100,000--
$109,999................ 142 14,800,740.03 5.09
Between$110,000--
$119,999................ 98 11,207,540.59 3.86
Between$120,000--
$129,999................ 78 9,744,834.23 3.35
Between$130,000--
$139,999................ 53 7,122,924.68 2.45
Between$140,000--
$149,999................ 38 5,516,711.97 1.90
Between$150,000--
$159,999................ 39 5,996,664.67 2.06
Between$160,000--
$169,999................ 21 3,429,438.73 1.18
Between$170,000--
$179,999................ 17 2,970,654.63 1.02
Between$180,000--
$189,999................ 16 2,934,174.89 1.01
Between$190,000--
$199,999................ 10 1,960,629.21 .67
Between$200,000--
$249,999................ 31 6,886,677.82 2.37
Between$250,000--
$299,999................ 12 3,246,113.62 1.12
Between$300,000--
$349,999................ 4 1,262,499.10 .43
Between$350,000--
$399,999................ 3 1,093,589.59 .38
Between$400,000--
$449,999................ 2 855,895.35 .29
Between$450,000--
$499,999................ 0 .00 .00
Between$500,000--
$549,999................ 1 499,332.97 .17
----- --------------- ------
Total................ 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
S-29
<PAGE>
LOAN RATES--FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE LOANS
NUMBER OF BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF LOANS AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
BY LOAN RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- -------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.00%-- 9.00%....... 30 $ 2,300,260.57 .79%
From 9.01%--10.00%....... 203 17,094,651.11 5.88
From 10.01%--11.00%....... 690 55,259,176.42 19.02
From 11.01%--12.00%....... 1,070 67,630,606.44 23.27
From 12.01%--13.00%....... 1,594 78,463,889.79 27.01
From 13.01%--14.00%....... 1,155 45,258,939.35 15.57
From 14.01%--15.00%....... 539 16,417,088.69 5.65
From 15.01%--16.00%....... 190 5,143,912.06 1.77
From 16.01%--17.00%....... 78 2,315,519.49 .80
Over 17.00%............... 26 704,954.29 .24
----- --------------- ------
Total................. 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE LOANS
NUMBER OF BY
MONTHS REMAINING TO LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 30.............. 0 $ .00 .00%
31-45..................... 2 31,980.28 .01
46-60..................... 49 878,733.68 .30
61-75..................... 11 263,237.22 .09
76-90..................... 35 886,716.54 .31
91-105.................... 21 395,744.35 .14
106-120................... 439 10,951,647.73 3.77
121-135................... 2 31,135.42 .01
136-150................... 27 1,064,222.43 .37
151-165................... 9 327,792.26 .11
166-180................... 2,903 148,252,153.36 51.01
181-195................... 4 181,662.16 .06
196-210................... 0 .00 .00
211-225................... 5 279,500.00 .10
226-240................... 1,444 77,792,870.58 26.76
241-255................... 0 .00 .00
256-270................... 0 .00 .00
271-285................... 0 .00 .00
286-300................... 160 12,629,834.98 4.35
301-315................... 0 .00 .00
316-330................... 0 .00 .00
331-345................... 1 76,150.67 .03
346-360................... 463 36,545,616.55 12.58
Over 360.................. 0 .00 .00
----- --------------- ------
Total................. 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
S-30
<PAGE>
LIEN POSITION--FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE
NUMBER OF LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- ------------------- ---------------------
<S> <C> <C> <C>
First..................... 3,117 $216,058,570.18 74.35%
Second.................... 2,440 74,176,319.59 25.53
Third or Lower............ 18 354,108.44 .12
----- --------------- ------
Total................. 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
COMBINED LOAN-TO-VALUE RATIO--FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE
NUMBER OF LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
COMBINED LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 61.00%............. 359 $ 12,755,134.82 4.39%
From 61.00% to 65.99%........ 132 6,228,176.16 2.14
From 66.00% to 70.99%........ 219 11,648,204.51 4.01
From 71.00% to 75.99%........ 353 17,127,347.52 5.89
From 76.00% to 80.99%........ 527 29,539,592.19 10.17
From 81.00% to 85.99%........ 670 36,191,607.24 12.45
From 86.00% to 90.99%........ 1,481 83,779,858.09 28.84
From 91.00% to 95.99%........ 1,498 79,689,094.09 27.42
Over 95.99%.................. 336 13,629,983.59 4.69
----- --------------- ------
Total.................... 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
LOAN-TO-VALUE RATIO--FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF FIXED-RATE
NUMBER OF LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.00%-10.00%......... 156 $ 2,483,179.50 .85%
From 10.01%-20.00%........ 1,089 25,862,622.60 8.90
From 20.01%-30.00%........ 724 22,935,462.23 7.89
From 30.01%-40.00%........ 383 15,701,599.83 5.40
From 40.01%-50.00%........ 167 6,787,246.75 2.34
From 50.01%-60.00%........ 132 6,016,767.70 2.07
From 60.01%-70.00%........ 301 16,370,322.32 5.63
From 70.01%-80.00%........ 709 41,480,692.28 14.27
From 80.01%-90.00%........ 1,261 93,534,773.34 32.20
Over 90.00%............... 653 59,416,331.66 20.45
----- --------------- ------
Total................. 5,575 $290,588,998.21 100.00%
===== =============== ======
</TABLE>
S-31
<PAGE>
ADJUSTABLE RATE LOANS
This subsection contains information about the Adjustable Rate Loans, which
consist of closed-end home equity loans originated through April 30, 1997. The
information for each Adjustable Rate Loan is as of the Cut-off Date for such
Loan.
The Adjustable Rate Loans have an aggregate principal balance of
$36,462,722.97. Each Adjustable Rate Loan is a closed-end home equity loan
originated by the Company or by a Company-approved correspondent lender and
purchased by the Company.
The Adjustable Rate Loans have Loan Rates subject to annual or semiannual
adjustment after an initial six-month or twenty-four-month period on the day
of the month specified in the Adjustable Rate Loan (each such date, an
"Adjustment Date"), to equal the sum of (i) the Six-Month LIBOR Index (as
defined below) and (ii) a fixed percentage amount specified in the related
Adjustable Rate Loan (the "Gross Margin"). The Loan Rates will not increase on
any Adjustment Date by more than 2%. All of the Adjustable Rate Loans further
provide that the Loan Rate will in no event be more than the fixed percentage
set forth in the Adjustable Rate Loan (such rate, the "Maximum Loan Rate").
Each Adjustable Rate Loan provides that in no event will the Loan Rate be less
than the initial Loan Rate (such rate, the "Minimum Loan Rate"). Effective
with the first payment due on an Adjustable Rate Loan after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of such Adjustable Rate Loan
over its remaining term, and pay interest at the Loan Rate as so adjusted. All
of the Adjustable Rate Loans were originated with a Loan Rate less than the
sum of (i) the Six-Month LIBOR Index at the time the initial Loan Rate was
established and (ii) the Gross Margin. The Six-Month LIBOR Index is a per
annum rate equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks, as published in The Wall Street Journal and as most recently available
as of the date specified in the related Adjustable Rate Loan.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Loan is fully amortizing
and provides for monthly payments, except, in the case of a Balloon Loan, for
the final monthly payment, over the term of such loan, computed on the simple
interest method, (b) each Adjustable Rate Loan has its last scheduled payment
due no later than June 2027, and (c) each Adjustable Rate Loan is secured by a
lien on the related real estate. The Adjustable Rate Loans will be originated
or acquired by the Company in the ordinary course of the Company's business. A
detailed listing of the Adjustable Rate Loans is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. As of the
Cut-off-Date, the Adjustable Rate Loans had a weighted average Minimum Loan
Rate of 7.69%, a weighted average Maximum Loan Rate of 14.40% and a weighted
average Loan Rate of 9.87%. As of the Cut-off Date, the Adjustable Rate Loans
had remaining maturities of at least 179 months but not more than 360 months
and original maturities of at least 180 months but not more than 360 months.
The Adjustable Rate Loans had a weighted average term to scheduled maturity,
as of origination, of 356 months, and a weighted average term to scheduled
maturity, as of the Cut-off Date, of 355 months. The average principal balance
per Adjustable Rate as of the Cut-off Date was $111,506.80 and the principal
balances on the Adjustable Rate Loans as of the Cut-off Date ranged from
$23,934.94 to $397,519.84. No Adjustable Rate Loans are Balloon Loans. The
Adjustable Rate Loans arise from loans relating to real property located in 33
states and the District of Columbia. By principal balance as of the Cut-off
Date, approximately 11.28% of the Adjustable Rate Loans were secured by real
estate located in Texas, 9.71% in Michigan, 9.49% in California, 7.15% in
Georgia, 6.49% in Colorado and 6.19% in Ohio. No other state represented 5% or
more of the aggregate Cut-off Date Principal Balance of the Adjustable Rate
Loans.
S-32
<PAGE>
Set forth below is a description of certain additional characteristics of the
Adjustable Rate Loans.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF % OF ADJUSTABLE
ADJUSTABLE RATE LOANS
RATE LOANS AGGREGATE PRINCIPAL BY OUTSTANDING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
LOANS AS OF LOANS 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................. 4 1.22% $ 238,580.05 .65%
Arizona................. 11 3.36 1,252,116.89 3.43
California.............. 18 5.50 3,459,805.15 9.49
Colorado................ 16 4.89 2,366,539.14 6.49
Connecticut............. 5 1.53 619,283.58 1.70
District of Columbia.... 2 .61 250,978.22 .69
Florida................. 10 3.06 1,198,926.34 3.29
Georgia................. 23 7.04 2,608,434.76 7.15
Illinois................ 16 4.89 1,674,690.12 4.59
Indiana................. 4 1.22 312,021.57 .86
Iowa.................... 1 .31 50,382.98 .14
Kentucky................ 2 .61 235,426.07 .65
Maryland................ 11 3.36 1,576,290.32 4.32
Massachusetts........... 8 2.45 1,463,753.90 4.01
Michigan................ 51 15.61 3,539,355.09 9.71
Minnesota............... 4 1.22 610,523.59 1.67
Missouri................ 2 .61 182,823.06 .50
Nevada.................. 2 .61 382,500.00 1.05
New Jersey.............. 6 1.83 497,645.97 1.36
New Mexico.............. 1 .31 137,644.09 .38
New York................ 7 2.14 810,916.11 2.22
North Carolina.......... 6 1.83 801,133.36 2.20
Ohio.................... 27 8.27 2,258,007.67 6.19
Oklahoma................ 4 1.22 497,489.83 1.36
Oregon.................. 9 2.75 1,194,547.03 3.28
Pennsylvania............ 9 2.75 989,734.94 2.71
Rhode Island............ 2 .61 110,480.58 .30
South Carolina.......... 6 1.83 475,316.70 1.30
Texas................... 33 10.10 4,109,387.92 11.28
Utah.................... 8 2.45 811,516.56 2.23
Virginia................ 11 3.36 1,063,359.02 2.92
Washington.............. 3 .92 360,352.45 .99
West Virginia........... 1 .31 42,287.90 .12
Wisconsin............... 4 1.22 280,472.01 .77
--- ------ ------------- ------
Total............... 327 100.00% 36,462,722.97 100.00%
=== ====== ============= ======
</TABLE>
S-33
<PAGE>
YEARS OF ORIGINATION--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
1996................... 22 $ 3,297,905.13 9.04%
1997................... 305 33,164,817.84 90.96
--- -------------- ------
Total.............. 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL LOAN AMOUNTS--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL ADJUSTABLE RATE AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOAN AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than$ 30,000....... 8 $ 208,948.86 .57%
Between$ 30,000--
$ 39,999............... 19 670,741.03 1.84
Between$ 40,000--
$ 49,999............... 17 754,213.68 2.07
Between$ 50,000--
$ 59,999............... 30 1,662,775.84 4.56
Between$ 60,000--
$ 69,999............... 29 1,878,893.73 5.15
Between$ 70,000--
$ 79,999............... 25 1,866,211.22 5.12
Between$ 80,000--
$ 89,999............... 17 1,430,025.81 3.92
Between$ 90,000--
$ 99,999............... 17 1,621,091.08 4.45
Between$100,000--
$109,999............... 24 2,521,736.42 6.92
Between$110,000--
$119,999............... 26 2,999,530.75 8.24
Between$120,000--
$129,999............... 16 1,970,718.33 5.40
Between$130,000--
$139,999............... 19 2,535,209.42 6.95
Between$140,000--
$149,999............... 6 876,073.34 2.40
Between$150,000--
$159,999............... 13 2,013,656.45 5.52
Between$160,000--
$169,999............... 11 1,788,413.93 4.90
Between$170,000--
$179,999............... 8 1,391,123.60 3.82
Between$180,000--
$189,999............... 6 1,103,671.03 3.03
Between$190,000--
$199,999............... 6 1,162,422.25 3.19
Between$200,000--
$249,999............... 12 2,626,294.61 7.20
Between$250,000--
$299,999............... 11 2,980,273.18 8.17
Between$300,000--
$349,999............... 4 1,291,309.95 3.54
Between$350,000--
$399,999............... 3 1,109,388.46 3.04
Over$399,999............ 0 0 0
--- -------------- ------
Total............... 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
S-34
<PAGE>
CURRENT LOAN RATES--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF ADJUSTABLE RATE AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOANS BY LOAN RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-- 9.00%..... 80 $ 9,213,073.15 25.27%
From 9.01%--10.00%..... 98 12,868,040.51 35.29
From 10.01%--11.00%..... 90 9,413,233.88 25.82
From 11.01%--12.00%..... 46 4,120,738.60 11.30
From 12.01%--13.00%..... 6 554,601.89 1.52
From 13.01%--14.00%..... 5 220,534.94 .60
From 14.01%--15.00%..... 2 72,500.00 .20
--- -------------- ------
Total............... 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS BY
MONTHS REMAINING TO LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 166-180........... 8 751,083.07 2.06
From 181-195........... 0 .00 .00
From 196-210........... 0 .00 .00
From 211-225........... 0 .00 .00
From 226-240........... 0 .00 .00
From 241-255........... 0 .00 .00
From 256-270........... 0 .00 .00
From 271-285........... 0 .00 .00
From 286-300........... 0 .00 .00
From 301-315........... 0 .00 .00
From 316-330........... 0 .00 .00
From 331-345........... 0 .00 .00
From 346-360........... 319 35,711,639.90 97.94
Over 360............... 0 .00 .00
--- -------------- ------
Total.............. 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
LIEN POSITION--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF % OF ADJUSTABLE RATE LOANS BY
LOANS ADJUSTABLE RATE LOANS BY AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- NUMBER OF LOANS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- ------------------------ ------------------- ------------------------
<S> <C> <C> <C> <C>
First................... 327 100% $36,462,722.97 100%
--- --- -------------- ---
Total............... 327 100% $36,462,722.97 100%
=== === ============== ===
</TABLE>
S-35
<PAGE>
COMBINED LOAN-TO-VALUE RATIO--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
COMBINED LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 61.00%............ 9 $ 539,595.55 1.48%
From 61.00% to 65.99%....... 9 468,708.37 1.29
From 66.00% to 70.99%....... 20 2,094,760.76 5.74
From 71.00% to 75.99%....... 39 3,773,506.82 10.35
From 76.00% to 80.99%....... 72 6,656,473.85 18.26
From 81.00% to 85.99%....... 59 6,290,607.88 17.25
From 86.00% to 90.99%....... 112 15,831,972.30 43.41
From 91.00% to 95.99%....... 5 502,580.97 1.38
Over 95.99%................. 2 304,516.47 .84
--- -------------- ------
Total................... 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
LOAN-TO-VALUE RATIO--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS BY
LOANS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 61.00%....... 9 $ 539,595.55 1.48%
From 61.00% to 65.99%.. 9 468,708.37 1.29
From 66.00% to 70.99%.. 20 2,094,760.76 5.74
From 71.00% to 75.99%.. 39 3,773,506.82 10.35
From 76.00% to 80.99%.. 72 6,656,473.85 18.26
From 81.00% to 85.99%.. 59 6,290,607.88 17.25
From 86.00% to 90.99%.. 112 15,831,972.30 43.41
From 91.00% to 95.99%.. 5 502,580.97 1.38
Over 95.99%............ 2 304,516.47 .84
--- -------------- ------
Total.............. 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
S-36
<PAGE>
MONTH OF NEXT RATE ADJUSTMENT--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MONTH OF NEXT RATE ADJUSTMENT OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ----------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
May 1997.................... 1 $ 115,973.25 0.32%
June 1997................... 2 470,000.09 1.29
July 1997................... 12 1,506,453.18 4.13
August 1997................. 38 6,069,301.39 16.65
September 1997.............. 92 7,986,359.64 21.89
October 1997................ 52 4,813,466.78 13.20
November 1997............... 31 3,388,330.63 9.29
December 1997............... 6 636,404.99 1.75
January 1999................ 3 524,693.06 1.44
February 1999............... 15 1,849,603.64 5.07
March 1999.................. 53 6,572,645.29 18.03
April 1999.................. 22 2,529,491.03 6.94
--- -------------- ------
Total................... 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION OF GROSS MARGIN--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
GROSS MARGIN OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
3.500 to 3.749%........ 1 $ 138,835.27 0.38%
3.750 to 3.999%........ 0 0.00 0.00
4.000 to 4.249%........ 0 0.00 0.00
4.250 to 4.499%........ 0 0.00 0.00
4.500 to 4.749%........ 1 224,846.63 0.62
4.750 to 4.999%........ 52 7,072,082.94 19.39
5.000 to 5.249%........ 11 1,074,496.07 2.95
5.250 to 5.499%........ 41 5,364,491.13 14.70
5.500 to 5.749%........ 27 3,689,220.15 10.12
5.750 to 5.999%........ 32 4,217,100.25 11.57
6.000 to 6.249%........ 21 2,129,669.24 5.84
6.250 to 6.499%........ 20 2,150,446.96 5.90
6.500 to 6.749%........ 19 2,026,624.68 5.56
6.750 to 6.999%........ 23 2,465,886.99 6.76
7.000 to 7.249%........ 17 1,431,591.56 3.93
7.250 to 7.499%........ 16 1,582,012.42 4.34
7.500 to 7.749%........ 6 426,916.96 1.17
7.750 to 7.999%........ 16 1,113,214.34 3.05
8.000 to 8.249%........ 4 366,644.38 1.01
8.250 to 8.499%........ 5 206,570.00 0.57
8.500 to 8.749%........ 3 175,300.00 0.48
8.750 to 8.999%........ 6 319,023.00 0.87
9.000 to 9.249%........ 1 36,400.00 0.10
9.250 to 9.499%........ 3 149,850.00 0.41
9.500 to 9.749%........ 1 69,000.00 0.19
Over 9.749%............ 1 32,500.00 0.09
--- -------------- ------
Total.............. 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
S-37
<PAGE>
MAXIMUM LOAN RATES--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MAXIMUM LOAN RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
13.750 to 13.999%...... 2 $ 512,438.78 1.41%
14.000 to 14.249%...... 1 291,200.00 0.80
14.250 to 14.499%...... 6 717,791.23 1.97
14.500 to 14.749%...... 8 1,150,932.06 3.16
14.750 to 14.999%...... 24 2,836,708.14 7.78
15.000 to 15.249%...... 10 1,551,163.23 4.25
15.250 to 15.499%...... 19 2,018,662.92 5.54
15.500 to 15.749%...... 23 3,140,314.35 8.61
15.750 to 15.999%...... 51 5,685,240.69 15.58
16.000 to 16.249%...... 22 2,249,342.19 6.17
16.250 to 16.499%...... 24 3,169,361.59 8.68
16.500 to 16.749%...... 23 2,452,182.53 6.73
16.750 to 16.999%...... 41 4,338,745.53 11.89
17.000 to 17.249%...... 11 1,326,111.23 3.64
17.250 to 17.499%...... 21 1,622,552.78 4.45
17.500 to 17.749%...... 11 1,019,595.44 2.80
17.750 to 17.999%...... 12 1,166,320.41 3.20
18.000 to 18.249%...... 3 201,102.05 0.55
18.250 to 18.499%...... 4 397,636.31 1.09
18.500 to 18.749%...... 2 105,411.91 0.29
18.750 to 18.999%...... 1 112,023.00 0.31
19.000 to 19.249%...... 1 36,400.00 0.10
19.250 to 19.499%...... 1 23,934.94 0.07
19.500 to 19.749%...... 2 98,450.00 0.27
19.750 to 19.999%...... 2 166,601.66 0.46
Over 19.999%........... 2 72,500.00 0.20
--- -------------- ------
Total.............. 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
S-38
<PAGE>
MINIMUM LOAN RATES--ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
NUMBER OF ADJUSTABLE RATE LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MINIMUM LOAN RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
5.000 to 5.249%...... 1 $ 114,129.30 0.31%
5.250 to 5.499%...... 0 0.00 0.00
5.500 to 5.749%...... 5 506,240.45 1.39
5.750 to 5.999%...... 1 132,000.00 0.36
6.000 to 6.249%...... 0 0.00 0.00
6.250 to 6.499%...... 1 110,041.93 0.30
6.500 to 6.749%...... 1 46,193.29 0.13
6.750 to 6.999%...... 3 405,745.40 1.11
7.000 to 7.249%...... 0 0.00 0.00
7.250 to 7.499%...... 0 0.00 0.00
7.500 to 7.749%...... 1 108,789.99 0.30
7.750 to 7.999%...... 15 2,159,670.85 5.92
8.000 to 8.249%...... 3 605,622.38 1.66
8.250 to 8.499%...... 13 1,257,773.06 3.45
8.500 to 8.749%...... 11 1,414,306.75 3.88
8.750 to 8.999%...... 34 3,542,228.78 9.71
9.000 to 9.249%...... 14 2,007,219.10 5.50
9.250 to 9.499%...... 17 2,409,982.96 6.61
9.500 to 9.749%...... 22 2,970,011.67 8.15
9.750 to 9.999%...... 37 4,478,406.71 12.28
10.000 to 10.249%...... 18 1,877,677.65 5.15
10.250 to 10.499%...... 22 2,501,853.78 6.86
10.500 to 10.749%...... 22 2,386,798.79 6.55
10.750 to 10.999%...... 33 3,213,439.70 8.81
11.000 to 11.249%...... 8 1,001,267.85 2.75
11.250 to 11.499%...... 15 1,059,282.15 2.91
11.500 to 11.749%...... 9 816,665.39 2.24
11.750 to 11.999%...... 7 570,274.48 1.56
12.000 to 12.249%...... 3 201,102.05 0.55
12.250 to 12.499%...... 2 94,200.00 0.26
12.500 to 12.749%...... 1 73,911.91 0.20
12.750 to 12.999%...... 1 104,851.66 0.29
13.000 to 13.249%...... 1 36,400.00 0.10
13.250 to 13.499%...... 1 23,934.94 0.07
13.500 to 13.749%...... 2 98,450.00 0.27
13.750 to 13.999%...... 1 61,750.00 0.17
14.000 to 14.249%...... 0 0.00 0.00
14.250 to 14.499%...... 2 72,500.00 0.20
--- -------------- ------
Total................ 327 $36,462,722.97 100.00%
=== ============== ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in the
Loan Pool, and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Loans. In addition, the Company began originating, purchasing and
servicing home equity loans in January 1996, and thus has no significant
experience with respect to the performance of such loans. Moreover, because
all such home equity loans have been recently originated, it is likely that
this experience is not indicative of the delinquency experience to be expected
from a more seasoned portfolio.
S-39
<PAGE>
LOAN DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
THREE
MONTHS
AT ENDED
DECEMBER 31, MARCH 31,
------------ ---------
1996 1997
------------ ---------
<S> <C> <C>
Number of Loans Outstanding(1)........................... 17,731 26,874
Number of Loans Delinquent(2)(3)
30-59 Days............................................. 504 502
60-89 Days............................................. 94 98
90 Days or More........................................ 52 119
------ ------
Total Loans Delinquent................................... 650 719
Delinquencies as a Percent of Loans Outstanding(4)....... 3.67% 2.68%
</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. The information for December 31, 1996 does not
include as delinquent the home equity loans of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under
their bankruptcy payment plan.
(4) By number of contracts.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
the Loans.
RATIO OF EARNINGS TO FIXED CHARGES FOR THE COMPANY
Set forth below are the Company's ratios of earnings to fixed charges for
the past five years. For the purposes of compiling these ratios, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........... 3.55 4.81 7.98 7.90 7.83 5.81
</TABLE>
S-40
<PAGE>
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 related Loans.
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 Loan, to reduce the outstanding principal balance on the
Loans) will increase the yield on Certificates purchased at a price less than
the undivided ownership interest in the aggregate principal balance of the
Loans 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 Loans represented by such
Certificates. The Company has no significant experience with respect to the
rate of Principal Prepayments on home equity loans. Because the Loans have
scheduled due dates throughout the calendar month, prepayments on the Loans
would affect the amount of funds available to make distributions on the
Certificates on any Payment Date only if a substantial portion of the Loans
prepaid prior to their respective due dates in the preceding month (thus
paying less than 30 days' interest for that month) while very few Loans
prepaid after their respective due dates in the preceding month. In addition,
liquidations of defaulted Loans or the Servicer's exercise of its option to
repurchase the entire remaining pool of Loans (see "Description of the
Certificates--Repurchase Option" herein) will affect the timing of principal
distributions on the Certificates.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and (in the absence of any liquidation loss principal amount adjustment)
the Principal Balance of such Class immediately following the preceding
Payment Date. Interest on each Class of Certificates, other than the Class A-1
ARM Certificates, will be computed on the basis of a 360-day year of twelve
30-day months. Interest on the Class A-1 ARM Certificates will be computed on
the basis of actual days elapsed in a 360-day year. 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 Loans is computed according to the simple interest method.
The final scheduled payment date on the Loan with the latest maturity is in
June 2027.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the related Loans on the weighted average life of each Class of
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Loans.
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 related Loans is paid.
Principal payments on Loans 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 Loans). Prepayments
on mortgage loans and other consumer installment obligations are commonly
measured relative to a prepayment standard or model. The Class A-1 ARM
Certificates were priced using the 100% Prepayment Assumption for the
Adjustable Rate Loans, and the other classes of Certificates were priced using
the 100% Prepayment Assumption for the Fixed-Rate Loans (as such Prepayment
Assumptions are described below). There can be no assurance that the Loans
will prepay at the applicable rate, and it is unlikely that prepayments or
liquidations of the Loans will occur at any constant rate.
There is no assurance, however, that prepayment of the Loans will conform to
any level of the assumed rates of prepayment, and no representation is made
that the Loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of home equity loans
is influenced by a
S-41
<PAGE>
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 or loans. Other factors affecting prepayment of Loans
include changes in obligors' housing needs, job transfers, unemployment and
obligors' net equity in their homes. In the case of home equity loans secured
by real estate, in general, if prevailing interest rates fall significantly
below the interest rates on such contracts or loans, the contracts or loans
are likely to be subject to higher prepayment rates than if prevailing
interest rates remained at or above the rates borne by such contracts or
loans. Conversely, if prevailing interest rates rise above the interest rates
on such home equity loans, the rate of prepayment would be expected to
decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Loans are received in a timely manner and prepayments are made at the
indicated percentages of the model as described below set forth in the table;
(ii) the Servicer exercises its option to repurchase the Loans, as described
under "Description of the Certificates--Repurchase Option"; (iii) the
aggregate principal balance of the Loans as of the Cut-off Date is
$327,051,721.18 and such Loans have the characteristics set forth under "The
Loans"; (iv) the Loans (other than the Adjustable Rate Loans) will, as of the
Cut-off Date, be grouped into seven pools having the additional
characteristics set forth below under "Assumed Fixed-Rate Loan
Characteristics"; (v) the Adjustable Rate Loans will, as of the Cut-off Date,
be grouped into seven pools having the additional characteristics set forth
below under "Assumed Adjustable Rate Loan Characteristics"; (vi) each Class of
the Certificates has an Original Principal Balance as shown on the cover page
of this Prospectus Supplement; (vii) the rate for one-month LIBOR is 5.6875%
and the rate for six-month LIBOR is 6.0000%, (viii) no interest shortfalls
will arise in connection with prepayments in full of the Loans; (ix) no
delinquencies or losses are experienced on the Loans; (x) distributions are
made on the Certificates on the 15th day of each month, commencing in June
1997; and (xi) the Certificates are issued on May 29, 1997. No representation
is made that the Loans will not experience delinquencies or losses.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement with respect to the
Adjustable Rate Loans, on the one hand, and the Fixed-Rate Loans, on the
other. Reference in this Prospectus Supplement to a "Prepayment Assumption"
shall refer to the appropriate model, depending upon whether the reference is
with respect to the Adjustable Rate Loans or the Fixed-Rate Loans.
The Prepayment Assumption used in this Prospectus Supplement with respect to
the Adjustable Rate Loans represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of home equity
loans for the life of such home equity loans. The "100% Prepayment Assumption"
assumes a constant prepayment of 5.6% per annum of the then outstanding
principal balance of such loans in the first month in the life of such loans
and an additional 2.04% (precisely, 22.4/11%) per annum in each month
thereafter until the twelfth month. Beginning in the twelfth month and in each
month thereafter during the life of such loans, the 100% Prepayment Assumption
assumes a constant prepayment rate of 28% per annum each month.
The Prepayment Assumption used in this Prospectus Supplement with respect to
the Fixed-Rate Loans represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of home equity
loans for the life of such home equity loans. The "100% Prepayment Assumption"
assumes a constant prepayment rate of 4% per annum of the then outstanding
principal balance of such loans in the first month of the life of such loans
and an additional 1.45% (precisely, 16/11%) per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of such loans, the 100% Prepayment Assumption
assumes a constant prepayment rate of 20% per annum each month.
As used in the tables below, 80% Prepayment Assumption assumes prepayment
rates equal to 80% of the applicable Prepayment Assumption. Correspondingly,
90% Prepayment Assumption assumes prepayment rates equal to 90% of the
applicable Prepayment Assumption, and so forth. The respective Prepayment
Assumptions do not purport to be historical descriptions of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of home equity loans, including the Loans.
S-42
<PAGE>
ASSUMED FIXED-RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
WEIGHTED STEP UP WEIGHTED AVERAGE AVERAGE WEIGHTED
CUT-OFF DATE AVERAGE WEIGHTED AVERAGE MONTHS REMAINING TERM ORIGINAL TERM AVERAGE
POOL PRINCIPAL LOAN AVERAGE LOAN TO STEP UP TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE RATE RATE ADJUSTMENT (MONTHS) (MONTHS) TERM
- ---- -------------- -------- ------------ --------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ 1,650,056.28 11.103% 12.908% 11 177 180 N/A
2. ..................... 96,685,568.19 12.148 N/A N/A 179 180 360
3. ..................... 12,925,549.67 12.913 N/A N/A 112 113 N/A
4. ..................... 51,934,568.84 12.630 N/A N/A 178 179 N/A
5. ..................... 78,141,653.03 12.098 N/A N/A 239 240 N/A
6. ..................... 12,629,834.98 11.300 N/A N/A 300 300 N/A
7. ..................... 36,621,767.22 11.644 N/A N/A 359 360 N/A
</TABLE>
ASSUMED ADJUSTABLE RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING ORIGINAL WEIGHTED
AVERAGE TERM TO TERM TO AVERAGE MONTH(S) INITIAL
CUT-OFF DATE POOL LOAN MATURITY MATURITY GROSS LIFE LIFE PERIODIC TO RATE PERIODIC
POOL PRINCIPAL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP FLOOR CAP CHANGE CAP
- ---- ----------------- -------- --------- -------- -------- ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. .................. $11,476,433.02 10.300% 357 358 5.378% 16.413% 10.301% 1.036% 23 3.000%
2. .................. 2,032,189.26 10.140 355 360 6.179 16.358 9.868 1.160 3 1.000
3. .................. 6,067,176.55 9.651 357 360 5.655 15.764 9.616 1.033 4 1.000
4. .................. 5,318,525.87 9.483 359 360 5.718 15.679 9.464 1.037 5 1.000
5. .................. 7,256,162.65 9.953 358 358 6.884 16.397 9.934 1.045 6 1.000
6. .................. 3,675,830.63 9.222 349 349 6.821 16.017 9.222 1.028 7 1.000
7. .................. 636,404.99 9.307 261 261 7.196 16.307 9.307 1.000 8 1.000
</TABLE>
It is not likely that the Loans will prepay at any constant percentage of
the Prepayment Assumption to maturity or that all of the Loans 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.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the Original Principal Balance of each Class that would be
outstanding after each of the dates shown, at the indicated percentages of the
Prepayment Assumption.
S-43
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1 ARM
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 90 85 80 75 71
May 15, 1999...................................... 77 67 58 49 41
May 15, 2000...................................... 66 53 41 32 23
May 15, 2001...................................... 56 41 30 20 14
May 15, 2002...................................... 48 32 21 13 8
May 15, 2003...................................... 41 25 15 9 4
May 15, 2004...................................... 35 20 11 5 0
May 15, 2005...................................... 30 16 8 0 0
May 15, 2006...................................... 25 12 5 0 0
May 15, 2007...................................... 22 10 0 0 0
May 15, 2008...................................... 18 7 0 0 0
May 15, 2009...................................... 16 0 0 0 0
May 15, 2010...................................... 13 0 0 0 0
May 15, 2011...................................... 11 0 0 0 0
May 15, 2012...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 6.02 4.21 3.17 2.53 2.09
</TABLE>
- --------
(1) The weighted average life of a Class A-1 ARM 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 Class A-1 ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1 ARM Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 18 0 0 0 0
May 15, 1999...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 0.68 0.54 0.45 0.39 0.34
</TABLE>
- --------
(1) The weighted average life of a Class A-1 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 Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 100 88 61 35 8
May 15, 1999...................................... 32 0 0 0 0
May 15, 2000...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 1.78 1.32 1.08 0.93 0.82
</TABLE>
- --------
(1) The weighted average life of a Class A-2 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 Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
S-44
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-3 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 100 100 100 100 100
May 15, 1999...................................... 100 84 52 21 0
May 15, 2000...................................... 75 28 0 0 0
May 15, 2001...................................... 38 0 0 0 0
May 15, 2002...................................... 4 0 0 0 0
May 15, 2003...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 3.70 2.62 2.05 1.69 1.45
</TABLE>
- --------
(1) The weighted average life of a Class A-3 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 Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-4 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 100 100 100 100 100
May 15, 1999...................................... 100 100 100 100 74
May 15, 2000...................................... 100 100 56 0 0
May 15, 2001...................................... 100 49 0 0 0
May 15, 2002...................................... 100 0 0 0 0
May 15, 2003...................................... 43 0 0 0 0
May 15, 2004...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 5.93 4.01 3.05 2.48 2.09
</TABLE>
- --------
(1) The weighted average life of a Class A-4 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 Class A-4 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-4 Certificate.
S-45
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-5 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100%
May 15, 1998..................................... 100 100 100 100 100
May 15, 1999..................................... 100 100 100 100 100
May 15, 2000..................................... 100 100 100 78 39
May 15, 2001..................................... 100 100 71 30 0
May 15, 2002..................................... 100 80 34 0 0
May 15, 2003..................................... 100 59 19 0 0
May 15, 2004..................................... 97 44 11 0 0
May 15, 2005..................................... 93 43 11 0 0
May 15, 2006..................................... 82 34 1 0 0
May 15, 2007..................................... 69 21 0 0 0
May 15, 2008..................................... 55 8 0 0 0
May 15, 2009..................................... 41 0 0 0 0
May 15, 2010..................................... 27 0 0 0 0
May 15, 2011..................................... 14 0 0 0 0
May 15, 2012..................................... 0 0 0 0 0
Weighted Average Life (1) (years)................ 11.30 7.42 5.03 3.62 2.94
</TABLE>
- --------
(1) The weighted average life of a Class A-5 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 Class A-5 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-5 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-6 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 100 100 100 100 100
May 15, 1999...................................... 100 100 100 100 100
May 15, 2000...................................... 100 100 100 100 100
May 15, 2001...................................... 97 95 94 92 83
May 15, 2002...................................... 94 91 87 79 34
May 15, 2003...................................... 81 73 63 38 *
May 15, 2004...................................... 67 54 37 8 0
May 15, 2005...................................... 37 22 9 0 0
May 15, 2006...................................... 19 6 0 0 0
May 15, 2007...................................... 9 1 0 0 0
May 15, 2008...................................... 4 * 0 0 0
May 15, 2009...................................... 1 0 0 0 0
May 15, 2010...................................... * 0 0 0 0
May 15, 2011...................................... * 0 0 0 0
May 15, 2012...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 7.57 6.89 6.37 5.64 4.68
</TABLE>
- --------
* Indicates an amount greater than zero but less than .5% of the Original
Class A-6 Principal Balance.
(1) The weighted average life of a Class A-6 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 Class A-6 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-6 Certificate.
S-46
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100%
May 15, 1998.................................... 100 100 100 100 100
May 15, 1999.................................... 100 100 100 100 100
May 15, 2000.................................... 100 100 100 100 100
May 15, 2001.................................... 100 100 100 100 100
May 15, 2002.................................... 100 100 100 100 100
May 15, 2003.................................... 100 100 100 100 100
May 15, 2004.................................... 100 100 100 100 0
May 15, 2005.................................... 100 100 100 0 0
May 15, 2006.................................... 100 100 100 0 0
May 15, 2007.................................... 100 100 0 0 0
May 15, 2008.................................... 100 100 0 0 0
May 15, 2009.................................... 100 0 0 0 0
May 15, 2010.................................... 100 0 0 0 0
May 15, 2011.................................... 100 0 0 0 0
May 15, 2012.................................... 0 0 0 0 0
Weighted Average Life (1) (years)............... 14.88 11.96 9.38 7.54 6.29
</TABLE>
- --------
(1) The weighted average life of a Class M-1 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 Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100%
May 15, 1998.................................... 100 100 100 100 100
May 15, 1999.................................... 100 100 100 100 100
May 15, 2000.................................... 100 100 100 100 100
May 15, 2001.................................... 100 100 100 100 100
May 15, 2002.................................... 100 100 100 100 100
May 15, 2003.................................... 100 100 100 100 100
May 15, 2004.................................... 100 100 100 100 0
May 15, 2005.................................... 100 100 100 0 0
May 15, 2006.................................... 100 100 100 0 0
May 15, 2007.................................... 100 100 0 0 0
May 15, 2008.................................... 100 100 0 0 0
May 15, 2009.................................... 100 0 0 0 0
May 15, 2010.................................... 100 0 0 0 0
May 15, 2011.................................... 100 0 0 0 0
May 15, 2012.................................... 0 0 0 0 0
Weighted Average Life (1) (years)............... 14.88 11.96 9.38 7.54 6.29
</TABLE>
- --------
(1) The weighted average life of a Class M-2 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 Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
S-47
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
May 15, 1998...................................... 100 100 100 100 100
May 15, 1999...................................... 100 100 100 100 100
May 15, 2000...................................... 100 100 100 100 100
May 15, 2001...................................... 100 100 74 62 55
May 15, 2002...................................... 100 78 48 34 24
May 15, 2003...................................... 97 57 28 13 3
May 15, 2004...................................... 79 40 12 0 0
May 15, 2005...................................... 63 25 0 0 0
May 15, 2006...................................... 49 12 0 0 0
May 15, 2007...................................... 36 2 0 0 0
May 15, 2008...................................... 25 0 0 0 0
May 15, 2009...................................... 15 0 0 0 0
May 15, 2010...................................... 6 0 0 0 0
May 15, 2011...................................... 0 0 0 0 0
Weighted Average Life (1) (years)................. 9.21 6.62 5.14 4.57 4.29
</TABLE>
- --------
(1) The weighted average life of a Class B-1 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 Class B-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 50% 75% 100% 125% 150%
- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100%
May 15, 1998.................................... 100 100 100 100 100
May 15, 1999.................................... 100 100 100 100 100
May 15, 2000.................................... 100 100 100 100 100
May 15, 2001.................................... 100 100 100 100 100
May 15, 2002.................................... 100 100 100 100 100
May 15, 2003.................................... 100 100 100 100 100
May 15, 2004.................................... 100 100 100 96 0
May 15, 2005.................................... 100 100 100 0 0
May 15, 2006.................................... 100 100 76 0 0
May 15, 2007.................................... 100 100 0 0 0
May 15, 2008.................................... 100 85 0 0 0
May 15, 2009.................................... 100 0 0 0 0
May 15, 2010.................................... 100 0 0 0 0
May 15, 2011.................................... 95 0 0 0 0
May 15, 2012.................................... 0 0 0 0 0
Weighted Average Life (1) (years)............... 14.76 11.68 9.15 7.48 6.29
</TABLE>
- --------
(1) The weighted average life of a Class B-2 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 Class B-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2 Certificate.
S-48
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements the information in the Prospectus
under the heading "Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1996, had
stockholders' equity of approximately $1,254,454,000. 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, conventional home
improvement loans in September 1992 and home equity loans in January 1996. 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.
GENERAL
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof,
except for one Class B-2 Certificate with a denomination representing the
remainder of the Original Principal Balance of such Class. The Certificates
initially will be represented by certificates registered in the name of Cede
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 Loans and the rights, benefits, obligations and proceeds
arising therefrom or in connection therewith, including liens on the related
real estate, amounts held in the Certificate Account and the Class B-2 Limited
Guaranty of the Company for the benefit of the Class B-2 Certificateholders.
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 June 1997. 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 a Class of Certificates may request payment in respect of its
Percentage Interest in such Class by wire transfer). Final payments will be
made only upon tender of the Certificates to the Trustee for cancellation.
S-49
<PAGE>
CONVEYANCE OF LOANS
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 Loans, including all principal and interest
received on or with respect to such Loans (other than receipts of principal
and interest due on such Loans 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 Loans 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 Loan as
of the date of issuance of the Certificates, the Loan Rate on each Loan and
the maturity date of each Loan. 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 Loans to the
Trust, the Company's internal audit department will have completed a review of
all the Loan files, confirming the accuracy of each item on the list of Loans
delivered to the Trustee. Any Loan 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 Loan, the Company may deposit cash in the
Certificate Account in an amount sufficient to offset such discrepancy.
The Trustee will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the Loans
to the Trustee, and the Company's accounting records and computer systems will
also reflect such conveyance and assignment.
Dorsey & Whitney LLP, counsel to the Company, will render an opinion to the
Trustee that the transfer of the Loans 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 Loans from the Company to the Trust were treated
as a pledge to secure borrowings by the Company, the distribution of proceeds
of the Loans 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 Loans 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 Loans 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.
The Company will make certain representations and warranties in the
Agreement with respect to each Loan, 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 Loan has been waived, altered or modified
in any respect, except by instruments or documents included in the Loan file
and reflected on the list of Loans delivered to the Trustee; (c) each Loan 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 Loan is subject to any right of
rescission, set-off, counterclaim or defense; (e) each Loan was originated by
a home equity lender in the ordinary course of its business or was originated
by the Company directly; (f) no Loan was originated in or is subject to the
laws of any jurisdiction whose laws would make the transfer of the Loan or an
interest therein pursuant to the Agreement or the Certificates unlawful; (g)
each Loan complies with all requirements of law; (h) no Loan has been
satisfied, subordinated to a lower lien ranking than its original position (if
any) or rescinded; (i) each Loan creates a valid and perfected lien on the
related real estate; (j) all parties to each Loan had full legal capacity to
execute such Loan; (k) no Loan has been sold, conveyed and assigned or pledged
to any other person and the Company has good and marketable title to each Loan
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
Loan to the Trustee; (l) as of the Cut-off Date there was no default, breach,
violation or event permitting acceleration under any Loan (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
S-50
<PAGE>
Loan, and the Company has not waived any of the foregoing; (m) each Loan is a
fully-amortizing loan and provides for level monthly payments based on its
applicable Loan Rate, except, in the case of a Balloon Loan, for the final
monthly payment, over the term of such Loan; (n) each Loan contains customary
and enforceable provisions such as to render the rights and remedies of the
holder thereof adequate for realization against the collateral; (o) the
description of each Loan set forth in the list delivered to the Trustee is
true and correct; (p) there is only one original of each Loan; (q) each Loan
was originated or purchased in accordance with the Company's then-current
underwriting guidelines; and (r) each Loan is a "qualified mortgage" under
Section 860G(a)(3) of the Internal Revenue Code of 1986, as amended.
The Company will also make certain representations and warranties with
respect to the Loans in the aggregate, including that (i) each Fixed-Rate Loan
has a contractual rate of interest of at least 6.00%; (ii) no Loan had a
remaining term to maturity at origination of more than 360 months; (iii) no
more than 2% of the Loans, by principal balance as of the Cut-off Date, were
secured by properties located in an area with the same zip code; (iv) no more
than 8% of the Loans, by principal balance as of the Cut-off Date, were
originated by any one lender; and (v) no adverse selection procedures were
employed in selecting the Loans 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 Loan that is materially and
adversely affected by a breach of a representation and warranty with respect
to such Loan 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 Loan to be so repurchased
or with respect to a Liquidated Loan, means the outstanding principal balance
of such Loan (without giving effect to any Advances made by the Servicer or
the Trustee), plus interest on such Loan at the Pass-Through Rate (which will
be the weighted average of the Pass-Through Rates of the related Classes of
Certificates) from the end of the Due Period with respect to which the Obligor
last made a scheduled 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 Loans (but not with respect
to any other breach by the Company of its obligations under the Agreement).
In lieu of repurchasing a Loan as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Loan (as defined below) for the Loan
that it is otherwise obligated to repurchase (referred to herein as the
"Replaced Loan"). An Eligible Substitute Loan is a Loan that satisfies, as of
the date of its 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 Loan, has a Loan
Rate that is at least equal to the Loan Rate of the Replaced Loan and has a
remaining term to scheduled maturity that is not greater than the remaining
term to scheduled maturity of the Replaced Loan. 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 Loan exceeds the Scheduled
Principal Balance of the Loan being substituted. Such deposit will be deemed
to be a Partial Principal Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Loans conveyed and assigned to the Trustee as more fully set forth below.
PAYMENTS ON LOANS
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 Corporation (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 (if rated by Fitch), and
which is subject to supervision and examination by federal or state
authorities (an "Eligible Institution").
S-51
<PAGE>
"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 at least 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 Loans,
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 Loans, 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 Loans 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, any Advances by the Servicer or the Trustee as
described under "Description of the Certificates--Advances," and amounts paid
by the Company for Loans repurchased, or upon substitution for a Loan
otherwise required to be repurchased, as a result of breach of warranties
under the Agreement, as described under "Description of the Certificates--
Conveyance of Loans," shall be paid into the Certificate Account.
On the second Business Day preceding each Payment Date (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 Loans required to be
repurchased on such Payment Date, or any amounts required to be deposited upon
substitution for any Loan otherwise required to be repurchased on such
Purchase Date, as a result of a breach of representations and warranties under
the Agreement.
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:
(a) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Loans
to the Servicer;
(b) to pay interest and principal on the Certificates, in the manner and
the order of priority described below;
(c) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Loans;
(d) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Loans made in respect of current
or prior Payment Dates;
S-52
<PAGE>
(e) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(f) to reimburse the Company for any prior unreimbursed Class B-2
Guaranty Payments;
(g) to pay the Class B-2 Guaranty Fee to the Company; and
(h) to pay any remaining amounts to the holder of the Class C
Certificate.
The Scheduled Principal Balance of a Loan with respect to any Payment Date
is its principal balance as of the scheduled payment date (the "Due Date") in
the calendar month preceding such Payment Date (the "Due Period") as specified
in its amortization schedule, after giving effect to any previous partial
Principal Prepayments and to the scheduled payment due on such Due Date, but
without giving effect to any delinquency in payment or adjustments due to
bankruptcy or similar proceedings. The Pool Scheduled Principal Balance, with
respect to the Loan Pool, as of any Payment Date, is the aggregate of the
Scheduled Principal Balances of Loans comprising the Loan Pool that were
outstanding during the preceding Due Period. A Liquidated Loan is a defaulted
Loan as to which all amounts that the Servicer expects to recover on account
of such Loan have been received.
DISTRIBUTIONS ON THE CERTIFICATES
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made first to the holders of the Class A
Certificates, then to the holders of the Class M-1 Certificates, then to the
holders of the Class M-2 Certificates, then to the holders of the Class B-1
Certificates and then to the holders of the Class B-2 Certificates, as
described below.
Distributions of interest and principal to holders of a Class of Class A
Certificates will be made on each Payment Date, to the extent that the Amount
Available in the Certificate Account is sufficient therefor, in an amount
equal to the sum of (i) their respective Percentage Interests of the amount of
interest calculated as described under "Class A Interest" below, (ii) with
respect to the Class A-1 ARM Certificates, their respective Percentage
Interests of the Class A-1 ARM Formula Principal Distribution Amount and (iii)
with respect to each other Class of A Certificates, their respective
Percentage Interests, distributed to each Class of Class A Certificates in the
order of priority described under "Class A Principal" below, of the Senior
Percentage of the Formula Principal Distribution Amount, calculated as
described under "Class A Principal" below. Distributions on the Class A
Certificates will be applied first to the payment of interest and then to the
payment of principal. The Class A Distribution Amount for any Payment Date is
intended to be equal to the sum (referred to as the "Class A Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class A Interest" below, (ii) the Class A-1 ARM Formula Principal
Distribution Amount and (iii) the Senior Percentage of the Formula Principal
Distribution Amount, provided that, if the Class A Formula Distribution Amount
exceeds the Amount Available in the Certificate Account on such Payment Date,
then the Class A Distribution Amount shall instead equal the Amount Available
and the amount of such deficiency will be carried forward and added to the
amount the Class A Certificateholders will be entitled to receive on the next
Payment Date.
Distributions of interest and principal to holders of Class M-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-1 Distribution Amount.
Distributions on the Class M-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-1 Interest" below and (ii)
after the Class A Principal Balance has been reduced to zero and until the
Class M-1 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-1
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders on such Payment Date) (the "Class M-1 Remaining Amount
Available") is less than the Class M-1 Formula Distribution Amount, then the
Class M-1 Distribution Amount will equal the Class M-1 Remaining Amount
S-53
<PAGE>
Available and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date.
Distributions of interest and principal to holders of Class M-2 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-2 Distribution Amount.
Distributions on the Class M-2 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-2
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-2 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-2 Interest" below and (ii)
after the Class M-1 Principal Balance has been reduced to zero and until the
Class M-2 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-2
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders and the Class M-1 Certificateholders on such Payment Date)
(the "Class M-2 Remaining Amount Available") is less than the Class M-2
Formula Distribution Amount, then the Class M-2 Distribution Amount will equal
the Class M-2 Remaining Amount Available and the amount of such deficiency
will be carried forward and added to the amount such holders will be entitled
to receive on the next Payment Date.
Distributions of interest and principal to holders of Class B-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class B-1 Distribution Amount.
Distributions on the Class B-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class B-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class B-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class B-1 Interest" below and (ii)
until the Class B-1 Principal Balance has been reduced to zero, an amount of
principal equal to the Class B Percentage of the Formula Principal
Distribution Amount. If the Amount Available in the Certificate Account
available for distribution to the Class B-1 Certificateholders (after giving
effect to any distribution made to Class A Certificateholders, Class M-1
Certificateholders and Class M-2 Certificateholders on such Payment Date) (the
"Class B-1 Remaining Amount Available") is less than the Class B-1 Formula
Distribution Amount, then the Class B-1 Distribution Amount will equal the
Class B-1 Remaining Amount Available and the amount of such deficiency will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date.
Distributions of interest and principal to holders of the Class B-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests of the Class B-2 Distribution Amount and any
Class B-2 Guaranty Payment. The Class B-2 Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class B-2 Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class B-2 Interest" below and (ii) after the Class B-1 Principal
Balance has been reduced to zero and until the Class B-2 Principal Balance has
been reduced to zero, the Class B Percentage of the Formula Principal
Distribution Amount. Distributions on the Class B-2 Certificates will be
applied first to the payment of interest and then to the payment of principal.
If the Amount Available in the Certificate Account available for distribution
to the Class B-2 Certificateholders (after giving effect to distributions made
to Class A Certificateholders, Class M Certificateholders and Class B-1
Certificateholders on such Payment Date) (the "Class B-2 Remaining Amount
Available") is not sufficient to make a full distribution of the Class B-2
Formula Distribution Amount to the Class B-2 Certificateholders, then the
Class B-2 Distribution Amount will equal the Class B-2 Remaining Amount
Available and the Company will be obligated to make a Class B-2 Guaranty
Payment into the Certificate Account in respect thereof pursuant to the Class
B-2 Limited Guaranty.
On each Payment Date the Amount Available will be distributed to Class A
Certificateholders, then Class M Certificateholders and then Class B
Certificateholders in the amounts and order of priority set forth below:
Class A Interest
One month's interest will be paid concurrently to the holders of each Class
of Class A Certificates on each Payment Date, to the extent of the Amount
Available in the Certificate Account on such date, at the related Pass-
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Through Rate on the then outstanding Principal Balance of each Class of Class
A Certificates. Interest on each Class of Class A Certificates will accrue
from the Closing Date, or from the most recent Payment Date on which interest
has been paid, to but excluding the following Payment Date. Interest on each
Class of Class A Certificates, other than the Class A-1 ARM Certificates, will
be computed on the basis of a 360-day year of twelve 30-day months. Interest
on the Class A-1 ARM Certificates will be computed on the basis of actual days
elapsed in a 360-day year.
The Class A-1 ARM Pass-Through Rate is a floating rate equal to the lesser
of one-month LIBOR plus the Pass-Through Margin or the Available Funds Pass-
Through Rate, but in no case more than 14%. The Pass-Through Margin will equal
0.23% per annum on each Payment Date on which the Pool Scheduled Principal
Balance of the Loan Pool is 10% or more of the Cut-off Date Pool Principal
Balance of the Loan Pool, and 0.46% per annum on each Payment Date on which
the Pool Scheduled Principal Balance of the Loan Pool is less than 10% of the
Cut-off Date Pool Principal Balance of the Loan Pool. The Available Funds
Pass-Through Rate for any Payment Date will be a rate per annum equal to the
weighted average of the Expense Adjusted Loan Rates on the then outstanding
Adjustable Rate Loans. The Expense Adjusted Loan Rate on any Adjustable Rate
Loan is equal to the then applicable Mortgage Rate thereon, minus the Expense
Fee Rate. The Expense Fee Rate is .75%. One-month LIBOR with respect to any
monthly interest period will equal the offered rate for United States dollar
deposits for one month that appears on Telerate Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR business day prior to such monthly interest
period. For a description of the method used to calculate one-month LIBOR, see
"Description of the Certificates--Calculation of One-Month LIBOR."
The Pass-Through Rates for the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 Certificates are set forth on the cover of this
Prospectus Supplement.
The Principal Balance of any Class of Class A Certificates as of any Payment
Date is the Original Principal Balance of such Class less all amounts
previously distributed to holders of such Class on account of principal. The
Class A Principal Balance as of any Payment Date is the sum of the Class A-1
ARM Principal Balance, the Class A-1 Principal Balance, the Class A-2
Principal Balance, the Class A-3 Principal Balance, the Class A-4 Principal
Balance, the Class A-5 Principal Balance and the Class A-6 Principal Balance.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of each Class of Class A Certificates, the amount of interest
to be distributed in respect of the Class A Certificates will be allocated
among each Class thereof (and within a Class among the Certificates of such
Class) pro rata in accordance with their respective entitlements to interest,
and the amount of the shortfall will be carried forward and added to the
amount such holders will be entitled to receive on the next Payment Date. Such
a shortfall could occur, for example, if delinquencies or losses realized on
the Loans were exceptionally high and were concentrated in a particular month.
Any such amount so carried forward will bear interest at the applicable Pass-
Through Rate for each Class of Class A Certificates, to the extent permitted
by law.
Class A Principal
Holders of a Class of Class A Certificates will be entitled to receive
payments of principal on each Payment Date in the order of priority set forth
below and to the extent of the Amount Available in the Certificate Account
after payment of all interest payable on each Class of Class A Certificates.
Holders of the Class A-1 ARM Certificates will be entitled to receive, as
payments of principal, an amount equal to the Class A-1 ARM Formula Principal
Distribution Amount. The "Class A-1 ARM Formula Principal Distribution Amount"
on or before the Payment Date on which the Class A-1 ARM Certificates have
been paid in full will generally be equal to the lesser of (A) the Class A-1
ARM Principal Balance or (B) the sum of the following: (i) all scheduled
payments of principal due on each outstanding Adjustable Rate Loan during the
preceding month; (ii) all partial principal prepayments and principal
prepayments in full received on each Adjustable Rate Loan during the preceding
month; (iii) the scheduled principal balance of each Adjustable Rate Loan that
became liquidated during the preceding month; (iv) the scheduled principal
balance of each Adjustable Rate Loan purchased by the Company
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during the preceding month pursuant to the Pooling and Servicing Agreement;
and (v) on any Payment Date which is on or after the Payment Date on which the
Class A-1, A-2, A-3, A-4, A-5 and A-6 Certificates have been paid in full, (a)
the Senior Percentage times (x) the sum of the amounts described in clauses
(i) through (v) of the definition of the Formula Principal Distribution Amount
less (y) the sum of the amounts described in clauses (i) through (iv) of the
definition of the A-1 ARM Formula Principal Distribution Amount less (b) the
amount, if any, distributed in payment of principal on the Class A-1, A-2, A-
3, A-4, A-5 and A-6 Certificates on such Payment Date.
Holders of the Class A Certificates (other than the Class A-1 ARM
Certificates) will be entitled to receive, as payments of principal, an amount
equal to the Senior Percentage of the Formula Principal Distribution Amount.
The Formula Principal Distribution Amount is the sum of (i) all scheduled
payments of principal due on each outstanding Loan during the month preceding
the month in which the Payment Date occurs, (ii) the Scheduled Principal
Balance of each Loan which, during the month preceding the month of such
Payment Date, was purchased by the Company pursuant to the Agreement on
account of certain breaches of its representations and warranties, (iii) all
partial Principal Prepayments applied and all Principal Prepayments in Full
received during such preceding month in respect of the Loans, (iv) the
Scheduled Principal Balance of each Loan that became a Liquidated Loan during
such preceding month and (v) any amount described in clauses (i) through (iv)
above that was not previously distributed because of an insufficient amount of
funds available in the Certificate Account if (a) the Payment Date occurs on
or after the Payment Date on which the Class B-2 Principal Balance has been
reduced to zero, or (b) such amount was not covered by a Class B-2 Guaranty
Payment and corresponding reduction in the Class B-2 Principal Balance, minus
(vi) the Class A-1 ARM Formula Principal Distribution Amount. When the
Principal Balance of a Class of Class A Certificates is reduced to zero, no
further distributions of principal will be made to the holders of such Class.
The Senior Percentage for any Payment Date prior to the Class B Cross-over
Date, and for any Payment Date on or after the Class B Cross-over Date on
which any Class B Principal Distribution Test is not satisfied (each as
described under "Class B-1 Principal" below), will be 100%, and for any
Payment Date on or after the Class B Cross-over Date on which each Class B
Principal Distribution Test is satisfied will equal a fraction, expressed as a
percentage, the numerator of which is the sum of the Class A Principal Balance
(excluding the Class A-1 ARM Principal Balance) and the Class M Principal
Balance as of such Payment Date and the denominator of which is the Pool
Scheduled Principal Balance of the Loans (other than the Adjustable Rate
Loans) as of the immediately preceding Payment Date.
The Senior Percentage of the Formula Principal Distribution Amount will be
distributed, to the extent of the Amount Available after payment of interest
on each Class of Class A Certificates, as follows: (i) that portion, if any,
of the Senior Percentage of the Formula Principal Distribution Amount equal to
the Class A-6 Lockout Pro Rata Distribution Amount will be distributed to the
Class A-6 Certificateholders; and (ii) the remainder of the Senior Percentage
of the Formula Principal Distribution Amount will be distributed in the
following order: first to the Class A-1 Certificateholders until the Class A-1
Principal Balance has been reduced to zero, then to the Class A-2
Certificateholders until the Class A-2 Principal Balance has been reduced to
zero, then to the Class A-3 Certificateholders until the Class A-3 Principal
Balance has been reduced to zero, then to the Class A-4 Certificateholders
until the Class A-4 Principal Balance has been reduced to zero and then to the
Class A-5 Certificateholders until the Class A-5 Principal Balance has been
reduced to zero. After the Class A-5 Principal Balance has been reduced to
zero, Holders of the Class A-6 Certificates will be entitled to receive the
entire Senior Percentage of the Formula Principal Distribution Amount, up to
the amount necessary to reduce the Class A-6 Principal Balance to zero, to the
extent the remaining Amount Available is sufficient therefor.
The "Class A-6 Lockout Pro Rata Distribution Amount," as to any Payment
Date, is an amount equal to the lesser of:
(a) the product of (1) the Class A-6 Lockout Percentage, and (2) the
product of (A) a fraction, the numerator of which is the Class A-6
Principal Balance immediately preceding such Payment Date and the
denominator of which is the Class A Principal Balance less the Class A-1
ARM Principal Balance
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immediately preceding such Payment Date, and (B) the Senior Percentage of
the Formula Principal Distribution Amount for such Payment Date, and
(b) the Class A-6 Principal Balance immediately preceding such Payment
Date.
The "Class A-6 Lockout Percentage," as to any Payment Date occurring during
the periods set forth below, is the percentage designated as such as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) CLASS A-6 LOCKOUT PERCENTAGE
------------------------ ----------------------------
<S> <C>
June 1997 through May 2000..................... 0%
June 2000 through May 2002..................... 20%
June 2002 through May 2003..................... 80%
June 2003 through May 2004..................... 100%
June 2004 and thereafter....................... 300%
</TABLE>
On any Payment Date as to which there is a Class A Liquidation Loss
Principal Amount (which is the amount, if any, by which the Pool Scheduled
Principal Balance is less than the Class A Principal Balance), the remaining
Amount Available will be distributed pro rata to each Class of Class A
Certificates based on the Class Principal Balance of each Class (but in no
event will such amount exceed the Class Principal Balance of any such Class).
If, as to any Payment Date, the Amount Available is less than the sum of the
Senior Percentage of the Formula Principal Distribution Amount and the Class
A-1 ARM Formula Principal Distribution Amount, the amounts to be distributed
to the Class A Certificateholders (including the Class A-1 ARM
Certificateholders) will be allocated pro rata based upon the respective
portions of the Amount Available that would have been distributed to the Class
A Certificateholders, as described above, had the remaining Amount Available
been sufficient therefor.
As hereinafter described, all losses on Liquidated Loans will be absorbed
first by the Class C Certificate, then by the Class B-2 Guaranty Fee otherwise
payable to the Company, then by the Monthly Servicing Fee otherwise payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) with respect to the Loans, then by the Class B-2
Certificates, then by the Class B-1 Certificates, then by the Class M-2
Certificates and then by the Class M-1 Certificates. If the Amount Available
on any Payment Date is less than the Class A Distribution Amount, the Amount
Available will be applied first to the payment of interest on the Class A
Certificates and then to the payment of principal to the Class of Class A
Certificates then entitled thereto.
Class M-1 Interest
Interest will be paid to the Class M-1 Certificateholders on each Payment
Date, to the extent of the Class M-1 Remaining Amount Available, if any, in an
amount (the "Class M-1 Interest Payment Amount") equal to the product of (a)
the Class M-1 Pass-Through Rate and (b) the then outstanding Class M-1
Principal Balance less the Class M-1 Liquidation Loss Principal Amount, if
any. The "Class M-1 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the aggregate of the Principal Balances of the Class M-2
Certificates, the Class B-1 Certificates and the Class B-2 Certificates (but
in no event greater than the Class M-1 Principal Balance). The "Aggregate
Liquidation Loss Principal Amount" as of any Payment Date will equal the
excess, if any, of (i) the aggregate Principal Balance of the Certificates as
of the preceding Payment Date (after giving effect to distributions of
principal thereon) over (ii) the Pool Scheduled Principal Balance for such
preceding Payment Date. Interest on the outstanding Class M-1 Principal
Balance will accrue from the Closing Date, or from the most recent Payment
Date on which interest has been paid, to but excluding the following Payment
Date, and will be computed on the basis of a 360-day year of twelve 30-day
months. The Class M-1 Principal Balance is the Original Class M-1 Principal
Balance less the sum of all amounts previously distributed to Class M-1
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class M-1 Remaining Amount Available, plus other funds in
the Certificate Account available therefor, is not sufficient to
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make a full distribution of the Class M-1 Interest Payment Amount to the Class
M-1 Certificateholders, the amount of such interest to be distributed in
respect of the Class M-1 Certificates will be allocated among the Class B-1
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency will be carried forward
and added to the amount such holders will be entitled to receive on the next
Payment Date. Interest will accrue on the Class M-1 Liquidation Loss Principal
Amount, if any, and will be payable on the current or succeeding Payment Dates
to the extent of the Amount Available remaining after payment of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount and the Class B-2
Distribution Amount. Any interest amounts carried forward will bear interest
at the Class M-1 Pass-Through Rate, to the extent permitted by law.
The Class M-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class M-1 Principal
On each Payment Date after the Class A Principal Balance has been reduced to
zero, Class M-1 Certificateholders will be entitled to receive, as payments of
principal, the Senior Percentage of the Formula Principal Distribution Amount
(as described under "Class A Principal" above) to the extent of the Class M-1
Remaining Amount Available in the Certificate Account on such date, after
payment of all interest payable on the Class M-1 Certificates (other than in
respect of Class M-1 Liquidation Loss Principal Amounts), until the Class M-1
Principal Balance has been reduced to zero. On each Payment Date on or after
the Class B Cross-over Date on which each Class B Principal Distribution Test
is satisfied, payments of principal will be made to Class B-1 or Class B-2
Certificateholders, even if Class M-1 Certificateholders are not yet entitled
to receive payments of principal because the Class A Principal Balance has not
been reduced to zero.
Class M-2 Interest
Interest will be paid to the Class M-2 Certificateholders on each Payment
Date, to the extent of the Class M-2 Remaining Amount Available, if any, in an
amount (the "Class M-2 Interest Payment Amount") equal to the product of (a)
the Class M-2 Pass-Through Rate and (b) the then outstanding Class M-2
Principal Balance less the Class M-2 Liquidation Loss Principal Amount, if
any. The "Class M-2 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the aggregate of the Principal Balances of the Class B-1
Certificates and the Class B-2 Certificates (but in no event greater than the
Class M-2 Principal Balance). Interest on the outstanding Class M-2 Principal
Balance will accrue from the Closing Date, or from the most recent Payment
Date on which interest has been paid, to but excluding the following Payment
Date, and will be computed on the basis of a 360-day year of twelve 30-day
months. The Class M-2 Principal Balance is the Original Class M-2 Principal
Balance less the sum of all amounts previously distributed to Class M-2
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class M-2 Remaining Amount Available, plus other funds in
the Certificate Account available therefor, is not sufficient to make a full
distribution of the Class M-2 Interest Payment Amount to the Class M-2
Certificateholders, the amount of such interest to be distributed in respect
to the Class M-2 Certificates will be allocated among the Class M-2
Certificates pro rata in accordance with their respective entitlements to
interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class M-2 Liquidation Loss Principal Amount, if
any, and will be payable on the current or succeeding Payment Dates to the
extent of the Amount Available remaining after payment in full of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1
Liquidation Loss Principal Amount. Any interest amounts carried forward will
bear interest at the Class M-2 Pass-Through Rate, to the extent permitted by
law.
The Class M-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
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<PAGE>
Class M-2 Principal
On each Payment Date after the Class A Principal Balance and the Class M-1
Principal Balance have been reduced to zero, Class M-2 Certificateholders will
be entitled to receive, as payments of principal, the Senior Percentage of the
Formula Principal Distribution Amount (as described under "Class A Principal"
above) to the extent of the Class M-2 Remaining Amount Available in the
Certificate Account on such date, after payment of all interest payable on the
Class M-2 Certificates (other than in respect of Class M-2 Liquidation Loss
Principal Amounts), until the Class M-2 Principal Balance has been reduced to
zero. On each Payment Date on or after the Class B Cross-over Date on which
each Class B Principal Distribution Test is satisfied, payments of principal
will be made to Class B-1 or Class B-2 Certificateholders, even if Class M-2
Certificateholders are not yet entitled to receive payments of principal
because the Class A Principal Balance and Class M-1 Principal Balance have not
been reduced to zero.
Class B-1 Interest
Interest will be paid to the Class B-1 Certificateholders on each Payment
Date, to the extent of the Class B-1 Remaining Amount Available, if any, in an
amount (the "Class B-1 Interest Payment Amount") equal to the product of (a)
the Class B-1 Pass-Through Rate and (b) the then outstanding Class B-1
Principal Balance less the Class B-1 Liquidation Loss Principal Amount, if
any. The "Class B-1 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the Class B-2 Principal Balance (but in no event greater than the
Class B-1 Principal Balance). Interest on the outstanding Class B-1 Principal
Balance will accrue from the Closing Date, or from the most recent Payment
Date on which interest has been paid, to but excluding the following Payment
Date, and will be computed on the basis of a 360-day year of twelve 30-day
months. The Class B-1 Principal Balance is the Original Class B-1 Principal
Balance less the sum of all amounts previously distributed to Class B-1
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class B-1 Remaining Amount Available, plus other funds in
the Certificate Account available therefor, is not sufficient to make a full
distribution of the Class B-1 Interest Payment Amount to the Class B-1
Certificateholders, the amount of such interest to be distributed in respect
of the Class B-1 Certificates will be allocated among the Class B-1
Certificates pro rata in accordance with their respective entitlements to
interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class B-1 Liquidation Loss Principal Amount, if
any, and will be payable on the current or succeeding Payment Dates to the
extent of the Amount Available remaining after payment in full of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1
Liquidation Loss Principal Amount and Class M-2 Liquidation Loss Principal
Amount. Any interest amounts carried forward will bear interest at the Class
B-1 Pass-Through Rate, to the extent permitted by law.
The Class B-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class B-1 Principal
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B-1 Certificates. The Class B Cross-over Date will be
the earlier of (A) the Payment Date on which the Class M-2 Principal Balance
is reduced to zero, and (B) the first Payment Date on or after the Payment
Date in June 2000 on which the fraction, expressed as a percentage, the
numerator of which is the Class B Principal Balance as of such Payment Date
and the denominator of which is the Pool Scheduled Principal Balance as of the
immediately preceding Payment Date, is equal to or greater than 10%.
On each Payment Date on or after the Class B Cross-over Date and prior to
the Payment Date on which the Class A Principal Balance and the Class M
Principal Balance have been reduced to zero, holders of Class B Certificates
will be entitled to distributions of principal only if each of the following
tests (each a "Class B Principal Distribution Test") is satisfied on such
Payment Date: (i) the Average Sixty-Day Delinquency Ratio
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(as defined in the Agreement) as of such Payment Date must not exceed 6.0%;
(ii) the Average Thirty-Day Delinquency Ratio (as defined in the Agreement)
with respect to as of such Payment Date must not exceed 12.0%; (iii) the
Cumulative Realized Losses (as defined in the Agreement) as of such Payment
Date must not exceed 7.5%; (iv) the Current Realized Loss Ratio (as defined in
the Agreement) as of such Payment Date must not exceed 2.0%; and (v) the Class
B Principal Balance divided by the Pool Scheduled Principal Balance as of the
immediately preceding Payment Date must be equal to or greater than 10%.
On each Payment Date on or after the Class B Cross-over Date, if each Class
B Principal Distribution Test is satisfied on such Payment Date, Class B-1
Certificateholders will be entitled to receive, as payments of principal, the
Class B Percentage of the Formula Principal Distribution Amount to the extent
of the Class B-1 Remaining Amount Available in the Certificate Account on such
date after payment of all interest payable on the Class B-1 Certificates
(other than in respect of Class B-1 Liquidation Loss Principal Amounts), until
the Class B-1 Principal Balance has been reduced to zero. The Class B-2
Certificateholders will not be entitled to any distributions of principal from
the Class B-1 Remaining Amount Available until the Class B-1 Principal Balance
has been reduced to zero.
The Class B Percentage for any Payment Date will be equal to 100% minus the
Senior Percentage. The Class B Percentage for each Payment Date, if any, after
the Class A Principal Balance and the Class M Principal Balance have been
reduced to zero will be equal to 100%.
Class B-2 Interest
Interest will be paid to the Class B-2 Certificateholders on each Payment
Date, to the extent of (i) the Class B-2 Remaining Amount Available, if any
and (ii) the amount, if any, paid pursuant to the Class B-2 Limited Guaranty,
in an amount (the "Class B-2 Interest Payment Amount") equal to the product of
(a) the Class B-2 Pass-Through Rate and (b) the then outstanding Class B-2
Principal Balance less the Class B-2 Liquidation Loss Principal Amount, if
any. The "Class B-2 Liquidation Loss Principal Amount" as of any Payment Date
will equal the Aggregate Liquidation Loss Principal Amount (but in no event
greater than the Class B-2 Principal Balance). Interest on the outstanding
Class B-2 Principal Balance will accrue from the Closing Date, or from the
most recent Payment Date on which interest has been paid, to but excluding the
following Payment Date, and will be computed on the basis of a 360-day year of
twelve 30-day months. The Class B-2 Principal Balance is the Original Class B-
2 Principal Balance less the sum of all amounts previously distributed to
Class B-2 Certificateholders on account of principal. In the event that, on a
particular Payment Date, the Class B-2 Remaining Amount Available in the
Certificate Account is not sufficient to make a full distribution of the Class
B-2 Interest Payment Amount to the Class B-2 Certificateholders and the
Company fails to pay such amount under the Class B-2 Limited Guaranty, the
amount of such interest to be distributed in respect of the Class B-2
Certificates will be allocated among the Certificates of such Class pro rata
in accordance with their respective entitlements to interest, and the amount
of such deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue in respect of the Class B-2 Liquidation Loss Principal Amount, if any,
and will be payable on the current or succeeding Payment Dates to the extent
of the Amount Available remaining after payment in full of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1
Liquidation Loss Principal Amount, the Class M-2 Liquidation Loss Principal
Amount and the Class B-1 Liquidation Loss Principal Amount. Any interest
amounts carried forward will bear interest at the Class B-2 Pass-Through Rate,
to the extent permitted by law.
The Class B-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
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Class B-2 Principal
Except for distributions of any amounts representing a Class B-2 Liquidation
Loss Principal Amount (as described below), payments of principal on the Class
B-2 Certificates will not commence until the Payment Date on which the Class
B-1 Principal Balance has been reduced to zero (the "Class B-1 Cross-over
Date"), and will be made on that Payment Date and each Payment Date thereafter
only if each Class B Principal Distribution Test is satisfied on such Payment
Date (unless the Class A Principal Balance and the Class M Principal Balance
have been reduced to zero). On any such Payment Date, the Class B Percentage
of the Formula Principal Distribution Amount will be distributed, to the
extent of the Class B-2 Remaining Amount Available and any amounts actually
paid under the Class B-2 Limited Guaranty after payment of interest on the
Class B-2 Certificates (other than in respect of Class B-2 Liquidation Loss
Principal Amounts), to the Class B-2 Certificateholders until the Class B-2
Principal Balance has been reduced to zero.
On each Payment Date, the Class B-2 Certificateholders will be entitled to
receive pursuant to the Class B-2 Limited Guaranty the Class B-2 Liquidation
Loss Principal Amount, if any.
CALCULATION OF ONE-MONTH LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such
monthly interest period (a "LIBOR Determination Date"). "Telerate Page 3750"
means the display page so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service, or such other
service as may be designated by the Calculation Agent as the information
vendor, for the purpose of displaying London interbank offered rates of major
banks). If such rate appears on Telerate Page 3750, LIBOR will be such rate.
"LIBOR Business Day" as used herein means a day that is both a business day
and a day on which banking institutions in the City of London, England are not
required or authorized by law to be closed. If on any LIBOR Determination Date
the offered rate does not appear on Telerate Page 3750, the Calculation Agent
will request each of the reference banks (which shall be major banks that are
engaged in transactions in the London interbank market selected by the
Calculation Agent) to provide the Calculation Agent with its offered quotation
for United States dollar deposits for one month to prime banks in the London
interbank market as of 11:00 A.M., London time, on such date. If at least two
reference banks provide the Calculation Agent with such offered quotations,
LIBOR on such date will be the arithmetic mean, rounded upward, if necessary,
to the nearest 1/100,000 of 1% (.0000001), with five one-millionths of a
percentage point rounded upward, of all such quotations. If on such date fewer
than two of the reference banks provide the Calculation Agent with such
offered quotations, LIBOR on such date will be the arithmetic mean, rounded
upward, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward, of the offered per annum
rates that one or more leading banks in the City of New York selected by the
Calculation Agent are quoting as of 11:00 A.M., New York City time, on such
date to leading European banks for United States dollar deposits for one
month; provided, however, that if such banks are not quoting as described
above, LIBOR for such date will be LIBOR applicable to the monthly interest
period immediately preceding such monthly interest period. Notwithstanding the
foregoing, however, LIBOR for a Payment Date shall not be based on LIBOR for
the prior Payment Date for three consecutive Payment Dates. If, under the
priorities described above, LIBOR for a Payment Date would be based on LIBOR
for the previous Payment Date for the second consecutive Payment Date, the
Calculation Agent shall select an alternative comparable index (over which the
Calculation Agent has no control) used for determining one-month Eurodollar
lending rates that is calculated and published (or otherwise made available)
by an independent third party. The "Calculation Agent" will initially be the
Trustee.
SUBORDINATION OF CLASS M CERTIFICATES AND CLASS B CERTIFICATES
The rights of the holders of the Class M Certificates and the Class B
Certificates to receive distributions with respect to the Loans, as well as
any other amounts constituting Amount Available, will be subordinated to
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such rights of the Class A Certificateholders. This subordination is intended
to enhance the likelihood of regular receipt by the holders of the Class A
Certificates of the full amount of their scheduled monthly payments of
principal and interest and to afford such holders protection against losses on
Liquidated Loans. The protection afforded to the Class A Certificateholders by
means of the subordination feature will be accomplished by the preferential
right of the Class A Certificateholders to receive, prior to any distribution
being made on a Payment Date in respect of the Class M Certificates and the
Class B Certificates, the amount of principal and interest due them on each
Payment Date out of the Amount Available on deposit on such date in the
Certificate Account and by the right of the Class A Certificateholders to
receive future distributions on the Loans that would otherwise be payable to
the holders of Class M Certificates and Class B Certificates. On each Payment
Date the Class M-1 Certificateholders will be entitled to receive only amounts
described above under "Class M-1 Interest" and "Class M-1 Principal," the
Class M-2 Certificateholders will be entitled to receive only amounts
described under "Class M-2 Interest" and "Class M-2 Principal," the Class B-1
Certificateholders will be entitled to receive only amounts described above
under "Class B-1 Interest" and "Class B-1 Principal," and the Class B-2
Certificateholders will be entitled to receive only amounts described above
under "Class B-2 Interest" and "Class B-2 Principal."
In addition, the rights of the holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Loans, as
well as any other amounts constituting Amount Available, will be subordinate
to such rights of the Class M-1 Certificateholders. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class M-1 Certificates of the full amount of their scheduled monthly payments
of principal and interest and to afford such holders protection against losses
on Liquidated Loans. The protection afforded to the Class M-1
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class M-1 Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
M-2 Certificates and the Class B Certificates, the amount of principal and
interest due them on each Payment Date out of the Class M-1 Remaining Amount
Available on deposit on such date in the Certificate Account and by the right
of the Class M-1 Certificateholders to receive future distributions on the
Loans that would otherwise be payable to the holders of Class M-2 Certificates
and Class B Certificates.
In addition, the rights of the holders of the Class B-1 Certificates and the
Class B-2 Certificates to receive distributions with respect to the Loans, as
well as any other amounts constituting Sub-Pool HE Amount Available, will be
subordinate to such rights of the Class M-2 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-2 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Loans. The protection afforded to the
Class M-2 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-2 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class B Certificates, the amount of principal and interest due them on
each Payment Date out of the Class M-2 Remaining Amount Available on deposit
on such date in the Certificate Account and by the right of the Class M-2
Certificateholders to receive future distributions of the Loans that would
otherwise be payable to the holders of Class B Certificates.
In addition, the rights of the holders of the Class B-2 Certificates to
receive distributions with respect to the Loans, as well as any other amounts
constituting Amount Available, will be subordinate to such rights of the Class
B-1 Certificateholders. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class B-1 Certificates of
the full amount of their scheduled monthly payments of principal and interest
and to afford such holders protection against losses on Liquidated Loans. The
protection afforded to the Class B-1 Certificateholders by means of the
subordination feature will be accomplished by the preferential right of the
Class B-1 Certificateholders to receive, prior to any distribution being made
on a Payment Date in respect of the Class B-2 Certificates, the amount of
principal and interest due them on each Payment Date out of the Class B-1
Remaining Amount Available on deposit on such date in the Certificate Account
and by the right of the Class B-1 Certificateholders to receive future
distributions on the Loans that would otherwise be payable to the holders of
Class B-2 Certificates.
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As described above, prior to the time that the Class A Principal Balance is
reduced to zero, the distribution of principal to the Class A
Certificateholders is intended to include (i) the Senior Percentage of the
Scheduled Principal Balance of each Fixed-Rate Loan that became a Liquidated
Loan during the preceding Due Period and (ii) the Scheduled Principal Balance
of each Adjustable Rate Loan that became a Liquidated Loan during the
preceding Due Period. If the Liquidation Proceeds, net of related Liquidation
Expenses, from such Liquidated Loans are less than the Scheduled Principal
Balance of such Liquidated Loans plus accrued and unpaid interest thereon, the
deficiency will, in effect, be absorbed by the Class M, the Class B and the
Class C Certificateholders and the Company, since a portion of the Amount
Available equal to such deficiency and otherwise distributable to them will be
paid to the Certificateholders. Likewise, to the extent the Class M-1
Certificateholders or the Class M-2 Certificateholders are entitled to receive
distributions of principal, similar deficiencies could result for each Class
of Certificates with a lower payment priority. If the Amount Available is not
sufficient to cover the amounts distributable to the Class A or Class M
Certificateholders on a particular Payment Date, then the Senior Percentage on
future Payment Dates may be increased and the Class B Percentage on future
Payment Dates may be reduced as a result of such deficiency. But for the
effect of the relative subordination of the Class B-2 Guaranty Fee otherwise
payable to the Company, the related Monthly Servicing Fee payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Loans and amounts otherwise distributable
to the Class M-2, Class B and Class C Certificateholders, the Class M-1
Certificateholders will absorb all losses on each Liquidated Loan in the
amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee. But for the effect of
the relative subordination of the Class B-2 Guaranty Fee otherwise payable to
the Company, the related Monthly Servicing Fee payable to the Servicer (so
long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Loans and amounts otherwise distributable to the
Class B and Class C Certificateholders on each Payment Date, the Class M-2
Certificateholders will absorb all losses on each Liquidated Loan in the
amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee. But for the effect of
the relative subordination of the Class B-2 Guaranty Fee otherwise payable to
the Company, the related Monthly Servicing Fee payable to the Servicer (so
long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Loans and amounts otherwise distributable to the
Class B-2 and Class C Certificateholders, the Class B-1 Certificateholders
will absorb all losses on each Liquidated Loan in the amount by which its
Liquidation Proceeds, net of the related Liquidation Expenses, are less than
its unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee. But for the effect of the relative
subordination of the Class B-2 Guaranty Fee otherwise payable to the Company,
the related Monthly Servicing Fee payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the Company is the Servicer) and
amounts otherwise distributable to the Class C Certificateholder on each
Payment Date, and amounts paid under the Class B-2 Limited Guaranty as
described below, the Class B-2 Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its Liquidation Proceeds, net of
the related Liquidation Expenses, are less than its unpaid principal balance
plus accrued and unpaid interest thereon less the related Monthly Servicing
Fee. Class B-2 Certificateholders, however, will be entitled to receive Class
B-2 Guaranty Payments. If the Company fails to make a payment required under
the Class B-2 Limited Guaranty, the Class B-2 Certificateholders will incur a
loss on their investment in the Class B-2 Certificates.
ADVANCES
To the extent that collections on a Loan 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 Loan 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,
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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 furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class A
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of Class A
Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included) and (2) that
portion of any such distribution to Class A-6 Certificateholders
constituting the Class A-6 Lockout Pro Rata Distribution);
(c) the amount, if any, by which the Class A Formula Distribution Amount
exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage and the Class A-6 Lockout Percentage for such
Payment Date;
(f) the Pool Scheduled Principal Balance for such Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the numerator
of which is the sum of the Class A Principal Balance, the Class M Principal
Balance and the Class B Principal Balance and the denominator of which is
the Cut-off Date Pool Principal Balance); and
(h) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included;
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
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(h) the Pool Factor; and
(i) the number and aggregate principal balance of the Loans delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of the Loans delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class B-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
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(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of the Loans delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class B-2 Certificates
allocable to interest;
(b) the amount of such distribution to holders of Class B-2 Certificates
allocable to principal (separately identifying the aggregate amount of any
Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Liquidation Loss Principal Amount, if
any, exceeds the Class B-2 Distribution Amount for such Payment Date;
(d) the Class B-2 Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) any unpaid interest on any Class B-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B-2 Guaranty Payment, if any, for such Payment Date;
(g) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance for such Payment Date;
(j) the Pool Factor; and
(k) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed as
dollar amounts for a Class B-2 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance of the Loan Pool 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 Loans (other than any Loan as
to which title to the underlying property has been assigned) 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.
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COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Loans, exercising the degree of skill and care 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. The
Company does, however, as a matter of its own policy, monitor proof of hazard
insurance coverage (other than flood insurance) and require that it be named
as an additional loss payee on all first lien secured contracts and generally
on junior lien secured contracts with amounts financed of over $20,000.
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) for servicing the Loans equal to one-
twelfth of the product of .75% and the remaining Pool Scheduled Principal
Balance of the Loans in such Sub-Pool.
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 Loan 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 Loan. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Loans, 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 Loans and paid by the
Company from its servicing fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Loans or foreclosure on collateral relating thereto, payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders.
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 1998, 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 Aggregate Certificate Principal Balance 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.
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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.
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 Aggregate
Certificate Principal Balance 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 Loans 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. 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 Loans 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
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greater than the Monthly Servicing Fee payable to the Company as Servicer
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 Pool Scheduled Principal Balance of the Loan Pool is reduced
to zero; or (b) the Payment Date occurring in the month following the
Servicer's repurchase of the Loans 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 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 Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance 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 Loans 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.
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) arising out of or resulting from the use or ownership by the Company or
any affiliate thereof of any real estate securing a Loan, (b) for any taxes
which may at any time be asserted with respect to, and as of the date of, the
conveyance of the Loans 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 (c) 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 Loan.
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 Loan, Loan 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 Loans, 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.
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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, 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.
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.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States) or, only in the case of the Class A-1 ARM Certificates, CEDEL or
Euroclear (as defined herein) (in Europe) if they are participants of such
systems, or indirectly through organizations that are participants in such
systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on
behalf of the CEDEL Participants and the Euroclear Participants, respectively,
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries"),
which in turn will hold such positions in customers' securities accounts in
the Depositaries' names on the books 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
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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.
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.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
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<PAGE>
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Class A-1 ARM Certificates held through CEDEL
or Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Certain Federal Income Tax Consequences" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation Procedures"
in Annex I to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Class A-1 ARM Certificates among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
DESCRIPTION OF THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Loans, the
Company will provide a guaranty (the "Class B-2 Limited Guaranty") against
losses that would otherwise be borne by the Class B-2 Certificates. Each
payment required to be made under the Class B-2 Limited Guaranty is referred
to as a "Class B-2 Guaranty Payment." Prior to the Class B-1 Cross-over Date,
and on any Payment Date on or after the Class B-1 Cross-over Date on which a
Class B Principal Distribution Test is not satisfied, the Class B-2 Guaranty
Payment will equal the amount, if any, by which (i) the sum of (a) the Class
B-2 Formula Distribution Amount for such Payment Date (which will be equal to
accrued and unpaid interest on the Class B-2 Certificates) and (b) the Class
B-2 Liquidation Loss Principal Amount, if any, for such Payment Date exceeds
(ii) the Class B-2 Distribution Amount for such Payment Date. The Class B-2
Liquidation Loss Principal Amount for any Payment Date equals the amount, if
any, by which the sum of the Class A Principal Balance, the Class M Principal
Balance and the Class B Principal Balance for such Payment Date exceeds the
Pool Scheduled Principal Balance for such Payment Date (but in no event
greater than the Class B-2 Principal Balance). The Class B-2 Liquidation Loss
Principal Amount is, in substance, the amount of delinquencies and losses
experienced on the Loans during the related Due Period that was not absorbed
by the Class C Certificate and the related Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans. On each Payment
Date on or after the Class B-1 Cross-over Date, if each Class B Principal
Distribution Test is satisfied on such Payment Date (or the Class A Principal
Balance and the Class M Principal Balance have been reduced to zero), the
Class B-2 Guaranty Payment will equal the amount, if any, by which (a) the sum
of (i) the Class B-2 Formula Distribution Amount for such Payment Date (which
will include both interest and principal) and (ii) the Class B-2 Principal
Liquidation Loss Amount, if any, for such Payment Date exceeds (b) the Class
B-2 Distribution Amount for such Payment Date.
The Class B-2 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. The Class B-2 Limited Guaranty will not benefit in
any way, or result in any payment to, the Class A-1 ARM, Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class M-1, Class M-2 or Class B-1
Certificateholders.
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<PAGE>
As compensation for providing the Class B-2 Limited Guaranty, the Company
will be entitled to receive a Class B-2 Guaranty Fee on each Payment Date
equal to the lesser of (a) the Amount Available less the Class A Distribution
Amount, the Class M-1 Distribution Amount, the Class M-2 Distribution Amount,
the Class B-1 Distribution Amount, the Class B-2 Distribution Amount, the
Monthly Servicing Fee and certain other amounts required to be paid to the
Servicer, the Trustee, the Class C Certificateholder and the Company (see
"Description of the Certificates--Payments on Loans"), and (b) an amount equal
to 1/12th of the product of 3% and the Pool Scheduled Principal Balance for
the immediately preceding Payment Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Dorsey & Whitney LLP, counsel to the
Company, will deliver its opinion that, assuming ongoing compliance with the
terms of the Agreement, the Trust will qualify as a REMIC for federal income
tax purposes. Each Class of Certificates will constitute "regular interests"
in the REMIC. The Class C Certificate, which is not being offered hereunder,
will constitute the sole class of "residual interests" in the REMIC.
It is not anticipated that any of the Certificates will be issued with
original issue discount for federal income tax purposes. The prepayment
assumption that will be used to determine the rate of accrual of original
issue discount, market discount and premium, if any, will be based on the
assumption that the Loans will prepay at a rate equal to 100% of the
appropriate Prepayment Assumption.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "loans secured by an interest in real property" and
"real estate assets" for purposes of Sections 7701(a)(19)(C) and 856(c)(5) of
the Code, respectively. Furthermore, interest paid with respect to
Certificates held by a real estate investment trust will 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 further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such
plans may be invested in the Class A-1 ARM, Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Certificates without regard to the ERISA
restrictions described above, subject to applicable provisions of other
federal and state laws. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
The U.S. Department of Labor ("DOL") has granted administrative exemptions
to Lehman Brothers Inc. (Prohibited Transaction Exemption 91-14, 56 Fed. Reg.
7413 (1991)), to Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Prohibited Transaction Exemption 90-29; Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990)) and to Salomon Brothers Inc (Prohibited Transaction
Exemption 89-89, as amended; Exemption Application No. D-6446, 54 Fed. Reg.
42,589 (1989)) (the "Exemptions") from certain of the prohibited
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transaction rules of ERISA and the Code with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemptions. The receivables covered by the Exemptions
include home equity loans such as the Loans. The Exemptions will apply to the
acquisition, holding, and resale of the Class A-1 ARM, Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6 Certificates by a Plan, provided
that specified conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemptions to apply to
the Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Certificates are the following:
(1) The acquisition of the Class A-1 ARM, Class A-1, Class A-2, Class A-
3, Class A-4, Class A-5 or Class A-6 Certificates by a Plan is on terms
(including the price for the Class A-1 ARM, Class A-1, Class A-2, Class A-
3, Class A-4, Class A-5 or Class A-6 Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A-1 ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 or Class A-6 Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5 or Class A-6 Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either S&P, Fitch, Duff & Phelps Credit Rating Co.
or Moody's Investors Service, Inc.;
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with
the distribution of the Class A-1 ARM, Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 or Class A-6 Certificates represents not more than
reasonable compensation for underwriting the Class A-1 ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 or Class A-6 Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Loans to the Trust represents not more than the
fair market value of such Loans. The sum of all payments made to and
retained by the Servicer represents not more than reasonable compensation
for the Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A-1 ARM, Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 or Class A-6 Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemptions would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1 ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 or Class A-6 Certificates in
connection with the initial issuance, at least fifty percent (50%) of the
Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 or Class
A-6 Certificates, as applicable, are acquired by persons independent of the
Restricted Group, (ii) the Plan's investment in Class A-1 ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 or Class A-6 Certificates does not
exceed twenty-five percent (25%) of all of the Class A-1 ARM, Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 or Class A-6 Certificates, as applicable,
outstanding at the time of the acquisition and (iii) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemptions do not
apply to Plans sponsored by the Company, the Underwriters, the Trustee, the
Servicer, any obligor with respect to Loans included in the Trust constituting
more than five percent (5%) of the aggregate unamortized principal balance of
the assets in the Trust or any affiliate of such parties (the "Restricted
Group").
The Company believes that the Exemptions will apply to the acquisition and
holding of Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-
5 or Class A-6 Certificates sold by the Underwriters and by
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Plans and that all conditions of the Exemptions other than those within the
control of the investors have been met. In addition, as of the date hereof, no
obligor with respect to Loans included in the Trust constitutes more than 5%
of the aggregate unamortized principal balance of the assets of the Trust. Any
Plan fiduciary who proposes to cause a Plan to purchase Class A-1 ARM, Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5 or Class A-6, Certificates
should consult with its own counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of the Class
A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 Certificates unless it is clear that the assets of the
Trust will not be plan assets or unless it is clear that the Exemptions or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
In addition to the Exemptions, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, and PTCE 91-38,
which exempts certain transactions involving employee benefit plans and bank
collective investment funds. There also may be other exemptions applicable to
a particular transaction involving the Trust. A Plan that intends to acquire
any class of the Certificates should consult with its own counsel regarding
whether such investment would cause a prohibited transaction to occur and
whether the terms and conditions of an applicable class exemption may be
satisfied.
The two administrative exemptions referred to herein as the Exemptions are
included in the "underwriter exemptions" listed in PTE 95-60. Consequently,
the exemption provided by PTE 95-60 may apply to the acquisition and holding
of the Certificates by an insurance company general account in which an
employee benefit plan has an interest. The Small Business Job Protection Act
of 1996 (the "1996 Act") became effective on August 20, 1996. The 1996 Act
amends ERISA to require the DOL to issue regulations to clarify,
retroactively, the application of ERISA and the prohibited transaction
provisions of the Code to insurance company general accounts. Any insurance
company which proposes to purchase any Certificates for its general account
should consult with its own counsel with respect to the potential consequences
under ERISA and the Code of the insurance company's acquisition and ownership
of any of the Certificates. Assets of an insurance company general account in
which an employee benefit plan has an interest should not be invested in any
of the Certificates unless it is clear that PTE 95-60, the 1996 Act or other
exemptive relief will apply and exempt all potential prohibited transactions.
See "ERISA Considerations" in the Prospectus.
No transfer of any other Class of Certificates will be permitted to be made
to 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 other Class of
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 such
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.
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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 PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 ARM CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lehman Brothers Inc. ........ $12,154,000 $ 9,334,000 $12,215,000 $20,908,000 $ 6,852,000 $18,734,000 $13,562,000
Merrill Lynch, Pierce, Fenner
& Smith Incorporated.. 12,154,000 9,332,000 12,213,000 20,908,000 6,852,000 18,733,000 13,560,000
Salomon Brothers Inc......... 12,154,000 9,332,000 12,213,000 20,908,000 6,852,000 18,733,000 13,560,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Totals..................... $36,462,000 $27,998,000 $36,641,000 $62,724,000 $20,556,000 $56,200,000 $40,682,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS M-1 CLASS M-2 CLASS B-1 CLASS B-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Lehman Brothers Inc. ...... $ 5,996,000 $ 3,817,000 $ 3,817,000 $1,636,721
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated........ 5,996,000 3,815,000 3,815,000 1,635,000
Salomon Brothers Inc....... 5,996,000 3,815,000 3,815,000 1,635,000
----------- ----------- ----------- ----------
Totals................... $17,988,000 $11,447,000 $11,447,000 $4,906,721
=========== =========== =========== ==========
</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 Underwriters, 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 prices set forth on the cover page
of this Prospectus Supplement and in part to certain securities dealers at
such prices less concessions not to exceed .25% of the Original Class A-1 ARM
Principal Balance, .165% of the Original Class A-1 Principal Balance, .175% of
the Original Class A-2 Principal Balance, .18% of the Original Class A-3
Principal Balance, .225% of the Original Class A-4 Principal Balance, .275% of
the Original Class A-5 Principal Balance, .3% of the Original Class A-6
Principal Balance, .325% of the Original Class M-1 Principal Balance, .325% of
the Original Class M-2 Principal Balance, .4% of the Original Class B-1
Principal Balance, or .45% of the Original Class B-2 Principal Balance, as
applicable. The Underwriters may allow, and such dealers may reallow,
concessions not to exceed .125% of the Original Class A-1 ARM Principal
Balance, .1% of the Original Class A-1 Principal Balance, .1% of the Original
Class A-2 Principal Balance, .125% of the Original Class A-3 Principal
Balance, .125% of the Original Class A-4 Principal Balance, .15% of the
Original Class A-5 Principal Balance, .15% of the original Class A-6 Principal
Balance, .15% of the Original Class M-1 Principal Balance, .15% of the
Original Class M-2 Principal Balance, .2% of the Original Class B-1 Principal
Balance, or .2% of the Original Class B-2 Principal Balance, as applicable, 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.
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence
of such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates.
S-77
<PAGE>
Such transactions consist of bids or purchases for the purposes of pagging,
fixing or maintaining the price of the Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Certificates in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue of the Certificates to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
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.
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 or home equity loan 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 Dorsey & Whitney LLP,
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 Dorsey & Whitney LLP.
S-78
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Certificates will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, CEDEL
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Certificates from and including the last coupon payment date to and excluding
the settlement date. The payment will then be reflected in the account of the
CEDEL Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its clearing system and elect
to be in debit in anticipation of receipts of the sale proceeds in its
account, the bank-valuation will extinguish any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date. Finally, day traders that use CEDEL or Euroclear
and that purchase Global Certificates from DTC Participants for delivery to
CEDEL Participants or Euroclear Participants should note that
A-2
<PAGE>
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Certificates sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Certificates holding securities through CEDEL
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
A-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source, or (iv) a trust if (A) a court within the United States is able
to exercise primary supervision over the administration of the trust and (B)
one or more United States trustees have authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Certificates. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Certificates.
A-4
<PAGE>
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME EQUITY LOANS
(ISSUABLE IN SERIES)
Certificates for Home Equity 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 closed-
end home equity loans (the "Loans"), as more particularly described herein,
and liens on the related real estate. Except as otherwise specified in the
related Prospectus Supplement, the Loans 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 Loans 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 Loans. The Company will act as Servicer (in such capacity
referred to herein as the "Servicer") of the Loans.
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 Loans 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
Loans 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 Loans.
See "Description of the Certificates--Advances" and "--Distributions on
Certificates."
There will have been no public market for any Certificates sold hereunder
prior to the offering thereof and there is no assurance that any such market
will develop. The Underwriters named in the Prospectus Supplement relating to
a Series may from time to time buy and sell Certificates of such Series, but
there can be no assurance that an active secondary market therefor will
develop, and there is no assurance that any such market, if established, will
continue.
The Company may elect to cause the Trust Fund relating to a Series of
Certificates to be treated as a "Real Estate Mortgage Investment Conduit" (a
"REMIC") for federal income tax purposes. See "Certain Federal Income Tax
Consequences" herein.
---------------
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 May 23, 1997.
<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 Commission also maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. 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, 1996, and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, both 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 Equity Loans (Issuable in
Series) (the "Certificates").
Seller....................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Company").
Servicer..................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Servicer," 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
Loans (as defined herein) may be issued from
time to time in one or more series (each, a
"Series") pursuant to separate Pooling and Ser-
vicing 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 Loans.................... The Loans underlying a Series of Certificates
(the "Loan Pool") will be fixed or variable
rate Loans. Such Loans, as specified in the re-
lated Prospectus Supplement, will consist of
closed-end home equity loans (the "Loans").
Each Loan will be secured by the related real
estate.
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Loans compris-
ing the Loan Pool, as of the date specified in
the Prospectus Supplement (the "Cut-off Date");
(ii) the weighted average and range of contrac-
tual rates of interest (each, a "Loan Rate") on
the Loans; (iii) the weighted average and
ranges of terms to scheduled maturity of the
Loans as of origination and as of the Cut-off
Date; (iv) the average outstanding principal
balance of the Loans as of the Cut-off Date;
(v) the range of loan-to-value ratios; and (vi)
the geographic location of improved real estate
underlying the Loans. In addition, if so speci-
fied in the related Prospectus Supplement, ad-
ditional Loans may be purchased from the Com-
pany during the Pre-Funding Period specified in
the related Prospectus Supplement, from funds
on deposit in a Pre-Funding Account.
Except as otherwise specified in the related
Prospectus Sup-plement, the Loans will have
been originated by the Company on an individual
basis in the ordinary course of its business.
4
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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 Loan Pool and certain other prop-
erty 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
Loans will not be guaranteed or insured by any
government agency or other insurer.
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Loans will be subordinated to
the rights of Senior Certificateholders to the
extent and in the manner specified in the re-
lated Prospectus Sup-
5
<PAGE>
plement. If a Series of Certificates contains
more than one Class of Subordinated Certifi-
cates, distributions and losses will be allo-
cated among such classes in the manner speci-
fied in the related Prospectus Supplement. The
rights of the Subordinated Certificateholders,
to the extent not subordinated, may be on a
parity with those of the Senior
Certificateholders. This subordination is in-
tended to enhance the likelihood of regular re-
ceipt by Senior Certificateholders of the full
amount of scheduled monthly payments of princi-
pal and interest due them and to protect the
Senior Certificateholders against losses. If so
specified in the applicable Prospectus Supple-
ment, Mezzanine Certificates or other Classes
of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhance-
ment and may, if rated in one of the four high-
est rating categories by a nationally recog-
nized statistical rating organization, be of-
fered pursuant to this Prospectus and such Pro-
spectus 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
Prepayments)................ Except as otherwise set forth in the related
Prospectus Supple-ment, principal on each Loan,
including any principal prepayments, will be
passed through on each Payment Date. See "Matu-
rity and Prepayment Considerations" and "De-
scription of the Certificates."
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Loans
relating to a Series of Certificates remaining
outstanding at such time under the circum-
stances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Loans
plus accrued and unpaid interest thereon. See
"Description of the Certificates--Termination
of the Agreement."
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<PAGE>
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 Loan Pool to the Trust Fund, the Company
will be required to make certain representa-
tions and warranties in the related Agreement
regarding the Loans. 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 Loan 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 Sup-
plement, substitute for the affected Loan, in
each case under the conditions further de-
scribed herein and in the Prospectus Supple-
ment. See "Description of the Certificates--
Conveyance of Loans."
Federal Income Tax
Considerations.............. If an election (a "REMIC Election") is made to
treat the Trust Fund represented by a Series of
Certificates or a segregated portion thereof as
a "real estate mortgage investment conduit" (a
"REMIC") under the Internal Revenue Code of
1986, as amended (the "Code"), the Classes of
Certificates which are offered hereby may con-
stitute "regular interests" or "residual inter-
ests" in such REMIC under the Code, with the
tax consequences under the Code described
herein and in such Prospectus Supplement. If so
specified in the applicable Prospectus Supple-
ment, a Class of Certificates offered hereby
may represent interests in a "two-tier" REMIC,
but all interests in the first and second tier
REMIC will be created under the same Agreement.
See "Certain Federal Income Tax Consequences--
REMIC Series."
If a REMIC Election is not made with respect to
a Series of Certificates, the Trust Fund repre-
sented by such Certificates may be treated as a
grantor trust for federal income tax purposes
and not as an association taxable as a corpora-
tion. In such event, each Certificateholder
will be treated as the owner of an undivided
pro rata interest in income and corpus attrib-
utable to the related
7
<PAGE>
Loan Pool and any other assets held by the
Trust Fund and will be considered the equitable
owner of an undivided interest in the Loans in-
cluded in such Loan Pool. If a REMIC Election
is not made with respect to a Series of Certif-
icates and the Trust Fund represented by such
Certificates will not be treated as a grantor
trust, the federal income tax consequences of
ownership of such Certificates will be de-
scribed in the related Prospectus Supplement.
See "Certain Federal Income Tax Consequences--
Non-REMIC Series."
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Code,
should review carefully with its legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Code. See "ERISA Considerations."
Legal Investment............. Unless otherwise indicated in the applicable
Prospectus Supplement, the Certificates will
not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement
Act of 1984, as amended. See "Legal Invest-
ment."
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. 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.
2. Junior Mortgage Liens; Value of Mortgaged Property. The Company
expects that a substantial number of the liens on the improved real estate
securing the Loans in a given Loan Pool will be junior to other liens on
such real estate. The rights of the Trust Fund (and therefore the
Certificateholders of the related Series), as beneficiary under a
conventional junior deed of trust or as mortgagee under a conventional
junior mortgage, are subordinate to those of the mortgagee or beneficiary
under the senior mortgage or deed of trust, including the prior rights of
the senior mortgagee or beneficiary to cause the property securing the Loan
to be sold upon default of the mortgagor or trustor, thereby extinguishing
the junior mortgagee's or junior beneficiary's lien unless the Servicer on
behalf of the Trust Fund asserts its subordinate interest in the property
in foreclosure litigation and, possibly, satisfies the defaulted senior
loan or loans. See "Certain Legal Aspects of the Loans--Repurchase
Obligations."
A substantial portion of the Loans included in a Loan Pool are expected
to have loan-to-value ratios of 90% or more, based on the aggregate of the
outstanding principal balances of all senior mortgages or deeds of trust
and of the Loan on the one hand, and the value of the home, on the other.
See "Green Tree Financial Corporation--Loan Origination." An overall
decline in the residential real estate market, the general condition of a
property securing a Loan or other factors could adversely affect the value
of the property securing a Loan such that the remaining balance of such
Loan, together with that of any senior liens on the related property, could
equal or exceed the value of the property.
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. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company will not record the
assignment to the Trustee of the mortgage or deed of trust securing any
Loan. In some states, in the absence of such recordation, the assignment to
the related Trustee of the mortgage or deed of trust securing a Loan may
not be effective against creditors of or purchasers from the Company or a
trustee in bankruptcy of the Company.
5. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Loans to the related Trust Fund constitute a sale, rather than
a pledge of the Loans 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 Loans by the
Company was a pledge of the Loans 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 Loan 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) any letter of credit, guarantee,
surety bond, insurance policy, cash reserve fund or other credit enhancement
securing payment of
9
<PAGE>
all or part of a Series of Certificates, and (iv) 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 Loan Pool comprised of
Loans 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 Loan Pool and will have no interest in the Loan Pool
created with respect to any other Series of Certificates. If so specified in
the related Prospectus Supplement, the Trust Fund may include a Pre-Funding
Account which would be used to purchase additional Loans ("Subsequent Loans")
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 Loans,
including the requisite characteristics of the Subsequent Loans.
Except as otherwise specified in the related Prospectus Supplement, all of
the Loans will have been originated by the Company in the ordinary course of
its business. Specific information respecting the Loans 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 Loans 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 "Loan Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Loan Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related
Class of Certificates.
THE LOAN POOLS
Except as otherwise specified in the related Prospectus Supplement, the Loan
Pool will consist of closed-end home equity loans (the "Loans"), originated by
the Company on an individual basis in the ordinary course of business. All
Loans will be secured by the related real estate. Except as otherwise
specified in the related Prospectus Supplement, the Loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage
rate (the "Loan Rate").
For each Series of Certificates, the Company will assign the Loans
constituting the Loan 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 Loans pursuant to the Agreement. See "Description of the Certificates--
Servicing." Unless otherwise specified in the related Prospectus Supplement,
the Loan documents will be held by the Trustee or a custodian on its behalf.
Each Loan Pool will be composed of Loans bearing interest at the Loan 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 Loans 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.
10
<PAGE>
The related Prospectus Supplement will specify for the Loans contained in
the related Loan Pool, among other things, the range of the dates of
origination of the Loans; the range of the Loan Rates and the weighted average
Loan 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 Loans included in the Loan Pool as of the Cut-off
Date; the weighted average and range of scheduled terms to maturity as of
origination and as of the Cut-off Date; the range of original maturities of
the Loans and the last maturity date of any Loan; and the geographic location
of improved real estate securing the Loans. 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 Loans, including
the requisite characteristics of the Subsequent Loans.
The Company will make representations and warranties as to the types and
geographical distribution of the Loans included in a Loan Pool and as to the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each such Loan. Upon a breach of any representation or
warranty that materially and adversely affects the interests of the
Certificateholders in a Loan, the Company will be obligated to cure the breach
in all material respects, or to repurchase or substitute for the Loan 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 Loans."
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 equity
loans, costs of carrying such loans until sale of the related certificates and
to pay other expenses connected with pooling the Loans and issuing the
Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1996, had
stockholders' equity of approximately $1,245,454,000. 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
home equity loans in January 1996. 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.
LOAN ORIGINATION
The Company has originated closed-end home equity loans since January 1996.
As of December 31, 1996, the Company had approximately $812,558,053 aggregate
principal amount of outstanding closed-end home equity loans.
11
<PAGE>
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of marketing techniques. The
Company also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Company's credit approval process analyzes both the equity position of
the requested loan (including both the priority of the lien and the combined
loan-to-value ratio) and the applicant's creditworthiness; to the extent the
requested loan would have a less favorable (or more favorable) equity
position, the creditworthiness of the borrower must be stronger (or may be
weaker). The loan-to-value ratio of the requested loan, combined with any
existing loans with a senior lien position, may not exceed 95% without senior
management approval. In most circumstances, an appraisal of the property is
required. Currently, loans secured by a first mortgage with an obligor having
a superior credit rating may not exceed $300,000 without senior management
approval, and loans secured by a second mortgage with an obligor having a
superior credit rating may not exceed $250,000 without senior management
approval.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Loan Rate of the Loans (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 Loans. 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 Loans included in a Loan 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 Loans 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 Loans will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Loans generally may be prepaid in full or in part without penalty. The
Company has no significant experience with respect to the rate of principal
prepayments on home equity loans. Because the Loans 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 Loans would affect the amount of funds available to make
distributions on the Certificates
12
<PAGE>
on any Payment Date only if a substantial portion of the Loans 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 Loans prepaid after their
respective due dates in that month. In addition, liquidations of defaulted
Loans or the Servicer's or the Company's exercise of its option to repurchase
the entire remaining pool of Loans (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 Loans will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Loans 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 Loans comprising part
of a Trust Fund when the aggregate outstanding principal balance of such Loans
is less than a specified percentage of the initial aggregate outstanding
principal balance of such Loans as of the related Cut-off Date. See also "The
Trust Fund--The Loan Pools" for a description of the obligations of the
Company to repurchase a Loan in case of a breach of a representation or
warranty relative to such Loan.
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
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<PAGE>
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) Loans (the "Loan Pool")
which are subject to the Agreement, (ii) the amounts held in the Certificate
Account from time to time, (iii) 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 (iv) 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 Loan Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Loan 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 Loan 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 Loans 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
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wire transfer, except that the final distribution in retirement of
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
GLOBAL CERTIFICATES
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for,
a depositary (the "Depositary") identified in the related Prospectus
Supplement. The description of the Certificates contained in this Prospectus
assumes that the Certificates will be issued in definitive form. If the
Certificates of a Class are issued in the form of one or more Global
Certificates, the term "Certificateholder" should be understood to refer to
the beneficial owners of the Global Certificates, and the rights of such
Certificateholders will be limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it
is exchanged in whole or in part for a Certificate in definitive form, a
Global Certificate may not be transferred except as a whole by the Depositary
for such Global Certificate to a nominee of such Depositary or by a nominee of
such Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus
Supplement. It is anticipated that the following provisions will apply to all
depositary arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Certificate.
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
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<PAGE>
amounts proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name," and
will be the responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed
by or on behalf of the Company within the time period specified in the
Agreement, the Company will cause to be issued Certificates of such Class in
definitive form in exchange for the related Global Certificate or
Certificates. In addition, the Company may at any time and in its sole
discretion determine not to have any Certificates of a Class represented by
one or more Global Certificates and, in such event, will cause to be issued
Certificates of such Class in definitive form in exchange for the related
Global Certificate or Certificates. Further, if the Company so specifies with
respect to the Certificates of a Class, an owner of a beneficial interest in a
Global Certificate representing Certificates of such Class may, on terms
acceptable to the Company and the Depositary for such Global Certificate,
receive Certificates of such Class in definitive form. In any such instance,
an owner of a beneficial interest in a Global Certificate will be entitled to
physical delivery in definitive form of Certificates of the Class represented
by such Global Certificate equal in denominations to such beneficial interest
and to have such Certificates registered in its name.
CONVEYANCE OF LOANS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Loans, including
all principal and interest received on or with respect to the Loans (other
than receipts of principal and interest due on the Loans 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 Loans will be as
described on a list attached to the Agreement. Such list will include the
amount of monthly payments due on each Loan as of the date of issuance of the
Certificates, the Loan Rate on each Loan and the maturity date of each Loan.
Such list will be available for inspection by any Certificateholder at the
principal executive office of the Servicer. Prior to the conveyance of the
Loans to the Trust Fund, the Company's internal audit department will complete
a review of all of the Loan files confirming the accuracy of the list of Loans
delivered to the Trustee. Any Loan 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 Loan, 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 Loans, including the requisite
characteristics of the Subsequent Loans.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota reflecting the sale and assignment of the Loans 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
Loans 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 Loans from the Company to the Trust Fund were treated as a
pledge to secure borrowings by the Company, the distribution of proceeds of
the Loans to the Trust Fund might
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<PAGE>
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 Loans 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 Loans to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if the Company were to file
for reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Loan 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 Loan has been waived,
altered or modified in any respect, except by instruments or documents
included in the Loan file and reflected on the list of Loans delivered to the
Trustee; (c) each Loan 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 Loan is subject to any
right of rescission, set-off, counterclaim or defense; (e) each Loan was
originated by a home equity lender in the ordinary course of such lender's
business and assigned to the Company or was originated by the Company
directly; (f) no Loan was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the Loan or an interest
therein pursuant to the Agreement or the Certificates unlawful; (g) each Loan
complies with all requirements of law; (h) no Loan has been satisfied,
subordinated to a lower lien ranking than its original position (if any) or
rescinded; (i) each Loan creates a valid and perfected lien on the related
improved real estate; (j) all parties to each Loan had full legal capacity to
execute such Loan; (k) no Loan has been sold, conveyed and assigned or pledged
to any other person and the Company has good and marketable title to each Loan
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
Loan to the Trustee; (l) as of the Cut-off Date there was no default, breach,
violation or event permitting acceleration under any Loan (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 Loan, and the Company
has not waived any of the foregoing; (m) each Loan is a fully-amortizing loan
with a fixed rate of interest and provides for level payments over the term of
such Loan; (n) each Loan contains customary and enforceable provisions such as
to render the rights and remedies of the holder thereof adequate for
realization against the collateral; (o) the description of each Loan set forth
in the list delivered to the Trustee is true and correct; (p) there is only
one original of each Loan; and (q) each Loan 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 Loan 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 Loan, 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 Loans (but not with respect to any
other breach by the Company of its obligations under the Agreement). If a
prohibited transaction tax under the REMIC provisions of the Code is incurred
in connection with such repurchase, distributions otherwise payable to
Residual Certificateholders will be applied to pay such tax. The Company will
be required to pay the amount of such tax that is not funded out of such
distributions.
The "Repurchase Price" of a Loan at any time means the outstanding principal
amount of such Loan (without giving effect to any Advances made by the
Servicer or the Trustee), plus interest at the applicable Pass-Through Rate on
such Loan 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.
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PAYMENTS ON LOANS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to the limits established by the FDIC), the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Certificateholders have a claim with respect to the funds in the
Certificate Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Certificate Account is maintained or (v) otherwise acceptable to the rating
agency without reduction or withdrawal of the rating assigned to the relevant
Certificates. The collateral eligible to secure amounts in the Certificate
Account is limited to United States government securities and certain other
high-quality investments specified in the applicable Agreement ("Eligible
Investments"). A Certificate Account may be maintained as an interest-bearing
account, or the funds held therein may be invested pending each succeeding
Payment Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Loans
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 Loans;
(ii) all Obligor payments on account of interest on the Loans;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Loans, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(v) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vi) all proceeds of any Loan or property acquired in respect thereof
repurchased by the Servicer or the Company, as described under "Conveyance
of Loans" 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 Loans 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 Loans 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
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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 Loans.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Loan 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 Loan only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Loan 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 Loan from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including foreclosure
resale proceeds), if any, of the Loan, and will release its right to
reimbursements in conjunction with the purchase of the Loan 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 foreclosure resale proceeds), if any, of the Loan (an
"Uncollectible Advance"), the Servicer will be entitled to reimbursement from
payments on other Loans 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 Loan 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 Loans 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.
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(1) The initial principal balance of the Loan Pool will be the aggregate
principal balance of the Loans 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
Loan 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 Loan 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.
(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 Loans) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Loan and (b) for any taxes which may at any time be asserted with respect
to, and as of the date of, the conveyance of the Loans 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 Loans, 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 Loans) 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 Loan while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Loans 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 mortgage loans of the same type
as the Loans in those jurisdictions where the related real properties are
located or as otherwise specified in the Agreement. The duties to be performed
by the Servicer will include collection and remittance of principal and
interest payments, collection of insurance claims and, if necessary,
foreclosure of Loans.
The Servicer will make reasonable efforts to collect all payments called for
under the Loans and, consistent with the Agreement, will follow such
collection procedures with respect to the Loans as it follows with respect to
mortgage loans serviced by it that are comparable to the Loans.
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 Loan Pool and the Certificates of such Series as is
specified in
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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 equity loans
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.
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 equity loans 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
Loans, 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 Loan. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Loans,
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 Loans and paid
by the Company from its Monthly Servicing Fees include payment of fees and
expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of Loans or foreclosure on collateral relating
thereto, 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 Loan 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
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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 servicing 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.
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
Loans, 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 Loans 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. 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 Loans 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.
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 Loans, and other payments with respect to the
Loans;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the amount of fees payable out of the Trust Fund;
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(e) 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;
(f) the number and aggregate principal balance of Loans delinquent (i)
31-59 days, (ii) 60-89 and (iii) 90 or more days;
(g) the number of Loans liquidated during the Due Period ending
immediately before such Payment Date;
(h) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(i) 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
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 Loans in the related Loan
Pool at a price equal to the greatest of (i) the principal balance of the
Loans 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 Loans 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 Loans.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Code, to maintain the REMIC status of the Trust Fund and to avoid the
imposition of certain taxes on the REMIC or (iv) to make any other provisions
with respect to matters or questions arising under such Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of the
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 Loans which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
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TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Loan or the disposition of all
property acquired upon foreclosure of any Loan; or (b) the Payment Date on
which the Company or the Servicer repurchases the Loans 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.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan 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 Loans, 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 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.
CERTAIN LEGAL ASPECTS OF THE LOANS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Loans 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 Loans). The following
discussion contains summaries of certain legal aspects of home equity loans
secured by residential properties which are general in nature. Because such
legal aspects are governed by applicable state law (which laws may differ
substantially),
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the summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the real
estate securing the Loans may be situated or which may govern any Loan. The
summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Loans.
MORTGAGES AND DEEDS OF TRUST
The Loans will be secured by either mortgages, deeds of trust, security
deeds or deeds to secure debt depending upon the prevailing practice in the
state in which the underlying property is located, and may have first, second
or third priority. In some states, a mortgage creates a lien upon the real
property encumbered by the mortgage or deed of trust. In other states, the
mortgage conveys legal title to the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage: the mortgagor, who is the borrower, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or retail installment contract evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties: the borrower, or trustor, the lender as beneficiary,
and a third-party grantee called the trustee. Under a deed of trust, the
borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure repayment of the
loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by applicable state law, the express
provisions of the deed of trust or mortgage, and, in some cases with respect
to deeds of trust, the directions of the beneficiary. Some states use a
security deed or deed to secure debt which is similar to a deed of trust
except that it has only two parties: a grantor (similar to a mortgagor) and a
grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to
secure debt are not prior to liens for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority between
mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms, the knowledge of the parties to such instrument in
some cases and generally on the order of recordation of the mortgage, deed of
trust or the deed to secure debt in the appropriate recording office.
SUBORDINATE MORTGAGES; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the Loans in any Loan Pool are expected to be
second or third mortgages or deeds of trust which are junior to mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the related Trust Fund (and therefore the Certificateholders), as beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Loan to be sold upon default of the mortgagor or
trustor under the senior mortgage or deed of trust, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the Servicer on behalf
of the Trust Fund asserts its subordinate interest in the property in
foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans. As
discussed more fully below, a junior mortgagee or beneficiary may satisfy a
defaulted senior loan in full, or in some states may cure such default and
bring the senior loan current, in either event usually adding the amounts
expended to the balance due on the junior loan. Although the Company generally
does not cure defaults under a senior mortgage or deed of trust, it is the
Company's standard practice to protect its interest by attending any
foreclosure sale and bidding for property only if it is in the Company's best
interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of the Company, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance
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proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the first mortgage or deed of trust. Proceeds in excess of the
amount of first mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional amounts or, in some
states, has actual knowledge of the intervening junior mortgages or deeds of
trust and other liens, the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in some states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in
the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the mortgagor or trustor. All sums so expended by a senior
mortgagee or beneficiary generally become part of the indebtedness secured by
the senior mortgage or deed of trust.
SUBORDINATE FINANCING
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to
an increase in the principal amount of or the interest rate payable on the
senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. The bankruptcy of a junior
lender may operate to stay foreclosure or similar proceedings by the senior
lender.
FORECLOSURE
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of
a mortgage is generally accomplished by judicial action. A foreclosure action
is regulated by statutes and rules and subject throughout to the court's
equitable powers. Generally, a mortgagor is bound by the terms of the mortgage
note and the mortgage as made and cannot be relieved from its own default.
However, since a foreclosure action is equitable in nature and is addressed to
a court of equity, the court may relieve a mortgagor
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of a default and deny the mortgagee foreclosure on proof that the mortgagor's
default was neither willful nor in bad faith and that the mortgagee's action
was such as to establish a waiver, or fraud, bad faith, oppressive or
unconscionable conduct as to warrant a court of equity to refuse affirmative
relief to the mortgagee. Under certain circumstances a court of equity may
relieve the mortgagor from an entirely technical default where such default
was not willful. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a referee or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by non-
judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in
the deed of trust, security deed or deed to secure debt that authorizes the
trustee to sell the property upon any default by the borrower under the terms
of the note, deed of trust, security deed or deed to secure debt. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, prior to a sale,
the trustee must record a notice of default and send a copy to the borrower
trustor and to any person who has recorded a request for a copy of a notice of
default and notice of sale. In addition, prior to such sale, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. Certain states
require that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Certain state laws control the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title
and because the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is not common for a third party to
purchase the property at the foreclosure sale. In some states, there is a
statutory minimum purchase price which
the lender may offer for the property. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance, paying taxes and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss resulting from such sale may be reduced
by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the
foreclosure by a junior mortgagee triggers the enforcement of a "due-on-sale"
clause in a senior mortgage, the junior mortgagee may be required to pay the
full amount of the
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senior mortgages to the senior mortgagees. Accordingly, with respect to those
Loans which are second or third mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims
and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee or may require the institution of separate
legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Loan,
and any such taxes or fees imposed may reduce liquidation proceeds with
respect to such property, as well as distributions payable to the
Certificateholders.
SECOND OR THIRD MORTGAGES
The Loans may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds
and, upon default of the mortgagor under the senior mortgage or deed of trust,
to cause a foreclosure on the property. Upon completion of the foreclosure
proceedings by the holder of the senior mortgage or the sale pursuant to the
senior deed of trust, the junior mortgagee's or junior beneficiary's lien will
be extinguished unless the junior lienholder satisfies the defaulted senior
loan or asserts its subordinate interest in a property in foreclosure
proceedings. Such extinguishment will eliminate access to the collateral for
the Loan. See "--Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage,
deed of trust, deed to secure debt or security deed. In the event of a
conflict between the terms of the senior mortgage, deed of trust, deed to
secure debt or security deed and the
junior mortgage, deed of trust, deed to secure debt or security deed, the
terms of the senior mortgage, deed of trust, deed to secure debt or security
deed will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed may have the right to perform the obligation itself. Generally,
all sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed
of trust, deed to secure debt or security deed.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity
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of redemption and may redeem the property by paying the entire debt with
interest. In addition, in some states, when a foreclosure action has been
commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of
sale. In most states where the right of redemption is available, statutory
redemption may occur upon payment of the foreclosure purchase price, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. In some
states, the right to redeem is an equitable right. The equity of redemption,
which is a non-statutory right that must be exercised prior to foreclosure
sale, should be distinguished from statutory rights of redemption. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment is a personal judgment
against the borrower equal in most cases to the difference between the amount
due to the lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the
borrower has equity and the home is necessary to the bankruptcy
reorganization. Generally, with respect to the federal bankruptcy law, the
filing of a petition acts as a stay against virtually all actions against the
debtor, including the enforcement of remedies of collection of a
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debt and, often, no interest or principal payments are made during bankruptcy
proceedings. A bankruptcy court may also grant the debtor a reasonable time to
cure a payment default with respect to a mortgage loan on a debtor's residence
by paying arrearages and reinstate the original mortgage loan payment schedule
even though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's Chapter 13 petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years. In the case
of a mortgage loan not secured by the debtor's principal residence, courts
with federal bankruptcy jurisdiction may also reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
CONSUMER PROTECTION LAWS WITH RESPECT TO LOANS
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. The
Home Ownership and Equity Protection Act of 1994 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors
involved in non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. It is possible that some Loans included in a Loan
Pool may be subject to such provisions. The Home Protection Act applies to
mortgage loans originated on or after the effective date of such regulations.
These laws can impose specific statutory liabilities upon creditors who fail
to comply with their provisions and may affect the enforceability of the
contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States.
For the most part, courts have upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
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 such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a Loan; 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 Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans
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(which may include some Loans) are subject to all claims and defenses that the
debtor could assert against the original creditor, unless the assignee
demonstrates that a reasonable person in the exercise of ordinary due
diligence could not have determined that the mortgage loan was subject to the
provisions of the Home Protection Act.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In 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 forms of note, mortgage and deed of trust also include 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 foreclose a mortgage or deed of trust 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.
"DUE-ON-SALE" CLAUSES
All of the Loan documents will contain due-on-sale clauses unless the
Prospectus Supplement indicates otherwise. These clauses permit the Servicer
to accelerate the maturity of the loan on notice, which is usually 30 days, if
the borrower sells, transfers or conveys the property without the prior
consent of the mortgagee. In recent years, court decisions and legislative
actions placed substantial restrictions on the right of lenders to enforce
such clauses in many states. However, effective October 15, 1982, Congress
enacted the Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St.
Germain Act"), which, after a three-year grace period, preempts state laws
which prohibit the enforcement of due-on-sale clauses by providing, among
other matters, that "due-on-sale" clauses in certain loans (including the
Loans) made after the effective date of the Garn-St. Germain Act are
enforceable within certain limitations as set forth in the Garn-St. Germain
Act and the regulations promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any Loan which contains a "due-on-sale" clause upon
transfer of an interest in the mortgaged property. This ability to accelerate
will not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from
the death of a mortgagor or trustor, or a transfer where the spouse or
child(ren) becomes an owner of the
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mortgaged property in each case where the transferee(s) will occupy the
mortgaged property, (iii) a transfer resulting from a decree of dissolution of
marriage, legal separation agreement or from an incidental property settlement
agreement by which the spouse becomes an owner of the mortgaged property, (iv)
the creation of a lien or other encumbrance subordinate to the lender's
security instrument which does not relate to a transfer of rights of occupancy
in the mortgaged property (provided that such lien or encumbrance is not
created pursuant to a contract for deed), (v) a transfer by devise, descent or
operation of law on the death of a joint tenant or tenant by the entirety, and
(vi) other transfers as set forth in the Garn-St. Germain Act and the
regulations thereunder. As a result, a lesser number of Loans which contain
"due-on-sale" clauses may extend to full maturity than earlier experience
would indicate with respect to single-family mortgage loans. The extent of the
effect of the Garn-St. Germain Act on the average lives and delinquency rates
of the Loans, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Loans bearing an
interest rate below the current market rate being assumed by a new home buyer
rather than being paid off, which may have an impact upon the average life of
the Loans and the number of Loans which may be outstanding until maturity.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation
in the management of a property securing a loan or the business of a borrower
to render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability
of a Trust Fund and reduce the amounts otherwise distributable to the holders
of the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Loans.
Neither the Company nor any replacement Servicer will be required by any
Agreement to undertake any such evaluations prior to foreclosure or accepting
a deed-in-
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lieu of foreclosure. The Company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the Company will not foreclose on
related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on such
property. A failure so to foreclose may reduce the amounts otherwise available
to Certificateholders of the related Series.
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 Loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Loans, would result in a reduction
of the amounts distributable to the Certificateholders. In addition, the
Relief Act imposes limitations that would impair the ability of the Servicer
to foreclose on an affected mortgage, deed of trust, deed to secured debt or
security deed during the mortgagor's period of active duty status, and, under
certain circumstances, during an additional three month period thereafter.
Thus, in the event that the Relief Act or similar legislation applies to any
Loan 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 Loans resulting from similar legislation or
regulations may result in delays in payments or losses to Certificateholders.
REPURCHASE OBLIGATIONS
The Company will represent and warrant under each Agreement that each Loan
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 Loan, such
violation would constitute a breach of a representation and warranty under the
Agreement and would create an obligation to repurchase such Loan unless the
breach is cured. See "Description of the Certificates--Conveyance of Loans."
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.
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 "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.
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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 (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
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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
GENERAL
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after
November 12, 1991 (the "REMIC Regulations"), all of which are subject to
change (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.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made
to treat the Trust Fund or a segregated portion thereof evidenced by a
particular Series or sub-series of Certificates as a REMIC within the meaning
of Section 860D(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). The Prospectus Supplement for each series will indicate whether or
not an election to be treated as a REMIC has been or will be made with respect
thereto. The following discussion deals first with Series with respect to
which a REMIC Election is made and then with Series with respect to which a
REMIC Election is not made.
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel
to the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either as
regular interests in the REMIC within the meaning of Section 860G(a)(1) of the
Code ("Regular Certificates") or as residual interests in the REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day pursuant to a fixed price contract in effect on the Startup
Day. The REMIC Regulations provide that a Loan is principally secured by an
interest in real property if the fair market value of the real property
securing the Loan is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Loan at the time it was originated
or (ii) 80% of the adjusted issue price (the then-outstanding principal
balance, with certain adjustments) of the Loan at the time it is contributed
to a REMIC. The fair market value of the underlying real property is to be
determined after taking into account other liens encumbering that real
property. Alternatively, a Loan is principally secured by an interest in real
property if substantially all of the proceeds of the Loan were used to acquire
or to improve or protect an interest in real property that, at the origination
date, is the only security for the Loan (other than the
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personal liability of the obligor). A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage
within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash
received under qualified mortgages before distribution to holders of interests
in the REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund,
if any, reasonably required to provide for full payment of expenses of the
REMIC, the principal and interest due on regular or residual interests in the
event of defaults on qualified mortgages, lower than expected returns on cash-
flow investments, prepayment interest shortfalls or certain other
contingencies ("qualified reserve assets"), and (c) certain property acquired
as a result of foreclosure of defaulted qualified mortgages ("foreclosure
property"). A reserve fund will not be qualified if more than 30% of the gross
income from the assets in the reserve fund is derived from the sale or other
disposition of property held for three months or less, unless such sale is
necessary to prevent a default in payment of principal or interest on Regular
Certificates. In accordance with Section 860G(a)(7) of the Code, a reserve
fund must be "promptly and appropriately" reduced as payments on contracts are
received. Foreclosure property will be a permitted investment only to the
extent that such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest.
See "REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder.
Solely for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
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Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the
stated principal amount with respect to that Regular Certificate may be zero.
Such a specified portion may consist of a fixed number of basis points, a
fixed percentage of interest or a qualified variable rate on some or all of
the qualified mortgages. Stated interest on a Regular Certificate will be
taxable as ordinary income. Holders of Regular Certificates that would
otherwise report income under a cash method of accounting will be required to
report income with respect to such Regular Certificates under the accrual
method. Under Temporary Treasury Regulations, if a Trust Fund, with respect to
which a REMIC Election is made, is considered to be a "single-class REMIC," a
portion of the REMIC's servicing fees, administrative and other non-interest
expenses, including assumption fees and late payment charges retained by the
Company, will be allocated as a separate item of gross income and as a
separate item of expense to those Regular Certificateholders that are "pass-
through interest holders." Generally, a single-class REMIC is defined as a
REMIC that would be treated as a fixed investment trust under applicable law
but for its qualification as a REMIC, or a REMIC that is substantially similar
to an investment trust but is structured with the principal purpose of
avoiding this allocation requirement imposed by the Temporary Treasury
Regulations. Generally, a pass-through interest holder refers to individuals,
trusts and estates, certain other pass-through
entities beneficially owned by one or more individuals, trusts or estates, and
regulated investment companies. Such an individual, estate, trust or pass-
through entity that holds a Regular Certificate in such a REMIC will be
allowed to deduct the foregoing separate item of expense under Section 212 of
the Code only to the extent that, in the aggregate and combined with certain
other itemized deductions, it exceeds 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 ($121,200 for
1997, 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 such an individual, trust, estate or pass-through entity that is a
holder of a Regular Certificate in such a REMIC, 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. Unless otherwise stated in
the related Prospectus Supplement, the foregoing expenses will not be
allocated to holders of a Regular Certificate in a REMIC. If the foregoing
limitations apply, certain holders of Regular Certificates in "single-class
REMICs" may not be entitled to deduct all or any part of the foregoing
expenses. Accordingly, Regular Certificates in such a "single class-REMIC" may
not be appropriate investments for individuals, trusts, estates or pass-
through entities beneficially owned by one or more individuals, trusts or
estates. Such prospective investors should carefully consult with their own
tax advisors prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and interest thereon will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code. If less than 95% of
the average adjusted basis of the assets comprising the REMIC are assets
qualifying under any of the foregoing Sections of the Code (including assets
described in Section 7701(a)(19)(C) of the Code), then the Regular
Certificates will be qualifying assets only to the extent that the assets
comprising the REMIC are qualifying assets. Furthermore, interest paid with
respect to Certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Section 856(c)(3)(B) of
the Code to the same extent that the Certificates themselves are treated as
real estate assets. Regular Certificates held by a regulated investment
company or a real estate investment trust will not constitute "Government
securities" within the meaning of Sections 851(b)(4)(A)(i) and 856(c)(5)(A) of
the Code, respectively. In addition, the REMIC Regulations provide that
payments on Loans
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held and reinvested pending distribution to Certificateholders will be
considered to be "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. Entities affected by the foregoing provisions of the
Code that are considering the purchase of Certificates should consult their
own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt
instruments issued on or after April 4, 1994, but which generally may be
relied upon for debt instruments issued after December 21, 1992. Moreover,
although the rules relating to original issue discount contained in the Code
were modified by the Tax Reform Act of 1986 specifically to address the tax
treatment of securities, such as the Regular Certificates, on which principal
is required to be prepaid based on prepayments of the underlying assets,
regulations under that legislation have not yet been issued. Nonetheless, the
Code requires that a prepayment assumption be used with respect to the
underlying assets of a REMIC in computing the accrual of original issue
discount on Regular Certificates, and that regular adjustments be made in the
amount and the rate of accrual to reflect differences between the actual
prepayment rate and the prepayment assumption. Although regulations have not
been issued concerning the use of a prepayment assumption, the legislative
history associated with the Tax Reform Act of 1986 indicates that such
regulations are to provide that the prepayment assumption used with respect to
a Regular Certificate must be the same as that used in pricing the initial
offering of such Regular Certificate. The prepayment assumption (the
"Prepayment Assumption") used in reporting original issue discount for each
series of Regular Certificates will be consistent with this standard and will
be disclosed in the related Prospectus Supplement. However, no representation
is made hereby nor can there be any assurance that the underlying assets of a
REMIC will in fact prepay at a rate conforming to the prepayment assumption or
at any other rate. Certificateholders also should be aware that the OID
Regulations do not address certain issues relevant to, or are not applicable
to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue
price." The original issue discount with respect to a Regular Certificate will
be considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. As described above, it
appears that the Prepayment Assumption will be required to be used in
determining the weighted average maturity of the Regular Certificates. In the
absence of authority to the contrary, the Company expects to apply the de
minimis rule applicable to installment obligations by using the Prepayment
Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original
issue discount attributable to a so-called "teaser" interest rate or initial
interest rate holiday) includes that original issue discount in income as
principal payments are made. The amount includable in income with respect to
each principal payment equals a pro rata portion of the entire amount of de
minimis original issue discount with respect to that Regular Certificate. Any
de minimis amount of original issue discount includable in income by a holder
of a Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest
that accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
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The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is
stated interest that is unconditionally payable at least annually at a single
fixed rate of interest (or, under certain circumstances, a variable rate tied
to an objective index) during the entire term of the Regular Certificate
(including short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the Regular Certificates. Until
further guidance is issued, however, the REMIC will treat the interest on
Regular Certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable
on Regular Certificates, including rates based upon the weighted average
interest rate of a Loan Pool, may not be treated as qualified stated interest.
In such case, the OID Regulations would treat interest under such rates as
contingent interest which generally must be included in income by the Regular
Certificateholder when the interest becomes fixed, as opposed to when it
accrues. Until further guidance is issued concerning the treatment of such
interest payable on Regular Certificates, the REMIC will treat such interest
as being payable at a variable rate tied to a single objective index of market
rates. Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects to
determine the stated redemption price at maturity of a Regular Certificate by
assuming that the anticipated rate of prepayment for all Loans will occur in
such a manner that the initial Pass-Through Rate for a Certificate will not
change. Accordingly, interest at the initial Pass-Through Rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate generally includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the
original issue discount in ordinary gross income for federal income tax
purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of original issue discount, if any, required to be
included in a Regular Certificateholder's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of the Code and the OID Regulations. Under such Section and
the OID Regulations, original issue discount accrues on a daily basis under a
constant yield method that takes into account the compounding of interest. The
amount of original issue discount to be included in income by a holder of a
debt instrument, such as a Regular Certificate, under which principal payments
may be subject to acceleration because of prepayments of other debt
obligations securing such instruments, is computed by taking into account the
Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any accrual period a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the accrual
period and (ii) the payments during the accrual period of amounts included in
the stated redemption price of the Regular Certificate over the adjusted issue
price of the Regular Certificate at the beginning of the accrual period.
Generally, the accrual period for the Regular Certificates corresponds to the
intervals at which amounts are paid or compounded with respect to such Regular
Certificate, beginning with their date of issuance and ending with the
maturity date. The "adjusted issue price" of a Regular Certificate at the
beginning of any accrual period is the sum of the issue price and accrued
original issue discount for each prior accrual period reduced by the
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amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code requires the present value of the
remaining payments to be determined on the bases of (a) the original yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period), (b)
events, including actual prepayments, which have occurred before the close of
the accrual period, and (c) the assumption that the remaining payments will be
made in accordance with the original Prepayment Assumption. The effect of this
method is to increase the portions of original issue discount that a Regular
Certificateholder must include in income to take into account prepayments with
respect to the Loans held by the Trust Fund that occur at a rate that exceeds
the Prepayment Assumption and to decrease (but not below zero for any period)
the portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the Loans
that occur at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported
to Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Loans will be
prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's remaining stated redemption price. If the price paid exceeds the
Regular Certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price
therefor over the Regular Certificate's adjusted issue price by (ii) the
aggregate original issue discount remaining to be accrued with respect to such
Regular Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with more than de minimis original issue discount will be required
to include the original issue discount in ordinary gross income for federal
income tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate
Regular Certificate provides for qualified stated interest payments computed
on the basis of certain qualified floating rates or objective rates, then any
original issue discount on such a Regular Certificate may be computed and
accrued under the same methodology that applies to Regular Certificates paying
qualified stated interest at a fixed rate. See the discussion above under
"REMIC Series-- Original Issue Discount." If adjustable rate Regular
Certificates are issued, the related Prospectus Supplement will describe the
manner in which the original issue discount rules may be applied with respect
thereto and the method to be used in preparing information returns to the
holders of such adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return
on the Regular Certificate determined without such floor or ceiling; (ii) if
it is reasonably expected that the average value of the adjustable rate during
the first half of the term of the Regular Certificate will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the term of the Regular Certificate; or (iii) if
interest is not payable in all circumstances. In these situations, as well as
others, it is unclear under the OID Regulations whether such interest payments
constitute qualified stated interest payments, or must be treated as part of a
Regular Certificate's stated redemption price at maturity resulting in
original issue discount.
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Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary
income as payments of principal are received on such Regular Certificate or
upon the sale or exchange of the Regular Certificate. In general, the holder
of a Regular Certificate may elect to treat market discount as accruing either
(i) under a constant yield method that is similar to the method for the
accrual of original issue discount or (ii) under a ratable accrual method
(pursuant to which the market discount is treated as accruing in equal daily
installments during the period the Regular Certificate is held by the
purchaser), in each case computed taking into account 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 a Regular Certificate purchased at a
discount in the secondary market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would
be allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition
of such a Regular Certificate shall be treated as ordinary income to the
extent it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
amount of ordinary income to be recognized with respect to subsequent payments
on such a Regular Certificate is to be reduced by the amount previously
treated as ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted
basis of a Regular Certificate subject to such election will be increased to
reflect market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity will be considered
to have purchased the Regular Certificate at a premium. In general, the
Regular Certificateholder may elect to deduct the amortizable bond premium as
it accrues under a constant yield method. A Regular Certificateholder's tax
basis in the Regular Certificate will be reduced by the amount of the
amortizable bond premium deducted. It appears that the Prepayment Assumption
should be taken into account in determining the term of a Regular Certificate
for this purpose. Amortizable bond premium with respect to a Regular
Certificate will be treated as an offset to interest income on such Regular
Certificate, 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 Regular Certificate 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 a Regular Certificate 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
Regular Certificate. Certificateholders who pay a premium for a Regular
Certificate should consult their tax advisors concerning such an election and
rules for determining the method for amortizing bond premium.
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Realized Losses. Holders of a Regular Certificate acquired in connection
with a trade or business should be allowed to deduct as ordinary losses any
losses sustained during a taxable year in which the Regular Certificates
become wholly or partially worthless as a result of one or more realized
losses on the underlying assets of the REMIC. However, it appears that a
noncorporate holder of a Regular Certificate that does not acquire such
certificate in connection with a trade or business may not be entitled to
deduct such a loss until such holder's certificate becomes wholly worthless,
which may not occur until its outstanding principal balance has been reduced
to zero. Any such loss may be characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report
taxable income in excess of the amount of economic income actually accruing to
the benefit of such holder in a particular period. It is expected, however,
that the holder of such a Regular Certificate would eventually recognize a
loss or reduction in income attributable to such income when such loss is, in
fact, realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount
realized from the sale and the seller's adjusted basis in such Regular
Certificate. The adjusted basis generally will equal the cost of such Regular
Certificate to the seller, increased by any original issue discount included
in the seller's ordinary gross income with respect to such Regular Certificate
and reduced (but not below zero) by any payments on the Regular Certificate
previously received or accrued by the seller (other than qualified stated
interest payments) and any amortizable premium. Except as discussed below or
with respect to market discount, any gain or loss recognized upon a sale,
exchange, retirement, or other taxable disposition of a Regular Certificate
will be capital gain if the Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in
the holder's income if the yield on such Regular Certificate had equaled 110%
of the applicable federal rate determined as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized by
the holder with respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will
apply. REMIC taxable income generally means a REMIC's gross income, including
interest, original issue discount income, and market discount income, if any,
on the Loans, plus any cancellation of indebtedness income due to realized
losses with respect to Regular Certificates and income on reinvestment of cash
flows and reserve assets, minus deductions, including interest and original
issue discount expense on the Regular Certificates, bad debt losses with
respect to the underlying assets of a REMIC, servicing fees on the Loans,
other administrative expenses of a REMIC, and amortization of premium, if any,
with respect to the Loans.
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The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization
of premium with respect to the Loans, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the Loans is
acquired by a REMIC at a discount, and one or more of such Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding cash distribution because
(i) the prepayment may be used in whole or in part to make distributions on
Regular Certificates, and (ii) the discount on the Loans which is includable
in a REMIC's income may exceed its deduction with respect to the distributions
on those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates,
when distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable income may also be greater
in earlier years than in later years as a result of the fact that interest
expense deductions, expressed as a percentage of the outstanding principal
amount of Regular Certificates, may increase over time as distributions are
made on the lower yielding classes of Regular Certificates, whereas interest
income with respect to any given Loan will remain constant over time as a
percentage of the outstanding principal amount of that loan (assuming it bears
interest at a fixed rate). Consequently, Residual Holders must have sufficient
other sources of cash to pay any federal, state, or local income taxes due as
a result of such mismatching, or such holders must have unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "REMIC Series--Limitations on Offset or Exemption of
REMIC Income." The mismatching of income and deductions described in this
paragraph, if present with respect to a series of Certificates, may have a
significant adverse effect upon the Residual Holder's after-tax rate of
return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate
as of the close of the quarter (or time of disposition of the Residual
Certificate if earlier), determined without taking into account the net loss
for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Holder and decreased (but not below zero) by the
amount of loss of the REMIC reportable by the Residual Holder. A cash
distribution from the REMIC also will reduce such adjusted basis (but not
below zero). Any loss that is disallowed on account of this limitation may be
carried over indefinitely by the Residual Holder for whom such loss was
disallowed and may be used by such Residual Holder only to offset any income
generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC's basis in its assets. The REMIC Regulations
imply that residual interests cannot have a negative basis or a negative issue
price. However, the preamble to the REMIC Regulations indicates that, while
existing tax rules do not accommodate such concepts, the Service is
considering the tax treatment of these types of residual interests, including
the proper tax treatment of a payment made by the transferor of such a
residual interest to induce the transferee to acquire that interest. Absent
regulations or administrative guidance to the contrary, the Company does not
intend to treat a class of Residual Certificates as having a value of less
than zero for purposes of determining the basis of the related REMIC in its
assets.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is in excess of
the corresponding portion of the REMIC's basis in the Loans, the Residual
Holder will not recover such excess basis until termination of the REMIC
unless Treasury Regulations yet to be issued provide for periodic adjustments
to the REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue
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discount income on Regular Certificates as described above under "REMIC
Series--Original Issue Discount" and "--Adjustable Rate Regular Certificates,"
without regard to the de minimis rule described therein.
The REMIC will have market discount income in respect of the Loans if, in
general, the basis of the REMIC in such Loans is exceeded by their unpaid
principal balances. The REMIC's basis in such Loans is generally the fair
market value of the Loans immediately after the transfer thereof to the REMIC
(which will equal the aggregate issue prices of the REMIC Certificates which
are sold to investors and the estimated fair market value of any classes of
Certificates which are retained). In respect of the Loans that have market
discount to which Code Section 1276 applies, the accrued portion of such
market discount would be recognized currently as an item of ordinary income.
Market discount income generally should accrue in the manner described above
under "REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Loans exceeds the unpaid principal
balances thereof, the REMIC will be considered to have acquired such Loans at
a premium equal to the amount of such excess. As stated above, the REMIC's
basis in the Loans is the fair market value of the Loans immediately after the
transfer thereof to the REMIC. Generally, a REMIC that holds a Loan as a
capital asset will elect to amortize premium on the Loans under a constant
interest method. See the discussion under "REMIC Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. A portion (or all) of
the REMIC taxable income includable in determining the federal income tax
liability of a Residual Holder will be subject to special treatment. That
portion, referred to as the "excess inclusion," is equal to the excess of
REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of
the long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Section
1274(d) of the Code, multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning
of a quarter is the issue price of the Residual Certificate, plus the amount
of such daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to such
Residual Certificate prior to the beginning of such quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such Residual Holder's tax return,
including net operating loss carry forwards. Further, if the Residual Holder
is an organization subject to the tax on unrelated business income imposed by
Section 511 of the Code, the Residual Holder's excess inclusions will be
treated as unrelated business taxable income of such Residual Holder for
purposes of Section 511. In addition, if the Residual Holder is not a U.S.
person, such Residual Holder's excess inclusions generally would be ineligible
for exemption from or reduction in the rate of United States withholding tax.
Finally, if a real estate investment trust or regulated investment company
owns a Residual Certificate, a portion (allocated under Treasury Regulations
yet to be issued) of dividends paid by such real estate investment trust or
regulated investment company could not be offset by net operating losses of
its shareholders and would constitute unrelated business taxable income for
tax-exempt shareholders.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not
be less than the taxpayer's excess inclusions. The latter rule has the effect
of preventing nonrefundable tax credits from reducing the taxpayer's income
tax to an amount lower than the tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual
Certificate may not be transferred to a Disqualified Organization. If any
legal or beneficial interest in a Residual Certificate is, nonetheless,
transferred to a Disqualified Organization, a tax would be imposed in an
amount equal to the product of (i) the present value of the total anticipated
excess inclusions with respect to such Residual Certificate for periods after
the transfer, and (ii) the highest marginal
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federal income tax rate applicable to corporations. The anticipated excess
inclusions are based on actual prepayment experience to the date of the
transfer and projected payments based on the Prepayment Assumption. The
present value rate equals the applicable federal rate under Section 1274(d) of
the Code as of the date of the transfer for a term ending on the close of the
last quarter in which excess inclusions are expected to accrue. Such rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. Such a tax
generally would be imposed on the transferor of the Residual Certificate,
except that where such transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit, under
penalties of perjury, that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
residual interest and the transferor pays such amount of tax as the Treasury
Department may require (presumably, a corporate tax on the excess inclusion
for the period the residual interest is actually held by the Disqualified
Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust
or estate and certain corporations operating on a cooperative basis. Except as
may be provided in Treasury Regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder is disregarded for
all federal income tax purposes if a significant purpose of the transfer is to
enable the transferor to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above. The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by
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the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The Agreement with respect
to each series of REMIC Certificates will require the transferee of a Residual
Certificate to certify to the statements in clause (ii) of the preceding
sentence as part of the affidavit described above under "Restrictions on
Transfer of Residual Certificates."
Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement
that a securities dealer mark to market securities held for sale to customers.
This mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. The Mark-to-Market Regulations provide that for purposes
of this mark-to-market requirement, a Residual Certificate acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked
to market. Prospective purchasers of a Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as
described above of such Residual Holder in such Residual Certificate at the
time of the sale or exchange. In addition to reporting the taxable income of
the REMIC, a Residual Holder will have taxable income to the extent that any
cash distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in
his Residual Certificate remaining when his interest in the REMIC terminates,
and if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" that is
economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution
of a defective obligation), a disposition incident to the foreclosure,
default, or imminent default of a mortgage, the bankruptcy or insolvency of
the REMIC, or a qualified liquidation of the REMIC; (ii) the receipt of income
from assets other than qualified mortgages and permitted investments; (iii)
the receipt of compensation for services; and (iv) the receipt of gain from
the dispositions of cash flow investments. The REMIC Regulations provide that
the modification of the terms of a Loan occasioned by default or a reasonably
foreseeable default of the Loan, the assumption of the Loan, the waiver of a
due-on-sale clause or the conversion of an interest rate by an Obligor
pursuant to the terms of a convertible adjustable-rate Loan will not be
treated as a disposition of the Loan. In the event that a REMIC holds
Convertible ARM Loans which are convertible at the option of the Obligor into
fixed-rate, fully amortizing, level payment Loans, a sale of such Loans by the
REMIC pursuant to a purchase agreement or other contract with the Company or
other party, if and when the Obligor elects to so convert the terms of the
Loan, will not result in a prohibited transaction for the REMIC. The Code also
imposes a 100% tax on contributions to a REMIC made after the Startup Day,
unless such contributions are payments made to facilitate a cleanup call or a
qualified liquidation of the REMIC, payments in the nature of a guaranty,
contributions during the three-month period beginning on the Startup Day or
contributions to a qualified reserve fund of the REMIC by a holder of a
residual interest in the REMIC. The Code also imposes a tax on a REMIC at the
highest corporate rate on certain net income from foreclosure property that
the REMIC derives from the management, sale, or disposition of any real
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property, or any personal property incident thereto, acquired by the REMIC in
connection with the default or imminent default of a loan. Generally, it is
not anticipated that a REMIC will incur a significant amount of such taxes or
any material amount of state or local income or franchise taxes. However, if
any such taxes are imposed on a REMIC they will be paid by the Company or the
Trustee, if due to the breach of the Company's or the Trustee's obligations,
as the case may be, under the related Pooling and Servicing Agreement or in
other cases, such taxes shall be borne by the related Trust Fund resulting in
a reduction in amounts otherwise payable to holders of the related Regular or
Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is
considered qualified if a REMIC adopts a plan of complete liquidation (which
may be accomplished by designating in the REMIC's final tax return a date on
which such adoption is deemed to occur) and sells all of its assets (other
than cash) within the ninety-day period beginning on the date of the adoption
of the plan of liquidation, provided that it distributes to holders of Regular
or Residual Certificates, on or before the last day of the ninety-day
liquidation period, all the proceeds of the liquidation (including all cash),
less amounts retained to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and
who is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof, (iii) an estate the income of which
is includible in gross income for United States tax purposes regardless of its
source, or (iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one
or more United States trustees have authority to control all substantial
decisions of the trust. Unless the interest on a Regular Certificate is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States, the Foreign Holder is not subject to
federal income or withholding tax on interest (or original issue discount, if
any) on a Regular Certificate (subject to possible backup withholding of tax,
discussed below). To qualify for this tax exemption, the Foreign Holder will
be required to provide periodically a statement signed under penalties of
perjury certifying that the Foreign Holder meets the requirements for
treatment as a Foreign Holder and providing the Foreign Holder's name and
address. The statement, which may be made on a Form W-8 or substantially
similar substitute form, generally must be provided in the year a payment
occurs or in either of the two preceding years. The statement must be
provided, either directly or through clearing organization or financial
institution intermediaries, to the person that otherwise would withhold tax.
This exemption may not apply to a Foreign Holder that owns both Regular
Certificates and Residual Certificates. If the interest on a Regular
Certificate is effectively connected with the conduct by a Foreign Holder of a
trade or business within the United States, then the Foreign Holder will be
subject to tax at regular graduated rates. 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 Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii)
the gain is effectively connected with the conduct by the Foreign Holder of a
trade or business within the United States.
It appears that a Regular 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.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
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Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the
holder, among other circumstances, fails to furnish his Social Security number
or other taxpayer identification number to the Trustee. Backup withholding may
apply, under certain circumstances, to a REMIC Certificateholder who is a
foreign person if the REMIC Certificateholder fails to provide the Trustee or
the REMIC Certificateholder's securities broker with the statement necessary
to establish the exemption from federal income and withholding tax on interest
on the REMIC Certificate. Backup withholding, however, does not apply to
payments on a Certificate made to certain exempt recipients, such as
corporations and tax-exempt organizations, and to certain foreign persons.
REMIC Certificateholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that
are not excepted from the reporting requirements and, to the extent required
by the Code, other interested parties, information with respect to the
interest paid or accrued on the Regular Certificates, original issue discount,
if any, accruing on the Regular Certificates and information necessary to
compute the accrual of any market discount or the amortization of any premium
on the Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
NON-REMIC SERIES
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Loan 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 Loans and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of the
Code. In such event, each Non-REMIC Certificateholder will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the Loan 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 Loans included therein. The
following discussion assumes the Trust Fund will be so classified as a grantor
trust.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and interest thereon may be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. See the discussions of such Code provisions above
under "REMIC Series Tax Status of REMIC Certificates." Investors should review
the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Loans under these Code sections and should, in
addition, consult with their own tax advisors with respect to these matters.
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Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the "stripped bond" rules of the Code, Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share
of the entire income arising from the Loans comprising such Loan Pool,
including interest, market or original issue discount, if any, prepayment
fees, assumption fees, and late payment charges received by the Company, and
any gain upon disposition of such Loans. (For purposes of this discussion, the
term "disposition," when used with respect to the Loans, includes scheduled or
prepaid collections with respect to the Loans, as well as the sale or exchange
of a Non-REMIC Certificate.) Subject to the discussion below of certain
limitations on itemized deductions, Non-REMIC Certificateholders will be
entitled under Section 162 or 212 of the Code to deduct their pro rata share
of related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the
Code provides that the amount of itemized deductions (including those provided
for in Section 212 of the Code) otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a threshold amount specified
in the Code ($121,200 for 1997, 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 Non-REMIC 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 Non-REMIC Certificateholder is not permitted to deduct servicing fees
allocable to a Non-REMIC Certificate, the taxable income of the Non-REMIC
Certificateholder attributable to that Non-REMIC Certificate will exceed the
net cash distributions related to such income. Non-REMIC Certificateholders
may deduct any loss on disposition of the Loans to the extent permitted under
the Code.
To the extent that any of the Loans comprising a Loan Pool were originated
on or after March 2, 1984 and under circumstances giving rise to original
issue discount, Certificateholders will be required to report annually an
amount of additional interest income attributable to such discount in such
Loans prior to receipt of cash related to such discount. See the discussion
above under "REMIC Series--Original Issue Discount." Similarly, Code
provisions concerning market discount and amortizable premium will apply to
the Loans comprising a Loan Pool to the extent that the loans were originated
after July 18, 1984 and September 27, 1985, respectively. See the discussions
above under "REMIC Series--Market Discount" and "REMIC Series--Amortizable
Premium." However, it is unclear whether a prepayment assumption should be
used in accruing or amortizing any such discount or premium.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Loan from ownership of the right to receive
some or all of the related interest payments. Non-REMIC Certificates will
constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Loans comprising
a Loan Pool; (iii) if two or more classes of Non-REMIC Certificates are issued
representing the right to non-pro rata percentages of the interest or
principal payments on the Loans; or (iv) if Non-REMIC Certificates are issued
which represent the right to interest only payments or principal only
payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax
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purposes as it accrues in accordance with the constant-yield method that takes
into account the compounding of interest and such accrual of income may be in
advance of the receipt of any cash attributable to such income. See "REMIC
Series--Original Issue Discount" above. For purposes of applying the original
issue discount provisions of the Code, the issue price of a Stripped
Certificate will be the purchase price paid by each holder thereof and the
stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect to
a Stripped Certificate may be treated as zero under the original issue
discount de minimis rules described above. A purchaser of a Stripped
Certificate will be required to account for any discount on the certificate as
market discount rather than original issue discount if either (i) the amount
of original issue discount with respect to the certificate was treated as zero
under the original issue discount de minimis rule when the certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off of the Loans. See
"REMIC Series--Market Discount" above.
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 with
respect to which a REMIC election is not made, 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 Loan or (ii) a separate installment obligation for each Loan
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 Loans 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 Loans. 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.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal
to the difference between the amount realized in the sale and its aggregate
adjusted basis in the Loans represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported income or gain with respect to the Non-REMIC
Certificate and decreased by the amount of any losses previously reported with
respect to the Non-REMIC Certificate and the amount of any distributions
received thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital
gain or loss if the Non-REMIC Certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined above under "REMIC
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Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Loans were originated after
July 18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding information as may be required with
respect to interest and original issue discount, if any, with respect to the
Non-REMIC Certificates.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect
of ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Loans that are
secured by liens on real estate that are not first liens, as required by
SMMEA. Accordingly, many institutions with legal authority to invest in
"mortgage related securities" may not be legally authorized to invest in the
Certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests,
including securities previously purchased. There may be other restrictions on
the ability of certain investors, including depository institutions, either to
purchase Certificates or to purchase Certificates representing more than a
specified percentage of the investor's assets. Investors should consult their
own legal advisors in determining whether and to what extent the Certificates
constitute legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates
sold under this Prospectus that they be rated by at least one nationally
recognized statistical rating organization in one of its four highest rating
51
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categories (within which there may be sub-categories or gradations indicating
relative standing). A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time
and that offerings may be made concurrently through more than one of these
methods or that an offering of a particular Series of Certificates may be made
through a combination of such methods.
The distribution of the Certificates may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such
purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Certificates so purchased directly, through
one or more Underwriters to be designated at the time of the offering of such
Certificates or through broker-dealers acting as agent and/or principal. Such
offering may be restricted in the manner specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices.
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.
52
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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, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996 incorporated by reference herein have been audited by KPMG Peat Marwick
LLP, independent accountants, as stated in their report given upon their
authority as experts in accounting and auditing.
53
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PRO-
SPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRIT-
ERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY JURIS-
DICTION 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 PRO-
SPECTUS 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.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Terms of the Certificates................................... S-4
Risk Factors............................................................... S-25
Structure of the Transaction............................................... S-26
Use of Proceeds............................................................ S-26
The Loans.................................................................. S-27
Yield and Prepayment Considerations........................................ S-41
Green Tree Financial Corporation........................................... S-49
Description of the Certificates............................................ S-49
Description of the Class B-2 Limited Guaranty.............................. S-73
Certain Federal Income Tax Consequences.................................... S-74
ERISA Considerations....................................................... S-74
Underwriting............................................................... S-77
Legal Matters.............................................................. S-78
Annex I.................................................................... A-1
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............................................................. 9
Use of Proceeds............................................................ 11
Green Tree Financial Corporation........................................... 11
Yield Considerations....................................................... 12
Maturity and Prepayment Considerations..................................... 12
Description of the Certificates............................................ 13
Certain Legal Aspects of the Loans; Repurchase Obligations................. 24
ERISA Considerations....................................................... 33
Certain Federal Income Tax Consequences.................................... 35
Legal Investment Considerations............................................ 51
Ratings.................................................................... 51
Underwriting............................................................... 52
Legal Matters.............................................................. 53
Experts.................................................................... 53
</TABLE>
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$327,051,721 (Approximate)
[LOGO OF GREENTREE FINANCIAL APPEARS HERE]
Seller and Servicer
Certificates for Home Equity Loans
Series 1997-B
$36,462,000 (Approximate)
Floating Rate
Class A-1 ARM
$27,998,000 (Approximate) 6.02% Class A-1
$36,641,000 (Approximate) 6.28% Class A-2
$62,724,000 (Approximate) 6.61% Class A-3
$20,556,000 (Approximate) 6.81% Class A-4
$56,200,000 (Approximate) 7.15% Class A-5
$40,682,000 (Approximate) 7.12% Class A-6
$17,988,000 (Approximate) 7.65% Class M-1
$11,447,000 (Approximate) 7.80% Class M-2
$11,447,000 (Approximate) 7.84% Class B-1
$ 4,906,721 (Approximate) 8.00% Class B-2
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PROSPECTUS SUPPLEMENT
May 23, 1997
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Lehman Brothers
Merrill Lynch & Co.
Salomon Brothers Inc
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